Making the Case

Private Placement Memorandum Example 2 - American Carton Group, Inc.


Grand Rapids, Michigan

$ 12 million Subordinated Loan w/warrants

L. R. Nathan Associates, Ltd. is assisting American Carton, Inc. ("ACG" or the "Company") in the private placement of the $12 million Subordinated Loan with warrants (the "Proposed Financing") described herein, which will be used to fund an expansion of the Company's production capacity. The information contained in this brochure and related materials with respect to American Carton Group, Inc. is being made available to you and to a limited number of institutional lenders and investors on a confidential basis solely for the purpose of your considering participation in the private placement, and may not be reproduced or used for any other purpose. The information contained in the brochure has been obtained from sources believed to be reliable, but L. R. Nathan Associates, Ltd. does not warrant its accuracy or completeness. The Proposed Financing described herein has not been registered under the Securities Act of 1933, as amended, or under the securities laws of any state. In addition, there is no present intention to register any securities pursuant to the Act. L. R. Nathan Associates, Ltd. is receiving compensation from the Company for its advice and assistance relative to the private placement of the Proposed Financing. A representative of the Company will be made available to you to discuss any of the materials or data included in this memorandum, or any documentation referred to herein, and will furnish any additional information as may reasonably be requested and will arrange for an inspection of the physical properties, if requested.

L. R. Nathan Associates, Ltd.
June, 2005



ACG designs and manufactures folding carton packaging for leading branded consumer products companies throughout the United States and Canada. The Company and its predecessor businesses have maintained long-term relationships for many years with their most significant customers, including United Brands (19 yrs.), Kellogg Foods (14 yrs.) and R. J. Nabisco (17 yrs.). These and most other major customers, such as Pillsbury, Clorox, Hillshire Farms and Merisant, are very sophisticated and thoroughly process-oriented in their dealings with key vendors such as ACG. The Company's meticulously high manufacturing standards, along with compatible business practices developed over many years of working with these large companies, have combined to make ACG a virtual extension of its customers' supply chains. This is demonstrated by the fact that more than 80% of ACG's $81 million in 2000 projected Net Sales volume will be produced under long-term supply agreements. The Company's two manufacturing facilities currently are operating at near full capacity, three shifts per day, five days a week.

American Carton Group, Inc. was formed in July, 1998 for the purpose of acquiring substantially all of the assets of the Hargood Prince Carton North America division of Aluette-Suzette Holding AG. The primary assets were a 168,000 sq. ft. production facility in Grand Rapids, Michigan ("Grand Rapids") and a 147,000 sq. ft. manufacturing plant in Sherbrooke, Quebec, Canada ("London"). These facilities, along with a sales office in Pottstown, Pennsylvania, at the time comprised a business unit with a long and successful history of producing folding carton products for major branded consumer products companies. In fiscal 1997, the Hargood Prince Carton North America division reportedly earned close to $3.8 million EBITDA before management fees on Revenues of $50 million.

ACG's buyout of Hargood Prince closed on August 3, 1998 for a price of $22,330,000. The purchase price was funded with $15,830,000 senior debt from Bank North, a $4,500,000 subordinated loan from Pinehurst Capital and $2 million of cash equity. The transaction was led by Mr. Allen Smith. Mr. Smith founded American Carton International, Inc. in 1983, a folding carton graphics and structural design company that for many years was the exclusive manufacturer's representative for Hargood Prince with customers such as Masters & Johnson, Tetley Tea and HMR (now Aventis).

As a result of Allen Smith's controlling interest in ACG, the new Company has been certified by the National Minority Supplier Development Council ("NMSDC") as a minority-owned business*. Many large consumer product companies actively promote doing business with a supplier base that reflects the ethnic diversity of their customers. In particular, United Brand's Historically Underutilized Business Development Program, which was initiated in 1972, actively seeks well-qualified certified minority-owned suppliers. United Brand's stated goal under the program is to achieve a 6% level of "minority-spend," versus the actual 1998 level of only 3.7%, or $326 million (source: Paperboard Packaging Worldwide, December, 1998). As a consequence of this corporate objective, United Brands actively supported Mr. Smith's purchase of the Hargood Prince North America division. Following the buyout, United Brands entered into a series of Memorandums of Agreement with ACG. These are exclusive preferred supplier arrangements with an estimated value of $100 million over their three-year terms, which include raw materials price volatility protection for the supplier. The Company now has similar agreements in place with Clorox, R.J. Nabisco, Canada, Kellogg, Canada, Merisant and The Pillsbury Company. Audited operating results for the first full year under new ownership show that the Company earned $9 million at the EBITDA level on Net Sales of $67.7 million for the fiscal year ended December 31, 1999.

Management projects an increase in EBITDA for the current fiscal year to $11.7 million on Net Sales of $81 million, with a further increase in EBITDA to $19.3 million on Net Sales of $107.4 million for the fiscal 2001. These projections are based, in part, on the completion of two production capacity-building projects. First, a total of $4.2 million is being invested during fiscal 2000 in equipment for a new production facility located in Albion, Nebraska. This 50,000 sq. ft. plant will contain a new mid-web flexo printing/converting line that will provide manufacturing capacity to support an additional $15 million in annual sales volume, primarily for already-identified new customers in the pharmaceuticals, dental and food services industries. Second, $5.75 million will be invested during 2001 in a third gravure printing/converting line at the Grand Rapids plant, which will add annual sales capacity of $25-35 million (depending upon product mix) for new customers in the beverage and tobacco industries. Both of the new projects are being supported by major branded consumer products companies that have significant minority-spend goals and are eager to do business with ACG. In a limited number of which cases, they will enter into long-term supply agreements related to the new facilities. ACG's proven success, along with these planned undertakings, will drive an attractive five-year business plan of controlled growth and enhanced profitability, as described herein.

The $9.95 million investment in the two capacity-building projects cited above comes on the heels of substantial other investments in existing facilities over the past 18 months. This includes approximately $4.8 million to complete the upgrading of the Sherbrooke plant during 1999 and the first few months of 2000, as well as $3,925,000 in recent months for major improvements to the two existing gravure printing/converting lines in Grand Rapids. These expenditures have been funded through a combination of internal resources, plus term loans and capital leases provided by Bank North Corporation. Management is concerned that the use of significant additional senior debt financing at this time could impede the availability of working capital to support future growth. Consequently, management has opted to consider the new capital investment in the form of long-term subordinated debt, as described below. In addition to the equipment purchases, the Company wishes to enable a $1 million shareholder withdrawal, as well as to shore up its working capital position and to fund transaction costs.

The sources and uses of funds are as follows:

Uses: Requirements for the purchase of new equipment, installation and infrastructure:
               - Grand Rapids: $ 5,750,000
               - Nebraska 4,200,000
                     Total Equipment & Infrastructure 9,950,000
           Shareholder Withdrawal 1,000,000
           Additional Working Capital 650,000
           Estimated closing costs, points, fees, etc.      400,000
                     Total Uses $ 12,000,000
           The Proposed Financing: Subordinated Loan w/ warrants $ 12,000,000

The Company's capital structure presently consists of a $12.5 million revolving line of credit ($7.8 million outstanding @ June 1, 2000) with Bank North Capital, plus $12.7 million under three term loans with the same institution. The Company also has $4.7 million in the form of six equipment installment loans ("Capital Leases") with Bank North Capital. The $4.5 million subordinated loan from Pinehurst Capital that was used to partially fund the August 3, 1998 buyout was repaid in full on July 31, 1999, along with a $1.5 million premium - just one year from the date of the buyout closing. No other obligations to third parties exist outside of the ordinary course of business.

ACG has a long track record of generating a high level of repeat business from the branded consumer product industry's most demanding companies. The proceeds of the Proposed Financing will enable the Company to expand its production capacity to take advantage of certain well-defined and well-developed new business opportunities, some of which will be committed under long-term supply agreements. These new sectors in the pharmaceuticals, dental, food packaging and beverage industries bring significant diversification to the ACG's sales portfolio, in contrast to the earlier high concentration in detergent and paper products packaging for a limited number of major customers. The Company brings to this transaction a motivated and well-managed work force, a highly incentivized management/shareholder team and a record of strong operating performance that has improved markedly since the mid-1998 buyout. The Company's track record as a high quality, reliable folding carton manufacturer, along with its status as a certified minority-owned business, have resulted in a vast inflow of new business opportunities at a lower cost of sales than is enjoyed by competing folding carton converters.

Management believes that the Forecasted Operating Results shown later in this presentation are readily attainable. The projected sales volume is identified by product and customer. Moreover, management has demonstrated its ability to control operating costs (and raw materials costs through supply agreements), thereby assuring that the new production facilities will be profitable. Forecasted cash flows are more than sufficient to comfortably service and repay anticipated indebtedness over the course of the five-year plan. The Company's profitability, which culminates in more than $29 million of EBITDA on $142 million Net Sales in 2004, yields a very attractive Internal Rate of Return on the $12 million Subordinated Loan.

