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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended March 31, 1999
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________ to ____________
Commission file number 33-97090
ACG HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 62-1395968
(State or other jurisdiction of (I.R.S. employer identification
incorporation or organization) number)
100 Winners Circle
Brentwood, Tennessee 37027
(615) 377-0377
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
AMERICAN COLOR GRAPHICS, INC.
(Exact name of registrant as specified in its charter)
New York 16-1003976
(State or other jurisdiction of (I.R.S. employer identification
incorporation or organization) number)
100 Winners Circle
Brentwood, Tennessee 37027
(615) 377-0377
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
Aggregate market value of the voting and non-voting common stock of ACG
Holdings, Inc. held by non-affiliates: Not applicable.
ACG Holdings, Inc. has 134,250 shares outstanding of its common stock, $.01 Par
Value, as of June 17, 1999 (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...... 24
Item 8. Financial Statements and Supplementary Data..................... 25
Item 9. Changes In And Disagreements With Accountants on Accounting and
Financial Disclosure............................................ 54
PART III
Item 10. Directors and Executive Officers ............................... 55
Item 11. Executive Compensation ......................................... 56
Item 12. Security Ownership of Certain Beneficial Owners and Management.. 61
Item 13. Certain Relationships and Related Transactions.................. 62
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K ...................................................... 64
Signatures..................................................... 74
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 include without limitation, our expectation as to when we will
complete the remediation and testing phases of our Year 2000 program, as well
as, any Year 2000 contingency plans, our estimated cost of achieving Year 2000
readiness and our belief that internal systems and equipment will be Year 2000
compliant in a timely manner. 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") formerly Sullivan
Communications, Inc. ("Communications"), together with its wholly-owned
subsidiary, American Color Graphics, Inc. ("Graphics") formerly Sullivan
Graphics, Inc., including, but not limited to:
- fluctuations in the cost of paper and other raw materials used,
- changes in the advertising and printing 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,
- the availability of qualified personnel and other information
technology resources,
- the ability to identify and remediate all date sensitive lines of
computer code,
- the ability to replace embedded computer chips in systems affected by
Year 2000 issues,
- the actions of government agencies or other third parties with respect
to Year 2000 issues, and
- the matters set forth in this Report generally.
Consequently, such forward-looking statements should be regarded solely as our
current plans, estimates and beliefs. We do not undertake and specifically
decline any obligation to publicly release the results of any revisions to these
forward-looking statements that may be made to reflect any future events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
ITEM 1. BUSINESS
General
We are a successor to a business that commenced operations in 1926, and are one
of the largest national diversified commercial printers in North America with
ten printing plants in eight states and Canada, ten prepress facilities located
throughout the United States and one digital visual effects facility, that
provides special effects services for the motion picture industry, located in
California. We operate primarily in two business segments of the commercial
printing industry: printing (which accounted for approximately 83% of total
sales during the fiscal year ended March 31, 1999 ("Fiscal Year 1999")) and
digital imaging and prepress services conducted through our American Color
division (which accounted for approximately 16% of total sales in Fiscal Year
1999). Our printing business and American Color division are both headquartered
in Nashville, Tennessee. Partnerships affiliated with Morgan Stanley Dean Witter
& Co. ("MSDW") currently own 61.7% of the outstanding common stock and 72.7% of
the outstanding preferred stock of Holdings.
Market data used throughout this Report was obtained from industry publications
and internal company estimates. While we believe such information is reliable,
the accuracy of such information has not been independently verified and cannot
be guaranteed.
Financial Information About Industry Segments
See disclosure in note 17 of our consolidated financial statements appearing
elsewhere in this Report.
2
Printing
Our printing business, which accounted for approximately 83%, 84% and 86% of our
sales in the fiscal year ended March 31, 1999 (Fiscal Year 1999), the fiscal
year ended March 31, 1998 ("Fiscal Year 1998") and the fiscal year ended March
31, 1997 ("Fiscal Year 1997"), respectively, produces retail advertising
inserts, comics (newspaper Sunday comics, comic insert advertising and comic
books), and other publications.
