UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to __________
Commission file number 33-97090
ACG HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction 62-1395968
of incorporation or organization) (I.R.S. employer identification number)
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
(State or other jurisdiction of 16-1003976
incorporation or organization) (I.R.S. employer identification number)
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 whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ ------
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants' knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
-----
Aggregate market value of the voting and non-voting common stock of ACG
Holdings, Inc. held by non-affiliates: Not applicable.
ACG Holdings, Inc. has 143,399 shares outstanding of its common stock, $.01 Par
Value, as of May 31, 2002 (all of which are privately owned and not traded on a
public market).
DOCUMENTS INCORPORATED BY REFERENCE
None
INDEX
Page
Referenced
Form 10-K
----------
PART I
Item 1. Business............................................................. 2
Item 2. Properties........................................................... 7
Item 3. Legal Proceedings.................................................... 8
Item 4. Submission of Matters to A Vote of Security Holders.................. 8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters ............................................................. 9
Item 6. Selected Financial Data.............................................. 9
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................13
Item 7A.Quantitative and Qualitative Disclosures About Market Risk...........23
Item 8. Financial Statements and Supplementary Data..........................24
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.................................................51
PART III
Item 10. Directors and Executive Officers ...................................52
Item 11. Executive Compensation..............................................53
Item 12. Security Ownership of Certain Beneficial Owners and Management......58
Item 13. Certain Relationships and Related Transactions......................59
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.....60
Signatures..........................................................68
PART I
Special Note Regarding Forward Looking Statements
This Annual Report on Form 10-K (this "Report") contains forward-looking
statements within the meaning of Section 21E of the Securities Act of 1934.
Discussions containing such forward-looking statements may be found in Items 1,
3, 7 and 7A hereof, as well as within this Report generally. In addition, when
used in this Report, the words "believes," "anticipates," "expects" and similar
expressions are intended to identify forward-looking statements. Forward-looking
statements are subject to a number of risks and uncertainties. Actual results in
the future could differ materially from those described in the forward-looking
statements as a result of many factors outside the control of ACG Holdings, Inc.
("Holdings"), together with its wholly-owned subsidiary, American Color
Graphics, Inc. ("Graphics"), including, but not limited to:
- a failure to achieve improvements in operating efficiency or income
from the consolidation of our operations,
- fluctuations in the cost of paper and other raw materials used,
- changes in the advertising and print markets,
- actions by our competitors, particularly with respect to pricing,
- the financial condition of our customers,
- our financial condition and liquidity,
- the general condition of the United States economy,
- demand for our products and services, and
- the matters set forth in this Report generally.
Consequently, such forward-looking statements should be regarded solely as
our current plans, estimates and beliefs. We do not undertake and specifically
decline any obligation to publicly release the results of any revisions to these
forward-looking statements that may be made to reflect any future events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
ITEM 1. BUSINESS
General
We are a successor to a business that commenced operations in 1926, and are one
of the largest national diversified commercial printers in North America with
nine print plants in eight states and Canada, seven stand-alone premedia
facilities located throughout the United States and one digital visual effects
facility located in California that provides special effects services for the
motion picture industry. We operate primarily in two business segments of the
commercial printing industry: print, (which accounted for approximately 87% of
total sales during the fiscal year ended March 31, 2002 ("Fiscal Year 2002"))
and premedia services conducted through our American Color division (which
accounted for approximately 12% of total sales in Fiscal Year 2002). Our print
business and our premedia services business are both headquartered in Brentwood,
Tennessee. Partnerships affiliated with Morgan Stanley Dean Witter & Co.
("MSDW") currently own 57.7% of the outstanding common stock and 72.7% of the
outstanding preferred stock of Holdings.
Market data used throughout this Report was obtained from industry publications
and internal company estimates. While we believe such information is reliable,
the accuracy of such information has not been independently verified and cannot
be guaranteed.
Financial Information About Industry Segments
See segment disclosure in note 16 of our consolidated financial statements
appearing elsewhere in this Report.
2
Our print business, which accounted for approximately 87%, 86% and 85% of our
sales in Fiscal Year 2002, the fiscal year ended March 31, 2001 ("Fiscal Year
2001") and the fiscal year ended March 31, 2000 ("Fiscal Year 2000"),
respectively, produces retail advertising inserts, comics and other
publications.
Retail Advertising Inserts (86% of print sales in both Fiscal Year 2002 and
Fiscal Year 2001 and 83% in Fiscal Year 2000). We believe that we are one of the
largest printers of retail advertising inserts in the United States. We print
advertising inserts for approximately 270 retailers. Retail advertising inserts
are preprinted advertisements, generally in color, that display products sold by
a particular retailer or manufacturer. Advertising inserts are used extensively
by many different retailers; including discount, department, supermarket, home
center, drug and automotive stores. Inserts are an important and cost effective
means of advertising for these merchants. Advertising inserts are primarily
distributed through insertion in newspapers but are also distributed by direct
mail or in-store by retailers and generally advertise for a specific, limited
sale period. As a result, advertising inserts are both time sensitive and
seasonal.
Comics (8% of print sales in both Fiscal Year 2002 and Fiscal Year 2001 and 11%
in Fiscal Year 2000). We believe that we are one of the largest printers of
comics in the United States. Comics consist of newspaper Sunday comics, comic
insert advertising and comic books. We print Sunday comics for over 200
newspapers in the United States and Canada and print a significant share of the
annual comic book requirements of Marvel Entertainment Group, Inc.
Other Publications (6% of print sales in each of Fiscal Year 2002, Fiscal Year
2001 and Fiscal Year 2000). We print local newspapers, TV guide listings and
other publications.
In the last quarter of Fiscal Year 2001, the print segment began to present
postage revenue in sales as opposed to netting postage revenue against the
related postage costs within cost of sales. This presentation is consistent with
the requirements of Emerging Issues Task Force 00-10 "Accounting for Shipping
and Handling Fees and Costs" ("EITF 00-10"). Under EITF 00-10, the netting of
revenues and expenses associated with shipping and handling is no longer
permitted. The print segment's financial information for Fiscal Year 2001 and
Fiscal Year 2000 has been reclassified to conform with this presentation.
Print Production
Our network of nine print plants in the United States and Canada is
strategically well positioned to service our customers, providing us with
distribution efficiencies and shorter turnaround times, two factors that we
believe will allow our continuing success in servicing large national and
regional accounts. There are primarily three printing processes used to produce
advertising inserts and newspaper supplements: offset lithography (heatset and
cold), rotogravure and flexography. We principally use heatset offset and
flexographic web printing equipment in our print operations. We own the majority
of our printing equipment, which currently consists of 48 heatset offset
presses, 2 coldset offset presses and 11 flexographic presses. Most of our
advertising inserts, publications and comic books are printed using the offset
process, while substantially all of our newspaper Sunday comics and comic
advertising inserts are printed using the flexographic process.
In the heatset offset process, the desired printed images are distinguished
chemically from the non-image areas of a metal plate. This 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. Once printed, the web goes through
an oven that evaporates the solvents from the ink, thereby setting the ink on
the paper. In the cold offset process, inks are set by the absorption of
solvents into the paper. Due to the drying process, the heatset offset process
can be utilized on a wide variety of papers. Generally, heatset offset presses
have the ability to provide a more colorful and attractive product than cold
offset presses.
The flexographic process differs from offset printing in that it utilizes relief
image plates and 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.
3
In addition to press capacity, certain equipment parameters are critical to
competing in the advertising insert market, including cut-off length, folder
capabilities and certain in-line and off-line finishing capabilities. Cut-off
length is one of the determinants of the size of the printed page. 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.
As is reflective of our national account status, we believe we are one of the
United States' largest mailers. In combination with our national account status
with the United States Postal Service and our experience in such areas as list
services, addressing accuracy and postal service, we are able to offer
distribution and mailing services that help to maximize the advertising impact
and financial return for our customers.
Premedia Services
Our premedia services business is conducted by our American Color division
("American Color") which accounted for approximately 12%, 13% and 14% of our
Fiscal Year 2002, Fiscal Year 2001 and Fiscal Year 2000 sales, respectively. 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 these services nationwide within our print plants, our seven stand-alone
service locations and through our managed services sites (premedia service
facilities at a customer location). We assist customers in the capture,
manipulation, transmission and distribution of images. The majority of this work
leads to the production of a four-color image in a format appropriate for use by
printers 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 four-color images. From these digital files,
proofs, final corrections, and finally, four-color films or digital files are
produced for each page. The final four-color films or digital files enable
printers to prepare plates for each color resulting in the appearance of full
color on the printed page generated. Our revenue from these traditional services
is being supplemented by additional revenue sources including digital asset
management, managed services, computer-to-plate services, creative services,
conventional and digital photography, consulting and training services,
multimedia and internet services, and software and data-base management. We have
been a leader in implementing these new technologies, which enables us to reduce
unit costs and effectively service the increasingly complex demands of our
customers more quickly than many of our competitors. We have also been one of
the leaders in the integration of electronic page make-up, desktop
computer-based design and layout, and digital cameras into premedia production.
