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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended March 31, 2007
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 33-97090
ACG HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware | 62-1395968 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
100 Winners Circle, Brentwood, Tennessee | 37027 | |
(Address of principal executive offices) | (Zip Code) | |
Registrants telephone number including area code | (615) 377-0377 |
AMERICAN COLOR GRAPHICS, INC.
(Exact name of registrant as specified in its charter)
New York | 16-1003976 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
100 Winners Circle, Brentwood, Tennessee | 37027 | |
(Address of principal executive offices) | (Zip Code) | |
Registrants telephone number including area code | (615) 377-0377 |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
Yes o No þ
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 þ No o
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. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). o Yes þ No
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 173,254 shares outstanding of its common stock, $.01 Par Value, as of May
31, 2007 (all of which are privately owned and not traded on a public market).
DOCUMENTS INCORPORATED BY REFERENCE
None
None
INDEX
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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 the safe harbor provisions of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. These forward-looking statements reflect our
managements views and assumptions as of the date of this Report regarding future events and
operating performance. Statements that are not of historical fact are forward-looking statements
and are contained throughout this Report including Items 1, 3, 7 and 7A hereof. Some of the
forward-looking statements in this Report can be identified by the use of forward-looking terms
such as believes, intends, expects, may, will, estimates, should, could,
anticipates, plans or other comparable terms. Forward-looking statements are subject to known
and unknown risks and uncertainties, many of which may be beyond the control of ACG Holdings, Inc.
(Holdings), together with its wholly-owned subsidiary, American Color Graphics, Inc.
(Graphics), which could cause actual results to differ materially from any future results,
performance or achievements expressed or implied by the forward-looking statements.
You should understand that the following important factors and assumptions could affect our future
results and could cause actual results to differ materially from those expressed in the
forward-looking statements:
| a failure to achieve expected cost reductions or to execute other key strategies; | ||
| fluctuations in the cost of paper, ink and other key 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; | ||
| downgrades of our credit ratings; | ||
| our financial condition and liquidity and our leverage and debt service obligations; | ||
| the general condition of the United States economy; | ||
| interest rate and foreign currency exchange rate fluctuations; | ||
| the level of capital resources required for our operations; | ||
| changes in the legal and regulatory environment; | ||
| the demand for our products and services; and | ||
| other risks and uncertainties, including the matters set forth in this Report generally and those described from time to time in our filings with the Securities and Exchange Commission. |
All forward-looking statements in this Report are qualified by these cautionary statements and are
made only as of the date of this Report. We do not undertake any obligation, other than as
required by law, to update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
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
Overview
We are one of the leading printers of advertising inserts and newspaper products in the United
States developed from a business that commenced operations in 1926. We believe our success is a
result of the strong and long-standing relationships that we have developed with our customers by
providing high quality, on-time and consistent solutions and our network of facilities, which
provides distribution efficiencies and short turnaround times. Customers for our print services
include approximately 220 national and regional retailers and approximately 150 newspapers.
We are also one of the most technologically advanced providers of premedia services in the United
States. We provide our customers with comprehensive services and solutions for their advertising
and brand management programs. Our wide variety of services include digital photography, digital
asset management, prepress production, creative and design, color
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management services, and workflow
consulting for the preparation and management of materials for printing, and other forms of
distribution of their content.
Advertising Inserts. Our principal focus is on the printing of retail advertising inserts. In the
fiscal years ended March 31, 2007 (Fiscal Year 2007), 2006 (Fiscal Year 2006), and 2005
(Fiscal Year 2005), retail advertising inserts accounted for 82%, 81% and 83%, respectively, of
our total print segment sales.
Customers in the advertising insert segment of the print industry, particularly large national
accounts, have increasingly demanded more sophisticated distribution capabilities, higher quality
and greater flexibility from print service providers. This demand has resulted in the continued
consolidation among printers within the industry. Heatset offset is the dominant technology for
printing advertising inserts due to its reliability, high print quality and flexibility. The
industry has also experienced the increasing interest of newspapers to outsource their commercial
printing, inserting and product mailings. As a result, we believe that the key factors for success
in the advertising insert segment of the printing industry are price, quality, reliability and
proximity to customers target markets, as well as strong customer service capabilities that foster
lasting relationships.
Premedia
Services. Premedia services consist of several processes
necessary for the preparation and
management of advertising and packaging materials for printing and other mediums, including file
preparation, page layout and design, image capture, asset and content management, creative concept,
and color and brand management.
Premedia services have become a crucial part of the total mix of services demanded by print
customers. In an effort to meet these demands, we, as well as our major competitors in the print
segment, offer premedia services to our customers in addition to printing services. We believe
that the key factors for our success in the premedia services segment are:
| providing comprehensive services, including print services, as well as managed premedia services at customer locations; | ||
| enhancing customer workflow through technology leadership. |
As a result, we believe that these factors will build customer loyalty and enable us to establish
new print customer relationships.
Competitive Strengths
We believe our continued success, strong customer relationships and leading market position are
primarily the result of the following competitive strengths:
Leading
Provider of Print Solutions to our Customers. We believe our success in serving our
customers results primarily from the strong relationships that we have developed with them by
providing high quality print and premedia services solutions at competitive prices. We take a
proactive approach in adapting our offerings to the specific needs of our customers. We also
provide our print customers with comprehensive post-press services, such as mailing and freight
management. In our premedia services segment, we believe that we are one of a small number of
companies that can provide a full range of premedia services and we use those capabilities to
primarily support our print sales. We also manage 18 facilities for customers at their offices,
which enables us to develop strong and long-standing relationships with them. We believe that our
commitment to technology leadership and our ability and willingness to customize and improve our
solutions for our customers significantly enhance our ability to develop and maintain lasting
relationships.
Strong, Diverse Customer Base. The core of our customer base consists of growing, national
companies with whom we have strong, long-standing relationships. We also serve a broad customer
base consisting of geographically diverse companies in a wide variety of industries. We provide
printing services to approximately 150 newspapers and approximately 220 national and regional
retailers, including hardware and home improvement retailers such as The Home Depot, electronics
and appliance retailers such as Best Buy, general merchandisers such as Wal-Mart, drug store chains
such as Walgreens, grocery chains such as Supervalu Inc. and clothing retailers such as Federated
Department Stores. None of these customers represent more than 10% of our sales. In addition,
many of our print customers also use our premedia services. Overall, the customers of our premedia
services segment are diverse and include large and medium-sized companies in the retail,
publishing, catalog and packaging industries.
High Quality Assets and Investments in Technology. We believe that our 43 web heatset offset,
nine flexographic and two coldset offset printing presses are generally among the most advanced in
the industry. Through our comprehensive maintenance program, we are committed to extending the
life and enhancing the reliability of these valuable assets. We also
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strive to incorporate new
technology in our presses as it develops, and to acquire auxiliary equipment when needed, to
improve our process controls and print quality, as well as to satisfy customer requirements. For
example, our continued investment in pre-press, in-line and post-press technology has enabled us to
both strengthen existing and develop new partnerships with our customers. In the premedia services
segment, customers are continuously seeking ways to improve brand awareness, shorten
their production cycles and reduce their costs. We believe that our services and solutions are
among the most advanced available and that coupled with our experienced employees position us well
to address these requirements. We continuously strive to upgrade our equipment and integrate or
develop more advanced software. For example, we offer a variety of solutions which provide our
customers with better control of color, increased process control, shorter time to market and lower
production costs.
National Scope with Regional Focus. In our print division, we believe our seven printing plants
and a newspaper service facility in the United States and one printing plant in Canada form a broad
and efficient production and distribution network. These plants are located within convenient
distribution distance of a large number of major cities in the United States. Over the past
several years, we have restructured our print operations through specific initiatives which have
enhanced our production and distribution networks flexibility, turnaround times and logistical
capabilities, allowing us to better distribute print products in a timely manner. These qualities
have been and are instrumental to our continued success in serving our customers, whose demands are
increasingly complex. For instance, a number of our national customers routinely use numerous
versions of the same advertising insert, which are adapted by region of the country. By coupling
the flexibility of our heatset offset presses and our comprehensive logistical capabilities, we
have become one of the few printers that can reliably meet the demands of the large national and
regional accounts. In our premedia services division, we believe that our six stand-alone
production facilities allow us to provide strong customer service nationwide. They also provide us
with access to highly skilled technical personnel, provide redundancy and extra capacity during
peak periods and allow for short turnaround times.
Competitive Cost Structure. We believe that we are one of the lowest cost producers of retail
advertising inserts and we intend to continue our disciplined focus on overall cost reduction
through ongoing productivity and efficiency improvements at our print facilities. We have also
used our economies of scale to reduce the cost of raw materials and enter into long-term agreements
with our suppliers. In addition, we have been successful in reducing our cost structure in our
premedia services business and we expect continued improvements through the implementation and
management of disciplined cost containment programs and through the application of certain digital
premedia production methodologies and technological leadership.
Strong Management Team. The six members of our senior management team collectively have
approximately 100 years of service with us, and have worked together for us as a team for over 13
years. Our management team maintains a sharp focus on our customers, growth, quality and continued
cost reduction, resulting in a strong competitive position and a well-defined strategy for the
future.
Our Strategy
We are committed to enhancing the strong and long-standing relationships that we have with our
existing customers and to building relationships with new customers by providing high quality,
on-time and consistent solutions. As we work to meet our customers needs, we are also committed to
further reducing our operating costs. More specifically, our strategy consists of:
Growing Print Volumes Profitably through the Strength of our Customer Relationships. A significant
number of our major customers are growing companies. We are committed to growing with our existing
customers and adding new accounts on a profitable basis. We will continue to focus on providing
excellent customer service, high quality print and premedia services solutions and reliable
delivery of materials, all of which strengthen our customer relationships. We are also continuing
to actively pursue long-term printing and premedia opportunities similar to existing arrangements
we have in place with certain of our key customer accounts.
Improving Customer and Service Mix. We expect to continue to adjust the mix of our customers and
services within our print segment. We consistently monitor our customer and service mix to
optimize profitability and asset utilization. As part of this process, we target customers who
have geographic and service needs that match our capabilities. This approach allows us to provide
better service to our customers, while generating higher margins. Also as part of this process, we
target accounts, such as grocery and drug store chains, that generate weekly, non-seasonal demand
for retail advertising insert printing services and enable us to maximize the use of our equipment
throughout the year. In our premedia services segment, we continue to pursue large-scale managed
service opportunities, where we can work on-site with our customers to
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prepare materials for press
and other advertising mediums, foster strong long-term relationships and enhance sales of our print
solutions. We will continue to focus on high value-added, new business opportunities, particularly
projects that utilize the full breadth of the services and technologies we offer.
Continuing to Reduce Costs. We have a disciplined approach to cost reduction through ongoing
productivity and efficiency improvements in all of our print facilities. Our cost reduction
programs include benefits from various fixed and variable cost
containment initiatives that we put into place over the past several years. In our premedia
services business, our use of advanced technology and the implementation and management of
continued cost containment initiatives will enable us to reduce our capital costs and improve our
digital premedia workflow, which we expect to further enhance the productivity of our employees and
reduce the overall cost structure in this segment. In addition, we are continually working to
develop the most efficient selling, general and administrative cost structure.
Expanding our Printing Solutions through Disciplined Capital Expenditures. We are committed to
providing our customers with the solutions they need at competitive prices. We will continue to be
proactive in adapting our offerings to the specific needs of our customers, but we will do so only
through a disciplined program of capital spending. We will expand our production capacity through
the careful addition of equipment when opportunities support such an expansion. In our premedia
services segment, we believe that investments in new technology have allowed and will continue to
allow us to better market our service offerings to existing and new customers, including customers
in our print segment who increasingly use shared service offerings.
Print Segment
Our print business, which accounted for approximately 89% of our sales in Fiscal Year 2007 and 88%
of our sales in both Fiscal Year 2006 and 2005, produces advertising inserts, comics and other
publications.
Advertising Inserts. Retail advertising inserts accounted for 82% of print sales in Fiscal Year
2007, 81% of print sales in Fiscal Year 2006 and 83% of print sales in Fiscal Year 2005. We
believe that we are one of the largest printers of retail advertising inserts in the United States.
We print retail advertising inserts for approximately 220 retailers throughout the United States.
Advertising inserts are preprinted advertisements, generally in color, which display products sold
by a particular retailer or manufacturer, usually for a specific sale period. 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. As a result,
advertising inserts are both time sensitive and seasonal.
Comics. Comics accounted for 8% of print sales in Fiscal Year 2007, 9% of print sales in Fiscal
Year 2006 and 10% of print sales in Fiscal Year 2005. We believe that we are one of the largest
printers of comics in the United States. Comics consist of Sunday newspaper comics, comic insert
advertising and comic books. We print Sunday comics for approximately 150 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. Other publications, including local newspapers, TV guide listings and other
publications and services, accounted for 10% of print sales in both Fiscal Year 2007 and 2006 and
7% in Fiscal Year 2005.
Print Production. Our network of eight print plants in the United States and Canada is
strategically positioned to service our customers, providing us with distribution efficiencies and
short 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. Our printing equipment currently consists of 43 heatset offset presses, two
coldset offset presses and nine flexographic presses, 50 of which we own. Most of our advertising
inserts, publications and comic books are printed using the offset process, while substantially all
of our Sunday newspaper comics and comic advertising inserts are printed using the flexographic
process.
In the heatset offset process, the desired printed images are distinguished chemically from the
non-image areas of a metal plate. This process allows the image area to attract solvent-based ink,
which is then transferred from the plate to a rubber blanket and then to the paper surface, which
we also refer to as the web. 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
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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
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. Once printed, the water-based inks are rapidly dried. 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 product versioning.
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. 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.
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 Segment
Our premedia services business accounted for approximately 11% of our
sales in Fiscal Year 2007 and 12% in both Fiscal Year 2006 and 2005. We believe we are one of the largest full-service
providers of premedia services in the United States (based upon revenues) and a technological
leader in this industry. Our premedia services business commenced operations in 1975. We provide
premedia services within our print plants, our six stand-alone premedia facilities and through our
18 managed services sites, which are premedia facilities located in a
customer site.
We assist customers in the design, creation and capture, layout, storage, color and brand
management, transmission and distribution of images and content. The majority of this work leads to
the production of a file in a format appropriate for use by printers as well as other forms of
media. We make page changes, including type changes, and combine digital page layout information
with electronically captured and color-corrected images. From these digital files, proofs, final
corrections, and finally, digital files are produced for each page. The final digital files enable
printers to prepare plates and cylinders for each required color resulting in the appearance of
full color on the printed page generated. Our revenue from these traditional services is being
supplemented by additional revenue sources including digital asset and content management, managed
services, computer-to-plate services, creative and design, 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.
Customers and Distribution
Customers. We sell our print products and services to a large number of customers, primarily
retailers and newspapers. All of our products are produced in accordance with customer
specifications. We perform approximately 50% 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. 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.
Our premedia services customers consist of retailers, newspaper and magazine publishers, catalog
sales organizations, consumer products companies, packaging manufacturers, advertising agencies,
printers and direct mail advertisers. Our customers typically have a need for high levels of
technical expertise, automated workflow solutions, short turnaround times and responsive customer
service. In addition to our historical regional customer base, our premedia services business is
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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.
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, content management, managed services and speed to market
remain important to our customers. We believe cross-marketing 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
2007. Our top ten customers accounted for approximately 40% of our consolidated sales in Fiscal
Year 2007.
Distribution. We distribute our print products primarily by truck to customer-designated locations
(primarily newspapers and 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.
Sales and Marketing
Our print and premedia services divisions each have their own highly skilled sales forces that work
together to maximize our sales leverage by offering our customers multiple solutions utilizing the
products and services of both our print and premedia services segments. Each sales force is
trained in the specific requirements of the market it serves to further allow us to maximize our
sales success and works closely with our customers to help them successfully market their products.
Our print division employs approximately 30 sales professionals who are divided into three
segments, corporate sales, new business sales and newspaper services. These groups all specialize
in the retail, newspaper and comic book markets. The premedia services division employs 18 sales
professionals who focus on the retail, commercial, publications, catalog and packaging markets.
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. We believe that our largest
competitors are Vertis, Inc. and Quebecor World Inc., and to a lesser degree, R. R. Donnelley &
Sons Company. A trend of industry consolidation in recent years can be attributed to customer
preferences for larger printers with a greater range of services, capital requirements and
competitive pricing pressures. We believe that competition in the print business is based
primarily on quality and service at a competitive price.
Our premedia services segment competes with several premedia services firms on both a national and
regional basis. The premedia industry consists of small local and regional companies, with only a
few national full-service premedia services companies such as Graphics, none of which has a
significant nationwide market share. In addition there has been a recent onset of competition from offshore
premedia services companies and also from software technology companies offering certain premedia
related workflow solutions.
Raw Materials
The primary raw materials used in our print business are paper and ink. We purchase most of our
paper, ink and related products under long-term supply contracts. Raw materials used in our
premedia services processes include digital media, limited film usage and proofing substrate
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
that are derived from advertising inserts. Generally, our sales from advertising inserts are
highest during the following advertising periods: the Spring advertising season from March to May,
the Back-to-School advertising season from July to August, and the Thanksgiving/Christmas
advertising season from October to December. Sales of Sunday newspaper comics are not subject to
significant seasonal fluctuations. Our strategy includes 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, such as food and drug companies, which utilize advertising inserts more
frequently.
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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.
Our Employees
As of May 31, 2007, we had a total of approximately 2,060 employees. Approximately 142 employees
are represented by a collective bargaining agreement. 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 1A. RISK FACTORS
Our consolidated results of operations, financial condition and cash flows can be adversely
affected by various risks. These risks include, but are not limited to, the principal factors
listed below and the other matters set forth in this annual report on Form 10-K.
Our substantial indebtedness could have a material adverse effect on our financial health and our
ability to obtain financing, and to refinance our existing indebtedness, in the future and to react
to changes in our business.
We have a significant amount of indebtedness. At March 31, 2007, we had total indebtedness of
$352.1 million, comprised of:
| $61.9 million of borrowings outstanding under our $90.0 million Amended and Restated Credit Agreement with Banc of America Securities, LLC, as Sole Lead Arranger and Sole Book Manager, and Bank of America, N.A., as Administrative Agent, and certain lenders (as amended, the 2005 Credit Agreement), including a $35.0 million term loan payable in full on December 15, 2009 (the 2005 Term Loan Facility) and $26.9 million of borrowings under a revolving credit facility that expires on December 15, 2009 (the 2005 Revolving Credit Facility), when all borrowings thereunder become payable in full; | ||
| $4.7 million of borrowings outstanding under our $35 million revolving trade receivables facility (as amended, the Receivables Facility) entered into on September 26, 2006 with Banc of America Securities, LLC, as Sole Lead Arranger and Sole Book Manager, and Bank of America, N.A., as Administrative Agent, Collateral Agent and Lender, and certain other lenders (which facility expires on December 15, 2009, when all borrowings thereunder become payable in full); | ||
| $280.0 million of our outstanding 10% Senior Second Secured Notes Due 2010 (the 10% Notes), which mature on June 15, 2010; and | ||
| $5.5 million of capital lease obligations. |
In
addition, we had letters of credit outstanding under the 2005
Revolving Credit Facility of $22.2 million. See Managements Discussion and Analysis of Financial Condition and Results of
OperationsLiquidity and Capital Resources for additional information about our indebtedness,
including information about our additional borrowing capacity under
the 2005 Credit Agreement and the Receivables Facility.
Our significant amount of indebtedness could have important consequences for our financial
condition. For example, it could:
| make it more difficult for us to satisfy our obligations under our 10% Notes, our 2005 Credit Agreement and our Receivables Facility; |
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| require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, which would reduce the availability of our cash flow from operations to fund working capital, capital expenditures or other general corporate purposes; | ||
| make it more difficult to refinance our obligations, including those under the 2005 Credit Agreement, the Receivables Facility and the 10% Notes, as they come due; | ||
| limit our ability to purchase paper and other raw materials under satisfactory credit terms thereby limiting our sources of supply or increasing the cash required to fund operations, or both; | ||
| limit our ability to borrow additional funds in the future, if we need them, due to financial and restrictive covenants in our indebtedness; | ||
| increase our vulnerability to general adverse economic and general industry conditions, including interest rate fluctuations, because a portion of our borrowings are and will continue to be at variable rates of interest; | ||
| limit our flexibility in planning for, or reacting to, changes in our business and industry; and | ||
| place us at a disadvantage compared with competitors that have proportionately less debt. |
Despite current indebtedness levels, we may be able to incur additional indebtedness in the future.
If new debt is added to our current indebtedness levels, the related risks that we now face would
intensify.
In Fiscal Years 2007, 2006, 2005, and 2004, our earnings were insufficient to cover fixed charges.
Our ability to make payments on our indebtedness, to refinance our existing indebtedness and to
operate our business depends on our ability to generate significant amounts of cash in the future.
Our ability to generate such significant amounts of cash depends on many factors beyond our
control.
Our earnings were insufficient to cover fixed charges for the Fiscal Years 2007, 2006, 2005 and
2004 by $21.2 million, $17.9 million, $27.4 million and $16.9 million, respectively. The deficiency
of earnings to cover fixed charges is computed by subtracting earnings before fixed charges, income
taxes and discontinued operations from fixed charges. Fixed charges consist of interest expense,
net amortization of debt issuance expense, and the portion of operating lease rental expense that
we deem to be representative of interest. Borrowings under our 2005 Credit Agreement and
Receivables Facility bear interest at floating rates. If interest rates rise significantly, our
fixed charges will increase and our ability to meet our debt service obligations may be adversely
affected.
Our ability to make payments on our indebtedness, to refinance our existing indebtedness, and to
fund working capital needs, planned capital expenditures and other general corporate requirements
will depend on our ability to generate significant amounts of cash and secure financing and
refinancing in the future. This ability, to an extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors beyond our control.
If our business does not generate sufficient cash flow from operations, and sufficient future
borrowings are not available to us under the 2005 Credit Agreement, the Receivables Facility or
from other sources of financing, we may not be able to repay or refinance our indebtedness, operate
our business or fund our other liquidity needs.
We can provide no assurances that we will be able to generate earnings before fixed charges at or
above current levels or that we will be able to meet our debt service obligations, including our
obligations under the 2005 Credit Agreement, the Receivables Facility and the 10% Notes. If we do
not generate sufficient cash flow to meet our debt service obligations, we could face liquidity
problems and we might be required to refinance or restructure our
indebtedness, sell the entire company or dispose of material
assets or operations, reduce or delay capital expenditures or take other actions that could have a
material adverse effect on us. We can provide no assurances that any such refinancing or
restructuring of our debt or any other such actions could be accomplished or as to the timing or
terms thereof. The proceeds from any sale of our assets in all likelihood would have to be applied
to the reduction of our first priority secured debt.
We can provide no assurances that we will be able to obtain additional debt financing, as a result
of, among other things, our anticipated high levels of indebtedness and the debt incurrence
restrictions imposed by the agreements governing our indebtedness and because we pledged
substantially all our assets as collateral to secure obligations under our various existing
financing agreements, including the 2005 Credit Agreement, the Receivables Facility and the 10%
Notes.
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The agreements and instruments governing our indebtedness contain restrictions and limitations that
could significantly affect our ability to operate our business.
The 2005 Credit Agreement and the Receivables Facility require satisfaction of:
| a first lien leverage ratio test; and | ||
| a minimum total liquidity test. |
See Managements Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources for information about amendments to our credit
facilities on June 13, 2007.
In addition, the 2005 Credit Agreement includes various other customary affirmative and negative
covenants and events of default. These covenants, among other things, restrict our ability and the
ability of Holdings to:
| incur or guarantee additional debt; | ||
| create or permit to exist certain liens; | ||
| pledge assets or engage in sale-leaseback transactions; | ||
| make capital expenditures, other investments or acquisitions; | ||
| prepay, redeem, acquire for value, refund, refinance, or exchange certain debt (including the 10% Notes), subject to certain exceptions; | ||
| repurchase or redeem equity interests; | ||
| change the nature of our business; | ||
| pay dividends or make other distributions; | ||
| enter into transactions with affiliates; | ||
| dispose of assets or enter into mergers or other business combinations; and | ||
| place restrictions on dividends, distributions or transfers to us or Holdings from our subsidiaries. |
These restrictions could limit our ability to obtain future financing, make needed capital
expenditures, withstand a future downturn in our business or the economy in general, conduct
operations or otherwise take advantage of business opportunities that may arise.
The Receivables Facility contains other customary affirmative and negative covenants and events of
default. It also contains other covenants customary for facilities of this type, including
requirements related to credit and collection policies, deposits of collections and maintenance by
each party of its separate corporate identity, including maintenance of separate records, books,
assets and liabilities and disclosures about the transactions in the financial statements of
Holdings and its consolidated subsidiaries. Failure to meet these covenants could lead to an
acceleration of the obligations under the Receivables Facility, following which the lenders would
have the right to sell the assets securing the Receivables Facility.
Events beyond our control, including changes in general economic and business conditions, may
affect our ability to meet the first lien leverage ratio test and the minimum total liquidity test
referred to above. We can provide no assurances that we will meet either of these tests or that
the lenders under the 2005 Credit Agreement or the Receivables Facility will waive any default
arising from any failure to meet either of these tests.
The indenture for the 10% Notes limits Graphics and its restricted subsidiaries ability, among other things, to:
| incur additional debt; | ||
| pay dividends, acquire shares of capital stock, make payments on subordinated debt or make investments; | ||
| make distributions from restricted subsidiaries; | ||
| issue or sell capital stock of restricted subsidiaries; | ||
| issue guarantees; | ||
| sell or exchange assets; | ||
| enter into transactions with shareholders and affiliates; | ||
| enter into sale-leaseback transactions; | ||
| create liens; and | ||
| effect mergers. |
The 10% Note indenture requires that Graphics commence, within 30 days of the occurrence of a
Change of Control (as defined therein), and consummate an offer to purchase all 10% Notes then
outstanding, at a purchase price equal to 101% of
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their principal amount, plus accrued interest (if
any) to the payment date. The 10% Note indenture provides that such covenant can be amended or
waived with the consent of the holders of the requisite percentage of the 10% Notes. There can be
no assurance that such consent could be obtained.
There can be no assurance that Graphics would have sufficient funds available at the time of any
such Change of Control to make any debt payment (including repurchases of the 10% Notes) required
by the foregoing covenant (as well as may be contained in other securities of Graphics that might
be outstanding at the time). The above covenant requiring Graphics to repurchase the 10% Notes
would, unless consents are obtained from the requisite creditors, require Graphics to repay all
indebtedness then outstanding which by its terms would prohibit such 10% Note repurchase, either
prior to or concurrently with such 10% Note repurchase.
See the 10% Note indenture and the related intercreditor and security agreements for a description
of the terms of the 10% Notes.
A breach of a covenant in any of our debt agreements or instruments could result in an event
of default under such debt agreement or instrument. In addition, the 2005 Credit Agreement and the
Receivables Facility contain customary cross default provisions. The 10% Note indenture contains a
cross acceleration provision and, with respect to certain principal payment requirements, a cross
default provision.
If an event of default under the 2005 Credit Agreement or the Receivables Facility occurs, the
lenders thereunder could elect to declare all amounts outstanding thereunder, together with accrued
interest, to be immediately due and payable. The lenders thereunder would also have the right in
these circumstances to terminate any commitments they made to provide further borrowings. If we
are unable to repay outstanding borrowings when due, the lenders under the 2005 Credit Agreement
and the Receivables Facility will also have the right to proceed against the collateral, including
our available cash and our pledged assets, granted to them to secure the indebtedness. If the
indebtedness under the 2005 Credit Agreement and the Receivables Facility were to be accelerated,
we cannot assure you that our assets would be sufficient to repay that indebtedness and our other
indebtedness in full. If not cured or waived, such default could have a material adverse effect on
our business and our prospects.
If we are unable to retain key management personnel, our business could be adversely affected.
Our success is dependent to a large degree upon the continued service of key members of our
management, particularly Stephen M. Dyott, our Chairman and Chief Executive Officer, Patrick W.