Retail Advertising Inserts (81% of printing sales in Fiscal Year 1999 and 80% in
Fiscal Year 1998 and Fiscal Year 1997). We believe that we are one of the
largest printers of retail advertising inserts in the United States. We printed
advertising inserts for approximately 300 retailers in Fiscal Year 1999. Retail
advertising inserts are preprinted advertisements, generally in color, that
display products sold by a particular retailer or manufacturer. Advertising
inserts are used extensively by many different retailers, including discount,
department, supermarket, home center, drug and automotive stores. Inserts are an
important and cost effective means of advertising for these merchants.
Advertising inserts are primarily distributed through insertion in newspapers
but are also distributed by direct mail or in-store by retailers. They generally
advertise for a specific, limited sale period. As a result, advertising inserts
are both time sensitive and seasonal.
Comics (13% of printing sales in Fiscal Year 1999, 14% in Fiscal Year 1998 and
Fiscal Year 1997, includes newspaper Sunday comics, comic insert advertising and
comic books). We believe that we are one of the largest printers of comics in
the United States. We print Sunday comics for over 300 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 printing sales in Fiscal Year 1999, Fiscal Year 1998
and Fiscal Year 1997). We print local newspapers, TV guide listings and other
publications.
In January 1998, we approved a plan for our printing division which was designed
to improve responsiveness to customer requirements, increase asset utilization
and reduce overhead costs. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Restructuring Costs and Other
Special Charges" and note 14 to our consolidated financial statements appearing
elsewhere in this Report.
Printing Production
Our network of ten printing plants in the United States and Canada is
strategically positioned to service major metropolitan centers and provide us
with distribution efficiencies and shorter turnaround times, two factors
instrumental in continuing our success in servicing large national and regional
accounts. There are three printing processes used to produce advertising insert
and newspaper supplements: offset lithography (heatset and cold), rotogravure
and flexography. We principally use heatset offset and flexographic web printing
equipment in our printing operations. We own a substantial majority of our
printing equipment, which currently consists of 36 heatset offset presses, 5
coldset offset presses and 11 flexographic presses. Most of our advertising
inserts and all of our other publications and comic books are printed using the
offset process, while some advertising inserts and substantially all of our
newspaper Sunday comics and comic advertising inserts are printed using the
flexographic process.
In the heatset offset process, images are distinguished chemically from
non-image areas of a metal plate and transferred from the plate to a rubber
blanket and then to the paper surface. The printed web goes through an oven
which dries 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. Because the heatset offset process can be utilized on a wide variety of
papers and produce sharper reproductions, heatset offset presses provide a more
colorful and attractive product than cold offset presses.
The flexographic process differs from offset printing in that it utilizes raised
image plates and rapid-drying, water-based (as opposed to solvent-based) inks.
The flexographic image area results from application of ink to the raised
surface on the plate, which is transferred directly to the paper surface. Our
flexographic printing generally provides 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, brighter
colors, reduced paper waste, reduced energy use and maintenance costs, and
environmental advantages due to the use of water-based inks. Faster press set up
times make the process particularly attractive to commercial customers with
shorter runs and extensive regional versioning.
3
In addition to advertising insert capacity, certain equipment parameters are
critical to competing in the advertising insert market, including cut-off
length, folding capabilities and in-line finishing. Cut-off length is one of the
determinants of the size of the printed page. Folding capabilities for
advertising inserts must include a wide variety of page sizes, page counts and
special paper folding effects. Finally, many 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 and pricing 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.
Digital Imaging and Prepress Services
Our digital imaging and prepress services business is conducted by our American
Color division ("American Color") which accounted for approximately 16%, 15%,
and 14% of our Fiscal Year 1999, Fiscal Year 1998 and Fiscal Year 1997 sales,
respectively. We believe American Color is one of the largest full-service
providers of digital imaging, prepress and color separation services in the
United States and a technological leader in its industry. American Color
commenced operations in 1975 and maintains ten full service locations
nationwide.