* NMBDC changed its certification requirements on February 1, 2000 to permit 30% nonwhite ownership, so long as minorities still control the business by holding at least 51% of the voting stock. The purpose of this change was to facilitate exit options for investors in such businesses.


Subordinated Loan


The American Carton Group, Inc. & Subsidiaries

$ 12,000,000
Interest Rate:

12% fixed

Five years
Principal Payments:

Interest-only during the first two years. Thereafter, $2 million at the end of the third year, $3 million at the end of Year 4 and a $7 million balloon payment at the end of Year 5.

Permitted at the end of any fiscal quarter, in increments of no less than $100,000 each, without prepayment penalty.
Ranking Priority: The Loan will constitute subordinated debt of the Borrowers, which will be junior to all obligations owed to Bank North Capital or any successor senior lender(s). The Loan will be unsecured.

Use of Proceeds: The proceeds will be used principally to fund the expansion of existing manufacturing capacity, as described in the Strategic Plan, plus $1 million for a limited shareholder withdrawal and $1 million for working capital and estimated transaction costs.

Warrants: TDetachable warrants to purchase 10% of the Company's common stock at a nominal price, with anti-dilution protection and other provisions that are customary for transactions of this nature.

Takedown: 100% of the proceeds to be funded as soon as possible.



Hargood Prince Group Limited was a publicly-traded packaging company when it was acquired in 1994 by Aluette-Suzette Holding AG, a Gustadt-based $6 billion publicly-traded enterprise. The business traced its roots back to its founding in 1882 as Hargood Falafel. After more than 100 years of producing folding cartons and labels at its original location, a modern, state-of-the-art facility was built in Sherbrooke, Quebec in 1988. The Grand Rapids plant was completed in 1992. Very substantial additional capital investment was made in new and refurbished equipment for both plants during the decade of the 1990's, including $11,290,643 in Sherbrooke from 1991 through y-t-d 2000 and $17,450,015 in Grand Rapids from 1992 through y-t-d 2000.

By the time of the ACG buyout in August, 1998, Hargood Prince had a long history of solid customer relationships with leading branded consumer products companies. There also was in-place a complete professional management team and a culture dedicated to total quality management and high productivity. The Company's principal market at the time was supplying folding cartons to the detergent markets in Canada and the U.S. By mid-1998, the Hargood Prince Carton North America division supplied cartons to about 87% of the Canadian dry detergent segment, primarily through United Brands, Kellogg, and R.J. Nabisco. The Company's two manufacturing plants also provided United Brands with approximately 40% of its total North America dry laundry detergent carton supply. Hargood Prince also was a leading supplier of fabric softener cartons to United Brands and Kellogg HPC and was the sole supplier for United Brand's Canadian facial tissue business. The Company also was the exclusive supplier of cartons for United Brands's "Always" feminine care business in North America and R.J. Nabisco's Food Products for Canada.

On July 7, 1997, Aluette-Suzette publicly announced a change in the strategic direction of its chemical, aluminum and packaging lines of business. This included a refocusing of its packaging business on the food, tobacco and pharmaceutical industries and the divestiture of "non-core" businesses, including the Hargood Prince Carton North America division. Shearson Lehman was retained by the seller to market the business. A definitive agreement to buy the division was reached with Mr. Smith and his investor group in January, 1998 and the transaction closed on August 3rd. During the months following the buyout, a number of three-year Memorandums of Agreement were executed with United Brands and other major consumer products companies, many of which already had long-standing relationships with the Company (see "Customer Supply Agreements").

The Folding Carton Industry

Annual shipments of folding cartons in North America amounted to $8.256 billion in 1999. The folding carton industry is not characterized by rapid growth. Expansion of shipment volume is expected to average 2.5% per year over the next three years to the level of $8.884 billion in 2002 (source: Paperboard Packaging Council).

Company management estimates that there are approximately 400 folding carton converters in North America, the overwhelming number of which generate less than $5 million in annual sales volume. About 65% of all folding cartons are produced by large, vertically integrated pulp and paper companies, which tend to concentrate on the sale of high-volume, long-run, commodity-type folding carton products. This segment of the industry has undergone considerable consolidation through mergers in recent years. The single largest producer currently is ACX (includes Ft. James) with approximately $1.1 billion of folding carton sales, followed by International Paper (includes Union Camp & Shorewood), Smurfit/Stone Container at $700 million, RockTenn with $600 million, followed by Westavco and Riverwood at $500 million each, Meade and Caraustar at $400 million each, Field Container with $300 million, Gulf States, Malnove and Ivy Hill at about $200 million each. All of the above except for Malnove are vertically integrated manufacturers that own paperboard mills, as well as folding carton converting operations.

The 35% balance of folding carton manufacturing is conducted by pure converters like ACG, who do not serve as a distribution channel for their own manufactured paperboard output. The largest pure converters include Malnove, as cited above, and Chesapeake Packaging whose folding carton sales are estimated at $150 million each, and Packaging Graphics at an estimated $75 million. Company management believes that, based on its 1999 actual Net Sales of $67.7 million, SPG is the ninth largest pure folding carton converter in North America.

Independent manufacturers such as ACG are able to produce shorter-run, high value-added packaging more cost-effectively than the large pulp and paper plants. This flexibility is especially well-suited to the requirements of the major branded consumer products companies which, in addition to price and quality, require other services from their preferred suppliers, such as: (i) active involvement in the development of custom graphics for the packaging, (ii) the ability to design and implement innovative structural solutions such as spouts, windows and specialized coatings, (iii) just-in-time production and service practices, and (iv) the flexibility to respond promptly to change orders. ACG competes successfully in all of these areas, as demonstrated by the duration of its relationships with large, sophisticated, very demanding customers.

The End-User Market

The primary users of folding cartons are consumer products companies. Applications range from generic, commodity-like packaging such as folding take-out food containers, to high value-added packaging whose functionality and appearance are critical elements in the product's market positioning and selling strategy. As consumers have become more demanding and less loyal to specific product brands, the distinctiveness of packaging is critical to stimulating the desired consumer purchase decision. Similarly, new product introductions and point-of-purchase promotions attempt to attract customer attention through distinctive packaging. These strategies usually result in short packaging life cycles, increasing the demand for specialized folding cartons in small to medium production runs.

The principal end markets served by the folding carton converting industry are the soap, paper, food & beverages and personal care markets. Soap products comprise primarily powdered and liquid detergents, including laundry and dishwashing detergents and bleaches. Paper products include tissue paper, feminine hygiene products and various office supplies. The food and beverage segment includes cartons for both wet and dry food products and all types of beverages. The personal care market comprises a wide variety of products from bar soap to dental products to cosmetics.

Sales and Marketing

The importance to branded consumer products companies of developing reliable sources for high quality packaging cannot be overstated. The development of distinctive packaging, especially for new product introductions, is a key element in the marketing of consumer products in a highly competitive environment. ACG and its predecessors have been doing business with most of its customers for many years. As a result, ACG management and personnel are accustomed to the needs and business practices of their major clientele and, in turn, their customers in many cases have come to depend exclusively on ACG's key role in their supply chain. ACG often becomes the de facto manager of its customers' packaging program for certain products. Company personnel play key roles in the entire process, from conceptual design through to commercialization. Customer requirements are forecasted and production is scheduled well in advance. Customer/supplier communication is constant and on-going.

ACG management's objective is to become so important to its customers that new or renewal business is not put out to open bid. In fact, the Company usually does not even quote on Requests for Proposal, which too often result in unattractive pricing. Instead, ACG seeks to earn and retain its customers' on-going loyalty by always striving for improvement in product quality and service, constantly working to bring new product innovation and creativity to its customers, and perpetually striving for cost savings. In this way, ACG has been able to avoid the necessity of competing in RFP auctions, which has allowed the Company to maintain attractive profit margins on jobs. Proof of success in this regard is the high proportion of business that now is produced under long-term supply agreements. While there is no question that large corporate minority spending goals have enhanced the Company's success in this regard, it's long record of excellent performance on behalf of sophisticated, highly demanding consumer products companies has been the key factor in maintaining these relationships.

The nature of ACG's close partnership-like relationship with its customers dictates the necessity for a different approach to the traditional sales function. Rather than maintaining a staff of sales personnel, each of whom manage multiple accounts, ACG maintains Process Improvement Teams ("PIT") that are dedicated to servicing every aspect of a customer relationship. There currently are three PITs in Grand Rapids and three at the Sherbrooke plant; one PIT will be created in the new Nebraska II facility described below (see Strategic Plan). Each Process Improvement Team is dedicated to specific customer product groups and include ACG specialists in cross-functional roles, focused on continuous improvement related to quality and cost savings. The PIT team dedicated to United Brands, for example, is tasked with identifying areas of improvement in packaging and service provided to each of the eight United Brands product groups, portions of which are serviced out of both the Grand Rapids and Sherbrooke plants.