Kellick, our Chief Financial Officer, Kathleen A. DeKam, our President of Graphics, Stuart R.
Reeve, our President, New Business Development and Denis S. Longpré, our Executive Vice President,
Sales. The loss of any of these key executives could have a material adverse effect on our
business, financial condition and results of operations. See Executive
Compensation-Termination and Change in Control Payments for information concerning certain
agreements with such persons concerning their employment by us.
We are subject to competitive pressures.
Overall, commercial printing in the United States is a large, highly fragmented, capital-intensive
industry. We compete with numerous national, regional and local printers, although there has been
significant consolidation in our industry over the last decade. Our largest competitors are Vertis,
Inc. and Quebecor World Inc. and, to a lesser degree, R.R. Donnelley & Sons Company. The trend of
industry consolidation in recent years can be attributed to:
| customer preferences for larger printers with a greater range of services; | ||
| capital requirements; and | ||
| competitive pricing pressures. |
We have experienced significant competitive pricing pressures in recent years as a result of
industry overcapacity and the aggressive pricing strategies of certain competitors that have
negatively impacted our profitability. We believe there continues to be a modest amount of excess
capacity in the printing industry. Continued competitive pricing or any future periods of economic
downturn could further adversely affect our profitability and overall levels of cash flow.
Our premedia services segment competes with numerous premedia services firms on both a national and
regional basis. The industry consists of small local and regional companies, with only a few
national full-service premedia services companies such as Graphics, none of which has a significant
nationwide market share. In addition, there has been a recent onset of competition from offshore premedia
services companies who are competing on price. We believe that we need to remain
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focused on
delivering advanced technology based workflow solutions and superior customer service in order to
remain competitive with U.S. and offshore based companies.
Any future periods of economic downturn could result in continuing increased competition and
possibly affect our sales and profitability. A decline in sales and profitability may decrease our
cash flow and make it more difficult for us to service our level of indebtedness.
Because our business is sensitive to changes in paper prices, our business could be adversely
affected if paper prices increase significantly and we are unable to pass through price increases
to our customers.
Paper is a key raw material in our operations. Our results of operations and financial condition
are affected by the cost of paper, which is determined by constantly changing market forces of
supply and demand over which we have no control. If we are unable to pass through price increases
to customers or our customers reduce the size of their print advertising programs, significant
increases in paper prices could have a material adverse effect on our production volume,
profitability and cash flow.
In accordance with industry practice, we attempt to 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 can provide no assurances that we will be able to pass through future
paper price increases. In addition, increases in the cost of paper, and therefore the cost of
printed advertisements, may cause some of our advertising customers to reduce their print
advertising programs, which could have a material adverse effect on us.
Increases or decreases in the demand for paper have led to corresponding pricing changes and, in
periods of high demand, to limitations on the availability of certain grades of paper, including
grades used by us. A loss of the sources of paper supply or a disruption in those sources business
or their failure to meet our product needs on a timely basis could cause temporary shortages in
needed materials that could have a negative effect on our results of operations, including sales
and profitability.
Demand for our services may decrease due to a decline in customers or an industry sectors
financial condition or due to an economic downturn.
We can provide no assurances that the demand for our services will continue at current levels. Our
customers demand for our services may change based on their needs and financial condition. In
addition, when economic downturns affect particular clients or industry sectors, demand for
advertising and marketing services provided to these clients or industry sectors is often adversely
affected. A substantial portion of our revenue is generated from customers in the retail industry.
There can be no assurance that economic conditions or the demand for our services will improve or
that they will not deteriorate. If there is another period of economic downturn or stagnation, our
results of operations may be adversely affected.
If we do not keep pace with technological changes, we will not be able to maintain our competitive
position.
The premedia services business has experienced rapid and substantial changes during the past few
years primarily due to advancements in available technology, including the evolution to electronic
and digital formats. Many smaller competitors have left the industry as a result of their inability
to keep pace with technological advances required to service customer demands. We expect that
further changes in technology will affect our premedia services business, and that we will need to
adapt to technological advances as they occur. As technology in our business continues to improve
and evolve, we will need to maintain our competitive position. If we are unable to respond
appropriately to future changes and advancements in premedia technology, our premedia services
business will be adversely affected.
Our noncompliance with or liability for cleanup under environmental regulations or efforts to
comply with changes to current environmental regulations could adversely affect our business.
We are subject to federal, state and local laws, regulations and ordinances that:
| govern activities or operations that may adversely affect the environment, such as discharges to air and water, as well as handling and disposal practices for solid and hazardous wastes; and | ||
| impose liability for the costs of cleaning up, and certain damages resulting from, sites of past spills, disposals or other releases of hazardous substances. |
Noncompliance with or liability for cleanup under the environmental laws applicable to us could
have a material adverse effect on our results of operations, financial condition and cash flows. In
addition, changes in environmental laws and
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regulations, developments in environmental litigation
or technological advances could increase the amount of future expenditures and could have a
material adverse effect on our results of operations, financial condition and cash flows.
Metalmark controls us, and its interests and those of the Morgan Stanley Funds could be in conflict
with our interests.
The Morgan Stanley Leveraged Equity Fund II, L.P., Morgan Stanley Capital Partners III, L.P.,
Morgan Stanley Capital Investors, L.P., and MSCP III 892 Investors, L.P., which we refer to
collectively as the Morgan Stanley Funds, own shares of common stock of Holdings constituting 52.3%
of the outstanding common stock, and 47.2% of the fully diluted common equity, of Holdings. The
general partners of such limited partnerships are wholly-owned subsidiaries of Morgan Stanley.
Metalmark Capital LLC (Metalmark) is an independent private equity firm established in 2004 by
former principals of Morgan Stanley Capital Partners. An affiliate of Metalmark manages Morgan
Stanley Capital Partners III, L.P. and MSCP III 892 Investors, L.P. pursuant to a subadvisory
agreement. In addition, under such subadvisory arrangement, Morgan Stanley Capital Investors, L.P.
and The Morgan Stanley Leveraged Equity Fund II, L.P. are effectively obligated to vote or direct
the vote and to dispose or direct the disposition of any of our shares owned directly by them on
the same terms and conditions as are determined by Metalmark with respect to shares held by Morgan
Stanley Capital Partners III, L.P. and MSCP III 892 Investors, L.P. Three of the directors of
Holdings, Messrs. Fry, Hoffman and Chung, are employees of Metalmark. As a result of these
relationships, Metalmark may be deemed to control our management and policies. In addition,
Metalmark may be deemed to control all matters requiring stockholder approval, including the
election of a majority of our directors, the adoption of amendments to our certificate of
incorporation, our payment of dividends (subject to restrictions under our debt agreements) and the
approval of mergers and sales of all or substantially all our assets. Circumstances could arise
under which the interests of Metalmark or the Morgan Stanley Funds could be in conflict with our
interests.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We operate in 15 locations in 11 states and Canada. We own seven print plants in the United States
and one in Canada and lease one newspaper service facility in the United States. Our premedia
services business has six stand-alone production locations, all of which are leased. The premedia
services division also operates 18 managed service sites, which are premedia facilities located in
a customer site. In addition, we maintain one small executive office in Connecticut and our
headquarters facility in Brentwood, Tennessee, both of which are leased. We believe that our
plants and facilities are adequately equipped and maintained for present and planned operations.
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,
results of operations or cash flows.
Environmental Matters
Graphics, together with over 300 other persons, was designated by the U. S. Environmental
Protection Agency as a potentially responsible party, or a PRP, under the Comprehensive
Environmental Response Compensation and Liability Act, which we refer to as CERCLA or Superfund, at
a solvent recovery operation that closed in 1989. 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 in writing that Graphics share of removal costs is approximately 0.583%; therefore we
believe that our share of the anticipated remediation costs at such site will not be material to
our business or consolidated financial statements as a whole.
Graphics received written notice, dated May 10, 2004, of its potential liability in connection with
the Gibson Environmental Site at 2401 Gibson Street, Bakersfield, California. Gibson
Environmental, Inc. operated the (six acre) Site as a storage and treatment facility for used oil
and contaminated soil from June 1987 through October 1995. Graphics received the notice and a
Settlement Offer from LECG, a consultant representing approximately 60 companies comprising the
Gibson Group Trust. We are investigating this matter but we believe our potential liability in
connection with this Site will not be material to our business or consolidated financial statements
as a whole.
Based upon an analysis of Graphics volumetric share of waste contributed to these sites, we
maintain a reserve of approximately $0.1 million in connection with these liabilities in our
consolidated balance sheet at March 31, 2007. We believe this amount is adequate to cover such
liabilities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information
There is no established public market for the common stock of either Holdings or Graphics.
Holders
As of May 31, 2007, there were approximately 120 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 three 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
There have been no sales of unregistered securities during the three most recent fiscal
years.
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is selected financial data for and as of the fiscal years ended March 31, 2007,
2006, 2005, 2004 and 2003. The balance sheet data as of March 31, 2007, 2006, 2005, 2004, 2003 and
the statements of operations data for the fiscal years ended March 31, 2007, 2006, 2005, 2004 and
2003 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, 2004 and 2003,
also reflects our former digital visual effects business (Digiscope) as a discontinued operation.
This data should be read in conjunction with Managements Discussion and Analysis of Financial
Condition and Results of Operations and our consolidated financial statements appearing elsewhere
in this Report.
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ACG Holdings, Inc.
Selected Financial Data
Selected Financial Data
Fiscal Year Ended March 31, | ||||||||||||||||||||
2007 | 2006 | 2005 | 2004 | 2003 | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Statements of Operations Data: |
||||||||||||||||||||
Sales |
$ | 445,026 | 434,489 | 449,513 | 471,102 | 517,139 | ||||||||||||||
Cost of sales |
397,115 | 385,150 | 403,641 | 409,321 | 445,493 | |||||||||||||||
Gross profit |
47,911 | 49,339 | 45,872 | 61,781 | 71,646 | |||||||||||||||
Selling, general and administrative expenses |
27,539 | 26,792 | 28,824 | 32,734 | 37,614 | |||||||||||||||
Restructuring costs (benefit) and other charges (a) |
(445 | ) | (1,167 | ) | 10,037 | 8,140 | 1,722 | |||||||||||||
Operating income |
20,817 | 23,714 | 7,011 | 20,907 | 32,310 | |||||||||||||||
Interest expense, net |
40,305 | 37,541 | 34,050 | 34,166 | 28,584 | |||||||||||||||
Loss on early extinguishment of debt (b) |
| | | 3,196 | | |||||||||||||||
Other expense (c) |
1,714 | 4,119 | 313 | 489 | 1,503 | |||||||||||||||
Income tax expense (benefit) (d) |
(193 | ) | (3,369 | ) | (1,685 | ) | 11,441 | 1,559 | ||||||||||||
Income (loss) from continuing operations |
(21,009 | ) | (14,577 | ) | (25,667 | ) | (28,385 | ) | 664 | |||||||||||
Discontinued operations: (e) |
||||||||||||||||||||
Loss from operations, net of $0 tax |
| | | 12 | 979 | |||||||||||||||
Loss on disposal, net of $0 tax |
| | | 444 | | |||||||||||||||
Net loss |
$ | (21,009 | ) | (14,577 | ) | (25,667 | ) | (28,841 | ) | (315 | ) | |||||||||
Balance Sheet Data (at end of period): |
||||||||||||||||||||
Working capital deficit |
$ | (6,330 | ) | (15,704 | ) | (10,660 | ) | (15,772 | ) | (29,820 | ) | |||||||||
Total assets |
$ | 226,733 | 231,502 | 258,898 | 267,913 | 278,441 | ||||||||||||||
Long-term debt and capitalized leases, including current installments |
$ | 352,110 | 324,284 | 309,951 | 298,298 | 231,757 | ||||||||||||||
Stockholders deficit |
$ | (243,638 | ) | (229,732 | ) | (212,740 | ) | (188,775 | ) | (107,699 | ) | |||||||||
Other Data: |
||||||||||||||||||||
Net cash provided (used) by operating activities |
$ | (12,167 | ) | (5,213 | ) | (3,575 | ) | 21,163 | 45,647 | |||||||||||
Net cash used by investing activities |
$ | (12,703 | ) | (5,523 | ) | (7,172 | ) | (13,118 | ) | (27,446 | ) | |||||||||
Net cash provided (used) by financing activities |
$ | 24,870 | 10,760 | 10,822 | (7,924 | ) | (22,680 | ) | ||||||||||||
Capital expenditures (including capital lease obligations entered into) |
$ | 12,701 | 12,486 | 6,907 | 15,966 | 28,652 | ||||||||||||||
Ratio of earnings to fixed charges (f) |
| | | | 1.07 | x | ||||||||||||||
EBITDA (g) |
$ | 37,733 | 39,078 | 29,749 | 41,054 | 54,279 |
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NOTES TO SELECTED FINANCIAL DATA
(a) | In March 2005, we approved a restructuring plan for our premedia services segment, which was designed to improve operating efficiencies and overall profitability. We recorded $1.5 million of costs under this plan in Fiscal Year 2005. We recorded $(0.1) million and $(0.3) million of costs for this plan in Fiscal Year 2007 and Fiscal Year 2006, respectively. | |
In March 2005, we approved a restructuring plan for our print segment, to reduce manufacturing costs and improve profitability. We recorded $3.1 million of costs under this plan in Fiscal Year 2005. We recorded $(0.9) million of costs for this plan in Fiscal Year 2006. | ||
In February 2005, we approved a restructuring plan for our print and premedia services segments, to reduce overhead costs and improve operating efficiency and profitability. We recorded $3.8 million of costs under this plan in Fiscal Year 2005. We recorded $(0.1) million and $(0.4) million of costs for this plan in Fiscal Year 2007 and Fiscal Year 2006, respectively. | ||
In January 2004, we approved a restructuring plan for our print and premedia services segments, which was designed to improve operating efficiency and profitability. We recorded $5.7 million of costs under this plan in Fiscal Year 2004. We recorded $(0.2) million, $(0.1) million and $(0.7) million of costs for this plan in Fiscal Year 2007, Fiscal Year 2006 and Fiscal Year 2005, respectively. | ||
In July 2003, we implemented a restructuring plan for our print and premedia services segments to further reduce our selling, general and administrative expenses. We recorded $1.8 million of costs under this plan in Fiscal Year 2004. | ||
In the fourth quarter of Fiscal Year 2003, we approved a restructuring plan for our print and premedia services segments, which was designed to improve operating efficiency and profitability. We recorded $1.2 million of costs under this plan in Fiscal Year 2003. We recorded $(0.2) million of costs for this plan in Fiscal Year 2004. | ||
In January 2002, we approved a restructuring plan for our print and premedia services segments, which was designed to improve asset utilization, operating efficiency and profitability. We recorded $8.6 million of costs under this plan in Fiscal Year 2002. We recorded an additional $0.5 million, $0.7 million and $0.4 million of costs for this plan in Fiscal Year 2006, Fiscal Year 2005 and Fiscal Year 2004, respectively. | ||
In addition, we recorded $1.6 million, $0.4 million and $0.5 million of other charges in our print and premedia services divisions in Fiscal Year 2005, Fiscal Year 2004 and Fiscal Year 2003, respectively. See note 14 to our consolidated financial statements appearing elsewhere in this Report for further discussion of this restructuring activity. | ||
(b) | As part of a refinancing transaction entered into on July 3, 2003, we recorded a loss related to the early extinguishment of debt of $3.2 million, net of zero taxes. This loss related to the write-off of deferred financing costs associated with our old bank credit agreement and our 123/4% Senior Subordinated Notes Due 2005 (the 123/4% Notes), neither of which remain outstanding or in effect as of the date of this Report. | |
(c) | In the fourth quarter of the fiscal year ended March 31, 2006, we concluded that certain non-production information technology assets of the print segment were fully impaired as a result of our periodic assessment. This impairment resulted in a charge of $2.8 million. The impairment charge is classified within other, net in the consolidated statement of operations for the fiscal year ended March 31, 2006. | |
(d) | In Fiscal Year 2007, income tax benefit relates primarily to an adjustment recorded in the first quarter of $0.4 million to reflect the tax benefit associated with a change in estimate with respect to our income tax liability, net of tax expense related to taxable income in foreign jurisdictions. The valuation allowance increased by $6.0 million in Fiscal Year 2007 as a result of changes in the deferred tax items. This increase primarily includes an $8.8 million increase related to the tax effect of temporary differences generating deferred tax assets and a decrease of $2.8 million related to the tax effect of the decrease in the additional minimum pension liability, which is a component of other comprehensive income (loss). |
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In Fiscal Year 2006, income tax benefit relates primarily to an adjustment recorded in the third quarter of $3.6 million to reflect the tax benefit associated with a change in estimate with respect to our income tax liability, net of tax expense related to taxable income in foreign jurisdictions. The valuation allowance increased by $7.1 million in Fiscal Year 2006 as a result of changes in the deferred tax items. This increase primarily includes a $6.1 million increase related to the tax effect of temporary differences generating deferred tax assets and an increase of $1.0 million related to the tax effect of the increase in the additional minimum pension liability, which is a component of other comprehensive income (loss). | ||
In Fiscal Year 2005, income tax benefit relates primarily to tax benefit from losses in foreign jurisdictions and to an adjustment recorded in the third quarter of $0.4 million to reflect the tax benefit associated with a change in estimate with respect to our income tax liability. The valuation allowance increased by $9.6 million in Fiscal Year 2005 as a result of changes in the deferred tax items. This increase included a $9.6 million increase related to the tax effect of temporary differences generating deferred tax assets, net of a decrease of $0.4 million related to the tax effect of the decrease in the additional minimum pension liability, which is a component of other comprehensive income (loss). | ||
In the second quarter of Fiscal Year 2004, the valuation allowance for deferred tax assets was increased by $12.8 million, resulting in a corresponding debit to deferred income tax expense. This adjustment reflected a change in circumstances which resulted in a judgment that, based on the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109) that restrict our ability to consider forecasts of future income, a corresponding amount of deferred tax assets may not be realized. The change in circumstances arose from our assessment of the economic climate, particularly the continuance of competitive pricing pressures in our industry, and the expected increase in annual interest costs arising from the issuance of our 10% Notes in July 2003 that provided negative evidence about our ability to realize certain deferred tax assets. We will reverse our valuation allowance into income when and to the extent sufficient evidence arises to support the realization of the related deferred tax assets. The valuation allowance increased by $18.4 million in the fiscal year ended March 31, 2004 (Fiscal Year 2004) as a result of changes in the deferred tax items. This increase primarily included the $12.8 million increase discussed above and a $5.6 million increase related to the tax effect of temporary differences generating deferred tax assets, which is net of a decrease of $1.3 million related to the tax effect of the decrease in the additional minimum pension liability, a component of other comprehensive income (loss). In the third quarter of Fiscal Year 2004, we recorded an adjustment of $2.2 million to reflect the tax benefit associated with a change in estimate with respect to our income tax liability. | ||
The valuation allowance increased by $3.5 million in the fiscal year ended March 31, 2003 (Fiscal Year 2003) as a result of changes in the deferred tax items. This increase is primarily due to a $5.0 million increase related to the tax effect of the additional minimum pension liability, which is a component of other comprehensive income (loss), partially offset by a decrease in other temporary differences generating deferred tax assets. | ||
(e) | In June 2003, we made a strategic decision to sell the operations of our digital visual effects business, Digiscope, for a de minimis amount. This resulted in a net loss of approximately $0.4 million in the quarter ended June 30, 2003, which is net of zero income tax benefit. As a result of this sale, Digiscope has been accounted for as a discontinued operation, and accordingly, Digiscopes operations are segregated in our consolidated financial statements. Sales, cost of sales and selling, general and administrative expenses attributable to Digiscope for Fiscal Year 2003 have been reclassified and presented within discontinued operations. Sales attributable to Digiscope for Fiscal Year 2004 and Fiscal Year 2003 were $0.8 million and $3.2 million, respectively. | |
(f) | The ratio of earnings to fixed charges is calculated by dividing earnings (representing consolidated pretax income or loss from continuing operations) before fixed charges by fixed charges. Fixed charges consist of interest expense, net amortization of debt issuance expense, and that portion of operating lease rental expense which we deem to be representative of interest. The deficiency in earnings to cover fixed charges is computed by subtracting earnings before fixed charges, income taxes and discontinued operations from fixed charges. The deficiency in earnings required to cover fixed charges for Fiscal Years 2007, 2006, 2005 and 2004 was $21.2 million, $17.9 million, $27.4 million and $16.9 million, respectively. | |
(g) | We have included EBITDA because we believe that investors regard EBITDA as a key measure of a leveraged companys operating performance as it removes interest, taxes, depreciation and amortization from the operational results of our business. EBITDA is defined as earnings before net interest expense, income tax expense (benefit), depreciation and amortization. EBITDA is not a measure of financial performance under U.S. generally accepted |
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accounting principles and should not be considered an alternative to net income (loss) (or any other measure of performance under U.S. 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. Our calculation of EBITDA may be different from the calculations used by other companies and therefore comparability may be limited. Certain covenants in our debt agreements are based on, or include EBITDA, subject to certain adjustments. The following table provides a reconciliation of EBITDA to net loss: |
Fiscal Year Ended March 31, | ||||||||||||||||||||
2007 | 2006 | 2005 | 2004 | 2003 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
EBITDA |
$ | 37,733 | 39,078 | 29,749 | 41,054 | 54,279 | ||||||||||||||
Depreciation and amortization |
(18,630 | ) | (19,483 | ) | (23,051 | ) | (24,288 | ) | (24,451 | ) | ||||||||||
Interest expense, net |
(40,305 | ) | (37,541 | ) | (34,050 | ) | (34,166 | ) | (28,584 | ) | ||||||||||
Income tax (expense) benefit |
193 | 3,369 | 1,685 | (11,441 | ) | (1,559 | ) | |||||||||||||
Net loss |
$ | (21,009 | ) | (14,577 | ) | (25,667 | ) | (28,841 | ) | (315 | ) | |||||||||
The following items are included in the determination of EBITDA and net loss above:
Fiscal Year Ended March 31, | ||||||||||||||||||||
2007 | 2006 | 2005 | 2004 | 2003 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Restructuring costs (benefit) |
$ | (445 | ) | (1,167 | ) | 8,369 | 7,768 | 1,191 | ||||||||||||
Other charges |
| | 1,668 | 372 | 531 | |||||||||||||||
Loss on early extinguishment
of debt |
| | | 3,196 | | |||||||||||||||
Loss from discontinued
operations |
| | | 456 | 979 | |||||||||||||||
Impairment of assets |
| 2,830 | | | 750 | |||||||||||||||
Total |
$ | (445 | ) | 1,663 | 10,037 | 11,792 | 3,451 | |||||||||||||
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ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Overview
The most important drivers of our results of operations include:
| the relationships we have developed with key long-term customers and the capital we have devoted to those relationships; | ||
| the balance between capacity and demand in our industry sector; and | ||
| our experienced management teams clear focus on servicing the retail advertising insert and newspaper markets. |
We believe that our willingness to customize and improve customer solutions and our commitment to
technology leadership significantly enhances our ability to develop and maintain lasting
relationships. We provide our print customers with comprehensive services and solutions at our
print facilities and through our premedia services division. In the premedia services business, we
believe that we are one of a small number of companies that can provide a full range of premedia
services, and we use those capabilities to support our print sales. We also manage 18 facilities
for customers at their offices, which enables us to develop strong and long-term relationships with
them.
Our profitability has been negatively impacted over the past several years by significant
competitive pricing pressures due largely to continuing excess industry capacity, the prevailing
conditions within the retail markets and the aggressive pricing strategies of certain competitors.
We continue to be committed, however, to providing comprehensive solutions at competitive prices.
We believe we are one of the lowest cost producers of retail advertising inserts and we intend to
continue our disciplined focus on overall cost reduction through ongoing productivity and
efficiency improvements at our print facilities. In addition, we have been successful in reducing
our cost structure in our premedia services business and we expect continued improvements through
the implementation and management of disciplined cost containment programs and through the
application of certain digital premedia production methodologies and technological leadership.
We are one of the leading printers of retail advertising inserts in the United States. In Fiscal
Year 2007, retail advertising inserts accounted for 82% of our total print segment sales and in
Fiscal Years 2006 and 2005 accounted for 81% and 83% of our total print segment sales,
respectively. The focus and attention of our entire management team continues to be dedicated to
serving the retail advertising insert market. We have made, and will continue to make, disciplined
strategic capital investments to enable us to maintain our position as a leader in the retail
advertising insert market.
In addition to the items impacting our operating results discussed above, the cost of raw materials
used in our print business, which are primarily paper and ink, also affects our results of
operations. The cost of paper is a principal factor in our overall pricing to our customers. As a
result, the level of paper costs and the proportion of paper supplied by our customers have a
significant impact on our reported sales. Paper prices generally increased throughout Fiscal Years
2005 and 2006. During Fiscal Year 2007, paper prices generally decreased. In accordance with
industry practice, we generally pass through increases in the cost of paper to customers in the
cost of printed products, while decreases in paper costs generally result in lower prices to
customers.
Variances in gross profit margin are impacted by product and customer mix and are also affected by
changes in sales resulting from changes in paper prices and changes in the level of customer
supplied paper. Our gross margin may not be comparable from period to period because of the impact
of changes in paper prices included in sales and changes in the levels of customer supplied paper.
A portion of our print and premedia services business is seasonal in nature, particularly
those revenues that are derived from retail advertising inserts. Generally, our sales from retail
advertising inserts are highest during the following advertising periods: the Spring advertising
season from March to May, the Back-to-School advertising season from July to August, and the
Thanksgiving/Christmas advertising season from October to December. Sales of Sunday newspaper
comics are not subject to significant seasonal fluctuations. Our strategy includes, 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, such as food and drug companies, which
utilize retail advertising inserts more frequently.
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Recent Performance
During Fiscal Year 2007, we continued to operate in a very challenging and competitive market
environment in both our print and premedia services segments. Our print production volume
increased 1.3% from Fiscal Year 2006 levels, however, overall print profitability was negatively
impacted in Fiscal Year 2007 as a result of:
| the continuance of competitive pricing due to a modest amount of excess industry capacity; | ||
| incremental costs associated with the start-up of a replacement press in one of our print facilities; | ||
| incremental costs associated with the start-up of a newspaper service facility; and | ||
| increased utility costs and foreign exchange losses. |
Premedia profitability was negatively impacted in Fiscal Year 2007 as a result of:
| reduced volume; | ||
| the impact of competitive pricing in this segment; and | ||
| reductions in certain service requirements related to one major customer. |
In addition, other operations expenses were higher as a result of increased corporate expenses due
to incremental legal costs associated with two lawsuits in which the Company is the plaintiff.
We anticipate that in the fiscal year ending March 31, 2008 (Fiscal Year 2008), we will continue
to operate in a very competitive market environment in both our print and premedia services
segments. We also expect to make continued progress in reducing our overall cost structure in both
segments through the ongoing implementation and management of disciplined cost containment
programs.
In September 2006, we improved our overall liquidity position through the formation of American
Color Graphics Finance, LLC (Graphics Finance), a wholly-owned subsidiary of Graphics, and the
execution of a $35 million revolving trade receivables facility (the Receivables Facility)
between Graphics Finance and Banc of America Securities, LLC, as Sole Lead Arranger and Sole Book
Manager, and Bank of America, N.A., as Administrative Agent, Collateral Agent and Lender, and
certain other lenders. See -Liquidity and Capital Resources and Risk Factors.
On June 13, 2007, the 2005 Credit Agreement and the Receivables Facility were amended to (a)
increase the maximum permissible first lien leverage ratios as of the last day of our fiscal
quarters ending September 30, and December 31, 2007, and March 31, 2008, and (b) require that we
maintain certain levels of minimum total liquidity at November 30, December 13, and December 31,
2007, and at the end of each month thereafter through March 31, 2008. See -Liquidity and
Capital Resources and Risk Factors.
Our Restructuring Results and Cost Reduction Initiatives
We have been successful in implementing significant cost reductions and improved operating
efficiencies over the past several years through both specific restructuring programs as well as
the implementation of ongoing productivity and income improvement initiatives at our facilities.