American Color assists its customers in the capture, manipulation, transmission
and distribution of images. The majority of this work leads to the production of
four-color separations in a format appropriate for use by printers. American
Color makes page changes, including typesetting, and combines 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 output are produced for each advertising or
editorial page. The final four-color films or digital output enable printers to
prepare plates for each color resulting in the appearance of full color in the
printed page. American Color's revenue from these traditional services is being
supplemented by new revenue sources from electronic prepress services such as
digital image storage, facilities management (operating digital imaging and
prepress service facilities at a customer location), computer-to-plate services,
creative services, consulting and training services, multimedia and internet
services, and software and data-base management. American Color has been a
leader in implementing these new technologies, enabling it to reduce unit costs
and effectively service the increasingly complex demands of its customers more
quickly than many of its competitors. American Color has also been one of the
leaders in the integration of electronic page make-up, microcomputer-based
design and layout, and digital cameras into prepress production.
The digital imaging and prepress services industry is highly fragmented,
primarily consisting of smaller local and regional companies, with only a few
national full-service digital imaging and prepress companies such as American
Color, none of which has a significant nationwide market share. Many smaller
digital imaging and prepress companies have left the industry in recent years
due to their inability to keep pace with technological advances in the industry.
In March 1999, we approved a plan for our American Color division designed to
primarily:
1) Consolidate certain facilities in order to improve asset utilization
and operational efficiency;
2) Modify the organizational structure as a result of facility
consolidation and other changes; and
3) Reduce overhead and other costs.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Restructuring Costs and Other Special Charges" and note 14 to our
consolidated financial statements appearing elsewhere in this Report.
Competitive Advantages and Strategy
Competitive Advantages. We believe that we have the following competitive
advantages in our printing and digital imaging and prepress services businesses:
Modern Equipment. We believe that our web heatset offset and flexographic web
printing equipment is among the most advanced in the industry and that the
average age of our equipment is significantly less than the majority of our
regional competitors and is comparable to our major national competitors. We are
also committed to a comprehensive, long-term maintenance program, which enhances
the reliability and extends the life of our presses and other production
equipment. We also believe that our digital imaging and prepress equipment is
significantly more advanced than many of our smaller regional competitors, many
of whom have not incorporated digital prepress 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 300 retailers and over 300 newspapers in the
United States and Canada. Our printing 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 printing products and strong customer service at
competitive prices has resulted in long-term relationships with many of these
customers. American Color's customer base includes large and medium-sized
customers in the publishing, retail and catalog businesses, many of whom also
have long-term relationships with us. Although the digital imaging and prepress
services business has generally been on a spot bid basis in the past, 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 printing 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 both labor and material costs (the
principal variable production costs) in our digital imaging and prepress
services business primarily through the adoption of new digital prepress
production methodologies.
Strong Management Team. We have strengthened our printing management group by
hiring experienced managers with a clear focus on growth, quality and continued
cost reduction, resulting in an improved cost structure and a well-defined
strategy for future expansion. We have also strengthened our management group in
our digital imaging and prepress services business, filling a number of senior,
regional and plant management positions with individuals who we believe will
manage the digital imaging and prepress services business for growth and
profitability and will continue to upgrade our capabilities.
National Presence. Our nine printing plants in the United States and one plant
in Canada provide us with distribution efficiencies, strong customer service,
flexibility and short turnaround times, all of which are instrumental in our
continued success in servicing our large national and regional retail accounts.
Our expanded sales and marketing groups provide greater customer coverage and
enable us to more successfully penetrate regional markets. We believe that our
ten digital imaging and prepress facilities provide us with contingency
capabilities, increased capacity during peak periods, access to top quality
internal technical personnel throughout the country, short turnaround time and
other customer service advantages.
Strategy. Our objective is to increase shareholder value by growing our
revenues, increasing our market share and reducing costs. Our strategy to
achieve this objective is as follows:
Grow Unit Volume. Management believes that our level of national sales coverage,
when coupled with our significant industry experience and customer-focused sales
force, will result in unit growth. In an effort to stimulate unit volume growth,
we have strengthened our printing sales group. Unit volume growth is also
expected to result from continued capital expansion and selective printing
acquisitions. In addition, in our digital imaging and prepress services
business, we have strengthened our sales force, provided expanded training and,
more closely focused our marketing efforts on new, larger customers.