The premedia services industry is highly fragmented, primarily consisting of
smaller local and regional companies, with only a few national full-service
premedia companies such as American Color, none of which has a significant
nationwide market share.
Competitive Advantages and Strategy
Competitive Advantages. We believe that we have the following competitive
advantages in our print and premedia services businesses:
Modern Equipment. We believe that our web heatset offset and flexographic web
printing equipment is generally among the most advanced in the industry and that
the average age of our equipment is significantly less than the majority of our
regional competitors and is comparable to our major national competitors. We
incorporate technological changes as they occur in order to enhance our process
controls and improve our quality. We acquire auxiliary equipment when
appropriate to increase our product offerings and lower our costs. We are also
committed to a comprehensive, long-term maintenance program, which enhances the
reliability and extends the life of our presses and other production equipment.
We also believe that our premedia equipment is significantly more advanced than
many of our smaller regional competitors, many of whom have not incorporated
digital premedia technologies and computer-to-plate services to the same extent
as we have, nor adopted an open systems environment which allows greater
flexibility and more efficient maintenance.
4
Strong Customer Base. We provide printing services to a diverse base of
customers, including approximately 270 retailers and over 200 newspapers in the
United States and Canada. Our print services customer base includes a
significant number of the major national retailers and larger newspaper chains
as well as numerous smaller regional retailers. Our consistent focus on
providing high quality print products and strong customer service at competitive
prices has resulted in long-term relationships with many of these customers. Our
premedia services customer base includes large and medium-sized customers in the
retail, publishing, catalog and packaging businesses, many of whom also have
long-term relationships with our print segment. We have been successful in
continuing to increase the proportion of our business under long-term contracts.
Competitive Cost Structure. We have reduced the variable and fixed costs of
production at our print facilities over the past several years and believe we
are well positioned to maintain our competitive cost structure in the future due
to economies of scale. We have also reduced manufacturing costs and selling,
general and administrative expenses in our premedia services business primarily
through the application of certain digital premedia production methodologies,
facility consolidation and continued cost containment focus.
Strong Management Team. Our experienced print management group maintains a clear
focus on our customers, growth, quality and continued cost reduction, resulting
in an improved cost structure and a well-defined strategy for future expansion.
Our management group in the premedia services business consists of individuals
who we believe will manage the premedia services business for growth and
profitability and will continue to upgrade our capabilities.
National Presence. We believe our eight print plants in the United States and
one plant in Canada provide us with distribution efficiencies, strong customer
service, flexibility and short turnaround times, all of which are instrumental
in our continued success in servicing our large national and regional retail
accounts. Our sales and marketing groups provide the necessary customer coverage
and enable us to successfully penetrate regional markets. We believe that our
premedia services facilities provide us with contingency capabilities, increased
capacity during peak periods, access to highly skilled technical personnel
throughout the country, short turnaround time and other customer service
advantages.
Strategy. Our objective is to increase shareholder value by growing our
revenues, increasing our market share and reducing costs. Our strategy to
achieve this objective is as follows:
Grow Unit Volume. We believe that our level of national sales coverage, when
coupled with our significant industry experience and customer-focused sales
force, will result in unit growth. In an effort to stimulate unit volume growth,
we have strengthened our print sales group. Unit volume growth is also expected
to result from continued capital expansion and selective print acquisitions. In
addition, in our premedia services business, we have strengthened our sales
force, provided expanded training, and more closely focused our marketing
efforts on new, larger customers.
Improve Customer and Product Mix. We intend to increase our share of the retail
advertising insert market. In addition, we expect to continue to adjust the mix
of our customers and products within the retail advertising insert market to
those that are more profitable and less seasonal and to maximize the use of our
equipment. We are also continuing expansion of our print facilities'
capabilities for in-plant prepress and postpress services. Our premedia services
business will continue to focus on high value-added new business opportunities,
particularly large-scale projects that will best utilize the breadth of services
and technologies we have to offer. Additionally, we will continue to pursue
large scale managed services opportunities as well as national and large
regional customers that require more sophisticated levels of service and
technologies.
Reduce Manufacturing Costs and Improve Quality. We intend to further reduce our
production costs at our print and premedia service facilities through our Total
Quality Management Process, an ongoing cost reduction and continuous quality
improvement process. Additionally, we plan to continue to maximize scale
advantages in the purchasing, technology and engineering areas. We also intend
to continue to gain variable cost efficiencies in our premedia services business
by using our technical resources to improve digital premedia workflows. In
addition, we believe we will be able to reduce our per unit technical, sales and
management costs as we increase sales in this business.
Make Opportunistic Acquisitions. An integral part of our long-term growth
strategy includes a plan to selectively assess and acquire other print and
premedia services companies that we believe will enhance our leadership position
in these industries.
5
Restructuring
In January 2002, our Board of Directors approved a restructuring plan for our
print and premedia services segments. This plan included the closing of one
print and one premedia facility, the downsizing of another premedia facility and
the relocation of certain equipment and personnel within our company. This plan
was designed to improve asset utilization, operating efficiency and
profitability. See note 14 to our consolidated financial statements appearing
elsewhere in this Report.
Customers and Distribution
Customers. We sell our print products and services to a large number of
customers, primarily retailers and newspapers, and all of our products are
produced in accordance with customer specifications. We perform approximately
44% 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. Print prices are generally fixed during such
commitments; however, our standard terms of trade call for the pass-through of
changes in the price of raw materials, primarily paper and ink.
Our premedia services customers consist of magazine and newspaper publishers,
retailers, catalog sales organizations, printers, consumer products companies,
packaging manufacturers, advertising agencies and direct mail advertisers. Our
customers typically have a need for high levels of technical expertise, short
turnaround times and responsive customer service. In addition to our historical
regional customer base, our premedia services business is increasingly focused
on larger, national accounts that have a need for a broad range of fully
integrated services and communication capabilities requiring leading edge
technology.
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, managed
services and speed to market become more 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 2002. Our top ten customers accounted for approximately 50%
of our consolidated sales in Fiscal Year 2002.
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.
Competition
Commercial printing in the United States is a large, highly fragmented,
capital-intensive industry and we compete with numerous national, regional and
local printers. A trend of industry consolidation in recent years can be
attributed to (1) customer preferences for larger printers with a greater range
of services, (2) capital requirements and (3) competitive pricing pressures. We
believe that competition in the print business is based primarily on quality and
service at a competitive price.
American Color competes with numerous premedia services firms on both a national
and regional basis. The industry is highly fragmented, primarily consisting of
smaller local and regional companies, with only a few national full-service
premedia companies such as American Color, none of which has a significant
nationwide market share.
6
Raw Materials
The primary raw materials used in our print business are paper and ink. During
Fiscal Year 2000, paper prices were on average at lower levels than comparable
periods in the prior year. Throughout Fiscal Year 2001, the cost of paper
increased. In Fiscal Year 2002, demand for advertising declined, resulting in
reduced paper requirements. The reduction in paper requirements resulted in a
decline in paper prices throughout the year. Management expects that, as a
result of our strong relationships with key suppliers, our material costs will
remain competitive within the industry. In accordance with industry practice, we
generally pass through increases in the cost of paper to customers in the costs
of our printed products, while decreases in paper costs generally result in
lower prices to customers. We purchase all of our ink and related products under
long-term ink supply contracts. The primary inputs in premedia service processes
are film and proofing materials.
In both of our business segments, there is an adequate supply of the necessary
materials available from multiple vendors. We are not dependent on any single
supplier and have had no significant problems in the past obtaining necessary
raw materials.
Seasonality
Some of our print and premedia services business is seasonal in nature,
particularly those revenues derived from advertising inserts. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Seasonality" appearing elsewhere in this Report.
Backlog
Because our print and premedia services products are required to be delivered
soon after final customer orders are received, we do not experience any backlog
of unfilled customer orders.
Employees
As of April 30, 2002, we had a total of approximately 2,430 employees, of which
approximately 230 employees are represented by a collective bargaining agreement
that will expire on December 31, 2004. We consider our relations with our
employees to be excellent.
Governmental and Environmental Regulations
We are subject to regulation under various federal, state and local laws
relating to employee safety and health, and to the generation, storage,
transportation, disposal and emission into the environment of hazardous
substances. We believe that we are in material compliance with such laws and
regulations. Although compliance with such laws and regulations in the future is
likely to entail additional capital expenditures, we do not anticipate that such
expenditures will be material. See "Legal Proceedings - Environmental Matters"
appearing elsewhere in this Report.
ITEM 2. PROPERTIES
We operate in 17 locations in 12 states and Canada. We own seven print plants in
the United States and one in Canada and lease one print plant in California. Our
American Color division has seven stand-alone production locations, all of which
are leased. Our American Color division also operates premedia services
facilities on the premises of several of our customers ("managed services") and
in each of our print plants. In addition, we maintain one small executive office
in Connecticut, a digital visual effects facility in California and our
headquarter facility in Brentwood, Tennessee, all of which are leased. We
believe that our plants and facilities are adequately equipped and maintained
for present and planned operations.