Allen Smith's talents are devoted primarily to the development of new marketing strategies, with particular emphasis on maximizing the Company's reach to large corporate minority-spend programs. In this regard, he is responsible for displaying ACG's capabilities at the regional trade shows sponsored by the National Minority Supplier Development Council (, which is the private sector organization that certifies minority-owned businesses. These trade shows are attended by large corporations seeking well-qualified minority-owned vendors. ACG's participation in these events has led to numerous inquiries and some supply contracts, such as Monsanto (now Merisant), Deluxe Check, Miller Brewing, Coors and Philip Morris. The Company's team-based approach to sales generation, as well as its status as the only major minority-owned folding carton manufacturer, have resulted in a significant lowering of the Company's selling expenses. In fact, management believes that ACG's selling expenses are approximately one-half that of its major competitors such as Shorewood, Smurfit/Stone Container Corp. and Rock Tenn.

The SDRT Process

Company management employs a team-based decision-making methodology called Strategic Decision Resource Teamwork ("SDRT") for managing its growth and making new business and product development decisions. The primary objective of the SDRT process, which was developed and copyrighted by ACG management, is to explore new business initiatives and bring them to the market with minimal risk. The methodology involves four distinct modules that are activated in the following sequence:

  1. Strategic Market Development Team ("SMDT") is headed by Allen Smith. Its mandate is to identify market trends and new business opportunities, and then to develop strategies to take advantage of those opportunities. This includes the conduct of a feasibility study related to the identified opportunity and strategy. The scope of the SMDT's work includes a review of the product life cycle, competitive dynamics, the strategic fit for ACG, profitability expectations, capacity utilization and alignment with core competencies, the capital investment requirements and people & space resource impact, as well as the identification of any possible conflict with base customer interests.
  2. Product Development Team ("PDT") is headed by Sherman Feldbaum, chief operating officer. Its role is to examine the equipment, technology and materials required to achieve SBDT's projects, as well as to develop operating strategies for the Plan Implement Validate Team (see #3 below). In this regard, the PDT team is responsible for maintaining a current data base of knowledge related to equipment, technology and materials, and to understand relevant operating requirements and engineering processes.
  3. Plan Validation Team ("PVT") is directed by the operations group with dedicated PVT Facilitators for each facility, whose mandate it is examine and validate the manufacturing processes needed to achieve the projects identified by SBDT. PDT is responsible for bringing continuity and consistency to the manufacturing processes. This includes a critical examination of the final plan initiated by PDI and insuring that customer expectations are clearly defined and that internal targets/expectations are met. PVT also is responsible for developing a detailed plan to de-risk the project, where appropriate. Finally, PIV is responsible for managing the project budget.
  4. Focus Improvement Team ("FIT") is headed by the Director of Operations. FIT's mandate is to seek continuous improvement and cost savings in existing processes. This involves striving for a Perfect Order Rate an improving Factory Contribution Margins. The FIT team is the process/technical link between the customer's plant and ACG's internal work team. Each FIT team contains 8-10 people who are cross functional in term of their specialized skills and are customer-focused. They meet every three weeks and review proposed initiatives at monthly general meetings. These initiatives are presented to customers at semi-annual meetings.

Customer Supply Agreements

The Company currently has eight Memorandums of Agreement with major customers, which currently account for more than 80% of annual sales volume. The Memorandums of Agreement serve to strategically align the Company with its major customers.

Long-term supply contracts in the packaging industry are not common and, in fact, Hargood Prince had none prior to the buyout. All of the agreements that currently are in place were entered into subsequent to the mid-1998 buyout, even though in many cases they are with the same customers with whom the Company had been doing business for many years. The large corporate minority-spend goals, coupled with ACG's & its predecessor companies' long history of excellent service to the same customers, clearly has yielded a significant market advantage for the Company. The Memorandums of Agreement effectively shut out other suppliers from competing during the period that they are in effect. They also provide ACG with raw materials price volatility protection, since most agreements contain quarterly price adjustments for changes in raw materials costs. Finally, the supply agreements permit Company management to develop long-term plans, such as the Strategic Plan, without much uncertainty about the sources of future business. At the same time, the Memorandums of Agreement provide major corporate customers with a reliable source of quality product at predictable prices, as well as extraordinary leverage over their preferred supplier in order to managing inventories in the most cost-effective manner. The arrangements facilitate just-in-time inventory management and also motivate ACG as a key vendor to seek constant improvements in the product and manufacturing processes, cost savings, etc.

  • United Brands, Fabric & Home Care Products - This is a 3 yr. supply agreement (Nov. 1, 1998 - Dec. 31, 2001), plus 1 yr. extension option, for the purchase of seven types of folding cartons for United Brands' Canadian and U.S. markets. The agreement is between United Brands' Cincinnati, Ohio plant and ACG Grand Rapids. The estimated annual volume is 96.4 million to 129 million units at base prices that are specified in the agreement, along with provisions for price adjustments based on changes in the published cost of boxboard.
  • United Brands, Feminine Care Paper Products - This is a 3 yr. agreement (July 1, 1998 - June 30, 2000), plus 1 yr. extension option, for the purchase of Pantiliner folding cartons for the Alldays Pantiliners from Always Brand. The agreement is between United Brands's Belleville, Ontario plant and ACG Sherbrooke. The estimated annual volume is between 34 and 41 million cartons. The agreement contains a schedule of base prices by product, which declines over the 3 yr. term, as well as a raw material cost adjustment mechanism and selling terms (net 30 days, 1% discount for payment within 10 days).
  • United Brands, Royale & Puffs Pop-up facial tissue printed folding cartons - This is an 18 month agreement beginning January 1, 2000 and ending June 30, 2001, with the buyer's option to extend for an additional year. United Brands's Paper Products Company is based in Cincinnati which, in this case, is purchasing from ACG Sherbrooke. Attached to the agreement is a production schedule by product item, along with a base price for each and a price adjustment mechanism based on quarterly net changes in the supplier's raw materials prices.
  • Lever Pond's, division of Kellogg of Canada, Inc. - This is a 2 yr. (Jan. 1, 1999 - Dec. 31, 2001) agreement with ACG Grand Rapids, which includes revolving one-year extensions based on performance and cost savings. The agreement covers 100% of Lever Pond's folding carton requirements for branded laundry detergent, private label laundry detergent and automatic dishwasher detergent. Prices are specified with adjustments for published changes in the price of boxboard and corrugated. The 1999 annual volume estimate is $7.5 million.
  • Iams Products (formerly A & M Products) - This is a 3 yr. (Jan. 1, 2000 - Dec. 31, 2002) agreement, plus a 2 yr. extension option, with ACG Grand Rapids to supply folding cartons for Iam's S.O.S., Fresh Step Scoop and cat litter products. The agreement contains specific prices with built-in cost savings over the term. The agreement also covers ACG's warehousing responsibilities and 's obligation to pay for certain diecutting and press setup costs. It also specifies ACG's obligation to establish the Albion. Nebraska POD facility within 3 months of the commencement of the agreement.
  • The Pillsbury Company - This is a 4 yr. agreement beginning January 1, 2000 between Pillsbury's Minneapolis plant and ACG Sherbrooke to produce 100% of Pillsbury's Green Giant products, pizza products, turnovers and breadsticks. The agreement covers 11 items, with specified prices subject to an adjustment mechanism for published boxboard price changes. Terms are 1%/10 days, net 30 days.
  • R.J. Nabisco Canada, Inc. - This is a 3 yr. agreement beginning February 1, 1999 with ACG Sherbrooke to supply Nabisco's Misissauga facility with folding cartons for their dental cream product. Volume is estimated to be 68 million units in 1999, and increasing to 72 million and 76 million respectively in subsequent years.
  • Sara Lee Corporation - The Master Purchase Agreement has an initial term of 24 months beginning July 1, 2000, with two successive one-year buyer extension options. The Agreement covers purchased by six Sara Lee food units, Bil Mar Foods, Gallileo Foods, Hillshire Farm & Kahns, Ball Park Brands, St. Joseph Foods and Seitz Foods. The Agreement states that "During the term of the Master Purchase Agreement, Buyer hereby agrees to purchase from Seller and Seller hereby agrees to Sell to Buyer 100% of qualified folding carton business." ACG also agrees to target 5% per year in "value improvements," to provide on-going technical assistance and to institute an inventory consignment program for Sara Lee.