Continue to Improve Product Mix. We intend to increase our share of the retail
advertising insert market. In addition, we expect to continue to adjust the mix
of our customers and products within the retail advertising insert market to
those that are more profitable and less seasonable and to maximize the use of
our equipment. We are also continuing expansion of our printing facilities'
capabilities for in-plant prepress and postpress services. Our digital imaging
and prepress 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 facilities management opportunities as well as national
and large regional customers that require more sophisticated levels of service
and technologies.
Continue to Reduce Manufacturing Costs and Improve Quality. We intend to further
reduce our production costs at our printing 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 digital imaging and prepress services business
by using our technical resources to improve digital prepress workflows at our
various facilities. In addition, we believe we will be able to reduce our per
unit technical, sales and management costs as we increase sales in this
business.
5
Continue to Make Opportunistic Acquisitions. An integral part of our long-term
growth strategy includes a plan to selectively assess and acquire other printing
and digital imaging and prepress services companies that we believe will enhance
our leadership position in these industries.
Customers and Distribution
Customers. We sell our printing products and services to a large number of
customers, primarily retailers and newspapers, and all of the products are
produced in accordance with customer specifications. We perform a portion of our
printing work, primarily the printing of Sunday comics and comic books, under
long-term contracts with our customers. The contracts vary in length and many of
the contracts automatically extend for one year unless there has been notice to
the contrary from either of the contracting parties within a certain number of
days before the end of any term. For the balance of our printing work, we obtain
varying time commitments from our customers ranging from job to job to annual
allocations. Printing prices are generally fixed during such commitments;
however, our standard terms of trade call for the pass-through of changes in the
cost of raw materials, primarily paper and ink.
American Color's customers consist of magazine and newspaper publishers,
retailers, catalog sales organizations, printers, consumer products companies,
advertising agencies and direct mail advertisers. Its customers typically have a
need for high levels of technical expertise, short turnaround times and
responsive customer service. In addition to its historical regional customer
base, American Color is increasingly focused on larger, national accounts that
have a need for a broad range of fully integrated services and communication
capabilities requiring leading edge technology. This trend has resulted in an
increasing amount of contractual business related to facilities management
arrangements with customers over the past several years. These contracts
typically extend from three to five years in length.
The printing and American Color divisions have historically had certain common
customers and their ability to cross-market is an increasingly valuable tool as
computer-to-plate, regional versioning, electronic digital imaging, facilities
management and speed to market become more important to their customers. This
enables us to provide more comprehensive solutions to customers' digital imaging
and prepress and printing needs.
No single customer accounted for sales in excess of 10% of our consolidated
sales in Fiscal Year 1999. Our top ten customers accounted for approximately 34%
of consolidated sales in Fiscal Year 1999.
Distribution. We distribute our printing products primarily by truck to customer
designated locations, primarily newspapers. Costs of distribution are generally
paid by the customers, and most shipping is by common carrier. American Color
generally distributes its products via electronic transmission, overnight
express, or other methods of personal delivery or by courier.
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 printing business is based primarily on
quality and service at a competitive price.
American Color competes with numerous digital imaging and prepress service 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 digital imaging and prepress companies such as American
Color, none of which has a significant nationwide market share. Many smaller
digital imaging and prepress companies have left the industry in recent years
due to their
6
inability to keep pace with the technological advances required to service
increasingly complex customer demands. We believe that the digital imaging and
prepress services sector will continue to be subject to high levels of ongoing
technological change and the need for capital expenditures to keep up with such
change.
Raw Materials
The primary raw materials used in our printing business are paper and ink. We
purchase substantially all of our ink and related products under long-term ink
supply contracts. Throughout Fiscal Year 1997, the overall cost of paper
declined. During Fiscal Year 1998, paper prices increased slightly through mid
year and then declined to near beginning of the year levels. In Fiscal Year
1999, as most grades of paper became more plentiful, paper prices declined.
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. The primary inputs
in prepress 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 printing and digital imaging and prepress 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 printing, digital imaging and prepress 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 May 31, 1999, we had a total of approximately 2,760 employees, of which
approximately 220 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.