7
ITEM 3. LEGAL PROCEEDINGS
We have been named as a defendant in several legal actions arising from our
normal business activities. In the opinion of management, any liabilities that
may arise from such actions will not, individually or in the aggregate, have a
material adverse effect on our financial condition or results of operations.
Environmental Matters
Graphics, together with over 300 other persons, has been designated by the U.S.
Environmental Protection Agency as a potentially responsible party (a "PRP")
under the Comprehensive Environmental Response Compensation and Liability Act
("CERCLA," also known as "Superfund") at one Superfund site. Although liability
under CERCLA may be imposed on a joint and several basis and our ultimate
liability is not precisely determinable, the PRPs have agreed that Graphics'
share of removal costs is approximately 0.46% and therefore Graphics believes
that its share of the anticipated remediation costs at such site will not be
material to its business or financial condition. Based upon an analysis of
Graphics' volumetric share of waste contributed to the site and the agreement
among the PRPs, we maintain a reserve of approximately $0.1 million in
connection with this liability on our consolidated balance sheet at March 31,
2002. We believe this amount is adequate to cover such liability.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Market Information
------------------
There is no established public market for the common stock of either
Holdings or Graphics.
Holders
-------
As of May 31, 2002, there were approximately 98 record holders of Holdings'
common stock. Holdings is the sole shareholder of Graphics' common stock.
Dividends
---------
There have been no cash dividends declared on any class of common equity for
the two most recent fiscal years. See restrictions on Holdings' ability to
pay dividends and Graphics' ability to transfer funds to Holdings in note 1
to our consolidated financial statements appearing elsewhere in this Report.
Recent Sales of Unregistered Securities
---------------------------------------
During the first and third quarters of Fiscal Year 2000, certain officers
exercised options to purchase an aggregate of 8,143 and 1,106 shares of
Holdings stock, respectively, for $.01/share. The securities that were sold
were exempt from registration on the basis that all such officers are
"accredited investors" as defined by the rules of the Securities Act of
1933, as amended.
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is selected financial data for and as of the fiscal years ended
March 31, 2002, 2001, 2000, 1999 and 1998. The balance sheet data as of March
31, 2002, 2001, 2000, 1999 and 1998 and the statement of income data for the
fiscal years ended March 31, 2002, 2001, 2000, 1999 and 1998 are derived from
the audited consolidated financial statements for such periods and at such
dates. The selected financial data below, for the fiscal year ended March 31,
1998, also reflects our discontinued wholly-owned subsidiary, Sullivan Media
Corporation ("SMC").
This data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements appearing elsewhere in this Report.
9
Selected Financial Data
ACG Holdings, Inc.
Fiscal Year Ended March 31,
----------------------------------------------------------------
2002 2001 2000 1999 1998
----------------------------------------------------------------
Statement of Income Data: (Dollars in thousands)
Sales $ 542,421 606,039 554,282 520,343 533,335
Cost of Sales 465,448 508,188 464,017 439,091 461,407
--------- --------- --------- --------- ---------
Gross Profit 76,973 97,851 90,265 81,252 71,928
Selling, general and administrative expenses (a) 37,961 44,232 44,181 46,333 54,227
Restructuring costs and other special charges (b) 12,920 -- -- 5,464 5,598
--------- --------- --------- --------- ---------
Operating income 26,092 53,619 46,084 29,455 12,103
Interest expense, net 29,806 32,929 33,798 36,077 38,813
Other expense 637 1,194 627 1,217 412
Income tax expense (benefit) (c) (5,073) (4,927) 2,189 523 2,106
--------- --------- --------- --------- ---------
Income (loss) from continuing operations
before extraordinary items 722 24,423 9,470 (8,362) (29,228)
--------- --------- --------- --------- ---------
Discontinued operations: (d)
Estimated loss on shut down, net of tax -- -- -- -- (667)
Extraordinary loss on early extinguishment of
debt (e) -- -- -- (4,106) --
--------- --------- --------- --------- ---------
Net income (loss) $ 722 24,423 9,470 (12,468) (29,895)
========= ========= ========= ========= =========
Balance Sheet Data (at end of period):
Working capital (deficit) $ (865) 15,288 (2,973) (5,451) 11,610
Total assets $ 280,513 302,202 303,812 299,000 329,958
Long-term debt and capitalized leases,
including current installments $ 252,792 261,706 277,344 289,589 319,657
Stockholders' deficit $ (96,020) (85,867) (109,389) (119,306) (106,085)
Other Data:
Net cash provided by operating activities $ 38,216 40,913 38,774 48,137 18,257
Net cash used by investing activities $ (16,493) (19,006) (24,145) (10,364) (10,100)
Net cash used by financing activities $ (17,189) (21,968) (14,576) (37,812) (8,143)
Capital expenditures (including lease $ 24,550 25,271 22,724 16,238 23,713
obligations entered into)
Ratio of earnings to fixed charges (f) 1.56x 1.32x (f) (f)
EBITDA (g) $ 61,573 88,305 80,007 64,286 52,367
10
NOTES TO SELECTED FINANCIAL DATA
(a) For the fiscal year ended March 31, 1998 ("Fiscal Year 1998") selling,
general and administrative expense includes $1.5 million of non-recurring
American Color charges associated with the relocation of American Color's
corporate office and various severance related expenses and $0.6 million of
non-cash charges associated with an employee benefit program.
(b) In January 2002, we approved a restructuring plan for our print and American
Color divisions, 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.
In March 1999, we approved a restructuring plan for our American Color
division, which was designed to consolidate certain facilities in order to
improve asset utilization and operational efficiency, modify the
organizational structure as a result of facility consolidation and other
changes and reduce overhead and other costs. We recorded $4.6 million of
costs under this plan in the fiscal year ended March 31, 1999 ("Fiscal Year
1999").
In January 1998, we approved a restructuring plan for our print division
designed to improve responsiveness to customer requirements, increase asset
utilization and reduce overhead costs. We recorded $3.9 million of costs
under this plan in Fiscal Year 1998.
In addition, we recorded $4.3 million, $0.9 million and $1.7 million of
other special charges related to asset write-offs and write-downs in our
print and American Color divisions in Fiscal Year 2002, Fiscal Year 1999 and
Fiscal Year 1998, respectively. See note 14 to our consolidated financial
statements appearing elsewhere in this Report for further discussion of
Fiscal Year 2002 and 1999 restructuring activity.
(c) In the fourth quarter of Fiscal Year 2002, the valuation allowance for
deferred tax assets was reduced by $5.5 million, resulting in a
corresponding credit to deferred income tax expense. This adjustment
reflected a change in circumstances which resulted in a judgment that a
corresponding amount of our deferred tax assets will be realized in future
years. The valuation allowance decreased by $0.1 million during Fiscal Year
2002 as a result of changes in the deferred tax items. This decrease
primarily includes the $5.5 million decrease discussed above and a $4.2
million increase related to the tax effect of the minimum pension liability,
which is a component of other comprehensive income.
(d) In February of the fiscal year ended March 31, 1997, we made a strategic
decision to shut down the operation of our wholly-owned subsidiary SMC.
SMC's shut down has been accounted for as a discontinued operation, and
accordingly, SMC's operations are segregated in our consolidated financial
statements.
(e) As part of a refinancing transaction entered into on May 8, 1998 (the "1998
Refinancing"), we recorded an extraordinary loss related to early
extinguishment of debt of $4.1 million, net of zero taxes. This
extraordinary loss primarily consisted of the write-off of deferred
financing costs related to refinanced indebtedness in Fiscal Year 1999.
(f) The deficiency in earnings required to cover fixed charges for the fiscal
years ended March 31, 2002, 1999 and 1998 was $4,351, $7,839 and $27,122,
respectively. The deficiency in earnings to cover fixed charges is computed
by subtracting earnings before fixed charges, income taxes, discontinued
operations and extraordinary items from fixed charges. Fixed charges consist
of interest expense and one-third of operating lease rental expense, which
is deemed to be representative of the interest factor. The deficiency in
earnings required to cover fixed charges includes non-cash depreciation of
property, plant and equipment and amortization of goodwill and other assets
and other non-cash charges which are reflected in the financial statements,
in the following amounts (in thousands):
Fiscal Year Ended March 31,
----------------------------------------
2002 1999 1998
----------- ---------- ----------
Depreciation $ 27,024 $ 29,651 $ 28,124
Amortization 4,175 4,025 10,413
Non-cash charges 4,723 945 2,301
----------- ---------- ----------
Total $ 35,922 $ 34,621 $ 40,838
=========== ========== ==========
11
(g) EBITDA is included in the Selected Financial Data because we believe that
investors regard EBITDA as a key measure of a leveraged company's
performance and ability to meet its future debt service requirements. EBITDA
is defined as earnings before net interest expense, income tax expense
(benefit), depreciation, amortization, other non-cash expenses, other
special charges related to asset write-offs and write-downs, other expense
(income), discontinued operations and extraordinary items. EBITDA is not a
measure of financial performance under generally accepted accounting
principles and should not be considered an alternative to net income (or any
other measure of performance under generally accepted accounting principles)
as a measure of performance or to cash flows from operating, investing or
financing activities as an indicator of cash flows or as a measure of
liquidity. Certain covenants in the Indenture dated as of August 15, 1995
and the bank credit agreement entered into in May 1998 are based on EBITDA,
subject to certain adjustments.