Manufacturing Process & Facilities

ACG offers folding carton design and structural engineering solutions to its customers through in-house capabilities at each of its two plants, as well as through a Design and Innovation Centers in Rockford, Illinois. Once a folding carton is fully-designed and engineered for production, the manufacturing is typically a two or three-step process consisting of printing, diecutting and finishing (i.e., folding/gluing), depending on which printing technology is employed - i.e., Web-Flexo or sheet-fed printing and converting.

The primary raw material used in the production of ACG's folding cartons is clay coated recycled boxboard, which is both more economical and less environmentally disruptive than virgin stock. Although recycled boxboard is available to the Company in both sheet and roll (web) form from numerous sources, ACG maintains supply agreements with four mills at below published market prices: Paperboard Industries in Toronto, Strathcona Paper Corp. in Napanee Ontario and Smurfit-Stone's boxboard mills in Philadelphia and Newark. Boxboard is ordered only in connection with scheduled jobs and Company plants typically maintain about one to two weeks supply in-house. Inks are purchased from Sun Chemical and Flint Inks, who store their product on consignment at each of the ACG plants and invoice the Company as the ink is consumed. Other purchased items include glue, which is obtained from two suppliers, and corrugated cardboard used for shipping finished product, as well as chipboard used for liners. Certain special items also are purchased from outside vendors, such as windowing material and specially designed detergent box handles. All of the Company's purchased materials are available from multiple sources. It also is important to note that all of ACG's supply agreements with customers provide quarterly adjustments for changes in raw materials prices, so that the Company is largely immune to the risk of raw materials price volatility.

ACG's two manufacturing plants are attractive, modern, state-of-the-art facilities, both of which are ISO 9002 registered and American Institute of Bakers certified as a Superior rating. While the three basic steps of folding carton manufacturing - printing, die cutting and folding/gluing - are conducted at both plants, the operations differ in meaningful ways based on the configuration of their printing equipment, as described below.

Grand Rapids, Michigan ("Grand Rapids") - This is a 168,000 sq. ft. facility located on a planned industrial site called Rapids Industrial Park, which is located about ten miles outside of Syracuse, N. Y. The location is in close proximity to existing key customers in Canada, including United Brands Rockville, Kellogg Toronto and R.J. Nabisco. The plant was built to suit the Company's needs in 1991 and is leased for 25 years from a local development authority. About 150 non-union employees work at this location, which includes centralized corporate administrative functions, such as finance, human resources and information systems. A seven-person team currently is in the process of integrating all of ACG's information systems at this location including financial reporting, order entry and shop-floor systems - all of which are being converted from DOS to a Windows-based operating system. The project is scheduled to be completed by the end of the calendar year 2000.

Grand Rapids is a rotogravure printing operation. Gravure printing is a proven technology that is especially suitable to long web production runs because it enables the functioning of multiple production processes in-line, such as printing, diecutting, the application of special coatings and other processes. One of the in-line processes performed in Rockford, for example, is the application of coatings to produce the barrier properties required in packaging for hydroscopic dry powdered laundry soap. The core element of the gravure system is a printing plate cylinder made of steel with a copper plated electro-mechanically etched image that is chrome plated (engraving). The plates produce high quality, consistent images over long production runs. The disadvantage of gravure printing is the high initial setup expense for each job, including the cost of preparing the cylinder plates through outside vendors at over $1,000 apiece for each color, as well as the high tooling and press setup costs. As a result, gravure printing is uneconomical for short production runs, but is perfectly suited to certain kinds of packaging manufactured for major customers such as United Brands (detergents), R.J. Nabisco (tobacco) and Seven-Up (beverage).

The Grand Rapids operation employs two identical web-fed Lemanic 1150 Bobst Champlain gravure printing presses (circa 1985 vintage), which were acquired, refurbished and installed in 1991. Each of the presses has 8 color units, although production runs usually are printed as 4 or 5-color jobs, plus coatings. Printing and diecutting are set up in a continuous, in-line process. Once the raw boxboard has been printed and coatings have been applied in a single pass through the press, the product then goes through a drying unit. It then passes directly through an in-line platen diecutter, where the printed material is cut, creased and delivered as diecut blanks. Excess boxboard material is automatically collected and baled for resale back to the paperboard mills. The printed, coated, diecut product then is collected and stacked on skids at the end of the line in preparation for finishing. Once the product has been palletized, it is transferred to the finishing area, consisting of 6 Jagenberg Folder/Gluers, where the product is folded, glued and cased for shipment to the customer.

In keeping with management's practice of seeking continuous improvements to its manufacturing processes, it should be noted that the palletizing function, which is very labor-intensive, soon will be automated. The Company is acquiring two Fanuc robotic take-off systems, which will be installed at the end of each gravure production line and will eliminate the need for 18 personnel over three shifts. The installations will be completed in July and August, 2000 respectively, at a cost of approximately $400,000 each. Furthermore, two new ESI electron beam curing units were installed in-line with each gravure printing press in March and May respectively at a cost of $600,000 each. These units were purchased specifically to enable the production of a high gloss finish and protective barrier for United Brands and detergent and Iams pet care packaging. Grand Rapids is the site of a planned third gravure printing press/converting line, which is a major element of the Strategic Plan.

Sherbrooke, Quebec ("Sherbrooke") - This is a 147,000 sq. ft. facility located on an industrial site in North Central Quebec, Canada, midway between Montreal and Quebec City. The plant was built in 1987 and is leased from a third party investor under an agreement that expires in 2005, with a five-year extension option. Approximately 200 people are employed in Sherbrooke. Production workers are members of the Graphic Communications International Union, whose agreement expires on December 31, 2000. Management anticipates a 9% wage increase over the course of a new three-year union contact, which has been incorporated into the budget. Relations with the union is excellent.

The printing technology employed at Sherbrooke's sheet-fed offset lithography. There are two 44" six-color Komori offset presses and one 50" six-color Komori offset press that went into service on February 1, 2000, replacing an older, slower Roland 6-color offset unit. While offset lithography has a more complex inking system than gravure printing, its setup costs are far lower and setup procedures are faster. The customer supplies color-separated film and Company personnel prepare the photo-sensitive printing plates in-house which are easily mounted on to the press. Consequently, offset lithography is better suited and more economical for short-to-medium production runs than is gravure printing. The production configuration in Sherbrooke is a batch process, as opposed to the in-line positioning in Grand Rapids. The presses are matched with three Bobst diecutters - two of 1995-96 vintage and a third new Bobst SP 130 ERII which runs at 7,000 sheets/hr. The finishing area includes state-of-the-art Bobst fully-automated Domino and Alpina-model Gluers. Other finishing capabilities include modern cellophane windowing applicators for higher impact shelf exposure, promotional labeling and collation.

The Sherbrooke manufacturing operation has experienced major improvements in its capabilities and performance over the past several years as the result of measures put in place by Sherman Feldbaum, the Company's chief operating officer. In 1993, when Mr. Feldbaum was General Manager of the Hargood Prince Carton North America division of Aluette-Suzette Holding AG, he was given the mandate to either "fix the Sherbrooke operation or shut it down." He responded by taking the following steps to:

  • Eliminate bottlenecks in sheet-fed capacity. This has involved a reinvestment in equipment with compatible specifications, including the 3 high speed diecutters, 2 high speed windowing applicators and 3 new high speed folder/gluers. The final step was the addition of the 50" Komori press, which was a GE Capital repossession that was acquired and refurbished at a total cost of $1,675,000. Total capital expenditures on new and refurbished equipment in Sherbrooke during 1994-99 have amounted to $11,072,965. The final component of $2,070,000 was funded earlier this year, which has added an additional $10 million of annual sales capacity (5 days, 3 shifts) to Sherbrooke, along with a dramatic reduction in expensive overtime. The end result is three synchronized production lines with similar "matched" capabilities that offer greater scheduling flexibility and improved efficiency.

  • Diversify the customer mix and improve the order book. Approximately one-third of 1993 volume consisted of printing sports trading cards, a high margin but volatile business. The balance of the plant's business was with United Brands. New customers have since been developed in the areas of specialty foods, oral care, beverages and cosmetics. Management now is in a position to be selective by eliminating the lower margin orders to improve profitability. For example, Barilla Pasta and JemPak have been notified that their supply agreements will not be renewed when they expire at the end of this year due to inadequate profit margins.

  • Realign and refocus the Sherbrooke management team. This has included the elimination of redundant functions that were centralized in Grand Rapids and the addition of other key positions in the disciplines of human resources, logistics and customer support.

The result of these measures has been a steady growth in Sherbrooke sales volume from $18 million in 1993 to a planned $44 million in 2000. Profitability also has improved materially to a fully-absorbed EBITDA of 9.2% for the first quarter ended March 31, 2000. Now that management is in a position to selectively eliminate lower margin business like Barilla, which is being replaced with more attractive business, a continued improvement in profitability can be expected. Nevertheless, Sherbrooke's sheet-fed offset operation inherently provides a 5% lower contribution margin than Grand Rapids' gravure facility, due to normal competitive pressures resulting from the fact that the market place is populated by far more sheet-fed operations than web-fed gravure presses.