7
ITEM 2. PROPERTIES
We operate in 21 locations in 14 states and Canada. We own seven printing plants
in the United States and one in Canada and lease two printing plants, one in
California and one in Pennsylvania. The American Color division has ten
production locations, all of which are leased by American Color. The American
Color division also operates digital imaging and prepress facilities on the
premises of several of its customers ("facilities management"). In addition, we
maintain one small executive office in Connecticut, a digital visual effects
facility in California and our headquarter facility in Nashville, Tennessee, all
of which are leased. We believe that our plants and facilities are adequately
equipped and maintained for present and planned operations.
ITEM 3. LEGAL PROCEEDINGS
We have been named as a defendant in several legal actions arising from our
normal business activities. In the opinion of management, any liabilities that
may arise from such actions will not, individually or in the aggregate, have a
material adverse effect on our financial condition 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,
1999. 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 June 2, 1999, there were approximately 93 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 fourth quarter of Fiscal Year 1998, certain officers exercised
options to purchase an aggregate of 8,254 shares of Holdings' common stock
for $.01/share. The securities that were sold were exempt from registration
on the basis that all such officers are "accredited investors" within the
meaning of the Securities Act of 1933.
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is selected financial data for and as of the fiscal years ended
March 31, 1999, 1998, 1997, 1996 and 1995. The balance sheet data as of March
31, 1999, 1998, 1997, 1996 and 1995 and the statement of operations data for the
fiscal years ended March 31, 1999, 1998, 1997, 1996 and 1995 are derived from
the audited consolidated financial statements for such periods and at such
dates. The selected financial data below also reflects our discontinued
wholly-owned subsidiary, Sullivan Media Corporation ("SMC") and our coupon free
standing insert ("FSI") operation previously conducted by our discontinued
wholly-owned subsidiary Sullivan Marketing, Inc. ("SMI"). See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Discontinued Operations" and note 2 of our consolidated financial statements
appearing elsewhere in this Report.
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,
---------------------------------------------------------
1999 1998 1997 1996 1995(a)
---------------------------------------------------------
(dollars in thousands)
Statement of Operations Data:
Sales $ 520,343 533,335 524,551 529,523 433,198
Cost of Sales 439,091 461,407 459,880 465,110 370,267
--------- --------- --------- --------- ---------
Gross Profit 81,252 71,928 64,671 64,413 62,931
Selling, general and administrative expenses (b) 46,333 54,227 51,418 44,164 41,792
Restructuring costs and other special charges (c) 5,464 5,598 2,881 7,533 --
Gain from curtailment and establishment of defined
benefit pension plans, net (d) -- -- -- -- (3,311)
--------- -------- -------- -------- --------
Operating income 29,455 12,103 10,372 12,716 24,450
Interest expense, net 36,077 38,813 36,132 32,425 25,334
Other expense 1,217 412 245 1,722 985
Income tax expense 523 2,106 2,591 4,874 2,552
--------- -------- -------- -------- --------
Loss from continuing operations before
extraordinary items (8,362) (29,228) (28,596) (26,305) (4,421)
--------- -------- -------- -------- --------
Discontinued operations: (e)
Loss from operations, net of tax -- -- (1,557) (1,364) (912)
Estimated (loss) on shut down and gain on
settlement, net of tax -- (667) (1,550) 2,868 18,495
Extraordinary loss on early extinguishment
of debt(f) (4,106) -- -- (4,526) --
--------- -------- -------- -------- --------
Net (loss) income $ (12,468) (29,895) (31,703) (29,327) 13,162
========= ======== ======== ========= ========
Balance Sheet Data (at end of period):
Cash and cash equivalents $ 0 0 0 0 4,635
Working capital (deficit) $ (5,451) 11,610 (8,598) 9,612 4,958
Total assets $ 299,000 329,958 333,975 351,181 328,368
Long-term debt and capitalized leases, including
current installments (g) $ 289,589 319,657 312,309 297,617 258,201
Stockholders' deficit $(119,306) (106,085) (76,318) (44,396) (14,970)
Other Data:
Net cash provided (used) by operating activities $ 48,137 18,257 24,313 (4,187) 30,510
Net cash used by investing activities $ (10,364) (10,100) (10,997) (24,436) (17,580)
Net cash (used) provided by financing activities $ (37,812) (8,143) (13,312) 23,982 (17,527)
Capital expenditures (including lease obligations
entered into) $ 16,238 23,713 37,767 28,022 20,415
EBITDA (h) $ 64,286 52,367 46,972 46,847 51,719
10
NOTES TO SELECTED FINANCIAL DATA
(a) On August 15, 1995, Shakopee Valley Printing, Inc. ("Shakopee") was merged
with and into Graphics (the "Shakopee Merger"). The merger has been
accounted for as a combination of entities under common control (similar
to a pooling-of-interests), and accordingly, the consolidated financial
statements give retroactive effect to the Shakopee Merger and include the
combined operations of Holdings and Shakopee subsequent to December 22,
1994 (the date on which Shakopee became under our common control).