EBITDA in Fiscal Year 2002 includes restructuring costs related to the print
and American Color divisions of $6.5 million and $2.1 million, respectively.
EBITDA in Fiscal Year 2000 includes $0.5 million of non-recurring costs
associated with the consolidation of certain production facilities at the
American Color division.
EBITDA in Fiscal Year 1999 includes $4.6 million in restructuring costs
related to the American Color division, $0.6 million of non-recurring costs
associated with the consolidation of certain production facilities at the
American Color division, $0.3 million of non-recurring employee termination
expenses and $0.2 million of non-cash charges associated with an employee
benefit program.
EBITDA in Fiscal Year 1998 includes $3.9 million in restructuring costs
related to the print division, $1.5 million of non-recurring charges
associated with the relocation of American Color's corporate office and
various severance related expenses, and $0.7 million of certain charges
associated with employee benefit programs.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Print. Commercial printing in the United States is highly competitive. The
significant capital required to keep pace with changing technology and
competitive pricing trends has led to a trend of industry consolidation in
recent years. In addition, customers' preferences for larger printers, such as
our company, with a wider variety of services, greater distribution
capabilities, critical scale and more flexibility have also contributed to
consolidation within the industry. The industry is expected to remain
competitive in the near future and our sales will continue to be subject to
changes in retailers' demands for printed products.
The cost of paper is a principal factor in our overall pricing to our customers.
The level of paper costs also has a significant impact on our reported sales.
During Fiscal Year 2000, paper prices were on average at lower levels than
comparable periods in the previous year. Throughout Fiscal Year 2001, the cost
of paper increased. In Fiscal Year 2002, demand for advertising declined,
resulting in reduced paper requirements. The reduction in paper requirements
resulted in a decline in paper prices throughout the year. In accordance with
industry practice, we generally pass through increases in the cost of paper to
customers in the costs of our printed products, while decreases in paper costs
generally result in lower prices to customers.
In recent years, comprehensive quality improvement and cost reduction programs
have been implemented for all our printing processes. As a result of these
measures, we have been successful in lowering our manufacturing costs within the
print segment, while improving product quality.
American Color (Premedia Services). The premedia services industry has
experienced significant technological advances as electronic digital premedia
systems have replaced the more manual and photography-based methods utilized in
the past. Over the last several years, this shift in technology, which improved
process efficiencies and reduced processing costs, produced increased unit
growth for American Color as the demand for color pages increased. Selling price
levels per page, however, have declined because of greater efficiencies
resulting from technological advancements. Revenue from traditional services is
being supplemented by additional revenue sources including digital asset
management, managed services, computer-to-plate services, creative services,
conventional and digital photography, consulting and training services,
multimedia and internet services, and software and data-base management.
13
The following table summarizes our historical results of continuing operations
for Fiscal Years 2002, 2001 and 2000:
Fiscal Year Ended March 31,
---------------------------------------------
2002 2001 2000
-------- -------- ---------
(Dollars in thousands)
Sales
Print $ 473,915 519,961 470,458
American Color 65,293 80,060 80,240
Other (a) 3,213 6,018 3,584
--------- --------- ---------
Total 542,421 606,039 554,282
========= ========= =========
Gross Profit
Print $ 62,673 74,745 73,572
American Color 15,130 22,856 17,971
Other (a) (830) 250 (1,278)
--------- --------- ---------
Total $ 76,973 97,851 90,265
========= ========= =========
Gross Margin
Print 13.2% 14.4% 15.6%
American Color 23.2% 28.6% 22.4%
Total 14.2% 16.2% 16.3%
Operating Income (Loss)
Print (b) $ 31,148 49,918 49,446
American Color (b) 2,805 11,409 4,883
Other (a) (c) (7,861) (7,708) (8,245)
--------- --------- ---------
Total $ 26,092 53,619 46,084
========= ========= =========
(a) Other operations primarily include revenues and expenses associated with our
digital visual effects business ("Digiscope").
(b) Print and American Color operating income in Fiscal Year 2002 includes the
impact of restructuring costs of $6.5 million and $2.1 million,
respectively. Print and American Color operating income in Fiscal Year 2002
also includes $3.9 million and $0.4 million of other special charges related
to non-cash asset write-offs and write-downs, respectively. See
"Restructuring Costs and Other Special Charges" below. American Color's
operating income also includes $0.6 million of non-recurring charges in
Fiscal Year 2000 associated with the consolidation of certain production
facilities.
(c) Also includes corporate general and administrative expenses, and
amortization expense.
14
Historical Results of Operations
Fiscal Year 2002 vs. Fiscal Year 2001
Total sales decreased 10.5% to $542.4 million in Fiscal Year 2002 from $606.0
million in Fiscal Year 2001. This decrease primarily reflects a decrease in
print sales of $46.1 million, or 8.9%, and a decrease in American Color's sales
of $14.8 million, or 18.4%. Total gross profit decreased to $77.0 million, or
14.2% of sales, in Fiscal Year 2002 from $97.9 million, or 16.2% of sales, in
Fiscal Year 2001. Total operating income decreased to $26.1 million, or 4.8% of
sales, in Fiscal Year 2002 from $53.6 million, or 8.8% of sales, in Fiscal Year
2001. See the discussion of these changes by segment below.
In the fourth quarter of Fiscal Year 2001, the print segment began to present
postage revenue in sales as opposed to netting postage revenue against the
related postage costs within cost of sales. This presentation is consistent with
the requirements of EITF 00-10. Under EITF 00-10, the netting of revenues and
expenses associated with shipping and handling is no longer permitted. The
financial information for Fiscal Year 2001 and Fiscal Year 2000 has been
reclassified to conform with this presentation.
Sales. Print sales decreased $46.1 million to $473.9 million in Fiscal Year 2002
from $520.0 million in Fiscal Year 2001. The decrease in Fiscal Year 2002
includes a 6.9% decrease in print production volume, a decrease in postage
revenues, an increase in customer supplied paper and the impact of declining
paper prices. The reduced production volume is largely attributable to weakness
in the retail industry and the corresponding reduction in demand for printing as
a result of reduced advertising spending during Fiscal Year 2002. In response to
the current economic conditions, we have consolidated production. See the
discussion of the January 2002 restructuring plan below under "Restructuring
Costs and Other Special Charges".
Gross Profit. Print gross profit decreased $12.0 million to $62.7 million in
Fiscal Year 2002 from $74.7 million in Fiscal Year 2001. Print gross margin
decreased to 13.2% in Fiscal Year 2002 from 14.4% in Fiscal Year 2001. The
decreases in gross profit and gross margin are largely related to the decreased
print production volume and certain changes in product and customer mix.
Selling, General and Administrative Expenses. Print selling, general and
administrative expenses decreased $3.6 million to $21.2 million, or 4.5% of
print sales, in Fiscal Year 2002, from $24.8 million, or 4.8% of print sales, in
Fiscal Year 2001. This decrease includes the impact of decreases in certain
selling and employee related expenses.
Operating Income. As a result of the above factors and the incurrence of
restructuring and other special charges associated with the January 2002
restructuring plan of $10.4 million in Fiscal Year 2002 (see "Restructuring
Costs and Other Special Charges" below), operating income from the print
business decreased $18.8 million to $31.1 million in Fiscal Year 2002 from $49.9
million in Fiscal Year 2001.
American Color (Premedia Services)
Sales. American Color's sales decreased $14.8 million to $65.3 million in Fiscal
Year 2002 from $80.1 million in Fiscal Year 2001. The decrease in Fiscal Year
2002 was primarily the result of reduced premedia production volume. The reduced
volume includes the impact of the economic slowdown and related weakness in
demand for advertising during Fiscal Year 2002. See the discussion of the
January 2002 restructuring plan below under "Restructuring Costs and Other
Special Charges".
Gross Profit. American Color's gross profit decreased $7.8 million to $15.1
million in Fiscal Year 2002 from $22.9 million in Fiscal Year 2001. American
Color's gross margin decreased to 23.2% in Fiscal Year 2002 from 28.6% in Fiscal
Year 2001. The decreases in gross profit and gross margin are primarily the
result of reduced premedia production volume, offset in part by reduced
manufacturing costs due to the continuance of various cost containment programs
at the production facilities.