ACG management has instilled a culture of continuous improvement in its employees through two programs that are utilized at both plants:

  • All non-union production employees are rated according to a Skill Process. This is an internal system of continuous education where workers are trained on an ever-increasing variety of equipment and functions. Training materials consist of progressive study modules, as well as computer simulation software. As workers qualify on more pieces of equipment, they rate higher within the Skill Matrix, which directly affects their compensation. The program is designed to engage workers with a sense of career progression, as well as to provide variety in their day-to-day work. It also considerably enhances management's production flexibility, as well-qualified employees are rotated among a variety of tasks on an as-needed basis.

  • Incentive Sharing is a Company-wide incentive plan, which is structured in two parts. First, 12 key management personnel participate in a Leadership Incentive Plan, which is driven off of the level of EBITDA achieved at their plant relative to budgeted goals. For example, if the 2000 forecasted EBITDA of $14.4 million is achieved, they will receive a bonus equal to 20% of their salary; maximum is 30% if EBITDA exceeds $16.2 million. All other employees participate in a profit sharing program based on the Pretax Profit achieved in their plant, which then is weighted by their performance in the following three categories: (i) Perfect Order Rate: on-time delivery, right quantity, zero defects, zero downtime, shipment success rate; (ii) Competitive: waste reduction, process reliability, throughput; (iii) Employee value: housekeeping, recordable incident rating, regulatory compliance. The average employee gain share in Radisson for 1999 was $3,317 and only $87 in London. The 2000 forecast anticipates $4,327 per Radisson employee and $1,307 in London.

Management & Ownership

The August 3, 1998 buyout included $2 million of cash equity. A total of 1,000 shares was issued and Allen Smith invested more than $1.2 million of personal cash to obtain a 62.375% ownership position. Sherman Feldbaum invested $300,000 to obtain a 15% equity interest. Following the buyout closing, other management personnel were offered the opportunity to purchase 10 shares, or 1% for $20,000, or some fractional part thereof. A total of 14 active members of ACG's management team currently are shareholders, plus one non-management investor. The Board of Directors consists of Allen Smith, Sherman Feldbaum and Robert Simpson, an independent CPA.

Allen Smith (49 years old, 62% shareholder), President & CEO - Mr. Smith also is chief executive officer of American Carton International, Inc, a specialized packaging design company based in Duxbury, Massachusetts which he co-founded with a partner in 1983. He previously held positions as marketing manager with United Box and Purina Corporation. Allen earned a bachelors degree in Economics from the University of Alabama and an MBA from Wharton.

Sherman Feldbaum (44 year old, 15% shareholder), Vice President & Chief Operating Officer - Sherman began his career at Hargood Prince in 1976, where he held a variety of operational and executive positions - primarily in Sherbrooke and Hargood Prince's Montreal plant which produced pharmaceutical packaging. He was appointed General Manager of the Grand Rapids and Sherbrooke plants in 1994. He attended the Holy Cross and Texas Tech Universities.

Frank Magione (50 years old, shareholder), Director of Operations for Grand Rapids plant - Mr. Magione joined Hargood Prince in 1971 and spent about 20 years at Hargood Prince Packaging in Kocomo in a number of operational and managerial positions. He joined the Hargood Prince carton business in 1991 and has occupied his current position since 1993.

Wan Wong (39 years old, shareholder), Director of Operations for Sherbrooke, Quebec plant - Mr. Wong joined Hargood Prince Packaging in Kocomo in 1991 and moved to his current position in Grand Rapids in 1993. He previously spend four years in a variety of finance positions with other organizations, including the position of Director of Finance for the Grand Rapids plant until this position was centralized following the buyout. Wan is a certified management accountant and has a bachelors degree from Grenadine College.

Robert O'Connell (53 years old), Director of Supply Chain and Information Technology - Mr. O'Connell joined Hargood Prince in 1987, initially as an internal consultant and was appointed to his current position in 1991. He previously held engineering positions at B & O Railroad and Freemark and Shemp. Robert holds both bachelor and masters degrees in Mechanical Engineering from University College in Ghana. He also has completed an MBA program at the University.

Howard Blue (44 years old, shareholder), Director of Technical Services - Mr. Blue joined Hargood Prince as a plant manager and was appointed to his current position as a site manager for Sherbrooke in 1995. He previously spent ten years as an Engineer with Playtex. Mr. Blue holds a bachelors degree in Applied Science from the University of Phoenix, as well as an MBA.


American Carton Group, Inc. and its two wholly owned subsidiaries, American Carton Group Grand Rapids, Inc. and American Carton Group Sherbrooke, Inc., were formed in 1998 for the purpose of acquiring substantially all of the assets and working capital liabilities of the Grand Rapids and Sherbrooke plants of the Hargood Prince Carton North America division of Aluette-Suzette Holding AG. The establishment of separate subsidiaries was necessary because the two plants are located in different countries with distinct taxing authorities.

The consolidated financial statements of ACG and its subsidiaries have been audited since their inception by PriceWaterhouseCoopers LLP. Attached for reference (Exhibit III) are the audited financial statements for the post-buyout period August 4 - December 31, 1998, as well as for the full fiscal year ended December 31, 1999. All audit opinions have been issued without qualification. The pre-buyout operating statements for calendar year 1997 and the first seven months of 1998 are the result of ACG management's combining the Grand Rapids & Sherbrooke plants from the divisional financial reports of Hargood Prince Carton Grand Rapids and Hargood Prince Carton Sherbrooke. There was minimal inter-plant activity at the time.

Operating Results

The Company's historical operating results for the past three years are summarized on the next page. The calendar year 1997 and first seven months of 1998 reflect operations of the Grand Rapids and Sherbrooke plants as part of Hargood Prince Carton North America under the ownership of Aluette-Suzette. The two plants reported separately and maintained separate financial and administrative functions at each location. For the purpose of consistency, all of the periods shown below categorize manufacturing distribution costs (warehousing labor, packing supplies, etc.) as part of Cost of Products Sold. These costs had been classified as Selling, General and Administrative Expenses in the audited financial statements. Depreciation Expense also has been included in Cost of Products Sold.

The Grand Rapids plant operations were negatively impacted in 1997 by the loss of two major accounts - Kellogg and Babbo - which together accounted for $9.7 million in annual sales volume. This was the result of Kellogg's November 1996 announcement that it would consolidate its dry laundry operations by shutting down one of its facilities on January 1, 1997 and use a sole carton supplier for its remaining dry laundry plant. The loss of Babbo's business was the result of Hargood Prince's decision to reduce its credit exposure to the private label laundry manufacturer, which was in poor financial condition. By the end of the third quarter, 1997, a portion of the volume was replaced with work resulting from the early 1997 award of United Brands's U. S. Network business. This new business volume was especially significant because the ACG plants previously had done work only for United Brands detergent products sold in Canada. Further offsetting the loss of the Kellogg & USA Detergents volume was the Sherbrooke plant's pickup of Kellogg's folding carton business for its "Snuggle" line of fabric softeners and its Caress, Dove and Lever 2000 personal liquid wash product lines, which represented approximately $1.2 million of new 1997 sales, or $4.5 million on an annualized basis.

Gross profit margins were negatively impacted early in 1997 by the start-up costs associated with the certification and validation of the new Kellogg business. Competitive market pressures caused by industry-wide excess capacity during the mid-1990's contributed further to weak 1997 profit margins. Other Expenses in 1997 included management fees allocated to the plants for corporate overhead charges, which were somewhat offset by a gain on the sale of fixed assets from the Sherbrooke plant. Add-backs to EBITDA include Management Fees of $798,000 in 1997 paid to the parent company, as well as Amortization of Goodwill related to the 1994 acquisition, which amounted to $1.367 million in 1997 and $797,000 in 1998.

    1/1-8/3 8/4-12/31    
FYE - 12/31 1997 1998 1998 1998 1999
Net Sales 50,292 36,073 24,741 60,814 67,737
Cost of Products Sold 46,365 33,839 21,792 55,631 56,957
   Gross Profit 3,927 2,234 2,949 5,183 10,780
   - % margin 7.8% 6.2% 11.9% 8.5% 15.9%
Selling, General & Admin. 4,369 2,461 1,574 4,035 4,065
Other Expense (Income) 427 197 (58) 139 622
Foreign Currency loss/(gain) (46) (123) 108 (15) 149
Goodwill 1,367 797   -   797   -  
   Operating Income (loss) (2,189) ( 1,099) 1,325 226 5,944
   - % margin (8.1%) (3.0%) 5.4% 0.4% 8.8%
Interest Expense 1,883 1,188 1,615 1,615 3,202
Pretax Income (loss) (4,072) (2,287) (290) (2,577) 2,742
   Income Taxes (71) -   (47) (47) 2,742
Net Income (loss) (4,001) (2,287) (243) (2,530) 1,719
Calculation of EBITDA:          
   Operating Income (loss) (2,189) (1,099) 1,325 226 5,944
   Depreciation & Amort. 5,219 3,222 1,123 4,345 3,059
   Management Fees 798 -   -   -   -  
EBITDA 3,828 2,123 2,448 4,571 9,003

The Grand Rapids plant's sales volume recovered in 1998 by adding $7 million in that year from servicing United Brands' U. S. detergent folding carton requirements. The year also witnessed $1.9 million of additional packaging sales to Kellogg compared to 1997 and $2 million over the course of the year from commencement of the Iams (at the time was known as A & M Products) kitty litter folding carton program in Grand Rapids.