Since January 2002, our specific restructuring programs have resulted in the elimination of
approximately 637 positions within our Company and included the closure of two print facilities and
two premedia services facilities, the downsizing of one print facility and one premedia services
facility and the consolidation of two premedia services facilities.
With respect to restructuring activity in the last three fiscal years, in the quarter ended March
31, 2005, we approved three restructuring programs which resulted in:
| reduced headcount in the manufacturing and the selling and administrative areas; | ||
| the closure and sale of the Pittsburg, California print facility; and | ||
| the consolidation of our two premedia services facilities in New York, New York. |
These combined programs resulted in the elimination of 206 positions within our Company. As a
result of these actions, we recognized restructuring expense of $8.4 million and other charges of
$1.6 million in Fiscal Year 2005.
In Fiscal Years 2007 and 2006, we recognized net reversals of excess restructuring costs accrued in
prior periods of $0.4 million and $1.2 million, respectively. At March 31, 2007, we had accrued
restructuring costs of approximately $2.2 million recorded in our consolidated balance sheet. We
expect to make cash payments of approximately $1.1 million of the
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accrued
restructuring costs during Fiscal Year 2008, $0.3 million during the fiscal year ending March 31,
2009 (Fiscal Year 2009) and approximately $0.4 million in each of the fiscal years ending March
31, 2010 (Fiscal Year 2010) and March 31, 2011 (Fiscal Year 2011) associated with these
programs. See note 14 to our consolidated financial statements appearing elsewhere in this Report.
The following table summarizes the expense (income) recorded relating to the restructuring and
other charges incurred in association with our restructuring plans by segment for the three most
recent fiscal years (in thousands):
Fiscal Year | Fiscal Year | Fiscal Year | Three Year | |||||||||||||
2005 | 2006 | 2007 | Total | |||||||||||||
Fiscal Year 2002 Plan Costs |
||||||||||||||||
Restructuring costs: |
||||||||||||||||
Severance & other employee costs Print |
$ | (29 | ) | | | (29 | ) | |||||||||
Lease termination costs Print |
739 | 465 | | 1,204 | ||||||||||||
Total restructuring costs |
710 | 465 | | 1,175 | ||||||||||||
Fiscal Year 2003 Plan Costs |
||||||||||||||||
Restructuring costs: |
||||||||||||||||
Severance & other employee costs Premedia |
(5 | ) | | | (5 | ) | ||||||||||
Other costs Premedia |
(11 | ) | | | (11 | ) | ||||||||||
Total restructuring benefit |
(16 | ) | | | (16 | ) | ||||||||||
July 2003 Plan Costs |
||||||||||||||||
Restructuring costs: |
||||||||||||||||
Severance & other employee costs Print |
12 | | 11 | 23 | ||||||||||||
Severance & other employee costs Premedia |
(12 | ) | | | (12 | ) | ||||||||||
Total restructuring costs |
| | 11 | 11 | ||||||||||||
January 2004 Plan Costs |
||||||||||||||||
Restructuring costs: |
||||||||||||||||
Severance & other employee costs Print |
(234 | ) | (117 | ) | | (351 | ) | |||||||||
Severance & other employee costs Premedia |
(107 | ) | (66 | ) | (223 | ) | (396 | ) | ||||||||
Lease termination costs Print |
(3 | ) | | | (3 | ) | ||||||||||
Other costs Print |
(275 | ) | 117 | (15 | ) | (173 | ) | |||||||||
Other costs Premedia |
(75 | ) | | | (75 | ) | ||||||||||
Total restructuring benefit |
(694 | ) | (66 | ) | (238 | ) | (998 | ) | ||||||||
Fiscal Year 2005 Plant and SG&A Reduction Plan Costs |
||||||||||||||||
Restructuring costs: |
||||||||||||||||
Severance & other employee costs Print |
3,044 | (263 | ) | (39 | ) | 2,742 | ||||||||||
Severance & other employee costs Premedia |
458 | | (3 | ) | 455 | |||||||||||
Other costs Print |
200 | (124 | ) | (50 | ) | 26 | ||||||||||
Other costs Premedia |
50 | | (47 | ) | 3 | |||||||||||
Total restructuring costs (benefit) |
3,752 | (387 | ) | (139 | ) | 3,226 |
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Fiscal Year | Fiscal Year | Fiscal Year | Three Year | |||||||||||||
2005 | 2006 | 2007 | Total | |||||||||||||
Fiscal Year 2005 Pittsburg Facility Closure Plan Costs |
||||||||||||||||
Restructuring costs: |
||||||||||||||||
Severance & other employee costs Print |
2,293 | (812 | ) | | 1,481 | |||||||||||
Lease termination costs Print |
803 | (117 | ) | | 686 | |||||||||||
Other costs Print |
40 | | | 40 | ||||||||||||
Total restructuring costs (benefit) |
3,136 | (929 | ) | 2,207 | ||||||||||||
Other charges: |
||||||||||||||||
Asset impairment charge Print |
1,266 | | | 1,266 | ||||||||||||
Total other charges |
1,266 | | | 1,266 | ||||||||||||
Fiscal Year 2005 New York Premedia
Consolidation Plan Costs |
||||||||||||||||
Restructuring costs: |
||||||||||||||||
Severance & other employee costs Premedia |
195 | (40 | ) | | 155 | |||||||||||
Lease termination costs Premedia |
1,271 | (207 | ) | (79 | ) | 985 | ||||||||||
Other costs Premedia |
15 | (3 | ) | | 12 | |||||||||||
Total restructuring costs (benefit) |
1,481 | (250 | ) | (79 | ) | 1,152 | ||||||||||
Other charges: |
||||||||||||||||
Asset impairment charge Premedia |
402 | | | 402 | ||||||||||||
Total other charges |
402 | | | 402 | ||||||||||||
Total restructuring costs (benefit) |
8,369 | (1,167 | ) | (445 | ) | 6,757 | ||||||||||
Total other charges |
1,668 | | | 1,668 | ||||||||||||
Total restructuring costs (benefit) and
other charges |
$ | 10,037 | (1,167 | ) | (445 | ) | 8,425 | |||||||||
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The following table summarizes our historical results of continuing operations for Fiscal
Years 2007, 2006 and 2005.
Fiscal Year Ended March 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
(Dollars in thousands) | ||||||||||||
Sales |
||||||||||||
Print |
$ | 396,535 | 380,648 | 393,922 | ||||||||
Premedia Services |
48,491 | 53,841 | 55,591 | |||||||||
Total |
$ | 445,026 | 434,489 | 449,513 | ||||||||
Gross Profit |
||||||||||||
Print |
$ | 35,598 | 34,205 | 30,575 | ||||||||
Premedia Services |
12,303 | 15,134 | 15,293 | |||||||||
Other |
10 | | 4 | |||||||||
Total |
$ | 47,911 | 49,339 | 45,872 | ||||||||
Gross Margin |
||||||||||||
Print |
9.0 | % | 9.0 | % | 7.8 | % | ||||||
Premedia Services |
25.4 | % | 28.1 | % | 27.5 | % | ||||||
Total |
10.8 | % | 11.4 | % | 10.2 | % | ||||||
EBITDA |
||||||||||||
Print (a) |
$ | 33,730 | 31,571 | 22,997 | ||||||||
Premedia Services (a) |
8,777 | 11,070 | 10,059 | |||||||||
Other (b) |
(4,774 | ) | (3,563 | ) | (3,307 | ) | ||||||
Total |
$ | 37,733 | 39,078 | 29,749 | ||||||||
EBITDA Margin |
||||||||||||
Print |
8.5 | % | 8.3 | % | 5.8 | % | ||||||
Premedia Services |
18.1 | % | 20.6 | % | 18.1 | % | ||||||
Total |
8.5 | % | 9.0 | % | 6.6 | % |
(a) | In Fiscal Year 2007, EBITDA for the print and premedia services segments includes the impact of restructuring benefit of ($0.1) million and ($0.3) million, respectively. EBITDA for the print and premedia services segments in Fiscal Year 2006 includes the impact of restructuring benefit of ($0.9) million and ($0.3) million, respectively, and for the print segment also includes a non-cash asset impairment charge of $2.8 million. EBITDA for the print and premedia services segments in Fiscal Year 2005 includes the impact of restructuring costs and other charges of $7.8 million and $2.2 million, respectively. For additional information about our restructuring plan, see Our Restructuring Results and Cost Reduction Initiatives above. | |
(b) | Other operations include corporate general and administrative expenses. In addition, in Fiscal Year 2007, EBITDA for other operations includes the impact of incremental legal expenses associated with two lawsuits in which the Company is the plaintiff. |
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EBITDA is presented and discussed because management believes that investors regard EBITDA as a key
measure of a leveraged companys operating performance as it removes interest, taxes, depreciation
and amortization from the operational results of our business. EBITDA is defined as earnings
before net interest expense, income tax expense (benefit), depreciation and amortization. EBITDA
Margin is defined as EBITDA as a percentage of net sales. EBITDA is not a measure of financial
performance under U.S. generally accepted accounting principles and should not be considered an
alternative to net income (loss) (or any other measure of performance under U.S. 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 governing the 10% Notes, the 2005 Credit Agreement and the Receivables Facility
are based on, or include EBITDA, subject to certain adjustments. The following table provides
reconciliation (in thousands) of EBITDA to net income (loss):
Premedia | ||||||||||||||||
Services | Other | Total | ||||||||||||||
Fiscal Year 2007 |
||||||||||||||||
EBITDA |
$ | 33,730 | 8,777 | (4,774 | ) | 37,733 | ||||||||||
Depreciation and amortization |
(16,563 | ) | (2,067 | ) | | (18,630 | ) | |||||||||
Interest expense, net |
| | (40,305 | ) | (40,305 | ) | ||||||||||
Income tax benefit |
| | 193 | 193 | ||||||||||||
Net income (loss) |
$ | 17,167 | 6,710 | (44,886 | ) | (21,009 | ) | |||||||||
Fiscal Year 2006 |
||||||||||||||||
EBITDA |
$ | 31,571 | 11,070 | (3,563 | ) | 39,078 | ||||||||||
Depreciation and amortization |
(16,767 | ) | (2,716 | ) | | (19,483 | ) | |||||||||
Interest expense, net |
| | (37,541 | ) | (37,541 | ) | ||||||||||
Income tax benefit |
| | 3,369 | 3,369 | ||||||||||||
Net income (loss) |
$ | 14,804 | 8,354 | (37,735 | ) | (14,577 | ) | |||||||||
Fiscal Year 2005 |
||||||||||||||||
EBITDA |
$ | 22,997 | 10,059 | (3,307 | ) | 29,749 | ||||||||||
Depreciation and amortization |
(19,867 | ) | (3,184 | ) | | (23,051 | ) | |||||||||
Interest expense, net |
| | (34,050 | ) | (34,050 | ) | ||||||||||
Income tax benefit |
| | 1,685 | 1,685 | ||||||||||||
Net income (loss) |
$ | 3,130 | 6,875 | (35,672 | ) | (25,667 | ) | |||||||||
24
Table of Contents
Historical Results of Operations
Fiscal Year 2007 vs. Fiscal Year 2006
Total sales increased 2.4% to $445.0 million in Fiscal Year 2007 from $434.5 million in Fiscal Year
2006. This increase reflected an increase in print sales of $15.8 million, or 4.2%, offset in part
by a decrease in premedia services sales of $5.3 million, or 9.9%. Total gross profit decreased
to $47.9 million, or 10.8% of sales, in Fiscal Year 2007 from $49.3 million, or 11.4% of sales, in
Fiscal Year 2006. EBITDA decreased to $37.7 million, or 8.5% of sales, in Fiscal Year 2007 from
$39.1 million, or 9.0% of sales, in Fiscal Year 2006. See the discussion of these changes by
segment below.
Print
Sales. Print sales increased $15.8 million to $396.5 million in Fiscal Year 2007 from $380.7
million in Fiscal Year 2006. The increase in Fiscal Year 2007 primarily includes an increase in
print production volume of 1.3%, certain changes in customer and product mix and a decrease in the
level of customer supplied paper. These increases were offset in part by the continued impact of
competitive industry pricing. See Value Added Revenue and Print Impressions for the
Print Segment below.
Gross Profit. Print gross profit increased $1.4 million to $35.6 million in Fiscal Year 2007 from
$34.2 million in Fiscal Year 2006. Print gross margin remained unchanged at 9.0% in both Fiscal
Year 2007 and 2006. The increase in gross profit includes the impact of increased print production
volume, certain changes in customer and product mix and net benefits from various cost reduction
programs at our facilities. These increases were offset in part by the continuing impact of
competitive pricing pressures, increased utility costs, increased foreign exchange losses and
incremental costs associated with the start-up of a replacement press and a newspaper service
facility. Our gross margin may not be comparable from period to
period because of a) the impact of
changes in paper prices included in sales and b) changes in the level of customer supplied paper.
Selling, General and Administrative Expenses. Print selling, general and administrative expenses
increased $1.7 million to $18.3 million, or 4.6% of print sales, in Fiscal Year 2007, from $16.6
million, or 4.4% of print sales, in Fiscal Year 2006. This change primarily includes increases in
sales related compensation expense. These increases were offset in part by the impact of the change in our estimates related
to the allowance for doubtful accounts.
Restructuring Costs (Benefit) and Other Charges. Restructuring costs (benefit) and other charges
was a benefit of $(0.1) million in Fiscal Year 2007 versus a benefit of $(0.9) million in Fiscal
Year 2006. See Our Restructuring Results and Cost Reduction Initiatives above.
Other Expense (Income). Other expense (income) decreased $3.5 million to expense of $0.2 million
in Fiscal Year 2007 from expense of $3.7 million in Fiscal Year 2006. The Fiscal Year 2006 expense
included $2.8 million of non-cash asset impairment charges related to certain non-production
information technology assets as a result of our periodic assessment in accordance with Statement
of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS 144) and $0.4 million of non-recurring costs related to the closure of our
Pittsburg, California print facility, incurred in Fiscal Year 2006, which we were unable to accrue
as part of restructuring costs in Fiscal Year 2005.
EBITDA. As a result of the above factors and excluding the impact of depreciation and amortization,
EBITDA for the print business increased $2.1 million to $33.7 million in Fiscal Year 2007 from
$31.6 million in Fiscal Year 2006.
Premedia Services
Sales. Premedia services sales decreased $5.3 million to $48.5 million in Fiscal Year 2007 from
$53.8 million in Fiscal Year 2006. The decrease in Fiscal Year 2007 includes a decrease in
premedia production volume, the impact of continued competitive pricing pressures in this segment
and reductions in certain service requirements related to one major customer.
Gross Profit. Premedia services gross profit decreased $2.8 million to $12.3 million in Fiscal
Year 2007 from $15.1 million in Fiscal Year 2006. The decrease in gross profit includes the
impact of reduced sales, discussed above, offset in part by reduced manufacturing costs related to
benefits from various cost containment initiatives at our premedia facilities. Premedia services
gross margin decreased to 25.4% in Fiscal Year 2007 from 28.1% in Fiscal Year 2006.
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Selling, General and Administrative Expenses. Premedia services selling, general and
administrative expenses decreased $0.9 million to $5.8 million, or 12.0% of premedia services
sales in Fiscal Year 2007, from $6.7 million, or 12.4% of premedia services sales in Fiscal Year
2006. This decrease primarily includes the impact of decreased employee related costs in the
administrative areas and reduced amortization expense.
Restructuring Costs (Benefit) and Other Charges. Restructuring costs (benefit) and other charges
remained unchanged at a benefit of ($0.3) million in both Fiscal Year 2007 and 2006. See
Our Restructuring Results and Cost Reduction Initiatives above.
Other Expense (Income). Other expense (income) decreased to expense of $0.1 million in Fiscal Year
2007 from expense of $0.4 million in Fiscal Year 2006. This decrease was primarily due to net
losses on the sale of fixed assets in Fiscal Year 2006.
EBITDA. As a result of the above factors and excluding the impact of depreciation and
amortization, premedia services EBITDA decreased $2.3 million to $8.8 million in Fiscal Year 2007
from $11.1 million in Fiscal Year 2006.
Other Operations
Other operations consist primarily of corporate general and administrative expenses. In Fiscal
Year 2007, EBITDA for other operations increased to a loss of $4.8 million from a loss of $3.6
million in Fiscal Year 2006. This increased loss is largely related to incremental legal expenses
associated with two lawsuits in which the Company is the plaintiff.
Interest Expense
In Fiscal Year 2007, interest expense increased to $40.4 million from $37.6 million in Fiscal Year
2006. The increase in Fiscal Year 2007 is the result of both higher levels of indebtedness and
increased borrowing costs. See note 6 to our consolidated financial statements appearing elsewhere
in this Report.
Income Taxes
In Fiscal Year 2007, tax benefit decreased to a benefit of $0.2 million from a benefit of $3.4
million in Fiscal Year 2006. This decrease was primarily due to a Fiscal Year 2006 adjustment of
$3.6 million recorded to reflect a change in estimate with respect to our income tax liability net
of tax expense in foreign jurisdictions, partially offset by a Fiscal Year 2007 adjustment of $0.4
million recorded to reflect a change in estimate with respect to our income tax liability net of
Fiscal Year 2007 tax expense in foreign jurisdictions.
The adjustments arose from events that changed the Companys probability assessment (as discussed
in Statement of Financial Accounting Standards No. 5, Accounting for Contingencies) regarding the
likelihood that certain contingent income tax items would become actual future liabilities.
Net Loss
As a result of the factors discussed above, our net loss increased to $21.0 million in Fiscal Year
2007 from a net loss of $14.6 million in Fiscal Year 2006.
Additional Minimum Pension Liability
In compliance with Statement of Financial Accounting Standards No. 87, Employers Accounting for
Pensions (SFAS 87), we decreased our additional minimum pension liability to approximately $14.4
million in Fiscal Year 2007 from approximately $21.6 million in Fiscal Year 2006. This decrease
includes the net impact of plan activity including contributions to our plans, benefit payments,
investment market returns, plan expenses and an increase in our discount rate from 6.0% to 6.25%.
The recording of the reduction of this additional minimum pension liability had no impact on our
consolidated statement of operations for Fiscal Year 2007, but was recorded as a component of other
comprehensive income (loss) in our consolidated statement of stockholders deficit at March 31,
2007.
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Fiscal Year 2006 vs. Fiscal Year 2005
Total sales decreased 3.3% to $434.5 million in Fiscal Year 2006 from $449.5 million in Fiscal Year
2005. This decrease reflected a decrease in print sales of $13.2 million, or 3.4%, and a decrease
in premedia services sales of $1.8 million, or 3.1%. Total gross profit increased to $49.3
million, or 11.4% of sales, in Fiscal Year 2006 from $45.9 million, or 10.2% of sales, in Fiscal
Year 2005. EBITDA increased to $39.1 million, or 9.0% of sales, in Fiscal Year 2006 from $29.7
million, or 6.6% of sales, in Fiscal Year 2005. See the discussion of these changes by segment
below.
Print
Sales. Print sales decreased $13.2 million to $380.7 million in Fiscal Year 2006 from $393.9
million in Fiscal Year 2005. The decrease in Fiscal Year 2006 includes the continued impact of
competitive industry pricing, an increase in the level of customer supplied paper and a slight
decrease in print production volume of approximately 1%. These decreases were offset in part by
the impact of increased paper prices. See Value Added Revenue and Print Impressions
for the Print Segment below.
Gross Profit. Print gross profit increased $3.6 million to $34.2 million in Fiscal Year 2006
from $30.6 million in Fiscal Year 2005. Print gross margin increased to 9.0% in Fiscal Year 2006
from 7.8% in Fiscal Year 2005. The increase in gross profit includes net benefits from
productivity improvements and various cost reduction programs at our facilities. These increases
were offset in part by the impact of competitive pricing pressures and increased utility costs.
The increase in gross margin includes these items and the impact of increases in the level of
customer supplied paper, offset in part by increased paper prices reflected in sales. Our gross
margin may not be comparable from period to period because of a) the impact of changes in paper
prices included in sales and b) changes in the level of customer supplied paper.
Selling, General and Administrative Expenses. Print selling, general and administrative expenses
decreased $2.9 million to $16.6 million, or 4.4% of print sales, in Fiscal Year 2006, from $19.5
million, or 5.0% of print sales, in Fiscal Year 2005. This decrease includes net benefits
associated with numerous specific cost containment initiatives in this area.
Restructuring Costs (Benefit) and Other Charges. Restructuring costs (benefit) and other charges
decreased $8.7 million to $(0.9) million in Fiscal Year 2006 from $7.8 million in Fiscal Year 2005.
See Our Restructuring Results and Cost Reduction Initiatives above.
Other Expense (Income). Other expense (income) increased $3.6 million to expense of $3.7 million
in Fiscal Year 2006 from expense of $0.1 million in Fiscal Year 2005. This increase included $2.8
million of non-cash asset impairment charges related to certain non-production information
technology assets as a result of our periodic assessment in accordance with SFAS 144 and $0.4
million of non-recurring costs related to the closure of our Pittsburg, California print facility,
incurred in Fiscal Year 2006, which we were unable to accrue as part of restructuring costs in
Fiscal Year 2005.
EBITDA. As a result of the above factors and excluding the impact of depreciation and amortization,
EBITDA for the print business increased $8.6 million to $31.6 million in Fiscal Year 2006 from
$23.0 million in Fiscal Year 2005.
Premedia Services
Sales. Premedia services sales decreased $1.8 million to $53.8 million in Fiscal Year 2006 from
$55.6 million in Fiscal Year 2005. The decrease in Fiscal Year 2006 includes the impact of
continued competitive pricing pressures in this segment and reductions in certain service
requirements related to one major customer. These decreases were offset in part by increased
premedia production volume.
Gross Profit. Premedia services gross profit decreased $0.2 million to $15.1 million in Fiscal
Year 2006 from $15.3 million in Fiscal Year 2005. The decrease in gross profit includes the
impact of reduced sales, discussed above, offset in part by reduced manufacturing costs as a result
of various cost containment initiatives. Premedia services gross margin increased slightly to
28.1% in Fiscal Year 2006 from 27.5% in Fiscal Year 2005.
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Selling, General and Administrative Expenses. Premedia services selling, general and
administrative expenses increased $0.5 million to $6.7 million, or 12.4% of premedia services
sales in Fiscal Year 2006, from $6.2 million, or 11.2% of premedia services sales in Fiscal Year
2005. This increase includes the impact of increased employee related costs in the administrative
areas, offset in part by reductions in selling expenses.
Restructuring Costs (Benefit) and Other Charges. Restructuring costs (benefit) and other charges
decreased $2.5 million to ($0.3) million in Fiscal Year 2006 from $2.2 million in Fiscal Year 2005.
See Our Restructuring Results and Cost Reduction Initiatives above.
Other Expense (Income). Other expense (income) increased to expense of $0.4 million in Fiscal Year
2006 from income of less than $0.1 million in Fiscal Year 2005. This increase was primarily due to
net losses on the sale of fixed assets.
EBITDA. As a result of the above factors and excluding the impact of depreciation and
amortization, premedia services EBITDA increased $1.1 million to $11.1 million in Fiscal Year 2006
from $10.0 million in Fiscal Year 2005.
Other Operations
Other operations consist primarily of corporate general and administrative expenses. In Fiscal
Year 2006, EBITDA for other operations increased to a loss of $3.6 million from a loss of $3.3
million in Fiscal Year 2005. This change includes the impact of increases in certain employee
related expenses during Fiscal Year 2006.
Interest Expense
In Fiscal Year 2006, interest expense increased to $37.6 million from $34.1 million in Fiscal Year
2005. The increase in Fiscal Year 2006 is the result of both higher levels of indebtedness and
increased borrowing costs. See note 6 to our consolidated financial statements appearing elsewhere
in this Report.
Income Taxes
In Fiscal Year 2006, tax benefit improved to a benefit of $3.4 million from benefit of $1.7 million
in Fiscal Year 2005. This increase was primarily due to a Fiscal Year 2006 adjustment of $3.6
million recorded to reflect a change in estimate with respect to our income tax liability, net of
tax expense in foreign jurisdictions. The Fiscal Year 2005 benefit primarily reflects the tax
benefit from losses in foreign jurisdictions and a benefit of $0.4 million relating to a change in
estimate with respect to our income tax liability. The change in estimate adjustments arose from
events that changed our probability assessment (as discussed in Statement of Financial Accounting
Standards No. 5, Accounting for Contingencies) regarding the likelihood that certain contingent
income tax items would become actual future liabilities.
Net Loss
As a result of the factors discussed above, our net loss improved to $14.6 million in Fiscal Year
2006 from a net loss of $25.7 million in Fiscal Year 2005. Included in the Fiscal Year 2006 and
2005 net losses were restructuring costs (benefit) and other charges of ($1.2) million and $10.0
million, respectively. In addition, the Fiscal Year 2006 net loss includes a $2.8 million non-cash
asset impairment charge and non-recurring costs of $0.4 million related to the closure of our
Pittsburg, California print facility.
Additional Minimum Pension Liability
In compliance with Statement of Financial Accounting Standards No. 87, Employers Accounting for
Pensions (SFAS 87), we increased our additional minimum pension liability to approximately $21.6
million in Fiscal Year 2006 from approximately $19.2 million in Fiscal Year 2005. This increase
includes the net impact of plan activity including contributions to our plans, benefit payments,
investment market returns, plan expenses and a reduction in our discount rate from 6.25% to 6.0%.
The recording of the increase in this additional minimum pension liability had no impact on our
consolidated statement of operations for Fiscal Year 2006, but was recorded as a component of other
comprehensive income (loss) in our consolidated statement of stockholders deficit at March 31,
2006.
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Liquidity and Capital Resources
Overview of Liquidity and Capital Resources
Our primary sources of liquidity are cash provided by operating activities and borrowings under the
2005 Revolving Credit Facility (as defined below under May 2005 Refinancing) and the Receivables
Facility (as defined below under September 2006 Revolving Trade Receivables Facility). At March
31, 2007, we had additional borrowing capacity of $30.7 million under our two credit facilities as
follows:
| $5.9 million under the 2005 Revolving Credit Facility; and | ||
| $24.8 million under the Receivables Facility, including $1.1 million based on receivables purchased from Graphics at March 31, 2007 and an additional $23.7 million if Graphics Finance had purchased from Graphics all other eligible receivables at March 31, 2007. |
Our cash-on-hand of approximately $2.9 million is presented net of outstanding checks within trade
accounts payable at March 31, 2007. Accordingly, cash is presented at a balance of $0 in the March
31, 2007 consolidated balance sheet.
At March 31, 2007, we had total indebtedness of $352.1 million, which consisted of borrowings under
the 2005 Term Loan Facility (as defined below under May 2005 Refinancing) of $35.0 million,
borrowings under the 2005 Revolving Credit Facility of $26.9 million, borrowings under the
Receivables Facility of $4.7 million, capital lease obligations of $5.5 million, and $280 million
of our 10% Notes. In addition, we had letters of credit outstanding under the 2005 Revolving
Credit Facility of $22.2 million. The estimated fair value of our 10% Notes at March 31, 2007 was
$219.8 million, or $60.2 million less than the carrying value. We have no off-balance sheet
financial instruments other than operating leases.
On June 13, 2007, the 2005 Credit Agreement and the Receivables Facility were amended to (a)
increase the maximum permissible first lien leverage ratios as of the last day of our fiscal
quarters ending September 30, and December 31, 2007, and March 31, 2008, and (b) require that we
maintain certain levels of minimum total liquidity at November 30, December 13, and December 31,
2007, and at the end of each month thereafter through March 31,
2008. See Risk Factors. We paid consenting lenders an
aggregate amendment fee of $1.25 million in connection with such
amendments.
We are currently in compliance with the covenant requirements set forth in the 2005 Credit
Agreement and the Receivables Facility, as amended.
We anticipate that our primary needs for liquidity will be to conduct our business, meet our debt
service requirements and make capital expenditures. We believe that we have sufficient liquidity to
meet our requirements during Fiscal Year 2008.