15
Selling, General and Administrative Expenses. American Color's selling, general
and administrative expenses decreased $1.6 million to $9.8 million, or 15.0% of
American Color's sales in Fiscal Year 2002, from $11.4 million, or 14.3% of
American Color's sales in Fiscal Year 2001. This decrease includes the impact of
decreases in certain selling and employee related expenses.
Operating Income. As a result of the above factors and the incurrence of
restructuring and other special charges associated with the January 2002
restructuring plan of $2.5 million in Fiscal Year 2002 (see "Restructuring Costs
and Other Special Charges" below), operating income at American Color decreased
$8.6 million to $2.8 million in Fiscal Year 2002 from $11.4 million in Fiscal
Year 2001.
Fiscal Year 2001 vs. Fiscal Year 2000
Total sales increased 9.3% to $606.0 million in Fiscal Year 2001 from $554.3
million in Fiscal Year 2000. This increase is primarily attributable to an
increase in print sales of $49.5 million, or 10.5%. Total gross profit increased
to $97.9 million, or 16.2% of sales, in Fiscal Year 2001 from $90.3 million, or
16.3% of sales, in Fiscal Year 2000. Total operating income increased to $53.6
million, or 8.8% of sales, in Fiscal Year 2001 from $46.1 million, or 8.3% of
sales, in Fiscal Year 2000. See the discussion of these changes by segment
below.
Sales. Print sales increased $49.5 million to $520.0 million in Fiscal Year 2001
from $470.5 million in Fiscal Year 2000. The increase in Fiscal Year 2001
primarily includes the impact of increased paper prices and postage revenues and
a slight increase in production volume.
Gross Profit. Print gross profit increased $1.1 million to $74.7 million in
Fiscal Year 2001 from $73.6 million in Fiscal Year 2000. Print gross margin
decreased to 14.4% in Fiscal Year 2001 from 15.6% in Fiscal Year 2000. The
increase in gross profit includes the impact of reduced manufacturing costs and
increased production volume. The decrease in gross margin is primarily
attributable to the impact of increased paper prices reflected in sales.
Selling, General and Administrative Expenses. Print selling, general and
administrative expenses increased to $24.8 million, or 4.8% of print sales, in
Fiscal Year 2001 from $24.1 million, or 5.1% of print sales, in Fiscal Year
2000. This increase includes increases in certain selling and employee related
expenses, offset in part by a reduction in pension costs.
Operating Income. As a result of the above factors, operating income from the
print business increased to $49.9 million in Fiscal Year 2001 from $49.4 million
in Fiscal Year 2000.
American Color (Premedia Services)
Sales. American Color's sales of $80.1 million in Fiscal Year 2001 approximated
sales of $80.2 million in Fiscal Year 2000.
Gross Profit. American Color's gross profit increased $4.9 million to $22.9
million in Fiscal Year 2001 from $18.0 million in Fiscal Year 2000. American
Color's gross margin increased to 28.6% in Fiscal Year 2001 from 22.4% in Fiscal
Year 2000. These increases are primarily the result of reduced manufacturing
costs related to various cost containment programs and the consolidation of
certain production sites. Fiscal Year 2000 included $0.6 million of
non-recurring costs associated with the consolidation of certain production
sites.
Selling, General and Administrative Expenses. American Color's selling, general
and administrative expenses decreased to $11.4 million, or 14.3% of American
Color's sales in Fiscal Year 2001, from $13.1 million, or 16.3% of American
Color's sales in Fiscal Year 2000. These decreases include the impact of various
cost containment programs implemented during Fiscal Year 2000.
Operating Income. As a result of the above factors, operating income at American
Color increased $6.5 million to $11.4 million in Fiscal Year 2001 from $4.9
million in Fiscal Year 2000.
16
Other Operations (Fiscal Year 2002 vs. Fiscal Year 2001 and Fiscal Year 2001 vs.
Fiscal Year 2000)
Other operations consist primarily of revenues and expenses associated with
Digiscope and corporate general, administrative and other expenses, including
amortization expense.
Operating losses from other operations increased to a loss of $7.9 million in
Fiscal Year 2002 from a loss of $7.7 million in Fiscal Year 2001. This change
includes a $0.8 million increase in operating losses at Digiscope due primarily
to lower digital visual effects production volume, offset in part by decreases
in certain corporate general and administrative expenses.
Operating losses from other operations improved to a loss of $7.7 million in
Fiscal Year 2001 from a loss of $8.2 million in Fiscal Year 2000. This change
includes a $1.4 million decrease in operating losses at Digiscope due primarily
to higher digital visual effects production volume, offset in part by increases
in certain corporate general and administrative expenses and increased
amortization expense.
Non-cash amortization expenses (which primarily includes goodwill amortization)
within other operations, were $3.0 million, $3.2 million and $2.8 million in
Fiscal Years 2002, 2001 and 2000, respectively.
Restructuring Costs and Other Special Charges
Restructuring Costs
In January 2002, our Board of Directors approved a restructuring plan for our
print and premedia services segments designed to improve asset utilization,
operating efficiency and profitability. This plan included the closing of our
print facility in Hanover, Pennsylvania and our premedia services facility in
West Palm Beach, Florida, the downsizing of our Buffalo, New York premedia
services facility and the elimination of certain administrative personnel. This
action resulted in the elimination of 189 positions within our company.
As a result of this plan, we recorded a pretax restructuring charge of
approximately $8.6 million in the fourth quarter of Fiscal Year 2002. This
charge is classified within restructuring costs and other special charges in our
consolidated statement of income in Fiscal Year 2002. The cost of this
restructuring plan has been accounted for in accordance with the guidance set
forth in Emerging Issues Task Force Issue 94-3 "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring)" ("EITF 94-3"). The
restructuring charge includes 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
provide no future use or functionality.
The following table summarizes the activity related to this restructuring plan
for Fiscal Year 2002 (in thousands):
03/31/02
Restructuring Restructuring
Charges Activity Reserve
------------- -------- -------------
Severance and other employee costs $ 5,065 (1,546) 3,519
Lease termination costs 1,517 (228) 1,289
Equipment deinstallation costs 1,010 (1,010) --
Other costs 1,046 (623) 423
------- ------ -----
$ 8,638 (3,407) 5,231
======= ====== =====
As of March 31, 2002, we believe the restructuring reserve of $5.2 million is
adequate. The process of closing two facilities and downsizing one facility,
including equipment deinstallation and relocation of that equipment to other
facilities, was completed by March 31, 2002. The majority of all remaining costs
will be paid or settled before March 31, 2003. These costs will be funded
through cash generated from operations and borrowings under our Revolving Credit
Facility (defined below).
17
In March 1999, we approved a plan for our American Color division, which was
designed to consolidate certain facilities in order to improve asset utilization
and operational efficiency, modify the organizational structure as a result of
facility consolidation and other changes and reduce overhead and other costs.
Approximately $3.1 million of these costs were paid or settled before March 31,
2000. During Fiscal Year 2002 and Fiscal Year 2001, $0.3 million and $1.1
million of these costs were paid, respectively. The remaining $0.1 million
balance in the restructuring reserve at March 31, 2002 includes remaining
payouts of involuntary employee termination and lease commitment costs.
Other Special Charges
We recorded an impairment charge of approximately $4.3 million in the fourth
quarter of our Fiscal Year 2002, to reflect the decision to abandon certain
company assets. The provision was based on a review of our long-lived assets in
accordance with Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of"
("SFAS 121"). This impairment charge is classified within restructuring costs
and other special charges in the consolidated statements of income.
Interest Expense
Interest expense decreased 9.3% to $30.0 million in Fiscal Year 2002 from $33.0
million in Fiscal Year 2001. This decrease reflects lower levels of indebtedness
and lower borrowing costs. See note 5 to our consolidated financial statements
appearing elsewhere in this Report.
Interest expense decreased 2.7% to $33.0 million in Fiscal Year 2001 from $34.0
million in Fiscal Year 2000. This decrease reflects lower levels of
indebtedness, offset in part by increased borrowing costs.
Income Taxes
For Fiscal Year 2002, our federal tax benefit was greater than the federal tax
benefit calculated using the federal statutory rate. For Fiscal Years 2001 and
2000, our federal tax expense was less than the federal tax expense calculated
using the federal statutory rate. These differences were primarily due to
decreases in the valuation allowance, partially offset by amortization of
nondeductible goodwill and foreign tax expense. In the fourth quarter of Fiscal
Year 2002, the valuation allowance for deferred tax assets was reduced by $5.5
million, resulting in a corresponding credit to deferred income tax expense.
This adjustment reflected a change in circumstances which resulted in a judgment
that a corresponding amount of our deferred tax assets will be realized in
future years. The valuation allowance decreased by $0.1 million during Fiscal
Year 2002 as a result of changes in the deferred tax items. This decrease
primarily includes the $5.5 million decrease discussed above and a $4.2 million
increase related to the tax effect of the minimum pension liability, which is a
component of other comprehensive income.