Gross Profit margins suffered during the early part of 1998 vs. 1997 due to a 6% increase in raw materials costs, which was led by an industry-wide increase in boxboard commodity prices. The 5.7% improvement in Gross Profit margin between the pre-buyout (6.2%) and post-buyout (11.9%) months of 1998 is attributable primarily to two factors. First, the $140,000 per month reduction in the Depreciation Expense carried by ACG, compared to Aluette-Suzette, reduced fixed factory expenses by 2.4%. Second, the post-buyout months of 1998 witnessed a 2% reduction vs. the pre-buyout period in variable factory expenses, which includes electricity, repairs and maintenance. This was achieved primarily through a Power for Jobs Program with Michigan State, which reduced the cost of electricity, as well as through a strong preventative maintenance program at both plants. Operating Profit margins improved immediately following the buyout primarily through the elimination of Aluette-Suzette's sizable Goodwill Expense, which the seller had been amortizing as the result of the 1994 purchase of the fixed assets of Hargood Prince Group Limited. The post-buyout 1998 period also benefited from the elimination of redundant accounting and administrative functions in London, whereby SG&A represented 6.8% of sales for the 7 months before the buyout, 6.4% during the 5 month post-buyout period and 6.0% in 1999.

The first full year under new ownership brought an 11.4% increase in Net Sales as the full-year impact of the U.S. Network program with United Brands, as well as the continuation of other new business initiatives begun during 1997-98 with Kellogg and Iams. The year 1999 also witnessed a dramatic increase in Gross Profit margin for several reasons. First, boxboard commodity prices dropped significantly in December, 1998 and continued for several months thereafter. In addition to this favorable market condition, management was able to negotiate better terms from its suppliers based on the strength of ACG's new supply contracts with major branded consumer products companies, as well as the fact that ACG management's new ownership status made them even more intensely focused on the Company's profit performance than ever before. Finally, Gross Profit margin improved because the fixed costs of production dropped as a percentage of sales, since the plants were running at a higher percentage of capacity in 1999 than ever before. The Company's Operating Profit margin also improved dramatically over 1998. SG&A remained at essentially the same expenditure level in 1999 even though Net Sales grew by almost $7 million. Consequently, SG&A as a percentage of Net Sales dropped from 6.6% in 1998 to 6.0% in 1999. The Other Expense of $622,000 in 1999 relates primarily to holding company costs, including Allen Smith's salary, office and travel expenses. Finally, 1999 Operating Profit margin benefited from the elimination of Aluette-Suzette's Goodwill Expense.

Financial Position

The consolidated balance sheet of American Carton Group, Inc. and Subsidiaries at year-end 1999 is attached as part of the audited financial statements. Fixed assets represent approximately one-half of the Company's total assets, which is consistent with the nature of the manufacturing business and also with the substantial investment in recent years to upgrade both manufacturing plants. The balance sheet depicts a negative working capital position at year-end of $1.3 million, which is due in part to the use of $2,378,000 of short-term borrowings to contribute to the repayment of the Pinehurst subordinated loan on July 31, 1999. In addition to use of the revolving credit loan for this purpose, an additional $2.5 million was borrowed on a three-year basis from Bank North. The $828,000 principal payment due in the next 12 months is shown on the year-end balance sheet, thereby further exacerbating the negative working capital position. The completion of the proposed $12 million long-term Subordinated Loan is projected to enhance the Company's working capital position, as shown in the Pro Forma Balance sheet on the next page.

The Company's selling terms to its customers generally are 1% net, 30. Nevertheless, the actual payment experience is more favorable at approximately 28 days, which is due to the fact that many large corporate customers take advantage of the 1% discount for payment within 30 days. Accounts Receivable at May 28, 2000 amounted to $7,869,000, of which $3,645,000 or 46% of the total, was from various product divisions of United Brands, followed by Iams at 15.4%, Lever Ponds (Canada) with 9.2% and R.J. Nabisco representing 8.6% of the total. United Brands has consistently been the Company's largest customer, accounting for $37.9 million of 1999 sales, which was up from $33.4 million in 1998 and is expected to climb further to $44.8 million in 2000. This concentration risk is mitigated by several factors. First, ACG and its management have had a strong relationship with United Brands for 19 years and with its other largest customers for similar periods, including Kellogg (14 yrs.) and R.J. Nabisco (17 yrs.). Moreover, the Company has become an integral part of each of its customers' supply chains, as demonstrated by the long-term supply agreements that have been executed with them. In most cases, these large customers rely exclusively on ACG to execute their packaging programs. This dependence is further fortified by the minority-spending goals of such large corporations and ACG is, by far, the largest minority-owned folding carton manufacturer in North America. Furthermore, most major customers have multiple product units that deal quite independently from one another with their suppliers. For example, ACG serves six product categories within United Brands, each of which operates as a separate business unit at multiple locations. The customer concentration risk is further mitigated by the sizable investment that customers have made in preparing to run ACG packaging products. This includes investments in tooling and printing cylinders, as well as many years invested in the more subtle nuances of working together. This point is demonstrated by United Brands's willingness to reimburse ACG for approximately $550,000 of capital expenditures in connection with its purchase of electron beam equipment to service United Brands' needs. It is not a casual matter even for large companies such as United Brands to change its major vendors - especially once substantial investments have been made over a long period of time in such interdependent relationships. Notwithstanding all of the above mitigating factors, ACG management has worked diligently and with considerable success to diversify its customer base, as demonstrated by the fact that United Brands is anticipated to drop from 54.2 % of forecasted sales in 2000 to 42.3 % in 2004.

Inventories at year-end were valued at $ 8,949,000 on the FIFO basis, of which 35% was finished goods, 41% was work-in process and 24% consisted of raw materials and supplies. The finished goods and work-in-process inventories are salable goods produced to order, the majority of which are under long-term supply contracts. Inventory turnover is approximately 10 times per year. Raw materials and supplies consist primarily of a 3 week recycled boxboard supply, glue and corrugated cardboard..

Deferred financing costs are being amortized over the terms of the related debt and are shown net of accumulated amortization.

The net book value of plant and equipment at the Sherbrooke and Grand Rapids facilities amounted to $17,368,000 at year-end 1999, net of Depreciation. The equipment purchased as part of the August 3, 1998 buyout represented $13,684,000 of the total, with $3,684,000 of the equipment having been purchased since the buyout.

Cash Overdraft represents checks disbursed by the Company on remote disbursement checking accounts that have not yet cleared the bank. Such amounts were available at year-end to be drawn down under the Company's revolving credit facility.

Accounts payable at December 31, 1999 amounted to $5,731,000, all of which was current within agreed terms. Payment terms on raw materials are generally 30 to 60 days and average 45 days.

The Company's debt structure consists of four loans with Bank North Capital - an asset based revolving credit facility and three term loans - and various equipment installment loans ("Capital Leases") -

Revolving Credit: The outstanding balance under the revolving credit facility at year-end 1999 was $7,309,000 which increased to $7,830,968 at June 1, 2000. Maximum borrowings were capped at $10 million through year-end 1999 and are scheduled to increase thereafter to $12.5 million in 2000, $14 million in 2001 and $15.5 million through the maturity of the facility on May 31, 2002. Advances are at 85% of eligible accounts receivable, 65% of raw materials and supplies, 60% of work-in-process and 70% of finished goods inventory. The inventory portion is subject to an overall cap of $5 million. The interest rate is at the lower of prime + 0.5% or Libor + 2.75% (9.5% at December 31, 1999). A $5 million portion of the revolving credit loan has been swapped at an effective fixed rate of 9.27% through maturity .

Grand Rapids Term Loan: This is a seven-year term loan secured by all equipment at the Grand Rapids plant. The original amount was $8,820,000 and the balance has been reduced to $7,353,667 at June 1, 2000. Interest is due monthly at a variable rate of Libor + 3.5%, which has been fixed by swap agreements at 10.31%. Monthly principal payments of $133,000 are due through July 2004, which then decrease to $34,000 in August 2004 to maturity.