During the quarter ended June 30, 2005, we used proceeds from the 2005 Term Loan Facility (as
defined below under May 2005 Refinancing) to
repay borrowings outstanding under the Old Revolving
Credit Facility (as defined below under May 2005 Refinancing), of which the balance was $16.0
million as of March 31, 2005, and settle certain other obligations.
During the Fiscal Year 2007, we used net borrowings from the 2005 Revolving Credit Facility of
$26.9 million, net borrowings from the Receivables Facility of $4.7 million and $0.1 million in
proceeds from the sale of fixed assets primarily to fund the following:
| $12.2 million of operating activities (see our Consolidated Statements of Cash Flows appearing elsewhere in this Report); | ||
| $12.7 million in cash capital expenditures; and | ||
| $6.7 million to service other indebtedness (including repayment of capital lease obligations of $3.8 million and payment of deferred financing costs of $2.9 million). |
Scheduled repayments of existing capital lease obligations during Fiscal Year 2008 are
approximately $3.4 million.
Interest on our 10% Notes is payable semiannually in cash on each June 15 and December 15.
A significant portion of Graphics long-term obligations, including indebtedness under the 2005
Credit Agreement, and the 10% Notes, has been fully and unconditionally guaranteed by Holdings.
Holdings is subject to certain restrictions under its guarantee of indebtedness under the 2005
Credit Agreement, including, among other things, restrictions on mergers, acquisitions, incurrence
of additional debt and payment of cash dividends.
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May 2005 Refinancing
On May 5, 2005, we entered into an Amended and Restated Credit Agreement with Banc of America
Securities, LLC, as Sole Lead Arranger and Sole Book Manager, and Bank of America, N.A., as
Administrative Agent, and certain lenders (as amended, the 2005
Credit Agreement), which resulted
in the refinancing of our $70 million senior secured revolving
credit facility (the Old Revolving Credit Facility), which would have
matured on July 3, 2008, and significantly improved our liquidity
position. The 2005 Credit Agreement is a $90 million senior secured facility comprised of:
| a $55 million revolving credit facility ($40 million of which may be used for letters of credit), maturing on December 15, 2009, which is not subject to a borrowing base limitation (the 2005 Revolving Credit Facility); and | ||
| a $35 million non-amortizing term loan facility, maturing on December 15, 2009 (the 2005 Term Loan Facility). |
Interest on borrowings under the 2005 Credit Agreement is floating, based upon existing market
rates, at either (a) LIBOR plus a margin of 5.75% for loans at March 31, 2007, or (b) an alternate
base rate (based upon the greater of the agent banks prime lending rate or the Federal Funds rate
plus 0.5%) plus a margin of 4.75% for loans at March 31, 2007. Margin levels increase as the levels
of receivables sold by Graphics to Graphics Finance meet certain thresholds under the Receivables
Facility. In addition, Graphics is obligated to pay specified unused commitment, letter of credit
and other customary fees.
Borrowings under the 2005 Term Loan Facility must be repaid in full on the facilitys maturity date
of December 15, 2009. Graphics is also required to prepay the 2005 Term Loan Facility and the 2005
Revolving Credit Facility under certain circumstances with excess cash flows and proceeds from
certain sales of assets, equity issuances and incurrences of indebtedness.
Borrowings under the 2005 Credit Agreement are secured by substantially all of Graphics assets.
Receivables sold to Graphics Finance under the Receivables Facility are released from this lien at
the time they are sold. In addition, Holdings has guaranteed all indebtedness under the 2005
Credit Agreement which guarantee is secured by a pledge of all of Graphics capital stock.
The 2005 Credit Agreement, as amended, requires satisfaction of:
| a first lien leverage ratio test; and | ||
| a minimum total liquidity test. |
In addition, the 2005 Credit Agreement includes various other customary affirmative and negative
covenants and events of default. These covenants, among other things, restrict our ability and the
ability of Holdings to:
| incur or guarantee additional debt; | ||
| create or permit to exist certain liens; | ||
| pledge assets or engage in sale-leaseback transactions; | ||
| make capital expenditures, other investments or acquisitions; | ||
| prepay, redeem, acquire for value, refund, refinance, or exchange certain debt (including the 10% Notes), subject to certain exceptions; | ||
| repurchase or redeem equity interests; | ||
| change the nature of our business; | ||
| pay dividends or make other distributions; | ||
| enter into transactions with affiliates; | ||
| dispose of assets or enter into mergers or other business combinations; and | ||
| place restrictions on dividends, distributions or transfers to us or Holdings from our subsidiaries. |
As of April 30, 2005, we had approximately $2.8 million of unamortized deferred financing costs
associated with the Old Revolving Credit Facility. These costs are being amortized over the term of
the 2005 Credit Agreement in accordance with the guidance set forth in Emerging Issues Task Force
Issue 98-14, Debtors Accounting for Changes in Line-of-Credit or RevolvingDebt Arrangements
(EITF 98-14).
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September 2006 Revolving Trade Receivables Facility
On September 26, 2006, American Color Graphics Finance, LLC (Graphics Finance), a newly formed
wholly-owned subsidiary of Graphics, entered into a $35 million revolving trade receivables
facility (as amended, the Receivables Facility) with Banc of America Securities, LLC, as Sole
Lead Arranger and Sole Book Manager, and Bank of America, N.A., as Administrative Agent, Collateral
Agent and Lender, and certain other lenders. The Receivables Facility improved Graphics overall
liquidity position.
The maximum borrowing availability under the Receivables Facility is $35 million. Availability at
any time is limited to a borrowing base linked to 85% of the balances of eligible receivables less
certain minimum excess availability requirements. Graphics expects that most of its receivables
from U.S. customers will be eligible for inclusion in the borrowing base.
Borrowings under the Receivables Facility are secured by substantially all the assets of Graphics
Finance, which consist primarily of any receivables sold by Graphics to Graphics Finance pursuant
to a receivables contribution and sale agreement. Graphics services these receivables pursuant to a
servicing agreement with Graphics Finance.
The Receivables Facility also requires Graphics, as servicer of the receivables sold by it to
Graphics Finance to satisfy the same first lien leverage ratio test and minimum total liquidity
test contained in the 2005 Credit Agreement.
In addition, the Receivables Facility contains other customary affirmative and negative covenants
and events of default. It also contains other covenants customary for facilities of this type,
including requirements related to credit and collection policies, deposits of collections and
maintenance by each party of its separate corporate identity, including maintenance of separate
records, books, assets and liabilities and disclosures about the transactions in the financial
statements of Holdings and its consolidated subsidiaries. Failure to meet these covenants could
lead to an acceleration of the obligations under the Receivables Facility, following which the
lenders would have the right to sell the assets securing the Receivables Facility.
The Receivables Facility expires on December 15, 2009, when all borrowings thereunder become
payable in full.
Interest on borrowings under the Receivables Facility is floating, based on existing market rates,
at either (a) an adjusted LIBOR rate plus a margin of 4.25% at March 31, 2007 or (b) an alternate
base rate (based upon the greater of the agent banks prime lending rate or the Federal Funds rate
plus 0.5%) plus a margin of 3.25% at March 31, 2007. In addition, Graphics Finance is obligated to
pay specified unused commitment and other customary fees.
At March 31, 2007, Graphics Finance had $0.2 million of cash deposits with Bank of America, which
have been classified as Other current assets in our consolidated balance sheet, as such funds are
pledged to secure payment of borrowings under the Receivables Facility and are therefore not
available to meet our cash operating requirements.
Value Added Revenue and Print Impressions for the Print Segment
We have included value-added revenue (VAR) information to provide a better understanding of sales
activity within our print segment. VAR is a non-GAAP measure and is defined as sales less the cost
of paper, ink and subcontract services. We generally pass the costs of paper, ink and subcontract
services through to our customers. We have also included print impressions because we use this as
an internal measure of production throughput. Although we believe print impressions to be
indicative of overall production volume, total impressions may not be fully comparable period to
period due to (1) differences in the type, performance and width of press equipment utilized and
(2) product mix produced.
Fiscal Year Ended March 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Print segment VAR (in thousands) |
$ | 191,366 | 181,364 | 188,422 | ||||||||
Print impressions (in millions) |
11,354 | 11,207 | 11,279 |
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The following table provides a reconciliation of print segment sales to print segment VAR:
Fiscal Year Ended March 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
(Dollars in thousands) | ||||||||||||
Print segment sales |
$ | 396,535 | 380,648 | 393,922 | ||||||||
Paper, ink and subcontract services |
(205,169 | ) | (199,284 | ) | (205,500 | ) | ||||||
Print segment VAR |
$ | 191,366 | 181,364 | 188,422 | ||||||||
Impact of Inflation
In accordance with industry practice, we generally pass through increases in our costs, primarily
paper and ink, to customers in the cost of printed products, while decreases in paper costs
generally result in lower prices to our customers. Paper prices generally increased throughout
Fiscal Year 2005 and 2006. During Fiscal Year 2007, paper prices generally decreased. We expect
that, as a result of our strong relationships 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
that are derived from advertising inserts. Generally, our sales from advertising inserts are
highest during the following advertising periods: the Spring advertising season from March to May,
the Back-to-School advertising season from July to August, and the Thanksgiving/Christmas
advertising season from October to December. Sales of Sunday newspaper comics are not subject to
significant seasonal fluctuations. Our strategy includes, 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, such as food and drug companies, which utilize advertising inserts more
frequently.
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 that do not contribute to current or future period revenue generation are expensed. Environmental
liabilities are recorded when assessments or remedial efforts are probable and the related costs
can be reasonably estimated. We believe that environmental
liabilities, both current and for the prior
periods discussed herein, are not material. We maintain a reserve of approximately $0.1 million in
our consolidated balance sheet at March 31, 2007, which we believe to be adequate. See Business
Legal Proceedings Environmental Matters appearing elsewhere in this Report. We do not
anticipate receiving insurance proceeds related to this liability or potential settlement. Our
management does not expect that any identified matters, individually or in the aggregate, will have
a material adverse effect on our consolidated financial statements as a whole.
New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 123 (revised 2004), Share Based Payment (SFAS 123R). SFAS 123R
superseded Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123) and amended Statement of Financial Accounting Standards No. 95,
Statement of Cash Flows (SFAS 95). Generally, the fair value approach in SFAS 123R is similar
to the fair value approach described in SFAS 123. Upon adoption of SFAS 123R on April 1, 2006, we
elected to continue using the Black-Scholes-Merton formula to estimate the fair value of stock
options granted to employees. The adoption of SFAS 123R had no impact on compensation expense for
the Fiscal Year 2007 as no options were granted during this period. Additionally,
all outstanding options on the date of adoption had a fair value of $0. SFAS 123R also requires
that the benefits of tax deductions in excess of recognized compensation cost be reported as a
financing cash flow rather than as an operating cash flow. We reported no such financing cash
flows in Fiscal Year 2007. For Fiscal Years 2006 and 2005,
we recognized no operating cash flows for such excess tax deductions.
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In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, Accounting
Changes and Error Corrections (SFAS 154), a replacement of Accounting Principles Board Opinion
No. 20, Accounting Changes (APB 20) and Statement of Financial Accounting Standards No. 3,
Reporting Accounting Changes in Interim Financial Statements (SFAS 3). SFAS 154 requires
retrospective application to prior periods financial statements of a voluntary change in
accounting principle unless it is impracticable. APB 20 previously required that most voluntary
changes in accounting principle be recognized by including in net income of the period of the
change the cumulative effect of changing to the new accounting principle. The adoption of SFAS 154
as of April 1, 2006 has had no impact on the consolidated financial statements as a whole.
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes
(FIN 48), to clarify the accounting for uncertainty in income taxes in financial statements
prepared in accordance with the provisions of SFAS 109 and to provide greater consistency in
criteria used to determine benefits related to income taxes. In accounting for uncertain tax
positions, we currently apply the provisions of Statement of Financial Accounting Standards No. 5,
Accounting for Contingencies (SFAS 5). SFAS 5 provides that a contingency should be recorded
if it is probable that an uncertain position will become an actual future liability. FIN 48
provides that the benefit of an uncertain position should not be recorded unless it is more
likely than not that the position will be sustained upon review. FIN
48 is effective for fiscal years beginning after December 15, 2006.
In accordance, we will adopt FIN
48 as of April 1, 2007. The cumulative effect of applying FIN 48 will be reported as an adjustment
to the April 1, 2007 balance sheet. We do not believe the adoption of FIN 48 will have a material impact
on the consolidated financial statements as a whole.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106 and 132(R) (SFAS 158). SFAS 158 requires an entity to (a) recognize
in its statement of financial position an asset for a defined benefit postretirement plans
overfunded status or a liability for a plans underfunded status; (b) measure a defined benefit
postretirement plans assets and obligations that determine its funded status as of the end of the
employers fiscal year; and (c) recognize changes in the funded status of a defined benefit
postretirement plan in comprehensive income (loss) in the year in which the changes occur. The
requirement to recognize the funded status of a defined benefit postretirement plan prospectively
and the disclosure requirements are effective for the fiscal year ending March 31, 2008. The
requirement to measure plan assets and benefit obligations as of the date of our fiscal year end
will be effective for the fiscal year ending March 31, 2009. We have begun our analysis of the
impact of the adoption of SFAS 158 but do not currently anticipate a significant impact on the
consolidated financial statements as a whole.
Critical Accounting Estimates
Our consolidated financial statements and related public financial information are based on the
application of generally accepted accounting principles in the United States (GAAP). GAAP
requires the use of estimates, assumptions, judgments and subjective interpretations of accounting
principles that have an impact on the assets, liabilities, revenue and expense amounts reported.
These estimates can also affect supplemental information contained in our external disclosures
including information regarding contingencies, risk and financial condition. We base our estimates
on historical experience and on various other assumptions that we believe are reasonable under the
circumstances. Valuations based on estimates are reviewed for reasonableness on a consistent basis
throughout our Company. Actual results may differ from these estimates under different assumptions
or conditions. See note 1 to our consolidated financial statements appearing elsewhere in this
Report for a description of all of the Companys significant accounting policies.
Critical accounting estimates are defined as those that are reflective of significant judgments and
uncertainties, and potentially result in materially different results under different assumptions
and conditions. We believe the following critical accounting estimates affect our more significant
judgments and assumptions used in the preparation of our consolidated financial statements:
Allowance for Doubtful Accounts
We continuously monitor collections and payments from our customers. Allowances for doubtful
accounts are maintained based on historical payment patterns, aging of accounts receivable and
actual write-off history. We estimate losses resulting from the inability of our customers to make
required payments. If the financial condition of our customers was to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be required. The allowance
for doubtful accounts balance was approximately $1.0 million and $1.3 million at March 31, 2007 and
2006, respectively.
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Restructuring
During Fiscal Year 2005, we established restructuring reserves for our print and premedia services
segments. These reserves,
for severance and other exit costs, required the use of estimates, which management reviews
periodically for reasonableness and records changes as necessary. As a result of managements
periodic assessment, these reserves were reduced in both Fiscal Year 2007 and 2006 based on annual
activity and certain changes in our estimates. Though management believes these reserves
accurately reflect the costs of these plans currently, actual results may be different.
Contingencies
We have established reserves for environmental and legal contingencies at both the operating and
corporate levels. A significant amount of judgment and use of estimates is required to quantify
our ultimate exposure in these matters. The valuation of reserves for contingencies is reviewed on
a quarterly basis to assure that we are properly reserved. Reserve balances are adjusted to
account for changes in circumstances for ongoing issues and the establishment of additional
reserves for emerging issues. While we believe that the current level of reserves is adequate,
changes in the future could impact these determinations.
Deferred Taxes
We estimate our actual current tax expense, together with our temporary differences resulting from
differing treatment of items, such as fixed assets, for tax and accounting purposes. These
temporary differences result in deferred tax assets and liabilities. We must then assess the
likelihood that our deferred tax assets will be recovered from future taxable income or the
reversal of existing taxable temporary differences and to the extent we believe that recovery is
not likely, we must establish a valuation allowance. At March 31, 2007, we had a valuation
allowance of $67.9 million established against our deferred tax assets. We considered changes in
the allowance when calculating the tax provision in the statement of operations. Significant
management judgment is required in determining our provision for income taxes, our deferred tax
assets and liabilities and any valuation allowance recorded against our deferred tax assets. As a
result of changing circumstances, we may be required to record changes to the valuation allowance
against our deferred tax assets in the future.
Contractual Obligations and Commercial Commitments
The following table gives information about our existing material commitments under our
indebtedness and contractual obligations at March 31, 2007, which are net of imputed interest:
Payments Due By Period | ||||||||||||||||||||
Contractual Obligations | Total | < 1 year | 1-3 years | 3-5 years | > 5 years | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Long-term debt |
$ | 346,580 | | 66,580 | 280,000 | | ||||||||||||||
Interest payments on fixed rate
debt (a) |
98,000 | 28,000 | 56,000 | 14,000 | | |||||||||||||||
Capital lease obligations |
5,530 | 3,435 | 2,095 | | | |||||||||||||||
Operating lease obligations |
9,792 | 3,347 | 5,094 | 1,351 | | |||||||||||||||
Pension obligations (b) |
713 | 713 | | | | |||||||||||||||
Total contractual cash obligations |
$ | 460,615 | 35,495 | 129,769 | 295,351 | | ||||||||||||||
(a) | Excludes interest on $66.6 million of variable rate borrowings outstanding at March 31, 2007, as such borrowing levels and related rates of interest fluctuate. | |
(b) | Although we expect to make contributions to our pension plan in future years, those amounts cannot be estimated at this time. See note 9 to our consolidated financial statements appearing elsewhere in this Report. |
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In the fiscal year ended March 31, 1998, we entered into multi-year contracts to purchase a portion
of our raw materials to be used in our normal operations. In connection with such purchase
agreements, pricing for a portion of our raw materials is adjusted for certain movements in market
prices, changes in raw material costs and other specific price increases while purchase quantity
levels are variable based upon certain contractual requirements and conditions. We are deferring
certain contractual provisions over the life of the contracts, which are being recognized as the
purchase commitments are achieved and the related inventory is sold. The amount deferred at
March 31, 2007 is $41.5 million and is included within Other liabilities in our consolidated
balance sheet. At March 31, 2007, we had no other significant contingent commitments. The
following table gives information about our other commercial commitments:
Commitment Due By Period | ||||||||||||||||||||
Other Commercial | < 1 year | 1-3 years | 3-5 years | > 5 years | ||||||||||||||||
Commitments | Total | (Dollars in thousands) | ||||||||||||||||||
Standby letters of credit |
$ | 22,257 | 18,723 | 106 | 58 | 3,370 |
The standby letters of credit generally serve as collateral and a substantial portion are renewable
quarterly pursuant to the terms of certain long-term arrangements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative Information. At March 31, 2007, we had fixed rate and variable rate debt (both
excluding capitalized lease obligations) approximating $280.0 million and $66.6 million,
respectively. At March 31, 2006, we had fixed rate and variable rate debt (both excluding
capitalized lease obligations) approximating $280.0 million and $35.0 million, respectively. The
estimated fair value of our debt instruments excluding capital lease obligations, at March 31, 2007
was $286.4 million, or $60.2 million less than the carrying value. The estimated fair value of our
debt instruments, excluding capital lease obligations, at March 31, 2006 was $232.4 million, or
$82.6 million less than the carrying value. At our March 31, 2007 and 2006 borrowing levels, a 1%
adverse change in interest rates would result in an approximate $15 million reduction in the fair
value of our fixed rate debt and would have resulted in additional annual interest expense and
related payments of approximately $0.7 million at March 31, 2007 and approximately $0.4 million at
March 31, 2006 on our variable rate debt.
Qualitative Information. In the ordinary course of business, our exposure to market risks is
limited as discussed 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 to mitigate such exposures.
Interest rate risk for us primarily relates to interest rate fluctuations on variable rate debt.
We have only one print facility outside the United States, in Canada, which is subject to foreign
currency exchange rate risk; however, any fluctuations in net asset values as a result of changes
in foreign currency exchange rates associated with activity at this one facility have been, and are
expected to continue to be, immaterial to our Company as a whole.
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.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page No. | ||||
The following consolidated financial statements of ACG Holdings, Inc. are included in this Report: |
||||
37 | ||||
38 | ||||
For the Years Ended March 31, 2007, 2006 and 2005: |
||||
40 | ||||
41 | ||||
42 | ||||
44 |
The following consolidated financial statement schedules of ACG Holdings, Inc. are included in Part
IV, Item 15:
I. | Condensed Financial Information: | ||
Condensed Consolidated Financial Statements (parent company only) for the years ended March 31, 2007, 2006 and 2005, and as of March 31, 2007 and 2006 | |||
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 consolidated financial statements or notes thereto.
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Report of Independent Registered Public Accounting Firm
Board of Directors
ACG Holdings, Inc.
ACG Holdings, Inc.
We have audited the accompanying consolidated balance sheets of ACG Holdings, Inc. as
of March 31, 2007 and 2006, 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, 2007. Our audits also included the related financial
statement schedules. These financial statements and schedules are the responsibility
of the Companys 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 the standards of the Public Company
Accounting Oversight Board (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. We were not engaged to perform an
audit of the Companys internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the Companys internal
control over financial reporting. Accordingly, we express no such opinion. An audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management and 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, 2007 and 2006, and the consolidated results of its
operations and its cash flows for each of the three fiscal years in the period ended
March 31, 2007, in conformity with U.S. generally accepted accounting principles.
Also, in our opinion, the related financial statement schedules, when considered in
relation to the basic financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
/s/ Ernst & Young
LLP
Nashville, Tennessee
June 21, 2007
June 21, 2007
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ACG HOLDINGS, INC.
Consolidated Balance Sheets
(In thousands)
March 31, | ||||||||
2007 | 2006 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | | | |||||
Receivables: |
||||||||
Trade accounts, less allowance for doubtful accounts of
$1,017 and $1,275 at March 31, 2007 and 2006,
respectively |
44,385 | 41,080 | ||||||
Other |
2,645 | 3,463 | ||||||
Total receivables |
47,030 | 44,543 | ||||||
Inventories |
7,146 | 7,714 | ||||||
Deferred income taxes |
962 | 1,409 | ||||||
Prepaid expenses and other current assets |
4,997 | 4,733 | ||||||
Total current assets |
60,135 | 58,399 | ||||||
Property, plant and equipment: |
||||||||
Land and improvements |
3,185 | 3,058 | ||||||
Buildings and improvements |
29,959 | 28,332 | ||||||
Machinery and equipment |
223,737 | 212,904 | ||||||
Furniture and fixtures |
14,369 | 13,007 | ||||||
Leased assets under capital leases |
22,972 | 23,119 | ||||||
Equipment installations in process |
2,334 | 6,850 | ||||||
296,556 | 287,270 | |||||||
Less accumulated depreciation |
(214,772 | ) | (199,504 | ) | ||||
Net property, plant and equipment |
81,784 | 87,766 | ||||||
Excess of cost over net assets acquired |
66,548 | 66,548 | ||||||
Other assets |
18,266 | 18,789 | ||||||
Total assets |
$ | 226,733 | 231,502 | |||||
See accompanying notes to consolidated financial statements.
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ACG HOLDINGS, INC.
Consolidated Balance Sheets
(Dollars in thousands, except par values)
Consolidated Balance Sheets
(Dollars in thousands, except par values)
March 31, | ||||||||
2007 | 2006 | |||||||
Liabilities and Stockholders Deficit |
||||||||
Current liabilities: |
||||||||
Current installments of capital leases |
$ | 3,435 | 3,731 | |||||
Trade accounts payable |
32,892 | 33,845 | ||||||
Accrued expenses |
29,651 | 36,367 | ||||||
Income tax payable |
487 | 160 | ||||||
Total current liabilities |
66,465 | 74,103 | ||||||
Long-term debt and capital leases, excluding current installments |
348,675 | 320,553 | ||||||
Deferred income taxes |
2,677 | 3,866 | ||||||
Other liabilities |
52,554 | 62,712 | ||||||
Total liabilities |
470,371 | 461,234 | ||||||
Commitments and contingencies |
||||||||
Stockholders deficit: |
||||||||
Common stock, voting, $.01 par value, 5,852,223 shares
authorized, 158,205 shares issued and outstanding at March
31, 2007 and March 31, 2006 |
2 | 2 | ||||||
Additional paid-in capital |
2,038 | 2,038 | ||||||
Accumulated deficit |
(230,769 | ) | (209,760 | ) | ||||
Other accumulated comprehensive loss, net of tax |
(14,909 | ) | (22,012 | ) | ||||
Total stockholders deficit |
(243,638 | ) | (229,732 | ) | ||||
Total liabilities and stockholders deficit |
$ | 226,733 | 231,502 | |||||
See accompanying notes to consolidated financial statements.
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ACG HOLDINGS, INC.
Consolidated Statements of Operations
(In thousands)
Year ended March 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Sales |
$ | 445,026 | 434,489 | 449,513 | ||||||||
Cost of sales |
397,115 | 385,150 | 403,641 | |||||||||
Gross profit |
47,911 | 49,339 | 45,872 | |||||||||
Selling, general and administrative expenses |
27,539 | 26,792 | 28,824 | |||||||||
Restructuring costs (benefit) and other charges |
(445 | ) | (1,167 | ) | 10,037 | |||||||
Operating income |
20,817 | 23,714 | 7,011 | |||||||||
Other expense (income): |
||||||||||||
Interest expense |
40,405 | 37,624 | 34,087 | |||||||||
Interest income |
(100 | ) | (83 | ) | (37 | ) | ||||||
Other, net |
1,714 | 4,119 | 313 | |||||||||
Total other expense |
42,019 | 41,660 | 34,363 | |||||||||
Loss before income taxes |
(21,202 | ) | (17,946 | ) | (27,352 | ) | ||||||
Income tax benefit |
(193 | ) | (3,369 | ) | (1,685 | ) | ||||||
Net loss |
$ | (21,009 | ) | (14,577 | ) | (25,667 | ) | |||||
See accompanying notes to consolidated financial statements.
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ACG HOLDINGS, INC.
Consolidated Statements of Stockholders Deficit
(In thousands)
Other | ||||||||||||||||||||
Voting | Additional | accumulated | ||||||||||||||||||
common | paid-in | Accumulated | comprehensive | |||||||||||||||||
stock | capital | deficit | income (loss) | Total | ||||||||||||||||
Balances, March 31, 2004 |
$ | 2 | 2,103 | (169,516 | ) | (21,364 | ) | $ | (188,775 | ) | ||||||||||
Net loss |
| | (25,667 | ) | | (25,667 | ) | |||||||||||||
Other comprehensive income (loss), net of tax: |
||||||||||||||||||||
Change in cumulative
translation adjustment |
| | | 593 | 593 | |||||||||||||||
Change in minimum pension
liability |
| | | 1,009 | 1,009 | |||||||||||||||
Comprehensive loss |
(24,065 | ) | ||||||||||||||||||
Executive stock compensation |
| 100 | | | 100 | |||||||||||||||
Balances, March 31, 2005 |
$ | 2 | 2,203 | (195,183 | ) | (19,762 | ) | $ | (212,740 | ) | ||||||||||
Net loss |
| | (14,577 | ) | | (14,577 | ) | |||||||||||||
Other comprehensive income (loss), net of tax: |
||||||||||||||||||||
Change in cumulative
translation
adjustment |
| | | 183 | 183 | |||||||||||||||
Change in minimum pension
liability |
| | | (2,433 | ) | (2,433 | ) | |||||||||||||
Comprehensive loss |
(16,827 | ) | ||||||||||||||||||
Executive stock compensation |
| (165 | ) | | | (165 | ) | |||||||||||||
Balances, March 31, 2006 |
$ | 2 | 2,038 | (209,760 | ) | (22,012 | ) | $ | (229,732 | ) | ||||||||||
Net loss |
| | (21,009 | ) | | (21,009 | ) | |||||||||||||
Other comprehensive income (loss), net of tax: |
||||||||||||||||||||
Change in cumulative
translation adjustment |
| | | (116 | ) | (116 | ) | |||||||||||||
Change in minimum pension
liability |
| | | 7,219 | 7,219 | |||||||||||||||
Comprehensive loss |
(13,906 | ) | ||||||||||||||||||
Balances, March 31, 2007 |
$ | 2 | 2,038 | (230,769 | ) | (14,909 | ) | (243,638 | ) | |||||||||||
See accompanying notes to consolidated financial statements.