Net Income
As a result of the factors discussed above, our net income decreased to $0.7
million in Fiscal Year 2002 from $24.4 million in Fiscal Year 2001. Our net
income increased to $24.4 million in Fiscal Year 2001 from $9.5 million in
Fiscal Year 2000. Fiscal Year 2002 net income includes $8.6 million of
restructuring costs and $4.3 million of other special charges related to asset
write-offs associated with the January 2002 restructuring plan.
Minimum Pension Liability
In compliance with Statement of Financial Accounting Standards No. 87,
"Employers' Accounting for Pensions" ("SFAS 87"), we recorded a minimum pension
liability of approximately $10.8 million in Fiscal Year 2002. This liability
represents the amount that the accumulated benefit obligation exceeds the fair
value of the plan assets at March 31, 2002. The recording of this liability had
no impact on our consolidated statement of income for Fiscal Year 2002, but is
recorded as a component of other comprehensive loss in our consolidated
statement of stockholders' deficit at March 31, 2002.
18
Liquidity and Capital Resources
We have a $145 million credit facility with a syndicate of lenders (the "Bank
Credit Agreement") that provides for:
(1) a $25 million amortizing term loan facility maturing on March 31, 2004
(the "A Term Loan Facility"),
(2) a $50 million amortizing term loan facility maturing on March 31, 2005
(the "B Term Loan Facility"), and
(3) a revolving credit facility providing for a maximum of $70 million
borrowing availability, subject to certain customary conditions,
maturing on March 31, 2004, including up to $40 million for letters of
credit, (the "Revolving Credit Facility").
At March 31, 2002, we had no borrowings outstanding under the Revolving Credit
Facility and had letters of credit outstanding of approximately $22.6 million.
As a result, we had additional borrowing availability of approximately $47.4
million.
At March 31, 2002, $9.5 million of the A Term Loan Facility and $39.6 million of
the B Term Loan Facility remained outstanding. Scheduled A Term Loan Facility
and B Term Loan Facility payments due in Fiscal Year 2003 are approximately $5.3
million and $4.7 million, respectively. Scheduled repayments of existing capital
lease obligations and other senior indebtedness during Fiscal Year 2003 are
approximately $8.3 million and $1.7 million, respectively.
During Fiscal Year 2002, we repurchased in the open market, an aggregate
principal amount of $8.2 million of our 12 3/4 % Senior Subordinated Notes Due
2005 (the "Notes") for approximately $8.1 million.
In Fiscal Year 2002, net cash provided by operating activities of $38.2 million
(see consolidated statements of cash flows appearing elsewhere in this Report)
and proceeds from the sale of fixed assets of $0.4 million were primarily used
to fund the following expenditures:
(1) $17.2 million in principal repayments of indebtedness and financing
costs (including capital lease obligations of $7.5 million and
repurchase of the Notes of $8.2 million), and
(2) $16.8 million in cash capital expenditures.
Our cash-on-hand of approximately $24.1 million is presented net of outstanding
checks and accordingly, cash is presented at a balance of $4.5 million in the
March 31, 2002 balance sheet. We plan to continue our program of upgrading our
print and premedia equipment and currently anticipate that Fiscal Year 2003 cash
capital expenditures will be approximately $28 million and equipment acquired
under capital leases will be approximately $1 million.
Our primary sources of liquidity are cash provided by operating activities and
borrowings under the Revolving Credit Facility. We anticipate that our primary
needs for liquidity will be to conduct our business, meet our debt service
requirements, make capital expenditures and, if we elect, redeem, repay or
repurchase outstanding indebtedness, including repurchases of Notes in privately
negotiated transactions or in open market purchases, to the extent permitted by
our Bank Credit Agreement.
At March 31, 2002, we had total indebtedness outstanding of $252.8 million,
including capital lease obligations, as compared to $261.7 million at March 31,
2001, representing a net reduction in total indebtedness during Fiscal Year 2002
of $8.9 million. Of the total debt outstanding at March 31, 2002, $49.1 million
(excluding letters of credit) was outstanding under the Bank Credit Agreement at
a weighted-average interest rate of 4.7%. Indebtedness under the Bank Credit
Agreement bears interest at floating rates. At March 31, 2002, we had
indebtedness other than obligations under the Bank Credit Agreement of $203.7
million (including $171.8 million of the Notes). We are currently in compliance
with all financial covenants set forth in the Bank Credit Agreement. See note 5
to our consolidated financial statements appearing elsewhere in this Report.
A significant portion of Graphics' long-term obligations, including indebtedness
under the Bank Credit Agreement and the Notes, has been fully and
unconditionally guaranteed by Holdings. Holdings is subject to certain
restrictions under its guarantee of indebtedness under the Bank Credit
Agreement, including among other things, restrictions on mergers, acquisitions,
incurrence of additional debt and payment of cash dividends. See note 1 to our
consolidated financial statements appearing elsewhere in this Report.
19
EBITDA
Fiscal Year Ended March 31,
--------------------------------------------
2002 2001 2000
-------- -------- --------
(Dollars in thousands)
EBITDA
Print (a) $ 57,170 74,298 72,543
American Color (a) 8,437 17,075 11,003
Other (b) (4,034) (3,068) (3,539)
-------- -------- --------
Total $ 61,573 88,305 80,007
======== ======== ========
EBITDA Margin
Print 12.1% 14.3% 15.4%
American Color 12.9% 21.3% 13.7%
Total 11.4% 14.6% 14.4%
(a) EBITDA for the print and American Color segments in Fiscal Year 2002
includes the impact of restructuring costs of $6.5 million and $2.1 million,
respectively. See "Restructuring Costs and Other Special Charges" above.
American Color EBITDA also includes $0.5 million of non-recurring charges in
Fiscal Year 2000 associated with the consolidation of certain production
facilities.
(b) Other operations include revenues and expenses associated with our digital
visual effects business and corporate general and administrative expenses.
EBITDA is presented and discussed because we believe that investors regard
EBITDA as a key measure of a leveraged company's performance and ability to meet
its future debt service requirements. "EBITDA" is defined as earnings before net
interest expense, income tax expense (benefit), depreciation, amortization,
other non-cash expenses, other special charges related to asset write-offs and
write-downs and other expense (income). "EBITDA Margin" is defined as EBITDA as
a percentage of net sales. EBITDA is not a measure of financial performance
under generally accepted accounting principles and should not be considered an
alternative to net income (or any other measure of performance under generally
accepted accounting principles) as a measure of performance or to cash flows
from operating, investing or financing activities as an indicator of cash flows
or as a measure of liquidity. Certain covenants in the Indenture and the Bank
Credit Agreement are based on EBITDA, subject to certain adjustments.
Amortization of Goodwill
Goodwill is amortized on a straight-line basis by business segment through
Fiscal Year 2002. Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" ("SFAS 142"), is effective for fiscal years
beginning after December 15, 2001. In compliance with this pronouncement, we
adopted SFAS 142 on April 1, 2002. Application of the non-amortization
provisions of SFAS 142 is expected to result in an increase in pre-tax income of
approximately $2.8 million in Fiscal Year 2003. We expect to perform the first
of the required impairment tests of goodwill during Fiscal Year 2003. We do not
anticipate that these tests will have a material effect on our results of
operations or financial position.
Impact of Inflation
In accordance with industry practice, we generally pass through increases in our
costs (primarily paper and ink) to customers in the costs of our printed
products, while decreases in paper costs generally result in lower prices to
customers. During Fiscal Year 2000, paper prices were on average at lower levels
than comparable periods in the prior year. Throughout Fiscal Year 2001, the cost
of paper increased. In Fiscal Year 2002, demand for advertising declined,
resulting in reduced paper requirements. The reduction in paper requirements
resulted in a decline in paper prices throughout the year. We expect that, as a
result of our strong relationship with key suppliers, our material costs will
remain competitive within the industry.
20
Seasonality
Some of our print and premedia services business is seasonal in nature,
particularly those revenues derived from advertising inserts. Generally, our
sales from advertising inserts are highest during periods prior to the following
advertising periods: Spring advertising season (March - May); Back-to-School
(July - August); and Thanksgiving/Christmas (October - December). Sales of
newspaper Sunday comics are not subject to significant seasonal fluctuations.
Our strategy has been and will continue to include the mitigation of the
seasonality of our print business by increasing our sales to customers whose own
sales are less seasonal (i.e., food and drug companies) and who utilize
advertising inserts 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 which do not contribute to current or future
period revenue generation are expensed. Environmental liabilities are recorded
when assessments and/or remedial efforts are probable and the related costs can
be reasonably estimated. We believe that environmental liabilities, currently
and in the prior periods discussed herein, are not material. We maintain a
reserve of approximately $0.1 million in connection with a Superfund site in our
consolidated statement of financial position at March 31, 2002, which we believe
to be adequate. See "Legal Proceedings - Environmental Matters" appearing
elsewhere in this Report. We do not anticipate receiving insurance proceeds
related to this potential settlement. Management does not expect that any
identified matters, individually or in the aggregate, will have a material
adverse effect on our consolidated financial position or results of operations.