Shakopee's financial results are not reflected in periods prior to
December 22, 1994 as these periods were prior to common control ownership.
(b) 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.
Fiscal Year 1997 selling, general and administrative expense includes $2.5
million of non-recurring employee termination expenses. See note 15 to our
consolidated financial statements appearing elsewhere in this Report.
(c) In March 1999, we approved a restructuring plan for our American Color
division, which was designed to consolidate certain facilities in order to
improve asset utilization and operational efficiency, modify the
organizational structure as a result of facility consolidation and other
changes and reduce overhead and other costs. We recorded $4.6 million of
costs under this plan in Fiscal Year 1999.
In January 1998, we approved a restructuring plan for our printing
division designed to improve responsiveness to customer requirements,
increase asset utilization and reduce overhead costs. We recorded $3.9
million of costs under this plan in Fiscal Year 1998.
In April 1995, we implemented a restructuring plan for our American Color
division, which was designed to improve productivity, increase customer
service and responsiveness and provide increased growth in the business.
We recorded $0.9 million and $4.1 million of costs under this plan in
Fiscal Year 1997 and the fiscal year ended March 31, 1996 ("Fiscal Year
1996"), respectively.
In addition, we recorded $0.9 million, $1.7 million, $1.9 million and $3.4
million of other special charges related to asset write-offs and
write-downs in our printing and American Color divisions in Fiscal Year
1999, Fiscal Year 1998, Fiscal Year 1997 and Fiscal Year 1996,
respectively. See note 14 to our consolidated financial statements
appearing elsewhere in this Report.
(d) In October 1994, we amended our defined benefit pension plans, which
resulted in the freezing of additional defined benefits for future
services under the plans effective January 1, 1995. We recognized a
curtailment gain of $3.7 million as a result of freezing such benefits.
Also in October 1994, the Board of Directors approved a new Supplemental
Executive Retirement Plan ("SERP"), which is a defined benefit plan, for
certain key executives. We recognized a $0.4 million expense associated
with the establishment of the SERP.
(e) In February of Fiscal Year 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. Sales,
costs of sales and selling, general and administrative expenses
attributable to SMC for Fiscal Years 1997, 1996 and 1995 have been
reclassified to discontinued operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Discontinued
Operations" and note 2 of our consolidated financial statements appearing
elsewhere in this Report.
On February 16, 1994, we assigned the coupon FSI contracts of our
subsidiary, SMI, to News America FSI, Inc. ("News America"). In June 1994,
we recorded income from the settlement of a lawsuit entitled Sullivan
Marketing, Inc. and Sullivan Graphics, Inc. v. Valassis Communications,
Inc., News America FSI Inc. and David Brandon (the "SMI Settlement") of
$18.5 million, net of taxes, and when coupled with settlement expenses
which had previously been accrued, the net cash proceeds resulting from
this settlement were approximately $16.7 million.
11
In Fiscal Year 1996, we recognized settlement of a complaint naming SMI,
News America and two packaged goods companies as defendants (the "EPI
lawsuit") and reversed certain accruals related to the estimated loss on
shut down of SMI. The resulting effect reflected in the Fiscal Year 1996
consolidated statement of operations was $2.9 million income in
discontinued operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Discontinued Operations"
and note 2 of our consolidated financial statements appearing elsewhere in
this Report.
(f) 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 the quarter ended
June 30, 1998. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources".