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ACG HOLDINGS, INC.
Consolidated Statements of Cash Flows
(In thousands)
Year ended March 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net loss |
$ | (21,009 | ) | (14,577 | ) | (25,667 | ) | |||||
Adjustments to reconcile net loss to net cash used
by operating activities: |
||||||||||||
Other charges non-cash (note 14) |
| | 1,668 | |||||||||
Depreciation |
18,567 | 19,130 | 22,594 | |||||||||
Amortization of other assets |
63 | 353 | 457 | |||||||||
Amortization of deferred financing costs |
3,537 | 3,001 | 2,487 | |||||||||
Loss (gain) on disposals of property, plant and equipment |
2 | 312 | (75 | ) | ||||||||
Impairment of asset |
| 2,830 | | |||||||||
Deferred income tax benefit |
(742 | ) | (3,632 | ) | (824 | ) | ||||||
Changes in assets and liabilities: |
||||||||||||
Decrease (increase) in receivables |
(2,487 | ) | 6,061 | (5,395 | ) | |||||||
Decrease (increase) in current income taxes receivable |
| 78 | (78 | ) | ||||||||
Decrease (increase) in inventories |
568 | 2,759 | (1,968 | ) | ||||||||
Increase (decrease) in trade accounts payable |
(953 | ) | (6,611 | ) | 10,440 | |||||||
Increase (decrease) in accrued expenses |
(7,465 | ) | (6,679 | ) | 385 | |||||||
Increase (decrease) in current income taxes payable |
327 | 160 | (9 | ) | ||||||||
Decrease in other liabilities |
(2,190 | ) | (9,880 | ) | (6,312 | ) | ||||||
Other |
(385 | ) | 1,482 | (1,278 | ) | |||||||
Total adjustments |
8,842 | 9,364 | 22,092 | |||||||||
Net cash used by operating activities |
(12,167 | ) | (5,213 | ) | (3,575 | ) | ||||||
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ACG HOLDINGS, INC.
Consolidated Statements of Cash Flows Continued
(In thousands)
Consolidated Statements of Cash Flows Continued
(In thousands)
Year ended March 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Cash flows from investing activities: |
||||||||||||
Purchases of property, plant and equipment |
(12,701 | ) | (12,486 | ) | (6,876 | ) | ||||||
Proceeds from sale of property, plant and equipment
held for sale (note 3) |
| 6,877 | | |||||||||
Proceeds from other sales of property, plant and equipment |
145 | 283 | 176 | |||||||||
Other |
(147 | ) | (197 | ) | (472 | ) | ||||||
Net cash used by investing activities |
(12,703 | ) | (5,523 | ) | (7,172 | ) | ||||||
Cash flows from financing activities: |
||||||||||||
Net increase (decrease) in revolver borrowings |
31,580 | (16,000 | ) | 16,000 | ||||||||
Net increase (decrease) in long-term debt, net |
| 35,000 | | |||||||||
Deferred financing costs paid |
(2,956 | ) | (3,573 | ) | (800 | ) | ||||||
Repayment of capital lease obligations |
(3,754 | ) | (4,667 | ) | (4,378 | ) | ||||||
Net cash provided by financing activities |
24,870 | 10,760 | 10,822 | |||||||||
Effect of exchange rates on cash |
| (24 | ) | (75 | ) | |||||||
Change in cash |
| | | |||||||||
Cash and cash equivalents: |
||||||||||||
Beginning of period |
| | | |||||||||
End of period |
$ | | | | ||||||||
Supplemental disclosure of cash flow information: |
||||||||||||
Cash paid (received) for: |
||||||||||||
Interest |
$ | 36,099 | 33,863 | 31,480 | ||||||||
Income taxes, net of refunds |
$ | 233 | 15 | (887 | ) | |||||||
Non-cash investing activities: |
||||||||||||
Assets purchased under capital lease obligations |
$ | | | 31 |
See accompanying notes to consolidated financial statements.
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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), (collectively, the Company). Holdings is dependent upon distributions from Graphics to fund its obligations. However, Graphics ability to pay dividends or lend to Holdings was restricted under the terms of its debt agreements at March 31, 2007. See note 6 below for further discussion of the 2005 Credit Agreement, the Receivables Facility and the 10% Notes (as defined herein). The 2005 Revolving Credit Facility (as defined herein) is secured by substantially all of the assets of Graphics. Receivables sold to Graphics Finance (as defined herein) under the Receivables Facility (as defined herein) are released from this lien at the time they are sold. Holdings has guaranteed Graphics indebtedness under the 2005 Credit Agreement, which guarantee is secured by a pledge of all of Graphics and Graphics subsidiaries stock. The Receivables Facility is secured by substantially all the assets of Graphics Finance, which consist primarily of any receivables sold by Graphics to Graphics Finance pursuant to a receivables contribution and sale agreement. Graphics services these receivables pursuant to a servicing agreement with Graphics Finance. The 10% Notes are fully and unconditionally guaranteed on a senior basis by Holdings, and by all future domestic subsidiaries of Graphics. | ||
The two business segments of the commercial printing industry in which the Company operates are (i) print and (ii) premedia services. | ||
The Company continues to operate in a challenging business environment due to, among other factors, excess industry capacity and significant competition. Such challenges have contributed to three consecutive fiscal years of net losses and cash used by operating activities. While management has prepared analyses indicating that the Companys forecasted results of operations for the fiscal year ending March 31, 2008 will allow it to remain in compliance with debt covenants and maintain sufficient liquidity to meet its operating requirements for the twelve month period subsequent to March 31, 2007, such analyses contain certain estimates and assumptions deemed reasonable by management that could differ from actual results. Management believes that the Company will continue to be challenged by difficult industry conditions. | ||
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 United States generally accepted accounting principles. | |||
All significant intercompany transactions and balances have been eliminated in consolidation. | |||
Earnings-per-share data has not been provided since Holdings common stock is closely held. | |||
(b) | Revenue Recognition | ||
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. | |||
Premedia services revenues are recognized as services are performed. Delivery of electronic files, proofs and plates generally occurs upon completion of the production process. Services are performed to unique customer specifications and are not returnable. | |||
Credits relating to specification variances and other customer adjustments have historically not been significant for either the print or premedia services business segments. |
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ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(c) | Cash and Cash Equivalents | ||
The Company uses available cash balances on hand and borrowings under its 2005 Revolving Credit Facility and Receivables Facility (defined herein), to fund operating disbursements and, to the extent applicable, invest in overnight cash investments. Cash on hand of approximately $2.9 million and $6.7 million (including $5.1 million of liquid overnight cash investments) at March 31, 2007 and 2006, respectively, is presented net of outstanding checks, which resulted in a reclassification of $9.6 million and $10.4 million at March 31, 2007 and 2006 respectively, to trade accounts payable in the consolidated balance sheets. The Company considers all highly liquid investments with maturities of three months or less to be cash equivalents. | |||
(d) | Trade Accounts Receivable | ||
Trade accounts receivable represents payments due from customers net of allowances for doubtful accounts. The Company continuously monitors collections and payments from its customers. Allowances for doubtful accounts are maintained based on historical payment patterns, aging of accounts receivable and actual write-off history. The Company estimates losses resulting from the inability of its customers to make required payments. | |||
(e) | Inventories | ||
Inventories are valued at the lower of first-in, first-out (FIFO) cost or market (net realizable value). | |||
(f) | 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 shorter of 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 25 years for buildings and improvements. Expenditures related to maintenance and repairs are expensed as incurred. | |||
(g) | Excess of Cost Over Net Assets Acquired | ||
The excess of cost over net assets acquired (or goodwill) is accounted for in accordance with the guidance set forth in Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 142 requires goodwill to be evaluated at least annually for impairment. The Company performed the required annual impairment tests of goodwill as of December 31, 2006 and 2005, and noted no impairment. | |||
The Company has goodwill associated with its two distinct segments, print and premedia services, and has determined that there are no additional reporting units within these segments, as there are no further components representing a business. Therefore, the impairment test for goodwill is calculated for each of the segments. The test is calculated by deducting the estimated carrying value of each reporting unit from the estimated enterprise value of each reporting unit. The estimated enterprise value is calculated by multiplying 12 months trailing EBITDA (defined as earnings before net interest expense, income tax expense, depreciation and amortization) by an assumed market multiple, which the Company believes to be reasonable based upon recent sales activity of businesses operating in comparable industries as the Companys segments. The estimated carrying value is calculated by deducting the liabilities, excluding interest-bearing debt, from total assets of the respective segment. A calculation in which the estimated enterprise value exceeds the estimated carrying value results in a conclusion of no impairment. If it is determined that the estimated carrying value exceeds the estimated enterprise value, the Company would calculate the implied fair value of goodwill by deducting the fair value of all tangible and intangible net assets, including unrecognized intangible assets, of the segment from the fair value of the segment. If the implied fair value of goodwill is less than the carrying value, an impairment loss would be recognized. |
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ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(h) | Impairment of Long-Lived Assets | ||
The Company evaluates the recoverability of its long-lived assets in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144). SFAS 144 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. | |||
In the fourth quarter of the fiscal year ended March 31, 2006, the Company concluded that certain non-production information technology assets of the print segment were fully impaired as a result of its periodic assessment under SFAS 144. This impairment resulted in a non-cash charge of $2.8 million. The impairment charge was classified within other, net in the consolidated statement of operations for the fiscal year ended March 31, 2006. | |||
(i) | Other Assets | ||
Financing costs related to the 2005 Credit Agreement (as defined herein) are deferred and amortized over the term of the agreement. Financing costs related to the Old Revolving Credit Facility (as defined herein) are amortized over the term of the 2005 Credit Agreement. Financing costs related to the Receivables Facility (as defined herein) are deferred and amortized over the term of the agreement. See note 6 for further discussion. Financing costs related to the 10% Notes (as defined herein) are deferred and amortized over the term of the 10% Notes. Covenants not to compete are amortized over the terms of the underlying agreements. | |||
(j) | Income Taxes | ||
Income taxes are provided using the liability method in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109). Management evaluates the need for a valuation allowance for deferred tax assets and determines whether the Companys deferred tax assets will more likely than not be realized through sources of future taxable income as defined by SFAS 109, including the future reversal of existing taxable temporary differences. | |||
(k) | Foreign Currency Translation | ||
The assets and liabilities of the Companys 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 remeasurement gains and losses pertaining to such balances are included in the Companys consolidated results of operations. | |||
(l) | 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. |
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ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(m) | Fair Value of Financial Instruments | ||
The carrying amounts reflected in the consolidated balance sheets for receivables and payables approximate their respective fair values. A discussion of the carrying value and fair value of the Companys long-term debt is included in note 6 below. Fair values are based primarily on quoted prices for these or similar instruments. The Company is not a party to any financial instruments with material off-balance-sheet risk. | |||
(n) | 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 is generally diversified due to the large number of entities comprising the Companys customer base and their geographic dispersion. The Company performs ongoing credit evaluations of its customers and maintains an allowance for potential credit losses. | |||
(o) | Use of Estimates | ||
The preparation of the financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. | |||
(p) | Stock-Based Compensation | ||
During the fiscal year ended March 31, 2007, the Company accounted for stock based awards under Statement of Financial Accounting Standards No. 123 (revised), Share Based Payment (SFAS 123R), which requires all share-based payments to employees, including grants of employee stock options and restricted stock, to be recognized in the Companys financial statements based on their grant date fair values. The Company adopted SFAS 123R on April 1, 2006, applying the modified prospective transition method outlined in the Statement. During the fiscal years ended March 31, 2006 and 2005, the Company accounted for stock based awards under Statement of Financial Accounting Standards, No. 123, Accounting for Stock-Based Compensation (SFAS 123) based on their grant date fair values as the Company believed that including the fair value of compensation plans in determining net income was consistent with accounting for the cost of all other forms of compensation. | |||
(q) | Shipping and Handling Costs | ||
The Companys shipping and handling costs are reflected within Cost of Sales in the Consolidated Statements of Operations. | |||
(r) | Impact of Recently Issued Accounting Standards | ||
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS 123R, which superseded SFAS 123 and amended Statement of Financial Accounting Standards No. 95, Statement of Cash Flows (SFAS 95). Generally, the fair value approach in SFAS 123R is similar to the fair value approach described in SFAS 123. Upon adoption of SFAS 123R on April 1, 2006, the Company elected to continue using the Black-Scholes-Merton formula to estimate the fair value of stock options granted to employees. The adoption of SFAS 123R had no impact on compensation expense for the fiscal year ended March 31, 2007 as the Company granted no options during this period. Additionally, all outstanding options on the date of adoption had a fair value of $0. SFAS 123R also requires that the benefits of tax deductions in excess of recognized compensation cost be reported as a financing cash flow rather than as an operating cash flow. The Company reported no such financing cash flows in the fiscal year ended March 31, 2007. For the fiscal years ended March 31, 2006 and 2005, the Company recognized no operating cash flows for such excess tax deductions. |
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ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections (SFAS 154), a replacement of Accounting Principles Board Opinion No. 20, Accounting Changes (APB 20) and Statement of Financial Accounting Standards No. 3, Reporting Accounting Changes in Interim Financial Statements (SFAS 3). SFAS 154 requires retrospective application to prior periods financial statements of a voluntary change in accounting principle unless it is impracticable. APB 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. The adoption of SFAS 154 as of April 1, 2006 has had no impact on the consolidated financial statements as a whole. | |||
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), to clarify the accounting for uncertainty in income taxes in financial statements prepared in accordance with the provisions of SFAS 109 and to provide greater consistency in criteria used to determine benefits related to income taxes. In accounting for uncertain tax positions, the Company currently applies the provisions of Statement of Financial Accounting Standards No. 5, Accounting for Contingencies (SFAS 5). SFAS 5 provides that a contingency should be recorded if it is probable that an uncertain position will become an actual future liability. FIN 48 provides that the benefit of an uncertain position should not be recorded unless it is more likely than not that the position will be sustained upon review. FIN 48 is effective for fiscal years beginning after December 15, 2006. In accordance, the Company will adopt FIN 48 as of April 1, 2007. The cumulative effect of applying FIN 48 will be reported as an adjustment to the April 1, 2007 balance sheet. The Company does not believe the adoption of FIN 48 will have a material impact on the consolidated financial statements as a whole. | |||
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R) (SFAS 158). SFAS 158 requires an entity to (a) recognize in its statement of financial position an asset for a defined benefit postretirement plans overfunded status or a liability for a plans underfunded status; (b) measure a defined benefit postretirement plans assets and obligations that determine its funded status as of the end of the employers fiscal year; and (c) recognize changes in the funded status of a defined benefit postretirement plan in comprehensive income (loss) in the year in which the changes occur. The requirement to recognize the funded status of a defined benefit postretirement plan prospectively and the disclosure requirements are effective for the Company for the fiscal year ending March 31, 2008. The requirement to measure plan assets and benefit obligations as of the date of the Companys fiscal year end will be effective for the fiscal year ending March 31, 2009. The Company has begun its analysis of the impact of the adoption of SFAS 158 but does not currently anticipate a significant impact on the consolidated financial statements as a whole. |
(2) | Inventories | |
The components of inventories are as follows (in thousands): |
March 31, | ||||||||
2007 | 2006 | |||||||
Paper |
$ | 5,036 | 5,959 | |||||
Ink |
152 | 140 | ||||||
Supplies and other |
1,958 | 1,615 | ||||||
Total |
$ | 7,146 | 7,714 | |||||
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ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(3) | Assets and Liabilities Held for Sale | |
At March 31, 2005, the Company held certain assets and obligations under capital leases for sale at a fair value of $8.1 million and $1.0 million, respectively. On March 16, 2005, the Company ceased operations at the Pittsburg, California facility, resulting in the write-off of certain assets totaling approximately $0.5 million (see note 14). In March 2005, the Company also executed a letter of intent with a prospective buyer to sell certain of the print facilitys other assets, some of which were subject to capital lease obligations. On April 20, 2005, the Company completed the sale of these assets for an aggregate selling price of approximately $8.1 million (including $0.1 million of miscellaneous closing and settlement costs and $6.9 million of property, plant and equipment) and terminated $1.0 million of related capital lease obligations. In accordance with the guidance set forth in SFAS 144, the Company wrote down the assets held for sale to fair value, resulting in a $0.7 million impairment charge, which was classified within restructuring costs and other charges in the consolidated statement of operations for the fiscal year ended March 31, 2005. | ||
(4) | Other Assets | |
The components of other assets are as follows (in thousands): |
March 31, | ||||||||
2007 | 2006 | |||||||
Deferred financing costs, less accumulated
amortization of $10,720 in 2007 and $7,183
in 2006 |
$ | 10,885 | $ | 11,466 | ||||
Spare parts inventory, net of valuation allowance
of $100 in 2007 and 2006 |
7,315 | 6,965 | ||||||
Other |
66 | 358 | ||||||
Total |
$ | 18,266 | 18,789 | |||||
(5) | Accrued Expenses | |
The components of accrued expenses are as follows (in thousands): |
March 31, | ||||||||
2007 | 2006 | |||||||
Compensation and related taxes |
$ | 5,876 | 4,849 | |||||
Employee benefits |
10,176 | 15,159 | ||||||
Interest |
10,012 | 9,268 | ||||||
Restructuring |
1,140 | 4,127 | ||||||
Other |
2,447 | 2,964 | ||||||
Total |
$ | 29,651 | 36,367 | |||||
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ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(6) | Notes Payable, Long-Term Debt and Capital Leases | |
Long-term debt, including capital leases, is summarized as follows (in thousands): |
March 31, | ||||||||
2007 | 2006 | |||||||
2005 Revolving Credit Facility |
$ | 26,900 | | |||||
2005 Term Loan Facility |
35,000 | 35,000 | ||||||
Receivables Facility |
4,680 | | ||||||
10% Senior Second Secured Notes Due 2010 |
280,000 | 280,000 | ||||||
Capital leases |
5,530 | 9,284 | ||||||
Total long-term debt and capital leases |
352,110 | 324,284 | ||||||
Less: current installments |
3,435 | 3,731 | ||||||
Long-term debt and capital leases,
excluding current installments |
$ | 348,675 | 320,553 | |||||
May 5, 2005 Refinancing Transaction
On May 5, 2005, the Company entered into an Amended and Restated Credit Agreement with Banc of
America Securities, LLC, as Sole Lead Arranger and Sole Book Manager, and Bank of America, N.A., as
Administrative Agent, and certain lenders (as amended, the 2005 Credit Agreement) which resulted
in the refinancing of the Companys $70 million senior
secured revolving credit facility (the Old Revolving Credit
Facility), which
would have matured on July 3, 2008, and significantly improved
the Companys liquidity position. The 2005 Credit Agreement is a $90 million secured facility
comprised of:
| a $55 million revolving credit facility ($40 million of which may be used for letters of credit), maturing on December 15, 2009 which is not subject to a borrowing base limitation, (the 2005 Revolving Credit Facility); and | |
| a $35 million non-amortizing term loan facility maturing on December 15, 2009 (the 2005 Term Loan Facility). |
Interest on borrowings under the 2005 Credit Agreement is floating, based upon existing market
rates, at either (a) LIBOR plus a margin of 5.75% for loans at March 31, 2007, or (b) an alternate
base rate (based upon the greater of the agent banks prime lending rate or the Federal Funds rate
plus 0.5%) plus a margin of 4.75% for loans at March 31, 2007. Margin levels increase as the levels
of receivables sold by Graphics to Graphics Finance (as defined below) meet certain thresholds
under the Receivables Facility (as defined below). In addition, Graphics is obligated to pay
specified unused commitment, letter of credit and other customary fees.
Borrowings under the 2005 Term Loan Facility must be repaid in full on the facilitys maturity date
of December 15, 2009. Graphics is also required to prepay the 2005 Term Loan Facility and the 2005
Revolving Credit Facility under certain circumstances with excess cash flows and proceeds from
certain sales of assets, equity issuances and incurrences of indebtedness.
Borrowings under the 2005 Credit Agreement are secured by substantially all of Graphics assets.
Receivables sold to Graphics Finance (as defined below) under the Receivables Facility (as defined
below) are released from this lien at the time they are sold. In addition, Holdings has guaranteed
all indebtedness under the 2005 Credit Agreement which guarantee is secured by a pledge of all of
Graphics capital stock.
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ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
The 2005 Credit Agreement requires satisfaction of a first lien leverage ratio test. In addition,
the 2005 Credit Agreement includes various other customary affirmative and negative covenants and
events of default. These covenants, among other things, restrict the Companys ability to:
| incur or guarantee additional debt; | ||
| create or permit to exist certain liens; | ||
| pledge assets or engage in sale-leaseback transactions; | ||
| make capital expenditures, other investments or acquisitions; | ||
| prepay, redeem, acquire for value, refund, refinance, or exchange certain debt (including the 10% Notes), subject to certain exceptions; | ||
| repurchase or redeem equity interests; | ||
| change the nature of its business; | ||
| pay dividends or make other distributions; | ||
| enter into transactions with affiliates; | ||
| dispose of assets or enter into mergers or other business combinations; and | ||
| place restrictions on dividends, distributions or transfers to the Company from its subsidiaries. |
The Company was in compliance with the covenant requirements set forth in the 2005 Credit
Agreement, as amended as of March 31, 2007.
As of April 30, 2005, the Company had approximately $2.8 million of unamortized deferred financing
costs associated with the Old Revolving Credit Facility. These costs are being amortized over the term
of the 2005 Credit Agreement in accordance with the guidance set forth in Emerging Issues Task
Force Issue 98-14, Debtors Accounting for Changes in Line-of-Credit or Revolving-Debt
Arrangements (EITF 98-14).
At March 31, 2007, the Company had borrowings outstanding under the 2005 Revolving Credit Facility
totaling $26.9 million and had letters of credit outstanding of approximately $22.2 million. As a
result, the Company had additional borrowing availability under the 2005 Revolving Credit Facility
of approximately $5.9 million. During the quarter ended June 30, 2005, the Company used the
proceeds from the 2005 Term Loan Facility to repay borrowings
outstanding under the Old Revolving
Credit Facility (of which the balance was $16.0 million as of March 31, 2005) and settle certain
other of its obligations.
September 26, 2006 Revolving Trade Receivables Facility
On September 26, 2006, American Color Graphics Finance, LLC (Graphics Finance), a newly formed
wholly-owned subsidiary of Graphics, entered into a $35 million revolving trade receivables
facility (as amended, the Receivables Facility) with Banc of America Securities, LLC, as Sole
Lead Arranger and Sole Book Manager, and Bank of America, N.A., as Administrative Agent, Collateral
Agent and Lender and certain lenders. The Receivables Facility improved Graphics overall
liquidity position.
The maximum borrowing availability under the Receivables Facility is $35 million. Availability at
any time is limited to a borrowing base linked to 85% of the balances of eligible receivables less
certain minimum excess availability requirements. Graphics expects most of its receivables from
U.S. customers will be eligible for inclusion in the borrowing base.
Borrowings under the Receivables Facility are secured by substantially all the assets of
Graphics Finance, which consist primarily of any receivables sold by Graphics to Graphics Finance
pursuant to a receivables contribution and sale agreement. Graphics services these receivables
pursuant to a servicing agreement with Graphics Finance.
Graphics Finances separate assets and liabilities are available to pay Graphics Finances separate
debts but are neither available to pay the debts of the consolidated entity or any other
constituent thereof nor constitute obligations of any other constituent of the consolidated entity.
Graphics separate assets and liabilities are available to pay Graphics separate debts but are
neither available to pay the debts of the consolidated entity or any other constituent thereof nor
constitute
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ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
obligations of any other constituent of the consolidated entity. The foregoing does not
apply to liabilities for which joint and several liability is provided under the Internal Revenue
Code or the Employment Retirement Income Security Act (ERISA).
The Receivables Facility also requires Graphics, as servicer of the receivables sold by it to
Graphics Finance, to satisfy the same first lien leverage ratio test contained in the 2005 Credit
Agreement. In addition, the Receivables Facility contains other customary affirmative and negative
covenants and events of default. It also contains other covenants customary for facilities of this
type, including requirements related to credit and collection policies, deposits of collections
and maintenance by each party of its separate corporate identity, including maintenance of separate
records, books, assets and liabilities and disclosures about the transactions in the financial
statements of Holdings and its consolidated subsidiaries. Failure to meet these covenants could
lead to an acceleration of the obligations under the Receivables Facility, following which the
lenders would have the right to sell the assets securing the Receivables Facility.
The Company was in compliance with the covenant requirements set forth in the Receivables Facility,
as amended, as of March 31, 2007.
The Receivables Facility expires on December 15, 2009, when all borrowings thereunder become
payable in full.
Interest on borrowings under the Receivables Facility is floating, based on existing market rates,
at either (a) an adjusted LIBOR rate plus a margin of 4.25% at March 31, 2007 or (b) an alternate
base rate (based upon the greater of the agent banks prime lending rate or the Federal Funds rate
plus 0.5%) plus a margin of 3.25% at March 31, 2007. In addition, Graphics Finance is obligated to
pay specified unused commitment and other customary fees.
On March 31, 2007, there were borrowings of $4.7 million under the Receivables Facility. Based on
receivables purchased from Graphics at March 31, 2007, additional availability under the
Receivables Facility was approximately $1.1 million. In addition to this availability, if Graphics
Finance had purchased from Graphics all other eligible receivables at March 31, 2007, availability
would have further increased by $23.7 million.
At March 31, 2007, Graphics Finance had $0.2 million of cash deposits with Bank of America, which
have been classified as Other current assets in the Companys consolidated balance sheet, as such
funds are pledged to secure payment of borrowings under the Receivables Facility and are therefore
not available to meet the Companys cash operating requirements.
10% Senior Second Secured Notes
The 10% Senior Second Secured Notes Due 2010 (the 10% Notes) mature June 15, 2010, with interest
payable semi-annually on June 15 and December 15. The 10% Notes are redeemable at the option of
Graphics in whole or in part on June 15, 2007, at 105% of the principal amount, plus accrued
interest. The redemption price will decline each year after 2007 and will be 100% of the principal
amount of the 10% Notes, plus accrued interest, beginning on June 15, 2009. Upon a change of
control, Graphics will be required to make an offer to purchase the
10% Notes, unless such requirement has been waived. The purchase price
will equal 101% of the principal amount of the 10% Notes on the date of purchase, plus accrued
interest.
Amendments to Credit Facilities
On June 13, 2007, the 2005 Credit Agreement and the Receivables Facility were amended to (a)
increase the maximum permissible first lien leverage ratios as of the last day of the fiscal
quarters ending September 30, and December 31, 2007, and March 31, 2008, and (b) require that the
Company maintain certain levels of minimum total liquidity at November 30, December 13, and
December 31, 2007, and at the end of each month thereafter through March 31, 2008.
The Company is currently in compliance with the covenant requirements set forth in the 2005 Credit
Agreement and the Receivables Facility, as amended.
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ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
Future maturities of long-term debt and future minimum obligations under capital leases at
March 31, 2007 are as follows (in thousands):
Long-Term | Capital | |||||||
Fiscal Year | Debt | Leases | ||||||
2008 |
$ | | $ | 3,713 | ||||
2009 |
| 1,966 | ||||||
2010 |
66,580 | 207 | ||||||
2011 |
280,000 | | ||||||
2012 |
| | ||||||
Total |
$ | 346,580 | 5,886 | |||||
Imputed interest |
(356 | ) | ||||||
Present value of minimum lease payments |
$ | 5,530 | ||||||
Capital leases have varying maturity dates and implicit interest rates which generally
approximate 7%-10%. The Company estimates that the fair value of debt instruments, excluding
capital lease obligations, was $286.4 million, or $60.2 million less than the carrying value,
at March 31, 2007. The Company estimated that the fair value of the Companys debt
instruments, excluding capital lease obligations, approximated $232.4 million, or $82.6
million less than the carrying value, at March 31, 2006.