Accounting
There are no pending accounting pronouncements that, when adopted, are expected
to have a material effect on our results of operations or financial position.
Critical Accounting Policies
Our consolidated financial statements and related public financial information
are based on the application of generally accepted accounting principles
("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 the external disclosures of
our company including information regarding contingencies, risk and financial
condition. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances.
Valuations based on estimates are reviewed for reasonableness and conservatism
on a consistent basis throughout our company. Actual results may differ from
these estimates under different assumptions or conditions.
Critical accounting policies 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 policies affect our more significant judgments and
estimates 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 were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required. The allowance for doubtful accounts balances were approximately $2.6
million and $3.9 million at March 31, 2002 and March 31, 2001, respectively.
Restructuring
During Fiscal Year 2002, we established restructuring reserves for our print and
premedia services segments. These reserves, for severance and other exit costs,
required the use of estimates. Though management believes these estimates
accurately reflect the costs of these plans, actual results may be different.
21
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,
2002, we had a valuation allowance of $23.3 million established against our
deferred tax assets. We considered changes in the allowance when calculating the
tax provision in the statement of income. 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 net deferred
tax assets.
Contractual Obligations and Commercial Commitments
The following table gives information about our existing material commitments
under our indebtedness and contractual obligations (in thousands):
Payments Due By Fiscal Year Ending March 31,
--------------------------------------------------------------
Total 2007
Payments and
Contractual Obligations Due 2003 2004 2005 2006 Thereafter
- --------------------------------------- --------- ------- ------- ------- -------- ----------
Long-term debt $ 222,584 11,644 21,712 17,473 171,755 --
Capitalized lease obligations 30,208 8,295 10,023 2,160 2,395 7,335
Operating lease obligations 13,630 3,251 2,617 2,054 1,672 4,036
--------- ------ ------ ------ ------- ------
Total contractual cash obligations $ 266,422 23,190 34,352 21,687 175,822 11,371
========= ====== ====== ====== ======= ======
In the quarter ended December 31, 1997, 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. We are deferring certain
contractual provisions over the life of the contracts, which are being
recognized as the purchase commitments are achieved. The amount deferred at
March 31, 2002 is $34.2 million and is included within Other liabilities in our
consolidated balance sheet. At March 31, 2002 we had no other significant
contingent commitments. The following table gives information about our other
commercial commitments (in thousands):
Fiscal Year Ending March 31,
--------------------------------------------------------------
Total 2007
Other Commercial Amounts and
Commitments Committed 2003 2004 2005 2006 Thereafter
- --------------------------------------- --------- -------- -------- -------- -------- -------------
Standby letters of credit $ 22,560 18,273 831 -- -- 3,456
22
Financial Indebtedness Covenants
Our Bank Credit Agreement (1) requires satisfaction of certain financial
covenants including Minimum Consolidated EBITDA, Consolidated Interest Coverage
Ratio and Leverage Ratio requirements, (2) requires prepayments in certain
circumstances including excess cash flows, proceeds from asset dispositions in
excess of prescribed levels and certain capital structure transactions and (3)
contains various restrictions and limitations on the following items: (a) the
level of capital spending, (b) the incurrence of additional indebtedness, (c)
mergers, acquisitions, investments and similar transactions and (d) dividends
and other distributions. In addition, the agreement includes various other
customary affirmative and negative covenants. The Senior Subordinated Notes
Indenture's negative covenants are similar to, but in certain respects are less
restrictive than, covenants under the Bank Credit Agreement. Graphics' ability
to pay dividends or lend funds to Holdings is restricted. See note 1 to our
consolidated financial statements appearing elsewhere in this Report for a
discussion of those restrictions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Qualitative Information. In the ordinary course of business, our exposure to
market risks is limited as is described below. Market risk is the potential loss
arising from adverse changes in market rates and prices, such as interest and
foreign currency exchange rates. Currently, we do not utilize derivative
financial instruments such as forward exchange contracts, future contracts,
options and swap agreements.
Interest Rate Risk for us primarily relates to interest rate fluctuations on
variable rate debt.
Foreign Currency Exchange Rate Risk is minimal as we have only one print
facility outside the United States (in Canada) and any fluctuations in net asset
values as a result of changes in foreign currency exchange rates associated with
activity at this one facility would be immaterial to the company as a whole.
Quantitative Information. At March 31, 2002 and March 31, 2001, we had both
fixed rate and variable rate debt. The carrying value of our total variable rate
debt approximated the fair value of such debt at March 31, 2002 and March 31,
2001. At our March 31, 2002 and March 31, 2001 borrowing levels, a hypothetical
10% adverse change in interest rates on the variable rate debt would have been
immaterial. Approximately 78% and 79% of our long-term debt (excluding
capitalized lease obligations) was fixed rate at March 31, 2002 and March 31,
2001, respectively.
The above market risk discussions are forward-looking statements of market risk
assuming the occurrence of certain adverse market conditions. Actual results in
the future may differ materially from those projected as a result of actual
developments in the market.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page No.
The following consolidated financial statements of
ACG Holdings, Inc. are included in this Report:
Report of Independent Auditors ...............................................25
Consolidated balance sheets - March 31, 2002 and 2001 ........................26
For the Years Ended March 31, 2002, 2001 and 2000:
Consolidated statements of income.............................28
Consolidated statements of stockholders' deficit..............29
Consolidated statements of cash flows.........................30
Notes to Consolidated Financial Statements ...................................32
The following consolidated financial statement schedules of ACG Holdings, Inc.
are included in Part IV, Item 14:
I. Condensed Financial Information:
Condensed Consolidated Financial Statements (parent company only)
for the years ended March 31, 2002, 2001 and 2000, and as of March
31, 2002 and 2001
II. Valuation and qualifying accounts
All other schedules specified under Regulation S-X for ACG Holdings, Inc. have
been omitted because they are either not applicable, not required, or because
the information required is included in the financial statements or notes
thereto.
24
Report of Independent Auditors
Board of Directors
ACG Holdings, Inc.
We have audited the accompanying consolidated balance sheets of ACG Holdings,
Inc. as of March 31, 2002 and 2001, and the related consolidated statements of
income, stockholders' deficit, and cash flows for each of the three fiscal years
in the period ended March 31, 2002. Our audits also included the financial
statement schedules listed in the Index Item 14(a). These financial statements
and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ACG
Holdings, Inc. at March 31, 2002 and 2001, and the consolidated results of their
operations and their cash flows for each of the three fiscal years in the period
ended March 31, 2002, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Nashville, Tennessee
May 24, 2002
25
ACG HOLDINGS, INC.
Consolidated Balance Sheets
(In thousands)
March 31,
---------------------
2002 2001
-------- --------
Assets
- ------
Current assets:
Cash $ 4,547 --
Receivables:
Trade accounts, less allowance for doubtful accounts of
$2,557 and $3,905 at March 31, 2002 and 2001,
respectively 50,870 62,585
Income tax receivable 1,015 --
Other 2,060 2,049
--------- ---------
Total receivables 53,945 64,634
Inventories 9,137 12,864
Deferred income taxes 7,564 9,817
Prepaid expenses and other current assets 3,839 3,740
--------- ---------
Total current assets 79,032 91,055
Property, plant and equipment:
Land and improvements 2,913 2,926
Buildings and improvements 22,210 20,333
Machinery and equipment 198,057 200,770
Furniture and fixtures 11,710 10,533
Leased assets under capital leases 56,830 52,762
Equipment installations in process 11,446 9,598
--------- ---------
303,166 296,922
Less accumulated depreciation (180,676) (167,014)
--------- ---------
Net property, plant and equipment 122,490 129,908
Excess of cost over net assets acquired, less accumulated
amortization of $53,274 and $50,262 at March 31, 2002
and 2001, respectively 66,548 69,560
Other assets 12,443 11,679
--------- ---------
Total assets $ 280,513 $ 302,202
========= =========
See accompanying notes to consolidated financial statements
26
ACG HOLDINGS, INC.
Consolidated Balance Sheets
(Dollars in thousands, except par values and liquidation preference)
March 31,
---------------------
2002 2001
-------- --------
Liabilities and Stockholders' Deficit
- -------------------------------------
Current liabilities:
Current installments of long-term debt and capitalized leases $ 19,946 7,809
Trade accounts payable 25,906 36,310
Accrued expenses 34,045 31,474
Income taxes -- 174
--------- ---------
Total current liabilities 79,897 75,767
Long-term debt and capitalized leases, excluding current installments 232,846 253,897
Deferred income taxes 2,933 10,546
Other liabilities 60,857 47,859
--------- ---------
Total liabilities 376,533 388,069
Stockholders' deficit:
Common stock, voting, $.01 par value, 5,852,223 shares authorized,
143,399 shares issued and outstanding 1 1
Preferred stock, $.01 par value, 15,823 shares authorized, 3,617 shares
Series AA convertible preferred stock issued and outstanding,
$39,442,551 liquidation preference, and 1,606 shares Series BB
convertible preferred stock issued and outstanding, $17,500,000
liquidation preference -- --
Additional paid-in capital 58,500 58,370
Accumulated deficit (140,340) (141,062)
Other accumulated comprehensive loss, net of tax (14,181) (3,176)
--------- ---------
Total stockholders' deficit (96,020) (85,867)
--------- ---------
Commitments and contingencies
Total liabilities and stockholders' deficit $ 280,513 302,202
--------- ---------
See accompanying notes to consolidated financial statements.