Sherbrooke Term Loan: This is a seven-year loan secured by all equipment at the Sherbrooke plant. The original amount was $3,600,000 and the balance has been reduced to $3,439,476 at June 1, 2000. Interest due monthly at a variable rate of Libor + 3.5%, which has been fixed at 10.46% by swap agreements. Monthly principal payments of $15,000 are due through July 2004, which then increase to $114,000 in August 2004 to maturity.

(Note: The principal amortization schedules on the Grand Rapids and Sherbrooke term loans together average seven years.)

Pinehurst Payoff Loan: This is a three-year term loan in the original amount of $2.5 million, which arose from the early prepayment of the Pinehurst note on July 31, 1999. While it is cross-collateralized with the other Bank North Capital notes, it is essentially unsecured. The balance at June 1, 2000 was $1,736,456 and interest is at a variable factor of the Prime + 3.5%. Principal is payable in monthly installments of $69,000 through July 2002.

Capital Leases: Two capital leases amounting to $1,832,000 were outstanding at December 31, 1999. Four new capital leases in the aggregate principal amount of $2,925,000 have been added since the start of the year 2000 for equipment purchases, raising the current balance outstanding at May 31, 2000 to approximately $4.7 million. Two additional capital leases totaling approximately $1 million will be executed later this year for the robotics and electron beam curing units that have been purchased for Grand Rapids. The capital leases are secured by specific pieces of equipment only and each has a five-year term, with equal monthly payments at interest rates averaging approximately 10%.


The Company's long track record as a value-added folding carton manufacturer and preferred supplier to leading branded consumer product companies in North America, combined with its status as a certified minority-owned business, has generated numerous new business opportunities since the August 3, 1998 buyout. In the process of evaluating these opportunities, management has determined to "…continue to broaden process capabilities, geographic coverage, manufacturing and people capacity while diversifying our customer base, product portfolio and demographics." (Strategic Growth Plan, January 19, 2000). In this regard, three new business initiatives have been selected which appear to provide the highest likelihood of success with minimal risk. Each of these undertakings is a clear and natural outgrowth from current activities and relies on ACG's proven core competencies. At the same time, they provide excellent growth and improved profitability over the next several years, as demonstrated in the projections shown below (see "Forecasted Operating Results")

  1. Nebraska I is a "product on demand" (POD) facility that is being established in connection with the three-year supply agreement with Iams Manufacturing Company, which began January 1, 2000. Under the agreement, ACG now produces folding cartons in Grand Rapids for Iams's cat litter products, which then are shipped to the customer's plant in Spring Hill, Kansas. Considerable freight savings can be realized by shipping the printed but unfinished, unfolded cartons flat directly to the new POD facility in Albion, Nebraska where they will be folded and glued, then delivered about 10 miles to Iams's Spring Hill plant on a just-in-time basis. It is estimated that the annual freight savings will be approximately $700,000, which will be shared equally by Iams & ACG.

    The POD will be housed in a 28,000 sq. ft. leased facility, for which a 5 year lease has been signed. Shelly Braverman, an experienced ACG manager with 20 years as plant manager with First Brands, has come on board with ACG to supervise the eight employees who are in the process of being hired. One of the six Jagenberg Gluers located in Grand Rapids has been transferred to the POD and became operational on May 8th.

  2. Nebraska II is a full production facility to be located in an 18,000 sq. ft. building adjacent to the POD. This facility will contain a full printing/converting line based around a new Bobst F-650 Mid-Web Flexo printer. Web flexo technology combines many of the positive features offered by gravure printing, such as highly efficient in-line production processes, with the low setup costs and scheduling flexibility of offset lithography. The new facility also will provide greater Company-wide scheduling flexibility, since anything that can be produced in London can also be manufactured at the new Nebraska II facility. The plant will contain two primary pieces of equipment, the Bobst press at a cost of approximately $3.15 million and a new Alpina 75 high speed folder/gluer for $550,000. All other infrastructure costs, etc. are estimated at $500,000, for a total cost of approximately $4.2 million. The equipment has been ordered and the facility is expected to be fully-operational by February 1, 2001. Management believes that the investment in Nebraska II will create an immediate $12 million of new sales capacity, rising to $15 million by 2004 (not including finishing capacity of an additional $3 million).

    The Nebraska II facility is strategically located to serve key customers in new market segments for the Company. In that regard, the facility will contain a "white room" environment for the manufacture of pharmaceuticals, dental packaging and food packaging for customers such as Nabisco, Kellogg, HPC, Masters & Johnson, and Abbott Labs. In addition, discussions currently are under way with Nabisco for the manufacture of tobacco promotional packaging, as well as with Deluxe Checks to produce folding cartons for their bank check printing operation, and with Schlitz Brewery (gluing only), among others. All of these prospective customers (except Unilever HPC,) have a strong minority-spend incentive to do business with ACG and it is expected that some customers will enter into formal supply agreements with the Company. Certain orders already are in-hand which are being produced in ACG-Sherbrooke, pending the full operation of Nebraska II. Based on discussions to date with selected customers, management forecasts the following:

    Nebraska II - Estimated Sales, $000s 2001 2002 2003 2004
    * Hillshire Farms, Deli-Select 2,600 2,800 2,900 3,000
    * Hillshire Farms, Ball Park 2,500 2,750 3,000 3,100
       Kellogg HPC, dental 1,000 2,500 2,600 2,700
       R.J. Nabisco, tobacco 500 750 1,000 1,250
       Ipana US, dental 250 500 750 1,000
       Schlitz Brewery (gluing/value added) 1,500 1,575 1,650 1,736
    * Oral B, dental brush 500 1,250 1,500 1,600
    * Deluxe Checks, financial services 750 1,250 1,750 2,000
    * Aventis (HMR), pharmaceuticals 1,000 1,500 2,000 2,500
          Estimated Annual Sales 10,600 14,875 17,150 18,886

    * Probable long-term supply agreement

  3. Grand Rapids: Gravure Line #3. The third element of the Company's Strategic Plan is the installation of a third complete gravure printing/converting production line in the Grand Rapids plant. A used Zerand 45" 7-color rotogravure press will be purchased and refurbished at an expected cost of $3.5 million. In addition, a new Alpina 110 specialty folder/gluer will be acquired, along with a Fanuc robotics system, thereby resulting in a similar configuration to the two existing gravure lines at the Grand Rapids plant. The total estimated cost of the project, including miscellaneous items, installation costs and infrastructure, amounts to approximately $5,750,000 The new conversion line will be positioned alongside the two existing gravure lines and will support additional annual sales in the range of $25-35 million, depending upon the product mix.

    The new gravure conversion line will be devoted primarily to the Company's "beverage/tobacco strategy," which is a new line of business to produce 6-pack bottle carriers for two direct buyers, Miller (beer) and Seven-Up, as well as for Ball Foster, a bottle manufacturer. The tobacco segment of the strategy is under development and may involve promotional packaging for Nabisco. Gravure Line #3 also will produce packaging for Clorox's P260 antibacterial wipe product, which is an existing product that is being re-sized and re-packaged by the customer. Orders already are in-house under the long-term supply agreement with Clorox and trial runs are being produced on Grand Rapids' other conversion lines.

    Gravure Line #3 -  
          Estimated Sales, $000s 2000 2001 2002 2003 2004
    Pepsico 495 2,000 2,500 3,000 4,000
    Miller 571 2,000 2,300 3,000 4,000
    Ball Foster 250 750 1,500 2,000 2,250
    Clorox P260   150 2,500  3,750  4,000  4,000
          Estimated Annual Sales 1,474 7,250 10,050 12,000 14,250

    All equipment for the Gravure Line #3 will be ordered once long-term contracts are in place for no less than $10 million of annual sales volume. Management anticipates that this objective will be met by January 1, 2001, or sooner if such contracts materialize at an earlier date. The lead time to full installation and validation of the production line is 6-7 months, so the operating forecasts assume an August 1, 2001 startup date.

Joint Venture with Weyerhauser Paper

ACG recently entered into an agreement in principal with Weyerhauser Paper ("WP") to start a new corrugated sheet plant in the Detroit area. The project was initiated by Audi USA, an important customer of WP, which is seeking to develop a minority-owned vendor for its auto parts components packaging purchases. The new company, American Carton Michigan ("ACM"), will satisfy Audi USA's second tier minority-spend goals. It is anticipated that other Daimler Chrysler first tier vendors will be eager to purchase corrugated product from ACM, especially in view of the active support and urging of their important customer. The new company will begin in business later this year with a $2 million annual sales base of "farm-out" volume from WP.