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ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(7) | Income Taxes | |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts as measured by tax laws and regulations. Significant components of the Companys deferred tax liabilities and assets as of March 31, 2007 and 2006 are as follows (in thousands): |
March 31, | ||||||||
2007 | 2006 | |||||||
Deferred tax liabilities: |
||||||||
Book over tax basis in property, plant and equipment |
$ | 8,508 | 11,558 | |||||
Foreign taxes |
1,715 | 1,924 | ||||||
Accumulated amortization |
3,207 | 2,806 | ||||||
Total deferred tax liabilities |
13,430 | 16,288 | ||||||
Deferred tax assets: |
||||||||
Allowance for doubtful accounts |
399 | 500 | ||||||
Accrued expenses and other liabilities |
5,164 | 8,546 | ||||||
Net operating loss carryforwards |
65,536 | 55,892 | ||||||
AMT credit carryforwards |
1,203 | 1,203 | ||||||
Additonal minimum pension liability |
5,645 | 8,477 | ||||||
Cumulative translation adjustment |
203 | 157 | ||||||
Other, net |
1,429 | 953 | ||||||
Total deferred tax assets |
79,579 | 75,728 | ||||||
Valuation allowance for deferred tax assets |
67,864 | 61,897 | ||||||
Net deferred tax assets |
11,715 | 13,831 | ||||||
Net deferred tax liabilities |
$ | 1,715 | 2,457 | |||||
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 of the Company. The valuation allowance increased by $6.0 million during the fiscal year ended March 31, 2007 as a result of an increase in the deferred tax items, which is net of a $2.8 million decrease related to the tax effect of the decrease in the additional minimum pension liability, which is a component of other comprehensive income (loss). | ||
The valuation allowance increased by $7.1 million during the fiscal year ended March 31, 2006 as a result of an increase in the deferred tax items, which includes an increase of $1.0 million related to the tax effect of the increase in the additional minimum pension liability, which is a component of other comprehensive income (loss). |
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ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
During fiscal years ended March 31, 2007 and 2006, the Company recorded adjustments of $0.4 million and $3.6 million, respectively, to reflect the tax benefit associated with changes in estimate with respect to its income tax liability. | ||
Income tax expense (benefit) attributable to loss from continuing operations consists of (in thousands): |
Year ended March 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Current |
||||||||||||
Federal |
$ | | | | ||||||||
State |
119 | 89 | 129 | |||||||||
Foreign |
430 | 174 | (990 | ) | ||||||||
Total current |
549 | 263 | (861 | ) | ||||||||
Deferred |
||||||||||||
Federal |
| (482 | ) | (310 | ) | |||||||
State |
(525 | ) | 47 | (417 | ) | |||||||
Foreign |
(217 | ) | (3,197 | ) | (97 | ) | ||||||
Total deferred |
(742 | ) | (3,632 | ) | (824 | ) | ||||||
Income tax benefit |
$ | (193 | ) | (3,369 | ) | (1,685 | ) | |||||
The effective tax rates for the fiscal years ended March 31, 2007, 2006 and 2005 were 0.9%, 18.8% and 6.2%, 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, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Statutory tax rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
State income taxes, less
federal tax impact |
0.1 | (0.4 | ) | (0.1 | ) | |||||||
Foreign taxes, less federal
tax impact |
(0.3 | ) | (0.5 | ) | 2.3 | |||||||
Other nondeductible expenses |
| | (0.5 | ) | ||||||||
Change in valuation allowance |
(35.4 | ) | (33.4 | ) | (31.4 | ) | ||||||
Change in cumulative translation adjustment |
0.1 | (1.1 | ) | (2.0 | ) | |||||||
Previously accrued taxes |
2.0 | 20.2 | 1.6 | |||||||||
Other, net |
(0.6 | ) | (1.0 | ) | 1.3 | |||||||
Effective income tax rate |
0.9 | % | 18.8 | % | 6.2 | % | ||||||
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ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
As of March 31, 2007, the Company had available net operating loss carryforwards (NOLs) for state purposes of $125.1 million, which can be used to offset future state taxable income. If these NOLs are not utilized, they will begin to expire in 2008 and will be totally expired in 2027. | ||
As of March 31, 2007, the Company had available NOLs for federal purposes of $172.1 million, which can be used to offset future federal taxable income. If these NOLs are not utilized, they will begin to expire in 2011 and will be totally expired in 2027. | ||
The Company also had available an alternative minimum tax credit carryforward of $1.2 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 NOLs in the amount of $186.0 million, which will begin to expire in 2011 and will be totally expired in 2027. | ||
(8) | Other Liabilities | |
The components of other liabilities are as follows (in thousands): |
March 31, | ||||||||
2007 | 2006 | |||||||
Deferred revenue agreements (see note 12) |
$ | 41,540 | 45,641 | |||||
Postretirement liabilities (see note 9) |
3,037 | 3,457 | ||||||
Pension liabilities and other benefit obligations |
5,361 | 11,601 | ||||||
Restructuring |
1,125 | | ||||||
Other |
1,491 | 2,013 | ||||||
Total |
$ | 52,554 | 62,712 | |||||
(9) | 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 employees years of service and, in the case of salaried employees, compensation during the years immediately preceding retirement. The Companys 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 and fixed income securities. In October 1994, the Board of Directors approved an amendment to the Companys 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. In July 2005, the Board of Directors approved an amendment to this plan (the Amended and Restated Supplemental Executive Retirement Plan). The aggregate accumulated benefit obligation under this plan, as amended, was approximately $0.5 million and $0.6 million at March 31, 2007 and 2006, respectively. |
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ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
Defined Benefit Postretirement Plans | ||
Postretirement Benefits | ||
The Company provides certain other postretirement benefits, primarily life and health insurance. Full-time employees who are eligible for benefits under the defined benefit pension plans, 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. | ||
Effective February 1, 2006, the Company amended the health care plan changing the post 65 healthcare benefits for all current and future retirees. This amendment had an immaterial impact on the accumulated postretirement benefit obligation at March 31, 2006. | ||
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 an employer-matching contribution on amounts contributed. Through March 16, 2003, the employer-matching contribution was made bi-weekly and equaled 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. Beginning March 17, 2003 through December 31, 2004, the employer matching contribution was made bi-weekly and equaled 25% of the first 6% of annual compensation contributed to the plan by each employee, subject to maximum amounts established by the Internal Revenue Service. Subsequent to December 31, 2004, the employer matching contributions were made bi-weekly and equaled 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 Companys contribution under this Plan amounted to $1.7 million during the fiscal year ended March 31, 2007, $1.6 million during the fiscal year ended March 31, 2006 and $1.1 million during the fiscal year ended March 31, 2005. |
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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, 2007 and 2006 and a
statement of the funded status of such plans as of March 31, 2007 and 2006 (in thousands):
Defined Benefit | Defined Benefit | |||||||||||||||
Pension Plans | Postretirement Plan | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Change in Benefit Obligation |
||||||||||||||||
Benefit obligation at beginning of
year |
$ | 72,621 | 69,624 | 2,412 | 2,823 | |||||||||||
Service cost |
455 | 462 | 22 | 34 | ||||||||||||
Interest cost |
4,208 | 4,321 | 128 | 179 | ||||||||||||
Plan amendments |
| | | (600 | ) | |||||||||||
Plan participants contributions |
| | 175 | 441 | ||||||||||||
Actuarial loss (gain) |
(2,432 | ) | 3,537 | (131 | ) | 251 | ||||||||||
Expected benefit payments |
(3,774 | ) | (5,323 | ) | (470 | ) | (716 | ) | ||||||||
Benefit obligation at end of year |
$ | 71,078 | 72,621 | 2,136 | 2,412 | |||||||||||
Change in Plan Assets |
||||||||||||||||
Fair value of plan assets at
beginning of year |
$ | 57,283 | 49,675 | | | |||||||||||
Actual return on plan assets |
7,637 | 3,196 | | | ||||||||||||
Employer contributions: |
||||||||||||||||
Pension Plans |
5,718 | 8,017 | | | ||||||||||||
SERP |
50 | 1,718 | | | ||||||||||||
Postretirement Plan |
| | 295 | 275 | ||||||||||||
Plan participants contributions |
| 175 | 441 | |||||||||||||
Benefits paid |
(3,774 | ) | (5,323 | ) | (470 | ) | (716 | ) | ||||||||
Fair value of plan assets at end of
year |
$ | 66,914 | 57,283 | | | |||||||||||
Funded Status |
$ | (4,164 | ) | (15,338 | ) | (2,136 | ) | (2,412 | ) | |||||||
Unrecognized net actuarial (gain) loss |
14,392 | 21,611 | (12 | ) | 109 | |||||||||||
Unrecognized prior service gain |
| | (1,282 | ) | (1,566 | ) | ||||||||||
Plan participants contributions |
| | 93 | 112 | ||||||||||||
Additional minimum pension liability |
(14,392 | ) | (21,611 | ) | | | ||||||||||
Accrued benefit liability |
$ | (4,164 | ) | (15,338 | ) | (3,337 | ) | (3,757 | ) | |||||||
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ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
Defined Benefit | ||||||||||||||||
Defined Benefit Pension Plans | Postretirement Plan | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Weighted Average Assumptions |
||||||||||||||||
Discount rate benefit obligation |
6.25 | % | 6.00 | % | 6.25 | % | 6.00 | % | ||||||||
Expected return on plan assets |
8.50 | % | 8.50 | % | N/A | N/A | ||||||||||
Rate of compensation increase |
N/A | N/A | N/A | N/A |
The Company uses a December 31 measurement date for its defined benefit pension and postretirement plans. For measurement purposes under the defined benefit postretirement plan, a 10 percent annual rate of increase in the per capita cost of covered health care benefits (including prescription drugs) was assumed for March 31, 2007. This rate was assumed to decrease gradually to 5 percent through the fiscal year ending 2013 and remain at that level thereafter. |
Defined Benefit Pension Plans | Defined Benefit Postretirement Plan | |||||||||||||||||||||||
2007 | 2006 | 2005 | 2007 | 2006 | 2005 | |||||||||||||||||||
Components of Net Periodic Benefit Cost
(in thousands) |
||||||||||||||||||||||||
Service cost |
$ | 455 | 462 | 468 | 22 | 34 | 31 | |||||||||||||||||
Interest cost |
4,208 | 4,321 | 4,217 | 128 | 179 | 170 | ||||||||||||||||||
Expected return on plan assets |
(4,868 | ) | (4,262 | ) | (3,510 | ) | | | | |||||||||||||||
Amortization of prior service cost |
| | | (284 | ) | (222 | ) | (222 | ) | |||||||||||||||
Amortization of unrecognized loss |
2,017 | 2,001 | 2,022 | | | | ||||||||||||||||||
Settlement loss |
| 169 | 46 | | | | ||||||||||||||||||
Recognized net actuarial (gain) loss |
| | | (10 | ) | 2 | (43 | ) | ||||||||||||||||
Net periodic benefit cost (income) |
$ | 1,812 | 2,691 | 3,243 | (144 | ) | (7 | ) | (64 | ) | ||||||||||||||
Expected Future Benefit Payments | ||
The following benefit payments are expected to be paid (in thousands) to eligible plan participants under the Companys defined benefit pension plans and defined benefit postretirement plan. |
Defined Benefit | Defined Benefit | |||||||
Fiscal Year | Pension Plans | Postretirement Plan (a) | ||||||
2008 |
$ | 4,473 | 205 | |||||
2009 |
4,546 | 206 | ||||||
2010 |
4,625 | 206 | ||||||
2011 |
4,710 | 204 | ||||||
2012 |
4,815 | 202 | ||||||
2013 2017 |
25,239 | 934 | ||||||
Total |
$ | 48,408 | 1,957 | |||||
(a) | Represents expected benefit payments net of plan participants contributions. |
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ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
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 (in thousands): |
1% Point | 1% Point | |||||||
Increase | Decrease | |||||||
Effect on total of service and interest
cost components of expense |
$ | 4 | (3 | ) | ||||
Effect on postretirement benefit obligation |
$ | 63 | (58 | ) |
Plan Assets | ||
The Companys defined benefit pension plans reflect weighted-average target allocations as of March 31, 2007 and the percentages of the fair value of plan assets by asset category are allocated at March 31, 2007 and 2006 as follows: |
Target | ||||||||||||
Allocation | Percentage of Plan Assets | |||||||||||
2007 | 2007 | 2006 | ||||||||||
Global equity securities |
73.6 | % | 74.0 | % | 73.3 | % | ||||||
Fixed income securities |
21.9 | % | 21.0 | % | 20.9 | % | ||||||
Real Estate |
4.5 | % | 4.5 | % | 4.6 | % | ||||||
Cash |
0.0 | % | 0.5 | % | 1.2 | % | ||||||
Total |
100.0 | % | 100.0 | % | 100.0 | % | ||||||
The Companys pension plans long-term target asset allocation is shown above. The long-term allocation targets reflect the Companys asset class return expectations and tolerance for investment risk within the context of the pension plans long-term obligations. The long-term asset allocation is supported by an analysis that incorporates historical and expected returns by asset class as well as volatilities and correlations across asset classes and the Companys liability profile. Due to market conditions and other factors, actual asset allocations may vary from the target allocation outlined above. | ||
To develop the expected long-term rate of return on assets assumption, the Company considered the historical returns and future expectations for returns for each asset class, as well as the target asset allocation of the present portfolio. This resulted in the selection of the 8.5% long-term rate of return on asset assumption for 2007. | ||
It is the Companys practice to fund amounts for the defined benefit pension plans at least sufficient to meet the minimum requirements set forth in applicable employee benefit laws and local tax laws. Liabilities in excess of these funding levels are included in the Companys consolidated balance sheets. Employer contributions for the defined benefit pension plans for the fiscal year ending March 31, 2008 are estimated to be approximately $0.7 million. | ||
(10) | Capital Stock | |
At March 31, 2007, capital stock consists of Holdings common stock (Common Stock). Each share of Common Stock is entitled to one vote on each matter common shareholders are entitled to vote. Dividends on the Common Stock are discretionary by the Board of Directors and are restricted by the 2005 Credit Agreement (see note 6). |
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ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(11) | Stock Option Plans | |
Common Stock Option Plans | ||
In 1993, the Company established the ACG Holdings, Inc. Common Stock Option Plan. This plan, as amended, (the 1993 Common Stock Option Plan) is administered by a committee of the Board of Directors (the Committee) and currently provides for granting up to 17,322 shares of Common Stock. On January 16, 1998, the Company established another common stock option plan (the 1998 Common Stock Option Plan). This plan is administered by the Committee and provides for granting up to 36,939 shares of Common Stock. The 1993 Common Stock Option Plan and the 1998 Common Stock Option Plan are collectively referred to as the Common Stock Option Plans. Stock options may be granted under the Common Stock Option Plans to officers and other key employees of the Company at the exercise price per share of Common Stock, as determined at the time of grant by the Committee in its sole discretion. All options are 25% exercisable on the first anniversary date of a grant and vest in additional 25% increments on each of the next three anniversary dates of each grant. All options expire 10 years from the date of grant. | ||
A summary of activity under the Common Stock Option Plans is as follows: |
Weighted- | ||||||||||||
Average | ||||||||||||
Exercise | Exercisable | |||||||||||
Options | Price ($) | Options (a) | ||||||||||
Outstanding at March 31, 2004 |
9,197 | .01 | 6,946 | |||||||||
Granted |
| | ||||||||||
Exercised |
| | ||||||||||
Forfeited |
(1,301 | ) | .01 | |||||||||
Outstanding at March 31, 2005 |
7,896 | .01 | 7,131 | |||||||||
Granted |
2,504 | .01 | ||||||||||
Exercised |
| | ||||||||||
Forfeited |
(1,047 | ) | .01 | |||||||||
Outstanding at March 31, 2006 |
9,353 | .01 | 6,466 | |||||||||
Granted |
| | ||||||||||
Exercised |
| | ||||||||||
Forfeited |
| | ||||||||||
Outstanding at March 31, 2007 |
9,353 | .01 | 7,475 | |||||||||
(a) | At March 31, 2007, 2006 and 2005 all exercisable options had a $.01/option exercise price. |
Black-Scholes Option Pricing Model Wtd. Avg. Assumptions | ||||||||||||||||||||||||||||
Fiscal Year | # | Wtd. Avg. | Exercise | Risk Free | Annual | Expected | ||||||||||||||||||||||
Ended | Options | Grant Date | Price per | Interest | Dividend | Expected | Life | |||||||||||||||||||||
March 31, | Granted | Fair Value ($) | Option ($) | Rate (%) | Yield (%) | Volatility | (Years) | |||||||||||||||||||||
2007 |
| | | | | | | |||||||||||||||||||||
2006 |
2,504 | | (a | ) | (a | ) | (a | ) | (a | ) | (a | ) | ||||||||||||||||
2005 |
| | | | | | |
(a) | As the grant date Fair Value was $0, the Black-Scholes pricing was not calculated. |
The weighted-average remaining contractual life of the options outstanding at March 31, 2007 was 4.1 years. A total of 7,974 options for shares (including 2,224 previously exercised options that were subsequently canceled) of Holdings Common Stock were reserved for issuance, but not granted under the Common Stock Option Plans at March 31, 2007. |
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ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
There was no stock compensation expense recorded in the fiscal year ended March 31, 2007. The Company recorded a net reversal of prior years stock compensation expense of approximately $0.2 million in the fiscal year ended March 31, 2006, and recognized net stock compensation expense of $0.1 million in the fiscal year ended March 31, 2005. | ||
(12) | Commitments and Contingencies | |
The Company incurred rent expense of $3.6 million, $3.2 million and $4.3 million for the fiscal years ended March 31, 2007, 2006 and 2005, respectively, under various operating leases. Future minimum rental commitments under existing operating lease arrangements at March 31, 2007 are as follows (in thousands): |
Fiscal Year | ||||
2008 |
$ | 3,347 | ||
2009 |
2,941 | |||
2010 |
2,153 | |||
2011 |
1,143 | |||
2012 |
208 | |||
Thereafter |
| |||
Total |
$ | 9,792 | ||
The Company has employment agreements with three of its principal officers. These agreements provide for minimum salary levels as well as incentive bonuses, which are payable if specified management goals are attained. The aggregate commitment for future compensation under these agreements, excluding bonuses, is approximately $3.1 million. | ||
In the fiscal year ended March 31, 1998, the Company entered into multi-year contracts to purchase a portion of the Companys raw materials to be used in its normal operations. In connection with such purchase agreements, pricing for a portion of the Companys raw materials is adjusted for certain movements in market prices, changes in raw material costs and other specific price increases while purchase quantity levels are variable based upon certain contractual requirements and conditions. The Company is deferring certain contractual provisions over the life of the contracts, which are being recognized as the purchase commitments are achieved and the related inventory is sold. The amount deferred at March 31, 2007 is $41.5 million and is included within Other liabilities in the Companys consolidated balance sheet. | ||
Graphics, together with over 300 other persons, has been designated by the U. S. Environmental Protection Agency as a potentially responsible party (a PRP) under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA, also known as Superfund) at a solvent recovery operation that closed in 1989. Although liability under CERCLA may be imposed on a joint and several basis and the Companys ultimate liability is not precisely determinable, the PRPs have agreed in writing that Graphics share of removal costs is approximately 0.583%; therefore Graphics believes that its share of the anticipated remediation costs at such site will not be material to its business or the Companys consolidated financial statements as a whole. | ||
Graphics received written notice, dated May 10, 2004, of its potential liability in connection with the Gibson Environmental Site at 2401 Gibson Street, Bakersfield, California. Gibson Environmental, Inc. operated the (six acre) Site as a storage and treatment facility for used oil and contaminated soil from June 1987 through October 1995. Graphics received the notice and a Settlement Offer from LECG, a consultant representing approximately |
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ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
60 companies comprising the Gibson Group Trust. Graphics is investigating this matter but it believes its potential liability in connection with this Site will not be material to its business or the Companys consolidated financial statements as a whole. | ||
Based upon an analysis of Graphics volumetric share of waste contributed to the sites, the Company maintains a reserve of approximately $0.1 million in connection with these liabilities in its consolidated balance sheets at March 31, 2007 and 2006. The Company believes this amount is adequate to cover such liabilities. | ||
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 Companys consolidated financial statements as a whole. | ||
(13) | Interim Financial Information (Unaudited) | |
Quarterly financial information follows (in thousands): |
Net | ||||||||||||||||
Gross | Income | |||||||||||||||
Sales | Profit | (Loss) | ||||||||||||||
Fiscal Year 2007 | Quarter Ended: |
|||||||||||||||
June 30 |
$ | 110,010 | 12,146 | (3,342 | ) | |||||||||||
September 30 |
111,654 | 12,347 | (4,374 | ) | ||||||||||||
December 31 |
120,065 | 13,118 | (4,454 | ) | ||||||||||||
March 31 |
103,297 | 10,300 | (8,839 | )(a) | ||||||||||||
Total |
$ | 445,026 | 47,911 | (21,009 | ) | |||||||||||
Fiscal Year 2006 | Quarter Ended: |
|||||||||||||||
June 30 |
$ | 108,270 | 12,650 | (2,390 | ) | |||||||||||
September 30 |
105,460 | 11,776 | (4,198 | ) | ||||||||||||
December 31 |
118,724 | 14,911 | 2,252 | (b) | ||||||||||||
March 31 |
102,035 | 10,002 | (10,241 | )(c) | ||||||||||||
Total |
$ | 434,489 | 49,339 | (14,577 | ) | |||||||||||
(a) | Includes ($0.4) million of pre-tax restructuring benefit. | |
(b) | Includes ($0.5) million of pre-tax restructuring benefit. | |
(c) | Includes ($0.7) million of pre-tax restructuring benefit and a non-cash asset impairment charge of $2.8 million. |
(14) | Restructuring Costs and Other Charges | |
Fiscal Year 2005 Restructuring Costs | ||
New York Premedia Consolidation Plan | ||
In March 2005, the Companys Board of Directors approved a restructuring plan for the premedia services segment designed to improve operating efficiencies and overall profitability. This plan included the consolidation of the Companys two premedia facilities located in New York, New York. This action resulted in the elimination of 10 positions within the Company. | ||
As a result, the Company recorded a pre-tax restructuring charge of approximately $1.5 million in the quarter ended March 31, 2005 associated with this plan. This charge was classified within restructuring and other |
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ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
charges in the consolidated statement of operations for the fiscal year ended March 31, 2005. The costs of this restructuring plan were accounted for in accordance with the guidance set forth in Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146). This restructuring charge was composed of severance and related termination benefits, lease termination costs primarily related to future lease commitments and other costs. In the quarter ended March 31, 2007, the Company reduced the restructuring reserve related to this plan by approximately $0.1 million due to certain changes in assumptions related to lease termination costs. The Company also reduced the restructuring reserve related to this plan by approximately $0.3 million in the quarter ended March 31, 2006. This was primarily the result of lower than anticipated severance and other employee costs due to certain terminated employees obtaining other employment during their severance periods and certain changes in assumptions related to lease termination costs. These reductions of the restructuring reserve are and were classified within restructuring costs (benefit) and other charges in the consolidated statement of operations for the fiscal years ended March 31, 2007 and 2006, respectively. | ||
The following table summarizes the activity related to this restructuring plan for the fiscal year ended March 31, 2007 (in thousands): |
03/31/06 | 03/31/07 | |||||||||||||||
Restructuring | Reserve | Restructuring | ||||||||||||||
Reserve Balance | Activity | Adjustment | Reserve Balance | |||||||||||||
Lease termination
costs |
$ | 576 | (162 | ) | (79 | ) | 335 | |||||||||
Other costs |
12 | | | 12 | ||||||||||||
$ | 588 | (162 | ) | (79 | ) | 347 | ||||||||||
The process of consolidating the two premedia services facilities and the elimination of certain personnel within the Company was substantially completed by April 30, 2005. During the fiscal year ended March 31, 2006, $0.6 million of these costs were paid. As of March 31, 2007 the Company believes the restructuring reserve of approximately $0.3 million is adequate. The Company anticipates that approximately $0.1 million of these costs will be paid during each fiscal year through March 31, 2010. These payments will be funded through cash generated from operations and borrowings under the Companys 2005 Revolving Credit Facility and Receivables Facility. | ||
Pittsburg Facility Closure Plan | ||
In March 2005, the Companys Board of Directors approved a restructuring plan for the print segment to reduce manufacturing costs and improve profitability. This plan included the closure of the Pittsburg, California print facility. This action resulted in the elimination of 136 positions within the Company. | ||
As a result, the Company recorded a pre-tax restructuring charge of approximately $3.1 million in the quarter ended March 31, 2005 associated with this plan. This charge was classified within restructuring and other charges in the consolidated statements of operations for the fiscal year ended March 31, 2005. The costs of this restructuring plan were accounted for in accordance with the guidance set forth in SFAS 146. This restructuring charge was composed of severance and related termination benefits, lease termination costs and other costs. The Company reduced the restructuring reserve related to this plan by approximately $0.8 million in the quarter ended December 31, 2005 as a result of lower than anticipated severance and other employee costs due to certain terminated employees obtaining other employment during their severance periods. The Company further reduced the restructuring reserve related to this plan by approximately $0.1 million in the quarter ended March 31, 2006 as a result of certain changes in assumptions related to lease termination costs. These reductions of the reserve were classified within restructuring costs (benefit) and other charges in the consolidated statements of operations for the fiscal year ended March 31, 2006. |
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ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
The following table summarizes the activity related to this restructuring plan for the fiscal year ended March 31, 2007 (in thousands): |
03/31/06 | 03/31/07 | |||||||||||
Restructuring | Restructuring | |||||||||||
Reserve Balance | Activity | Reserve Balance | ||||||||||
Lease termination costs |
$ | 599 | (1 | ) | 598 | |||||||
Other costs |
26 | (10 | ) | 16 | ||||||||
$ | 625 | (11 | ) | 614 | ||||||||
The process of closing the print facility and the elimination of certain personnel within the Company was completed by March 31, 2005. During the fiscal year ended March 31, 2006, $0.6 million of these costs were paid and in the fiscal year ended March 31, 2005, $1.0 million of these costs were paid. As of March 31, 2007 the Company believes the restructuring reserve of approximately $0.6 million is adequate. The Company anticipates that these costs will be paid by March 31, 2008. These payments will be funded through cash generated from operations and borrowings under the Companys 2005 Revolving Credit Facility and Receivables Facility. | ||
Plant and SG&A Reduction Plan | ||
In February 2005, the Companys Board of Directors approved a restructuring plan for the print and premedia services segments to reduce overhead costs and improve operating efficiency and profitability. This plan resulted in the elimination of 60 positions within the Company, including both facility and selling and administrative employees. | ||
As a result, the Company recorded a pre-tax restructuring charge of approximately $3.8 million in the quarter ended March 31, 2005 associated with this plan. This charge was classified within restructuring costs and other charges in the consolidated statements of operations for the fiscal year ended March 31, 2005. The costs of this restructuring plan were accounted for in accordance with the guidance set forth in SFAS 146. This restructuring charge was composed of severance and related termination benefits and other costs. The Company reduced the reserve related to this plan by approximately $0.1 million in the quarter ended March 31, 2007 and approximately $0.4 million in the quarter ended March 31, 2006. These reductions were primarily the result of lower than anticipated severance and other employee costs due to certain terminated employees obtaining other employment during their severance periods. These reductions of the reserve are and were classified within restructuring costs (benefit) and other charges in the consolidated statements of operations for the fiscal years ended March 31, 2007 and 2006, respectively. | ||
The following table summarizes the activity related to this restructuring plan for the fiscal year ended March 31, 2007 (in thousands): |
03/31/06 | 03/31/07 | |||||||||||||||
Restructuring | Reserve | Restructuring | ||||||||||||||
Reserve Balance | Activity | Adjustment | Reserve Balance | |||||||||||||
Severance and
Other employee costs |
$ | 848 | (735 | ) | (42 | ) | 71 | |||||||||
Other costs |
103 | (3 | ) | (97 | ) | 3 | ||||||||||
$ | 951 | (738 | ) | (139 | ) | 74 | ||||||||||
Employee terminations related to this plan were substantially completed by March 31, 2005. During the fiscal year ended March 31, 2006, $2.1 million of these costs were paid and during the fiscal year ended March 31, 2005, $0.3 million of those costs were paid. As of March 31, 2007 the Company believes the restructuring |
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ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
reserve of approximately $0.1 million is adequate. The Company anticipates these costs will be paid by March 31, 2008. These payments will be funded through cash generated from operations and borrowings under the Companys 2005 Revolving Credit Facility and Receivables Facility. | ||
Fiscal Year 2004 Restructuring Costs | ||
January 2004 Plan | ||
In January 2004, the Company implemented a restructuring plan for the print and premedia services segments designed to improve operating efficiency and profitability. This plan included a consolidation of capacity and the related downsizing of a print facility in Stevensville, Ontario, a reduction of personnel in certain of the Companys other print and premedia facilities and the elimination of certain selling and administrative positions. These actions included the elimination of 208 positions within the Company. | ||