27
ACG HOLDINGS, INC.
Consolidated Statements of Income
(In thousands)
Year ended March 31,
-------------------------------------
2002 2001 2000
----------- ---------- ----------
Sales $ 542,421 606,039 554,282
Cost of sales 465,448 508,188 464,017
----------- ---------- ----------
Gross profit 76,973 97,851 90,265
Selling, general and administrative expenses 34,949 41,176 41,562
Amortization of goodwill 3,012 3,056 2,619
Restructuring costs and other special charges 12,920 -- --
----------- ---------- ----------
Operating income 26,092 53,619 46,084
----------- ---------- ----------
Other expense (income):
Interest expense 29,973 33,042 33,963
Interest income (167) (113) (165)
Other, net 637 1,194 627
----------- ---------- ----------
Total other expense 30,443 34,123 34,425
----------- ---------- ----------
Income (loss) before income taxes (4,351) 19,496 11,659
Income tax expense (benefit) (5,073) (4,927) 2,189
----------- ---------- ----------
Net income $ 722 24,423 9,470
=========== ========== ==========
See accompanying notes to consolidated financial statements.
28
ACG HOLDINGS, INC.
Consolidated Statements of Stockholders' Deficit
(In thousands)
Series AA
and BB Other
Voting convertible Additional accumulated
common preferred paid-in Accumulated comprehensive
stock stock capital deficit income (loss) Total
--------- ------------- ----------- ------------ -------------- ------------
Balances, March 31, 1999 $ 1 -- 58,286 (174,905) (2,688) $ (119,306)
------------
Net income -- -- -- 9,470 -- 9,470
Other comprehensive income, net of tax:
Change in cumulative
translation adjustment -- -- -- -- 296 296
Minimum pension liability -- -- -- -- 184 184
------------
Comprehensive income 9,950
Treasury stock -- -- -- (50) -- (50)
Executive stock compensation -- -- 17 -- -- 17
----------- ------------ ------------ ----------- ------------- ------------
Balances, March 31, 2000 $ 1 -- 58,303 (165,485) (2,208) $ (109,389)
------------
Net income -- -- -- 24,423 -- 24,423
Other comprehensive loss, net of tax:
Change in cumulative
translation adjustment -- -- -- -- (968) (968)
------------
Comprehensive income 23,455
Executive stock compensation -- -- 67 -- -- 67
----------- ------------ ------------ ----------- ------------- ------------
Balances, March 31, 2001 $ 1 -- 58,370 (141,062) (3,176) $ (85,867)
------------
Net income -- -- -- 722 -- 722
Other comprehensive loss, net of tax:
Change in cumulative translation
adjustment -- -- -- -- (254) (254)
Minimum pension liability -- -- -- -- (10,751) (10,751)
------------
Comprehensive loss (10,283)
Executive stock compensation -- -- 130 -- -- 130
----------- ------------ ------------ ----------- ------------- ------------
Balances, March 31, 2002 $ 1 -- 58,500 (140,340) (14,181) $ (96,020)
=========== ============ ============ =========== ============= ============
See accompanying notes to consolidated financial statements.
29
ACG HOLDINGS, INC.
Consolidated Statements of Cash Flows
(In thousands)
Year ended March 31,
--------------------------------------
2002 2001 2000
------------ ---------- ----------
Cash flows from operating activities:
Net income $ 722 24,423 9,470
Adjustments to reconcile net income to net cash provided
by operating activities:
Other special charges - non-cash 4,282 -- --
Depreciation 27,024 30,579 30,067
Amortization of goodwill 3,012 3,056 2,619
Amortization of other assets 1,163 1,051 1,100
Amortization of deferred financing costs 1,420 1,389 1,326
Loss on disposals of property, plant and equipment 147 403 286
Deferred income tax expense (benefit) (5,360) (7,302) 115
Changes in assets and liabilities, net of effects of acquisition
of business:
Decrease (increase) in receivables 11,682 3,118 (7,832)
Increase in current income taxes receivable (1,015) -- --
Decrease (increase) in inventories 3,705 (1,920) (2,676)
Increase (decrease) in trade accounts payable (10,358) (9,246) 8,611
Increase (decrease) in accrued expenses 2,584 (122) (178)
Increase (decrease) in current income taxes payable (174) 118 (1,140)
Increase (decrease) in other liabilities 2,247 (2,451) (1,459)
Other (2,865) (2,183) (1,535)
---------- ---------- ---------
Total adjustments 37,494 16,490 29,304
---------- ---------- ---------
Net cash provided by operating activities 38,216 40,913 38,774
---------- ---------- ---------
30
ACG HOLDINGS, INC.
Consolidated Statements of Cash Flows - Continued
(In thousands)
Year ended March 31,
------------------------------------
2002 2001 2000
---------- ---------- ----------
Cash flows from investing activities:
Purchases of property, plant and equipment (16,771) (19,161) (21,462)
Acquisition of business -- -- (2,829)
Proceeds from sales of property, plant and equipment 400 180 169
Other (122) (25) (23)
---------- ------- -------
Net cash used by investing activities (16,493) (19,006) (24,145)
---------- ------- -------
Cash flows from financing activities:
Debt:
Proceeds -- -- 9,215
Payments (9,237) (14,787) (15,893)
Increase in deferred financing costs (483) (198) (371)
Repayment of capital lease obligations (7,453) (6,961) (7,504)
Exchange rate adjustment (16) (22) (23)
---------- ------- -------
Net cash used by financing activities (17,189) (21,968) (14,576)
---------- ------- -------
Effect of exchange rates on cash 13 61 (53)
---------- ------- -------
Change in cash 4,547 -- --
Cash:
Beginning of period -- -- --
---------- ------- -------
End of period $ 4,547 -- --
========== ======= =======
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 28,320 31,873 32,639
Income taxes, net of refunds $ 1,530 2,418 3,111
Non-cash investing activities:
Lease obligations $ 7,779 6,110 1,262
See accompanying notes to consolidated financial statements.
31
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
ACG Holdings, Inc. ("Holdings") has no operations or significant assets
other than its investment in American Color Graphics, Inc. ("Graphics").
Holdings and Graphics are collectively referred to as (the "Company").
Holdings is dependent upon distributions from Graphics to fund its
obligations. Under the terms of its debt agreements at March 31, 2002,
Graphics' ability to pay dividends or lend to Holdings was either
restricted or prohibited, except that Graphics may pay specified amounts to
Holdings (i) to pay the repurchase price payable to any officer or employee
(or their estates) of Holdings, Graphics or any of their respective
subsidiaries in respect of their stock or options to purchase stock in
Holdings upon the death, disability or termination of employment of such
officers and employees (so long as no default, or event of default, as
defined, has occurred under the terms of the Bank Credit Agreement, as
defined below, and provided the aggregate amount of all such repurchases
does not exceed $2 million) and (ii) to fund the payment of Holdings'
operating expenses incurred in the ordinary course of business, other
corporate overhead costs and expenses (so long as the aggregate amount of
such payments does not exceed $250,000 in any fiscal year) and Holdings'
obligations pursuant to a tax sharing agreement with Graphics. A
significant portion of Graphics' long-term obligations has been fully and
unconditionally guaranteed by Holdings.
The two business segments of the commercial printing industry in which the
Company operates are (i) print and (ii) premedia services conducted by its
American Color division.
Significant accounting policies are as follows:
(a) Basis of Presentation
The consolidated financial statements include the accounts of Holdings
and all greater than 50% - owned subsidiaries, which are consolidated
under accounting principles generally accepted in the United States.
All significant intercompany transactions and balances have been
eliminated in consolidation.
Earnings-per-share data has not been provided since Holdings' common
stock is closely held.
Certain prior period information has been reclassed to conform to
current period presentation.
(b) Revenue Recognition
Print revenues are recognized upon the completion of production.
Shipment of printed material generally occurs upon completion of this
production process. Materials are printed to unique customer
specifications and are not returnable. Credits relating to
specification variances and other customer adjustments are not
significant.
(c) Inventories
Inventories are valued at the lower of first-in, first-out ("FIFO")
cost or market (net realizable value).
(d) Property, Plant and Equipment
Property, plant and equipment is stated at cost. Depreciation, which
includes amortization of assets under capital leases, is based on the
straight-line method over the estimated useful lives of the assets or
the remaining terms of the leases. Estimated useful lives used in
computing depreciation and amor