Under the agreement, Weyerhauser Paper will supply all major pieces of equipment to ACM, as well as technical mentoring in the manufacture of corrugated. Experienced key management personnel already have been engaged from outside of SPG to run the operation. The total shareholder investment in ACM is $723,000, of which ACG will contribute $397,650 for a 55% ownership position. The balance of $325,350 will be invested by ACM management and WP. In addition, a $300,000 working capital loan will be advanced by WP Capital, with no recourse of any kind to ACG. The entire capital raise of $1,023,000 is expected to more than cover anticipated losses during the first three years of operation, with attractive returns on investment anticipated thereafter. The $397,650 investment by ACG has been reviewed by Bank North Capital, which has agreed to its drawdown under the Revolving Credit Loan. This capital contribution will be carried on ACG's balance sheet as a one-line investment in accordance with the equity method of accounting.


Management's forecasted operating results for the five years, 2000-2004, are shown on the next page. This includes a quarterly breakdown for the current fiscal year, beginning with actual results of the first quarter ended March 31, 2000. The forecasts are tied closely to the timing of the three projects discussed in the Strategic Plan, especially Nebraska II and Grand Rapids Gravure Line 3, both of which add significant manufacturing capacity in support of additional sales volume. The projections show dramatic increases in profitability made possible by the additional capacity described in the Strategic Plan, as well as the new equipment purchased earlier this year. The allocation of slowly rising fixed costs, direct labor and SG&A over projected increases in Net Sales during the next five years results in the growth of EBITDA from the actual level of $9.0 million in 1999 to $29.4 million in 2004 - an average EBITDA growth rate of 26.7% over the period.

The five-year forecast is based on the following assumptions:

  1. Forecasted Net Sales are based on a detailed sales plan that has been developed by customer, by product and within the constraints of available plant capacity. The degree of certainty of these forecasts is enhanced by the existence of executed supply agreements with major customers, as well as on-going discussions that are expected to lead to additional supply agreements. For reasons of confidentiality in a competitive market place, management has chosen to withhold the detailed sales plan from this document, but the information will be made available to interested lenders upon request. The forecasts assume that the mid-web flexo production facility in Albion, Nebraska is fully operational by February 1, 2001 and that the Grand Rapids Gravure Line #3 is fully operational by August 1, 2002.

  2. Cost of Products Sold reflects management's assessment of product costs based on historical operating experience. These estimates have been adjusted for the anticipated effects of the new equipment that has been recently purchased and installed, as well as the equipment that will be acquired pursuant to the Strategic Plan. The major components of Cost of Products Sold include:

    • Raw Material costs are based on historical experience with the product mix that is anticipated in the sales plan. It is noted that existing long-term supply agreements provide the Company with quarterly price volatility protection, so that dramatic swings either way should be minimized. For this reason, only a 0.5% annual increase in Raw Materials costs after the first year is built into the forecasts.

    • Forecasted direct labor, benefits, electricity and other variable costs are based on their historical relationships to sales. Direct Labor savings of 1% in 2000 are anticipated from the recently-installed equipment in London, followed by another 1% over the remaining four years, primarily from the Fanuc robotic take-off systems in Grand Rapids.

    • Fixed factory expense forecasts are based on current actual costs by plant. These amounts were annualized and adjustments made for the estimated effects of the implementation of Strategic Plan. Depreciation expense for new equipment was projected and added to this expense category. Fixed factory expenses are projected to decline as a percent of sales over the next five years, since sufficient capacity will be in-place with implementation of the Strategic Plan that this category of expenses is not expected to increase meaningfully over the next five years. Fixed factory expenses as a percent of Net Sales are projected to decrease by 1.3% in 2001, with a cumulative decline of 3.7% realized by 2004.

  3. Gross profit is forecasted to increase from 15.9% in 1999 to 17.5% in 2000, primarily as a result of the direct labor reductions discussed above. The margin continues to improve thereafter as additional variable cost reductions are realized from new equipment efficiencies, coupled with the benefit of spreading fixed factory costs over significantly larger sales volumes. The Gross Profit is projected to grow from $14 million in the year 2000 to $29.9 million, or 21% of Net Sales, by 2004.

  4. Selling, General & Administrative (includes reclassified Distribution Expenses) Expenses are based upon first quarter 2000 actual SG&A, which then is annualized. Thereafter, SG&A is grown at the rate of $120,000 for every $5 million of incremental gross sales. It is anticipated that additions in this expense category will be primarily administrative staff to coordinate customer service.

  5. Interest Expense is based on the debt structure described earlier, along with the Proposed Financing. It is assumed that all indebtedness is paid in accordance with its respective terms and that the revolving credit loan is repaid with available cash. It also is assumed that the Subordinated Loan is repaid at the rate of $1 million in the third year, $2 million in the fourth year and $7 million in Year 5.

  6. The income tax rate is assumed to be 38%.

  7. Other Expenses related to ACG Group are projected to be $928,000 in 2000 and $952,000 annually through 2004.

  8. Capital Expenditures to cover maintenance and replacement items beyond the Strategic Plan are assumed at $800,000 in 2002, $1 million in 2003 and $800,000 in 2004.

  9. Accounts Receivable collections are assumed at 33 days, while Accounts Payable are assumed to be paid in an average of 45 days.

Joint Venture with Weyerhauser Paper

ACG recently entered into an agreement in principal with Weyerhauser Paper ("WP") to start a new corrugated sheet plant in the Detroit area. The project was initiated by Audi USA, an important customer of WP, which is seeking to develop a minority-owned vendor for its auto parts components packaging purchases. The new company, American Carton Michigan ("ACM"), will satisfy Audi USA's second tier minority-spend goals. It is anticipated that other Daimler Chrysler first tier vendors will be eager to purchase corrugated product from ACM, especially in view of the active support and urging of their important customer. The new company will begin in business later this year with a $2 million annual sales base of "farm-out" volume from WP.

Under the agreement, Weyerhauser Paper will supply all major pieces of equipment to ACM, as well as technical mentoring in the manufacture of corrugated. Experienced key management personnel already have been engaged from outside of SPG to run the operation. The total shareholder investment in ACM is $723,000, of which ACG will contribute $397,650 for a 55% ownership position. The balance of $325,350 will be invested by ACM management and WP. In addition, a $300,000 working capital loan will be advanced by WP Capital, with no recourse of any kind to ACG. The entire capital raise of $1,023,000 is expected to more than cover anticipated losses during the first three years of operation, with attractive returns on investment anticipated thereafter. The $397,650 investment by ACG has been reviewed by Bank North Capital, which has agreed to its drawdown under the Revolving Credit Loan. This capital contribution will be carried on ACG's balance sheet as a one-line investment in accordance with the equity method of accounting.


The financial model which follows portrays forecasted cash flows over the five years following the closing of the Subordinated Loan, as if it were funded on January 1, 2000. This is a conservative approach to projected debt service coverages and investment returns for two reasons. First, by the time the funding actually takes place in the third quarter of this year, much of the 2000 forecast already will have been realized. Second, the Year 1 operating results shown in the model do not realize any benefits from the Strategic Plan, since Nebraska II is not expected to be fully-operational until February 1, 2001 and Gravure Line #3 will not begin production until mid-2002. The proceeds of the Subordinated Loan will be used initially to pay down the Revolving Credit Loan until needed soon thereafter to fund the two projects. Notwithstanding this careful approach to matching the timing of projected operating results with the funding of the Proposed Financing, the model demonstrates that the pro forma capital structure is easily serviced from the outset. Total debt balances (including capital leases and the Subordinated Loan) at the end of Year 1 are just 2.59 times the forecasted EBITDA for 2000, and reduce rapidly thereafter to 1.34 times in Year 2. Moreover, forecasted 2000 EBITDA is 1.60 times total debt service in Year 1, which increases dramatically thereafter to 2.98 times in Year 2. In addition to these measures of cash flow adequacy, the model demonstrates that the holder of the Subordinated Loan will earn an attractive Internal Rate of Return from the combination 12% fixed interest rate and 10% warrant position during the five-year investment period.

The Proposed Financing represents an attractive, low risk investment opportunity for several reasons. First, all three elements of the Strategic Plan flow easily from the Company's existing activities, for which a track record of long-term success is well-documented. In all three cases, the market segments, customers and products have been identified and certain of the manufacturing and sales activities will occur under long-term supply agreements. All three initiatives - Nebraska I (POD) with Iams; Nebraska II, which will be dedicated new market segments (pharmaceuticals, dental packaging and food packaging); and Gravure Line #3, which will be dedicated to a beverage & tobacco strategy - have been selected by management from among an abundance of new business opportunities that have been presented to ACG since the mid-1998 management buyout. The Company's reputation for excellence and its long-term relationships with the industry's most demanding customers, combined with ACG's status as a minority-owned business, have enabled the management/owners to grow the business significantly over the past 18 months on a more diverse customer base, as well as to improve profitability dramatically from previous levels. The proceeds of the Proposed Financing will permit this growth to continue at a faster pace based on sound, well-planned strategies that are well within the Companies core competencies.