As a result, the Company recorded a pre-tax restructuring charge of approximately $5.7 million in the quarter ended March 31, 2004 associated with this plan. This charge was classified within restructuring costs and other charges in the consolidated statements of operations for the fiscal year ended March 31, 2004. The costs of this restructuring plan were accounted for in accordance with the guidance set forth in SFAS 146. This restructuring charge was composed primarily of severance and related termination benefits. The Company reduced the restructuring reserve for this plan by approximately $0.2 million in the quarter ended March 31, 2007, as a result of changes in facts and circumstances related to this plan. The Company also reduced the restructuring reserve related to this plan by approximately $0.1 million and $0.7 million in the quarters ended March 31, 2006 and 2005, respectively. These reductions were primarily the result of lower than anticipated severance and other employee costs due to the terminated employees obtaining other employment during their severance periods. These reductions are and were classified within restructuring costs (benefit) and other charges in the consolidated statements of operation for the fiscal years ended March 31, 2007, 2006 and 2005, respectively. | ||
The following table summarizes the activity related to this restructuring plan for the fiscal year ended March 31, 2007 (in thousands): |
03/31/06 | 03/31/07 | |||||||||||||||
Restructuring | Reserve | Restructuring | ||||||||||||||
Reserve Balance | Activity | Adjustment | Reserve Balance | |||||||||||||
Severance and
other employee costs |
$ | 223 | | (223 | ) | | ||||||||||
Other costs |
110 | (95 | ) | (15 | ) | | ||||||||||
$ | 333 | (95 | ) | (238 | ) | | ||||||||||
During the fiscal year ended March 31, 2006, $0.5 million of these costs were paid, in the fiscal year ended March 31, 2005, $2.3 million of these costs were paid and in the fiscal year ended March 31, 2004, $1.8 million of these costs were paid. As of March 31, 2007, the Company has paid all costs associated with this plan. | ||
July 2003 Plan | ||
In July 2003, the Company implemented a restructuring plan for the print and premedia services segments to further reduce its selling, general and administrative expenses. This plan resulted in the termination of four administrative employees. | ||
As a result of this plan, the Company recorded a pre-tax restructuring charge of approximately $1.8 million in the quarter ended September 30, 2003. This charge was classified within restructuring costs and other charges in the consolidated statements of operations for the fiscal year ended March 31, 2004. The cost of this restructuring plan was accounted for in accordance with the guidance set forth in SFAS 146. The restructuring charge was composed of severance and related termination benefits. |
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ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
The following table summarizes the activity related to this restructuring plan for the fiscal year ended March 31, 2007 (in thousands): |
03/31/06 | 03/31/07 | |||||||||||||||
Restructuring | Reserve | Restructuring | ||||||||||||||
Reserve Balance | Activity | Adjustment | Reserve Balance | |||||||||||||
Severance and other
employee costs |
$ | 102 | (113 | ) | 11 | |
During the fiscal year ended March 31, 2006, $0.3 million of these costs were paid and in each of the fiscal years ended March 31, 2005 and 2004, $0.7 million of these costs were paid. As of March 31, 2007, the Company has paid all costs associated with this plan. | ||
Fiscal Year 2002 Restructuring Costs | ||
In January 2002, the Companys Board of Directors approved a restructuring plan for the print and premedia services segments designed to improve asset utilization, operating efficiency and profitability. This plan included the closing of a print facility in Hanover, Pennsylvania, and a premedia services facility in West Palm Beach, Florida, the downsizing of a Buffalo, New York premedia services facility and the elimination of certain administrative personnel. This action resulted in the elimination of 189 positions within the Company. | ||
As a result of this plan, the Company recorded a pre-tax restructuring charge of approximately $8.6 million in the fourth quarter of the fiscal year ended March 31, 2002. This charge was classified within restructuring costs and other charges in the consolidated statements of operations for the fiscal year ended March 31, 2002. The cost of this restructuring plan was accounted for in accordance with the guidance set forth in Emerging Issues Task Force Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring) (EITF 94-3). The restructuring charge included severance and related termination benefits, lease termination costs primarily related to future lease commitments, equipment deinstallation costs directly associated with the disassembly of certain printing presses and other equipment, and other costs primarily including legal fees, site clean-up costs and the write-off of certain press related parts that provided no future use or functionality. In the quarter ended March 31, 2007, the Company recorded non-cash imputed interest associated with sub-lease income to this reserve of less than $0.1 million. This imputed interest is classified as interest expense in the consolidated statement of operations for the fiscal year ended March 31, 2007. The Company recorded an additional $0.2 million, $0.3 million and $0.7 million of restructuring charges related to this plan in the quarters ended March 31, 2006, December 31, 2005 and March 31, 2005, respectively, and an additional $0.2 million in each of the quarters ended March 31, 2004 and September 30, 2003. These charges are primarily related to future lease commitments and were classified within restructuring costs (benefit) and other charges in the consolidated statements of operations for the fiscal years ended March 31, 2006, 2005 and 2004. | ||
The following table summarizes the activity related to this restructuring plan for the fiscal year ended March 31, 2007 (in thousands): |
03/31/06 | 03/31/07 | |||||||||||||||
Restructuring | Restructuring | |||||||||||||||
Reserve | Reserve | Reserve | ||||||||||||||
Balance | Activity | Adjustment | Balance | |||||||||||||
Lease termination
costs |
1,528 | (333 | ) | 35 | 1,230 |
The process of closing two facilities and downsizing one facility, including equipment deinstallation and relocation of that equipment to other facilities within the Company, was completed by March 31, 2002. During each of the fiscal years ended March 31, 2006 and 2005, $0.5 million and of these costs were paid, in the fiscal |
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ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
year ended March 31, 2004, $0.9 million of these costs were paid and in each of the fiscal years ended March 31, 2003 and 2002, $3.4 million of these costs were paid. As of March 31, 2007, the Company believes the restructuring reserve of approximately $1.2 million is adequate. The Company anticipates that $0.3 million of the restructuring reserve balance will be paid in the fiscal year ending March 31, 2008, $0.2 million will be paid during the fiscal year ending March 31, 2009, $0.3 million will be paid in the fiscal year ending March 31, 2010 and $0.4 million will be paid in the fiscal year ending March 31, 2011. These payments will be funded through cash generated from operations and borrowings under the 2005 Revolving Credit Facility and Receivables Facility. | ||
Other Charges | ||
The Company recorded no other charges in the fiscal years ended March 31, 2007 and 2006. Other charges of approximately $1.6 million were recorded in the fourth quarter of the fiscal year ended March 31, 2005. These other charges represented the impairment associated with restructuring initiatives reflecting the decision to abandon certain Company assets and to write-down other assets to fair value. The $1.6 million impairment charge recorded in the fourth quarter of fiscal year ended March 31, 2005, included $1.2 million related to the write-off of certain assets and the write-down to fair value of the assets held for sale in the Pittsburg, California print facility (see note 3). The provision was based on a review of the Companys long-lived assets in accordance with SFAS 144. These impairment charges were classified within restructuring costs (benefit) and other charges in the consolidated statements of operations. | ||
(15) | Parent Guarantee of Subsidiary Debt | |
Graphics, the issuer of the 10% 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 10% Notes. The 10% Notes are fully and unconditionally guaranteed on a senior basis by Holdings and by future domestic subsidiaries of Graphics (subject to certain exceptions). 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 2005 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 under the terms of the indenture governing the 10% Notes and the 2005 Credit Agreement (see note 6). | ||
(16) | Industry Segment Information | |
The Company has significant operations principally in two industry segments: (1) print and (2) premedia services. All of the Companys print business and assets are attributed to the print division and all of the Companys premedia services business and assets are attributed to the premedia services division. The Companys corporate expenses have been segregated and do not constitute a reportable segment. | ||
The Company has two reportable segments: (1) print and (2) premedia services. The print business produces advertising inserts, comics (Sunday newspaper comics, comic insert advertising and comic books) and other publications. The Companys premedia services business assists customers in the design, creation and capture; manipulation; storage; 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 and amortization. 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 Companys 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 Companys reportable segments are attributed to or located in the United States. |
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ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
Premedia | Corporate | |||||||||||||||
Services | and Other | |||||||||||||||
(In thousands) | (a) | (a) | (b) | Total | ||||||||||||
Fiscal Year Ended March 31, 2007 |
||||||||||||||||
Sales |
$ | 396,535 | 48,491 | | 445,026 | |||||||||||
EBITDA |
$ | 33,730 | 8,777 | (4,774 | ) | 37,733 | ||||||||||
Depreciation and amortization |
(16,563 | ) | (2,067 | ) | | (18,630 | ) | |||||||||
Interest expense |
| | (40,405 | ) | (40,405 | ) | ||||||||||
Interest income |
| | 100 | 100 | ||||||||||||
Income tax benefit |
| | 193 | 193 | ||||||||||||
Net income (loss) |
$ | 17,167 | 6,710 | (44,886 | ) | (21,009 | ) | |||||||||
Total assets |
$ | 203,135 | 11,527 | 12,071 | 226,733 | |||||||||||
Total goodwill |
$ | 64,656 | 1,892 | | 66,548 | |||||||||||
Total capital expenditures |
$ | 11,139 | 1,562 | | 12,701 | |||||||||||
Fiscal Year Ended March 31, 2006 |
||||||||||||||||
Sales |
$ | 380,648 | 53,841 | | 434,489 | |||||||||||
EBITDA |
$ | 31,571 | 11,070 | (3,563 | ) | 39,078 | ||||||||||
Depreciation and amortization |
(16,767 | ) | (2,716 | ) | | (19,483 | ) | |||||||||
Interest expense |
| | (37,624 | ) | (37,624 | ) | ||||||||||
Interest income |
| | 83 | 83 | ||||||||||||
Income tax benefit |
| | 3,369 | 3,369 | ||||||||||||
Net income (loss) |
$ | 14,804 | 8,354 | (37,735 | ) | (14,577 | ) | |||||||||
Total assets |
$ | 205,753 | 12,852 | 12,897 | 231,502 | |||||||||||
Total goodwill |
$ | 64,656 | 1,892 | | 66,548 | |||||||||||
Total capital expenditures |
$ | 10,651 | 1,835 | | 12,486 | |||||||||||
Fiscal Year Ended March 31, 2005 |
||||||||||||||||
Sales |
$ | 393,922 | 55,591 | | 449,513 | |||||||||||
EBITDA |
$ | 22,997 | 10,059 | (3,307 | ) | 29,749 | ||||||||||
Depreciation and amortization |
(19,867 | ) | (3,184 | ) | | (23,051 | ) | |||||||||
Interest expense |
| | (34,087 | ) | (34,087 | ) | ||||||||||
Interest income |
| | 37 | 37 | ||||||||||||
Income tax benefit |
| | 1,685 | 1,685 | ||||||||||||
Net income (loss) |
$ | 3,130 | 6,875 | (35,672 | ) | (25,667 | ) | |||||||||
Total assets |
$ | 230,490 | 15,179 | 13,229 | 258,898 | |||||||||||
Total goodwill |
$ | 64,656 | 1,892 | | 66,548 | |||||||||||
Total capital expenditures |
$ | 5,418 | 1,489 | | 6,907 |
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ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(a) | EBITDA for the print and premedia services segments in the fiscal year ended March 31, 2007 includes the impact of restructuring benefit of ($0.1) million and ($0.3) million, respectively. EBITDA for the print and premedia services segments in the fiscal year ended March 31, 2006 includes the impact of restructuring benefit of ($0.9) million and ($0.3) million, respectively, and the print segment also includes a non-cash asset impairment charge of $2.8 million. EBITDA for the print and premedia services segments in the fiscal year ended March 31, 2005 includes the impact of restructuring costs and other charges of $7.8 million and $2.2 million, respectively. | |
(b) | EBITDA for corporate and other includes corporate general and administrative expenses. In addition, corporate and other in the fiscal year ended March 31, 2007, includes incremental legal expenses associated with two lawsuits in which the Company is the plaintiff. |
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ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
ITEM 9A. CONTROLS AND PROCEDURES
As of March 31, 2007, an evaluation was performed under the supervision and with the participation
of our management, including the Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended).
Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial
Officer, concluded that the disclosure controls and procedures were effective as of March 31, 2007.
There have been no significant changes in our internal controls or in other factors that could
significantly affect internal controls subsequent to March 31, 2007. There have not been any
changes in our internal controls over financial reporting during the
period covered by this Report that have materially affected, or are reasonably likely to materially affect,
our internal controls over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following table provides certain information about each of the current directors and executive
officers of Holdings and Graphics (ages as of March 31, 2007). All directors hold office until
their successors are duly elected and qualified.
Name | Age | Position with Graphics and/or Holdings | ||||
Stephen M. Dyott
|
55 | Chairman, President of Holdings, Chief Executive Officer and Director | ||||
Kathleen A. DeKam
|
46 | President, Graphics | ||||
Patrick W. Kellick
|
49 | Senior Vice President/Chief Financial Officer and Secretary | ||||
Stuart R. Reeve
|
43 | President, New Business Development | ||||
Denis S. Longpré
|
52 | Executive Vice President, Sales | ||||
Eric T. Fry
|
40 | Director | ||||
Michael C. Hoffman
|
44 | Director | ||||
Hwan-Yoon
F. Chung
|
33 | Director |
Stephen M. Dyott has been the Chairman and Chief Executive Officer of Graphics and Holdings since
September 1996, President of Holdings since February 1995 and Director of Graphics and Holdings
since September 1994. Mr. Dyott was President of Graphics from 1991 to 2007, Chief Operating
Officer of Holdings from February 1995 to September 1996 and Chief Operating Officer of Graphics
from 1991 to September 1996. Prior to joining Graphics, Mr. Dyott was the Vice President and
General Manager Flexible Packaging of American National Can Company (ANCC) from 1988 to 1991
and the Vice President and General Manager Tube Packaging of ANCC from 1985 to 1987.
Kathleen A. DeKam has been President of Graphics since 2007. Prior to 2007, Ms. DeKam was the
President of Print and Premedia Services from 2004 to 2007, President of Premedia Services from
1998 to 2004, the Vice President, Human Resources of Premedia Services from 1996 to 1998,
Director, Human Resources of Premedia Services from 1995 to 1996 and Manager, Human Resources for
various print plants of Graphics from 1986 to 1995.
Patrick W. Kellick has been President of Graphics Finance, since 2006, Secretary
of Graphics and Holdings since 2005 and the Senior Vice President and Chief Financial Officer of
Holdings and Graphics since 2002. Mr. Kellick was Assistant Secretary of Holdings and Graphics
from 1995 to 2005. Prior to 2002, Mr. Kellick was the Senior Vice President/Corporate Controller
of Holdings and Graphics from 1997 to 2002, Vice President/Corporate Controller of Holdings and
Graphics from 1989 to 1997 and Corporate Controller of Graphics from 1987 to 1989. Prior to
joining Holdings and Graphics, he served in various financial positions with Williams Precious
Metals (a division of Brush Wellman, Inc.) from 1984 to 1987, including Chief Financial Officer
from 1986 to 1987 and was an auditor with KPMG from 1979 to 1984.
Stuart R. Reeve has been the President, New Business Development since 2003. Prior to 2003, Mr.
Reeve served as President, Retail and Newspaper Services of Graphics from 2002 to 2003, Executive
Vice President, Operations of Graphics from 1999 to 2002, Executive Vice President, Sales and
Marketing of Graphics from 1997 to 1999, Senior Vice President, Commercial Sales of Graphics from
1995 to 1997, Vice President Midwest Sales of Graphics from 1994 to 1995, Vice President West
Sales of Graphics from 1991 to 1994 and as a Sales Executive of Graphics from 1989 to 1991.
Denis S. Longpré has been Executive Vice President, Sales since 2004. Prior to 2004, Mr. Longpré
served as Senior Vice President, Sales of Graphics from 2003 to 2004, Area Vice President,
Mid-Atlantic Sales of Graphics from 1995 to 2003, Vice President, Canada/New England Sales of
Graphics from 1993 to 1995 and as Sales Manager-Canada of Graphics from 1992 to 1993.
Eric T. Fry has been a Director of Holdings and Graphics since 1996. Mr. Fry has been a Managing
Director of Metalmark Capital LLC since its formation in 2004. Prior to joining Metalmark, he was
a Managing Director of Morgan Stanley & Co. Incorporated (MS & Co.) and Morgan Stanley Capital
Partners from 2002 to 2004, and Executive Director of Morgan Stanley Capital Partners from 1998 to
2001. He joined MS & Co. initially in 1989. Mr. Fry serves as a Director of Mericap Credit
Corporation, EnerSys, Vanguard Health Systems, Direct Response Corporation and Homesite Group, Inc.
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Michael C. Hoffman has been a Director of Holdings and Graphics since 2003. Mr. Hoffman has been a
Managing Director of Metalmark Capital LLC since its formation in 2004. Prior to joining
Metalmark, he was a Managing Director of Morgan Stanley Capital Partners from 1998 to 2004. He
joined MS & Co. in 1986 and worked in the firms Strategic Planning Group prior to joining Morgan
Stanley Private Equity in 1990. Mr. Hoffman is a Director of Aventine Renewable Energy, Inc. and
EnerSys, and is a former Director of Jefferson Smurfit Corporation and eAccess Limited.
Hwan-Yoon
F. Chung has been a Director of Holdings and Graphics since 2004. Mr. Chung has been a
Principal of Metalmark Capital LLC since its formation in 2004. Prior to joining Metalmark, he was
an Executive Director of Morgan Stanley Capital Partners from 2003 to 2004. He joined Morgan
Stanley Capital Partners in 1998. Prior to joining Morgan Stanley Capital Partners, he was an
Associate in the Restructuring and Reorganization Group at the Blackstone Group L.P. Mr. Chung
serves as a Director of EnerSys.
Code of Ethics
We have adopted a code of ethics that applies to our principal executive officer, principal
financial officer, principal accounting officer and all other employees. We will provide a copy of
the code of ethics to any person, without charge, upon written request made to our Corporate
Secretary at American Color Graphics, Inc., 100 Winners Circle, Suite 300, Brentwood, Tennessee
37027.
Audit Committee Financial Expert
We are not required to maintain an audit committee or an audit committee financial expert as we do
not have exchange listed securities. However, many of the functions of an audit committee are
performed by the Companys Board of Directors.
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11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
The following discussion relates to the compensation of Stephen M. Dyott (our Chairman and
Chief Executive Officer), Kathleen A. DeKam (President, Graphics), Patrick W. Kellick (Senior Vice
President, Chief Financial Officer and Secretary), Stuart R. Reeve (President, New Business
Development) and Denis S. Longpré (Executive Vice President, Sales). These individuals were our
five most highly-compensated executive officers as of March 31, 2007 and are referred to herein as the Named
Executive Officers or the Executives.
OVERALL OBJECTIVES OF EXECUTIVE COMPENSATION PROGRAM
Our compensation program for our Named Executive Officers is designed to attract, motivate and
retain highly qualified individuals with the leadership skills necessary to achieve our annual and
long-term business objectives. Our executive compensation program is based on the following
underlying principles:
| executives total direct compensation (consisting of salary, annual incentive compensation and long-term equity incentive opportunities) should be competitive; | ||
| a substantial portion of executives compensation should be at risk and should vary based on our financial and operational performance as well as the executives level of responsibility and individual performance; and | ||
| compensation should be designed to reward both individual and collective achievement in order to align the interests of management with those of our shareholders. |
ELEMENTS OF EXECUTIVE COMPENSATION
The executive compensation program is comprised of the following elements:
| Direct compensation, consisting of: |
- | Base salary; | ||
- | Annual incentive opportunities; and | ||
- | Long-term incentives through the issuance of stock options. |
| Other compensation and benefits, consisting of participation in our broad-based employee benefit plans | ||
| Severance benefits | ||
| Special retention bonuses |
Consistent with the principles outlined above, a substantial portion of total direct compensation
varies based upon the achievement of our financial and operational objectives, as well as an
executives individual performance level. We do not have a pre-established policy or target for
allocating between fixed and variable compensation or among the different types of variable
compensation. Instead, we strive to provide fixed pay (base salary) at levels sufficient to attract
and retain qualified executives. The remaining portion of total direct compensation is comprised of
variable compensation in the form of annual incentive compensation and long-term equity incentives.
We believe that our executives should be rewarded for achieving annual performance goals, but that
consistent and sustained performance is the single most important influence on long-term
shareholder value. Additionally, we believe that the interests of the Named Executive Officers
should be aligned with the interests of our shareholders.
Base Salaries
We offer all our Named Executive Officers an annual base salary to compensate them for services
rendered during the year. Competitive base salaries are essential for the attraction and retention
of talented executives. Salaries are reviewed periodically and adjusted by Mr. Dyott through
consultation with our Board of Directors. Mr. Dyotts salary is determined by our Board of
Directors. Changes to base salaries, if any, are based upon both individual and overall company
performance. We also periodically review competitors salaries for similar executive positions to
ensure maintenance of a competitive compensation scale. There were no increases to the base
salaries of our Named Executive Officers over the two fiscal year period ended March 31, 2007,
except for Mr. Longpré.
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Annual Cash Incentive Compensation
Our Board of Directors annually adopts a bonus plan and performance criteria upon which the annual
bonuses of our executives are based. Pursuant to their employment agreements, the minimum annual
target bonus is 75% of base salary (as defined therein) for
Mr. Dyott and 50% of base salary (as defined therein) for Ms. DeKam and Mr.
Kellick. There are no minimum target bonus levels for our other Named Executive Officers. The
minimum annual target bonus levels were determined based upon our Named Executive Officers
responsibilities and their individual contribution to the company. Any other executive bonuses are
discretionary and are determined based upon individual and overall company performance. There were
no incentive compensation bonuses paid to the Named Executive
Officers for Fiscal Year 2007.
Long-term Incentives through the Issuance of Stock Options
Our Board of Directors may, in its discretion, issue grants of common stock options of Holdings to
the Executives, as well as to other employees.
Other Compensation and Benefits
The Executives are eligible to participate in the benefit plans available to our eligible
employees, including health care, disability, and life insurance programs as well as a
tax-qualified 401(k) plan, on the same basis as other eligible employees. We also provide
certain Executives with automobile allowances.
Severance Benefits
As described in detail below under -Termination and Change in Control Payments, employment
agreements for Mr. Dyott, Ms. DeKam and Mr. Kellick, and severance agreements for Mr. Reeve and Mr.
Longpré, specify certain severance benefits to be paid in the event of an Executives involuntary
termination of employment without Cause or the Executives resignation for Good
Reason. We have entered into these agreements because we believe that protecting Executives in
the event of a termination without Cause or upon their resignation for Good Reason is necessary to
attract and retain the talented executives we need to run our business.
Special Retention Bonuses
We paid special retention bonuses to the Named Executive Officers in April 2007, as a result of
retention bonus agreements entered into on July 1, 2005, in the following amounts: Mr. Dyott
($325,000); Ms. DeKam ($225,000); Mr. Kellick ($225,000); Mr. Reeve ($125,000); and Mr. Longpré
($125,000). These special retention bonuses were payable pursuant to the retention bonus agreements
and such payments were made as a result of the Named Executive Officer having remained in the
active employ of the Company through March 31, 2007, subject to the specific terms and provisions
of the agreements.
In addition, we paid, in April 2007, special retention bonuses to the Named Executive Officers in
the following amounts: Mr. Dyott ($325,000); Ms. DeKam ($225,000); Mr. Kellick ($225,000); Mr.
Reeve ($125,000); and Mr. Longpré ($125,000). These additional special retention bonuses were
payable pursuant to the employment agreements of Messrs. Dyott and Kellick and Ms. DeKam (see
Employment Agreements with Named Executive Officers below) and retention bonus agreements entered
into on April 19, 2007 for Mr. Reeve and Mr. Longpré. If the Named Executive Officer resigns
without Good Reason or the Named Executive Officers employment is terminated for Cause prior to
April 1, 2008, the Named Executive Officer is required to repay the special retention bonus within
five business days of termination of employment, together with interest from the date the Named
Executive Officer received the bonus (calculated at the prime rate as
published in The Wall Street
Journal on the date the Named Executive Officer received the bonus) to the date of repayment.
These special retention bonuses were paid as an incentive to retain our key executives.
For Messrs. Dyott and Kellick and Ms. DeKam, Cause and Good Reason have the meanings described
below under -Termination and Change in Control Payments. For purposes of the special
retention bonus agreements for Mr. Reeve and Mr. Longpré:
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| Cause means termination of employment by Graphics because of: |
- | any act or omission that constitutes a material breach by the Executive of any of his obligations under the retention bonus agreement; | ||
- | the continued willful failure or refusal of the Executive to substantially perform the duties reasonably required of him as an employee of Graphics; | ||
- | any willful and material violation by the Executive of any Federal or state law or regulation applicable to the business of Graphics, Holdings or any of their respective subsidiaries, or the Executives conviction of a felony, or any willful perpetration by the Executive of a common law fraud that is materially injurious to Graphics; or | ||
- | any other willful misconduct by the Executive which is materially injurious to the financial condition or business reputation of, or is otherwise materially injurious to, Graphics, Holdings or any of their respective subsidiaries or affiliates; |
provided, however, (x) the good faith performance by the Executive of the duties required of him pursuant to the retention bonus agreement, or (y) any act or omission of the Executive based upon authority given by or pursuant to an action of the Board of Directors or upon the advice of counsel for Graphics, is conclusively presumed not to be willful or to constitute a failure or refusal on the part of the Executive. In addition, if any such Cause relates to the Executives obligations under the retention bonus agreement, Graphics must provide the Executive written notice of its intention to terminate and of the grounds for such termination, and the Executive has 20 business days to cure such Cause to the reasonable satisfaction of the Board (or in the event such Cause is not susceptible to cure within such period, Cause will not exist if the Executive has taken all reasonable steps within such period to cure such Cause, to the reasonable satisfaction of the Board, as promptly as practicable thereafter). | |||
| Good Reason means any of the following, without the Executives prior written consent: |
- | a decrease in the Executives base rate of compensation or a failure by Graphics to pay material compensation due and payable to the Executive in connection with his employment; | ||
- | a material diminution of the responsibilities or title of the Executive with Graphics; | ||
- | Graphics requiring the Executive to be based at any office or location more than 20 miles from his principal employment location on the date of the retention bonus agreement, except for any change in employment location agreed to with the Executive prior to April 19, 2007; or | ||
- | a material breach by Graphics of any term or provision of the retention bonus agreement; |
provided, however, no event or condition described above constitutes Good Reason unless (i) the Executive provides Graphics written notice of his objection to such event or condition, (ii) such event or condition is not cured by Graphics within 20 business days (or in the event that such event or condition is not curable within such period, Graphics has not taken all reasonable steps within such period to cure such event or condition as promptly as practicable thereafter) and (iii) the Executive resigns his employment with Graphics and its subsidiaries not more than 40 business days following the expiration of the 20 business day period. |
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SUMMARY COMPENSATION TABLE
The following table sets forth certain information with respect to the compensation of our Chief
Executive Officer (CEO), Chief Financial Officer (CFO) and the three most highly compensated
executive officers other than the CEO and CFO, based on total compensation during the fiscal year
ended March 31, 2007, for their services with us in all capacities during that fiscal year.
There have
been no increases to the base salaries of our Named Executive Officers over the two fiscal
year period ended March 31, 2007, except for Mr. Longpré.
Non-Equity | ||||||||||||||||||||
Name and | Incentive Plan | All Other | ||||||||||||||||||
Principal Position | Year | Salary ($) | Compensation ($) | Compensation ($) | Total ($) | |||||||||||||||
(a) | (b) | (c) | (g) | (i) | (j) | |||||||||||||||
Stephen M. Dyott Chairman and Chief Executive Officer |
2007 | 575,000 | 325,000 | (1) | 30,478 | (2) | 930,478 | |||||||||||||
Kathleen M. DeKam President, Graphics |
2007 | 350,000 | 225,000 | (1) | 19,140 | (3) | 594,140 | |||||||||||||
Patrick W. Kellick Senior Vice President, Chief Financial Officer and Secretary |
2007 | 325,000 | 225,000 | (1) | 19,893 | (4) | 569,893 | |||||||||||||
Stuart R. Reeve President, New Business Development |
2007 | 350,000 | 125,000 | (1) | 19,152 | (3) | 494,152 | |||||||||||||
Denis S. Longpré Executive Vice President, Sales |
2007 | 275,000 | 125,000 | (1) | | 400,000 | ||||||||||||||
(1) | Retention bonus paid in April 2007, with respect to retention bonus agreement dated July 1, 2005. | |
(2) | Includes automobile lease payments, life insurance premiums paid and $5,308 contributed to Graphics 401(k) plan for the Named Executive Officer. | |
(3) | Includes an automobile allowance, life insurance premiums paid and $5,250 contributed to Graphics 401(k) plan for the Named Executive Officer. | |
(4) | Includes an automobile allowance, annual physical examination, life insurance premiums paid and $5,250 contributed to Graphics 401(k) plan for the Named Executive Officer. |
GRANTS OF PLAN-BASED AWARDS
No stock options or other equity awards were granted to the Named Executive Officers in the fiscal
year ended March 31, 2007.
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EMPLOYMENT AGREEMENTS WITH NAMED EXECUTIVE OFFICERS
Employment Agreements with Messrs. Dyott and Kellick and Ms. DeKam. Mr. Dyott and Graphics entered
into an amended and restated employment agreement on April 19, 2007, and Graphics entered into
similar employment agreements with Ms. DeKam and Mr. Kellick on the same date. Key provisions of
the agreements include the following:
| Term. Three years for Mr. Dyott and two years for Ms. DeKam and Mr. Kellick, subject to automatic one-year extensions thereafter. | ||
| Base Salary. $575,000 per annum for Mr. Dyott, $350,000 for Ms. DeKam and $325,000 for Mr. Kellick (plus, for Ms. DeKam and Mr. Kellick, an automobile allowance of $1,100 per month). In each case, the Executives base salary shall be reviewed by our Board of Directors, based upon the Executives performance, not less often than annually, and may be increased but not decreased. Mr. Dyott is entitled to use of an automobile of at least the same type and model as the automobile currently being provided to Mr. Dyott on terms no less favorable to the Executive. | ||
| Annual Bonus. The Board shall annually adopt a bonus plan and performance criteria. The target bonus is at least 75% of base salary (as defined) for Mr. Dyott and at least 50% of base salary (as defined) for Ms. DeKam and Mr. Kellick. | ||
| Special Retention Bonus. See description above. | ||
| Employee Benefits. The Executive participates in all employee benefit plans, programs or arrangements established by Graphics for, or made available to, its senior executives. Mr. Dyott is entitled to five weeks of paid vacation annually, Ms. DeKam and Mr. Kellick are entitled to four weeks each of paid vacation annually. | ||
| Severance Benefits. See below under -Termination and Change in Control Payments. | ||
| Nonsolicitation Covenants. For three years following termination of employment (two years for Ms. DeKam and Mr. Kellick), the Executive may not solicit or endeavor to entice away from Graphics, Holdings or their respective subsidiaries any employee or client of Graphics, Holdings or their respective subsidiaries. | ||
| Noncompetition Covenants. For three years following termination of employment (two years for Ms. DeKam and Mr. Kellick), the Executive may not be affiliated with a Competitor. However, if Graphics exercises its right not to extend the employment term, or the Executives employment by Graphics is terminated or the Executive resigns and, in either case, (i) the Executive is not entitled to severance payments or, if entitled thereto, does not receive such payments in full, or is entitled to less than the full amount described therein, and (ii) in the case of Ms. DeKam and Mr. Kellick only, Mr. Dyott has ceased (for any reason) to be the chief executive officer of Graphics at any time prior to, or prior to the end of the one hundred eightieth day after, the date of such termination or resignation, the Executives obligations under the noncompete shall terminate as of the date of termination of employment or resignation. For purposes of the noncompete, a Competitor is defined as any person that prints retail advertising inserts or provides premedia services for printing and has annual combined retail advertising insert printing and premedia revenues for the most recently ended annual reporting period in excess of $250 million. | ||
| 280G Cutback. In the event the golden parachute excise tax under Section 280G of the Internal Revenue Code would apply to any amounts payable to the Executive under the employment agreement or otherwise, such amount will be cut back to $1 less than the amount that would trigger coverage of Section 280G. |
Severance Agreements with Mr. Reeve and Mr. Longpré. Mr. Reeve and Mr. Longpré are parties to
severance agreements with Graphics dated as of August 1, 1999 and January 14, 2000, respectively.
These agreements, which provide specified cash severance benefits in the event of the Executives
termination by Graphics without Cause or the
Executives voluntary resignation for Good Reason,
are described in detail below under Termination and Change in Control Payments.
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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The following table sets forth certain information with respect to the outstanding equity awards
held by the Named Executive Officers as of March 31, 2007.
Option Awards
Number of | Number of | |||||||||||||||
Securities | Securities | |||||||||||||||
Underlying | Underlying | |||||||||||||||
Unexercised | Unexercised | |||||||||||||||
Options | Options | Option | ||||||||||||||
(#) | (#) | Option Exercise | Expiration | |||||||||||||
Name | Exercisable | Unexercisable | Price ($) | Date | ||||||||||||
(a) | (b) | (c) | (e) | (f) | ||||||||||||
Kathleen M. DeKam |
402.25 | | $ | 0.01 | 01/15/2009 | |||||||||||
President, Graphics |
425.50 | 1,276.50 | (1) | $ | 0.01 | 12/05/2015 | ||||||||||
Patrick W. Kellick |
900.00 | | $ | 0.01 | 03/21/2013 | |||||||||||
Senior Vice |
200.50 | 601.50 | (1) | $ | 0.01 | 12/05/2015 | ||||||||||
President, Chief Financial Officer and Secretary |
||||||||||||||||
Stuart R. Reeve |
110.25 | | $ | 0.01 | 07/27/2009 | |||||||||||
President, New |
360.00 | | $ | 0.01 | 04/01/2012 | |||||||||||
Business Development |
||||||||||||||||
Denis S. Longpré |
543.00 | | $ | 0.01 | 01/19/2008 | |||||||||||
Executive Vice
|
207.00 | | $ | 0.01 | 01/05/2010 | |||||||||||
President, Sales |
||||||||||||||||
(1) | 33.3% of the unexercised options vest on December 5, 2007, 33.3% vest on December 5, 2008, and the remaining 33.3% vest on December 5, 2009. |
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PENSION BENEFITS
Number of Years | Present Value of | |||||||
of Credited | Accumulated | |||||||
Name | Plan Name | Service | Benefit ($) | |||||
(a) | (b) | (c) | (d) | |||||
Stephen
M. Dyott Chairman and Chief Executive Officer |
American Color Graphics, Inc. Salaried Employees Pension Plan (1) | 3 years, 3 months | 42,774 | (1) | ||||
Kathleen
M. DeKam President, Graphics |
American Color Graphics, Inc. Salaried Employees Pension Plan (1) | 8 years, 4 months | 14,678 | (1) | ||||
Supplemental Executive Retirement Plan (2) | 1 year, 9 months | 145,539 | (2) | |||||
Patrick
W. Kellick Senior Vice President, Chief Financial Officer and Secretary |
American Color Graphics, Inc. Salaried Employees Pension Plan (1) | 6 years, 5 months | 42,480 | (1) | ||||
Stuart
R. Reeve President, New Business Development |
American Color Graphics, Inc. Salaried Employees Pension Plan (1) | 5 years, 4 months | 21,842 | (1) | ||||
(1) | In October 1994, the Board of Directors approved an amendment to the defined benefit Pension Plan (the Plan) that resulted in the freezing of additional defined benefits for future services under such plan effective January 1, 1995. Thus, no further service-related benefits have accrued under this Plan since 1994. The present value of accumulated benefit for each Named Executive Officer was determined utilizing the RP-2000 Mortality Table for male and female lives and a 6.25% discount rate. | |
(2) | After five years of vesting service (through July 5, 2010) the Supplemental Executive Retirement Plan, which is a defined benefit plan, provides that Ms. DeKam will be eligible for an annual benefit payable upon retirement on or after attaining age 65, or the present value of such benefit at an earlier date under certain circumstances. As specified in a schedule attached to the plan, at March 31, 2007, Kathleen A. DeKam will be entitled to a $50,000 annual benefit payable at age 65. At March 31, 2007, this plan included one Named Executive Officer (Ms. DeKam) and one former executive. The present value of the accumulated benefit for Ms. DeKam was determined utilizing the RP-2000 Mortality Table for female lives and a 6.25% discount rate. |
TERMINATION AND CHANGE IN CONTROL PAYMENTS
Mr. Dyott. In the event Mr. Dyotts employment is terminated by Graphics without Cause or he
resigns for Good Reason, he is entitled to a lump sum severance payment equal to
three times the sum of (a) his annual base salary, and (b) the greater of (i) his annual bonus
earned for the fiscal year preceding the fiscal year of termination and (ii) the annual bonus he
would have earned for the full fiscal year of termination (based upon Graphics actual performance
against target applicable to the portion of the performance period during which Mr. Dyott was
employed, with such percentage level of achievement annualized for the full fiscal year). In
addition, during the severance period, Mr. Dyott is entitled to continue to participate
in all employee health and welfare benefit plans that Graphics or any parent entity provides (and
continues to provide) generally to its employees on the same terms as are provided to active
executives of Graphics or any such parent. Mr. Dyott is also entitled to use of an automobile of
at least the same type and model as the automobile currently being provided to Mr. Dyott on terms
no less favorable to the Executive. The cash severance is payable in a lump sum within 10 business
days of termination of employment. Mr. Dyott has no duty to mitigate the amount of any
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severance
benefits by seeking other employment or otherwise, nor shall the amount of any payment or benefit
provided for in Mr. Dyotts employment agreement be reduced by any compensation or benefits earned by Mr. Dyott after
the date of Mr. Dyotts termination of employment or resignation.
For purposes of Mr. Dyotts employment agreement: | |||
| Cause means termination of Mr. Dyott by Graphics because of : |
- | any act or omission that constitutes a material breach by Mr. Dyott of any of his obligations under his employment agreement; | ||
- | the continued willful failure or refusal of Mr. Dyott to substantially perform the duties reasonably required of him as an employee of Graphics; | ||
- | any willful and material violation by Mr. Dyott of any Federal or state law or regulation applicable to the business of Graphics, Holdings or any of their respective subsidiaries, or Mr. Dyotts conviction of a felony, or any willful perpetration by Mr. Dyott of a common law fraud that is materially injurious to Graphics; or | ||
- | any other willful misconduct by Mr. Dyott which is materially injurious to the financial condition or business reputation of, or is otherwise materially injurious to, Graphics, Holdings or any of their respective subsidiaries or affiliates; |
provided, however, (x) the good faith performance by Mr. Dyott of the duties required of him pursuant to his employment agreement, (y) any act or omission of Mr. Dyott based upon authority given by or pursuant to an action of the Board or upon the advice of counsel for Graphics or (z) any disagreement with respect to the advisability, timing or implementation of the sale of any capital stock or assets of Graphics or Holdings, shall be conclusively presumed not to be willful or to constitute a failure or refusal on the part of Mr. Dyott. In addition, Mr. Dyott has a 20 business day period to cure any purported Cause related to Mr. Dyotts obligations under his employment agreement to the reasonable satisfaction of the Board before he may be terminated for Cause (or, if the event is not susceptible to cure within such period, to take all reasonable steps to cure such Cause, to the reasonable satisfaction of the Board, as promptly as practicable thereafter). For purposes of determining whether Cause has occurred, no act, or failure to act, on Mr. Dyotts part shall be deemed willful unless committed, or omitted, by Mr. Dyott in bad faith. | |||
| Good Reason means any of the following, without Mr. Dyotts prior written consent: |
- | a decrease in Mr. Dyotts base rate of compensation or a failure by Graphics to pay material compensation due and payable to Mr. Dyott in connection with his employment; | ||
- | a material diminution of the responsibilities or title of Mr. Dyott with Graphics or Holdings; | ||
- | Graphics requiring Mr. Dyott to be based at any office or location more than 20 miles from his principal employment location as of April 19, 2007; | ||
- | a material breach by Graphics of any term or provision of the employment agreement; | ||
- | receipt by Mr. Dyott of written notice from Graphics of its intention not to extend the term of his employment; | ||
- | the failure by Graphics to obtain from any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all the business or assets of Graphics an express written assumption and agreement to perform under Mr. Dyotts employment agreement; or | ||
- | a Change of Control occurs; |
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provided, however, Good Reason (other than a Change of Control) does not occur unless (i) Graphics fails to cure the event constituting Good Reason within 20 business days of receipt of notice from Mr. Dyott, and (ii) Mr. Dyott actually resigns his employment not more than 40 business days following the expiration of the 20-business day cure period. In addition, a Change of Control does not constitute Good Reason unless Mr. Dyott resigns within 40 business days after the closing of such Change of Control or within 10 business days after the first anniversary of such Change of Control. | |||
Change of Control is defined in Mr. Dyotts employment agreement to occur when (a) any person (as defined below) shall acquire, whether by purchase, exchange, tender offer, merger, consolidation or otherwise, beneficial ownership of securities of Graphics constituting a majority of the combined voting power of the securities of Graphics, (b) any person shall acquire all or substantially all the assets of Graphics pursuant to a sale, dissolution or liquidation, (c) any person shall acquire the ability to appoint or elect a majority of the members of the Board of Directors of Graphics or Holdings, or (d) the Designated Investors shall otherwise cease to beneficially own at least 30% of the combined voting power of the securities of Graphics. For purposes of this definition, person shall have the meaning given in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, except that such term shall not include (i) any stockholder of Holdings or Graphics as of April 19, 2007 and each of their respective affiliates (the Designated Investors), (ii) a trustee or other fiduciary holding securities under an employee benefit plan of Graphics or any of its affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, and (iv) a corporation owned, directly or indirectly, by the Designated Investors, such that the aggregate ownership of securities or assets of Graphics or the ability to appoint or elect directors of Graphics that is attributable to such Designated Investors would not decrease to a level that would result in a Change of Control, if such ownership or ability was deemed to be held directly in Graphics. The completion of an initial public offering in which no person acquires beneficial ownership of a majority of the combined voting power of the securities of such person shall not constitute a Change of Control, nor shall the acquisition of beneficial ownership of securities of Graphics by a person that has a class of securities registered under Section 12 of the Securities Exchange Act of 1934, if such acquisition does not result in the Designated Investors owning 30% or less of the combined voting power of the securities of Graphics. |
Ms. DeKam and Mr. Kellick. The employment agreements for Ms. DeKam and Mr. Kellick include
substantially similar severance provisions to Mr. Dyotts agreement, except that cash severance is
two times (rather than three times) the sum of the Executives
base salary (as defined) and the applicable bonus amount, and welfare benefit plan coverage continues for two years (rather
than three) following termination without Cause or resignation for Good Reason. In addition, cash
severance is paid in installments over the severance period in accordance with Graphics normal
payroll procedures, unless Mr. Dyott shall have ceased to be the chief executive officer of
Graphics at any time prior to, or prior to the end of the one hundred eightieth day after, the date
of the Executives date of termination, in which case the severance related to their base salaries
is payable in a lump sum within 10 business days after the date of termination or resignation of
the Executive (or Mr. Dyott, if later).
Mr. Reeve and Mr. Longpré. Under their severance agreements, Mr. Reeve and Mr. Longpré are
entitled to severance benefits if they are terminated without Cause
or resign for Good Reason. The
severance is equal 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 for Mr. Reeve and one year for Mr. Longpré . Such base salary and benefit
payments will be reduced, after the first twelve months from the date of termination for Mr. Reeve
and immediately for Mr. Longpré, to the extent the employee receives compensation from another
employer.
Under
these agreements, Cause includes a material breach by the employee of his obligations;
continued failure or refusal of the employee to substantially perform his duties to Graphics;
competition with Graphics; a willful and material violation of Federal or state law applicable to
Graphics or the employees conviction of a felony or perpetration of a common law fraud; or other
willful misconduct that is injurious to Graphics. Good Reason means a decrease in base pay or a
failure by Graphics to pay material compensation due and payable; a material diminution of the
employees responsibilities or title; or a material breach by Graphics of a material term of the
severance agreement; and for Mr. Reeve only, a material change in the employees principal
employment location. The severance agreements also contain confidentiality obligations that
survive indefinitely and non-solicitation and non-competition obligations that end on the second
anniversary of the date employment has ceased for Mr. Reeve and on the anniversary of the date
employment has ceased for Mr. Longpré.
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The potential severance payments under these agreements are as follows for a termination of
employment as of March 31, 2007, assuming that all current agreements were in effect as of that
date:
Name | Salary and Bonus ($) | Employee Benefits ($)(1) | Total ($) | |||||||||
Stephen M. Dyott Chairman and Chief |
2,700,000 | 77,922 | 2,777,922 | |||||||||
Executive Officer |
||||||||||||
Kathleen M. DeKam President, Graphics |
1,150,000 | 30,942 | 1,180,942 | |||||||||
Patrick W. Kellick Senior Vice President, Chief Financial Officer |
1,100,000 | 37,034 | 1,137,034 | |||||||||
and Secretary |
||||||||||||
Stuart R. Reeve President, New Business |
700,000 | 38,957 | 738,957 | |||||||||
Development |
||||||||||||
Denis S. Longpré Executive Vice |
275,000 | 27,171 | 302,171 | |||||||||
President Sales |
||||||||||||
(1) | Consists of continuing welfare plan coverage. The value is based on the type of insurance coverage we carried for each executive officer as of March 31, 2007 and is valued at the premiums in effect on that date. Also consists of continuation of auto allowance, where applicable, and accrued vacation pay. |
DIRECTOR COMPENSATION
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.
Compensation Committee Interlocks and Insider Participation
Graphics does not have a compensation committee. Stephen M. Dyott, our Chairman and Chief
Executive Officer, serves on the Board and participates in deliberations with the Board regarding
compensation of executive officers, other than his own compensation arrangement.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The following table sets forth information, as of March 31, 2007, 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 of | |||||||
Name | Common Stock | Class | ||||||
Morgan Stanley Capital Partners III, L.P. |
22,497.9 | 14.2 | ||||||
MSCP892 Investors, L.P. c/o Metalmark Capital LLC 1177 Avenue of the Americas New York, NY 10036 |
||||||||
Morgan Stanley Capital Investors, L.P. |
835.1 | 0.5 | ||||||
The Morgan Stanley Leveraged Equity Fund II, L.P. |
59,450.0 | 37.6 | ||||||
1585 Broadway New York, NY 10036 |
||||||||
First Plaza Group Trust |
17,000.0 | 10.8 | ||||||
c/o Mellon Bank, N.A. 1 Mellon Bank Center Pittsburgh, PA 15258 |
||||||||
Directors and Named Executive Officers: |
||||||||
Stephen M. Dyott |
14,970.0 | 9.5 | ||||||
Kathleen A. DeKam (a) |
2,234.5 | 1.4 | ||||||
Patrick W. Kellick (b) |
2,909.5 | 1.8 | ||||||
Stuart R. Reeve (c) |
2,610.0 | 1.6 | ||||||
Denis S. Longpré (d) |
750.0 | 0.5 | ||||||
Eric T. Fry |
| | ||||||
Michael C. Hoffman |
| | ||||||
Hwan-Yoon F. Chung |
| | ||||||
All directors and executive officers as a
Group (eight persons, including Messrs. Dyott,
Kellick, Reeve and Longpré and Ms. DeKam) (e) |
23,474.0 | 14.5 |
(a) | Includes 827.75 common stock options exercisable within 60 days. | |
(b) | Includes 1,100.50 common stock options exercisable within 60 days. | |
(c) | Includes 470.25 common stock options exercisable within 60 days. | |
(d) | Includes 750.00 common stock options exercisable within 60 days. | |
(e) | Includes 3,148.50 common stock options exercisable within 60 days. |
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Relationship With Metalmark and Morgan Stanley
Morgan Stanley Capital Partners III, L.P., MSCP III 892 Investors, L.P., Morgan Stanley Capital
Investors, L.P. and The Morgan Stanley Leveraged Equity Fund II, L.P. (collectively, the Morgan
Stanley Funds) hold 52.3% of the outstanding shares of our common stock at March 31, 2007. The
general partners of such limited partnerships are wholly owned subsidiaries of Morgan Stanley.
Metalmark Capital LLC is an independent private equity firm established in 2004 by former
principals of Morgan Stanley Capital Partners (Metalmark). An affiliate of Metalmark manages
Morgan Stanley Capital Partners III, L.P. and MSCP III 892 Investors, L.P. pursuant to a
subadvisory agreement. In addition, under such subadvisory arrangement, Morgan Stanley Capital
Investors, L.P. and The Morgan Stanley Leveraged Equity Fund II, L.P. are effectively obligated to
vote or direct the vote and to dispose or direct the disposition of any of our shares owned
directly by them on the same terms and conditions as are determined by Metalmark with respect to
shares held by Morgan Stanley Capital Partners III, L.P. and MSCP III 892 Investors, L.P. As a
result of these relationships, Metalmark may be deemed to control our management and policies. In
addition, Metalmark may be deemed to control all matters requiring stockholder approval, including
the election of a majority of our directors, the adoption of amendments to our certificate of
incorporation, our payment of dividends (subject to restrictions under our debt agreements) and the
approval of mergers and sales of all or substantially all our assets.
Stockholders Agreement
Holdings, the Morgan Stanley Funds and other stockholders of Holdings entered into an amended and
restated stockholders agreement, dated as of August 14, 1995, as subsequently amended as of
January 16, 1998. The stockholders agreement gives the Morgan Stanley Funds the right to
designate a director of Holdings. 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 arms length basis.
Tax Sharing Agreement
Holdings and Graphics are parties to an amended and restated tax sharing agreement effective July
27, 1989. Under the terms of the agreement, Graphics (the income from which is consolidated with
that of Holdings for U. S. federal income tax purposes) is liable to Holdings for amounts
representing U. S. federal income taxes calculated on a stand-alone basis. Each year Graphics
pays to Holdings the lesser of (a) Graphics U. S. federal tax liability computed on a stand-alone
basis and (b) its allocable share of the U. S. 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 U. S. federal income tax equal to an amount which would be refundable to
Graphics had Graphics filed separate U. S. 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 U. S. federal income taxes as described above.
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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table represents fees for professional services rendered by Ernst & Young LLP for the
audit of our annual financial statements for the fiscal years ended March 31, 2007 and March 31,
2006 and fees billed for other services rendered by Ernst & Young LLP during those periods. The
fees for the annual audit and quarterly reviews reflect the fees for the year on an
accrual/estimated basis as required by the Securities and Exchange Commission disclosure rules.
Otherwise, the amounts reported reflect actual fees invoiced during the Companys fiscal year.
Fiscal Year Ended March 31, | ||||||||
2007 | 2006 | |||||||
(In thousands) | ||||||||
Audit fees (a) |
$ | 415 | 428 | |||||
Audit-related fees (b) |
133 | 70 | ||||||
Tax fees (c) |
40 | 42 | ||||||
All other fees |
| | ||||||
Total fees |
$ | 588 | 540 | |||||
(a) | Audit fees consist of fees for professional services related to the audit of our consolidated financial statements, review of financial statements included in our quarterly reports, comfort letters and other services related to SEC matters, as well as services that are normally provided by the independent auditor in connection with statutory filings or engagements. | |
(b) | Audit-related fees consist of employee pension and benefit plan audits and fees related to the review of financing agreements. | |
(c) | Tax fees include the review of federal, state, local and Canadian tax returns as well as tax planning and consultation on new tax legislation, regulations, rulings and developments. |
Board of Directors Pre-Approval Policies
The Board of Directors has established pre-approval policies and procedures pursuant to which all
audit and auditor provided non-audit engagement fees and terms must be approved. Pre-approval is
generally provided for up to one year and is detailed as to the particular service or category of
services. The Board of Directors is also responsible for considering, to the extent applicable,
whether the independent auditors provision of other non-audit services to the Company is
compatible with maintaining the independence of the independent auditors.
All services provided by Ernst & Young LLP in the fiscal year ended March 31, 2007 were
pre-approved by the Board of Directors.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) | The following documents are filed as a part of this Report: |
Reports of Independent Registered Public Accounting Firm
1 and 2. Financial Statements: The following Consolidated Financial Statements of
Holdings are included in Part II, Item 8:
Consolidated balance sheets March 31, 2007 and 2006
For the Years Ended March 31, 2007, 2006 and 2005:
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, 2007, 2006 and 2005 and as of March 31, 2007 and 2006 | 90 | |||||
II. |
Valuation and qualifying accounts | 97 |
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 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* | |
10.1
|
Amended and Restated Credit Agreement dated as of May 5, 2005, among Graphics and Holdings; with Banc of America Securities, as Sole Lead Arranger, and Bank of America, N.A., as Administrative Agent, and certain lenders#### | |
10.1 (a)
|
First Amendment to May 5, 2005 Amended and Restated Credit Agreement dated as of September 26, 2006, among Graphics and Holdings; with Bank of America, N.A., as Administrative Agent and L/C Issuer; and Banc of America Securities, LLC, as Sole Lead Arranger and Sole Book Manager, and certain lenders**** | |
10.1 (b)
|
Second Amendment to May 5, 2005 Amended and Restated Credit Agreement dated as of March 30, 2007, among Graphics and Holdings; with Banc of America, N.A. as Agent; and Banc of America Securities, LLC as Sole Lead Arranger and Sole Book Manager, and certain lenders ***** | |
10.1 (c)
|
Third Amendment to May 5, 2005 Amended and Restated Credit Agreement dated as of June 13, 2007, among Graphics and Holdings; with Bank of America, N.A., as Agent, and certain lendersvv |
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Exhibit No. | Description | |
10.2
|
Employment Agreement dated as of April 19, 2007, among Graphics, Holdings and Stephen M.Dyott##### | |
10.3
|
Severance Letter, dated August 1, 1999, between Graphics and Stuart Reeve*** | |
10.4
|
Employment Agreement dated as of April 19, 2007, among Graphics, Holdings and Patrick W. Kellick##### | |
10.5
|
Severance Letter, dated January 14, 2000, between Graphics and Denis S. Longprév | |
10.6
|
Employment Agreement dated as of April 19, 2007, among Graphics, Holdings and Kathleen A. DeKam##### | |
10.7
|
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** | ||
10.7 (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 | |
10.8
|
Stock Option Plan of Holdings | |
10.9
|
Common Stock Option Agreement Form | |
10.10
|
Holdings Common Stock Option Plan | |
10.11
|
Amended and Restated American Color Graphics, Inc. Supplemental Executive Retirement Plan | |
10.12
|
Credit Agreement dated as of July 3, 2003, among Graphics; Bank of America, N.A., as Administrative Agent, Collateral Agent and as a Lender; Morgan Stanley Senior Funding, Inc., as Documentation Agent; GECC Capital Markets Group Inc., as Syndication Agent; and the financial institutions named therein as Lenders# | |
10.12 (a)
|
First Amendment to Credit Agreement dated as of February 9, 2004 to Credit Agreement dated as of July 3, 2003, among Graphics; Bank of America, N.A., as Administrative Agent, Collateral Agent and as a Lender; Morgan Stanley Senior Funding, Inc., as Documentation Agent; GECC Capital Markets Group Inc., as Syndication Agent; and the financial institutions named therein as Lenders### | |