In August 1995, as part of the Shakopee Merger and the refinancing
transactions (the "1995 Refinancing"), collectively (the "1995
Transactions"), we recorded an extraordinary loss related to early
extinguishment of debt of $4.5 million, net of zero taxes. This
extraordinary loss primarily consisted of the early redemption premium on
Graphics' 15% Senior Subordinated Notes due 2000 (the "15% Notes") and the
write-off of deferred financing costs related to refinanced indebtedness
partially offset by the write-off of a bond premium associated with the
15% Notes.
(g) The balance of long-term debt outstanding at March 31, 1995 includes an
additional $9.7 million relating to a purchase accounting adjustment to
the 15% Notes resulting from the 1993 Acquisition. The principal amount
payable at maturity of the 15% Notes remained at $100 million. The 15%
Notes were redeemed in connection with the 1995 Refinancing.
(h) EBITDA is included in the Selected Financial Data because management
believes that investors regard EBITDA as a key measure of a leveraged
company's performance and ability to meet its future debt service
requirements. EBITDA is defined as earnings before net interest expense,
income tax expense, depreciation, amortization, other special charges
related to asset write-offs and write-downs, other income (expense),
discontinued operations and extraordinary items. EBITDA is not a measure
of financial performance under generally accepted accounting principles
and should not be considered an alternative to net income (or any other
measure of performance under generally accepted accounting principles) as
a measure of performance or to cash flows from operating, investing or
financing activities as an indicator of cash flows or as a measure of
liquidity. Certain covenants in the Indenture dated as of August 15, 1995
and the bank credit agreement entered into in May 1998 (see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources") are based on EBITDA, subject
to certain adjustments.
EBITDA in Fiscal Year 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 printing division, $1.5 million of non-recurring charges
associated with the relocation of American Color's corporate office and
various severance related expenses, and $0.7 million of certain charges
associated with employee benefit programs.
EBITDA in Fiscal Year 1997 includes $0.9 million of restructuring costs
related to the American Color division and non-recurring employee
termination expenses of $2.5 million (see note 15 to our consolidated
financial statements appearing elsewhere in this Report).
EBITDA in Fiscal Year 1996 includes $4.1 million of restructuring costs
related to the American Color division.
EBITDA in Fiscal Year 1995 includes a $3.3 million net gain related to a
change in our defined benefit pension plans (as discussed in note (d)
above).
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
On May 8, 1998, we refinanced all of our existing bank indebtedness in the 1998
Refinancing (see note 6 to our consolidated financial statements appearing
elsewhere in this Report and "Liquidity and Capital Resources" below). The
primary objectives of the refinancing were to gain greater financial and
operating flexibility, to reduce our overall cost of capital and to provide
greater opportunity for internal growth and growth through acquisitions.
Printing. 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' preference for larger printers, such as
us, with a wider variety of services, greater distribution capabilities 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.
Throughout Fiscal Year 1997, the overall cost of paper declined. During Fiscal
Year 1998, paper prices increased slightly through mid year and then declined to
near beginning of the year levels. In Fiscal Year 1999, as most grades of paper
became more plentiful, paper prices declined. 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
printing sector, while improving product quality. Additionally, in order to grow
sales and improve gross margins, we increased the geographic and industry scope
of our sales force and shifted the mix of our business toward retail customers
and away from the printing of certain lower margin publications. Furthermore,
management believes that continued strong demand for the retail advertising
insert product has resulted in less excess industry capacity and therefore an
improved supply/demand position within the marketplace. This dynamic has
resulted in a greater stabilization of printing prices which in conjunction with
our cost reduction programs has had favorable impact on printing gross profit
levels.
In January 1998, we approved a plan for our printing division which was designed
to improve responsiveness to customer requirements, increase asset utilization
and reduce overhead costs. The cost of this plan was accounted for in accordance
with the guidance set forth in Emerging Issues Task Force Issue 94-3 "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)" ("EITF 94-3")
(see "Restructuring Costs and Other Special Charges" below).
American Color. The digital imaging and prepress services industry has
experienced significant technological advances as electronic digital prepress
systems have replaced the more manual and photography-based methods utilized in
the past. This shift in technology, which improved process efficiencies and
decreased processing costs, produced increased unit growth for American Color as
the demand for color pages increased. However, American Color's selling price
levels per page have declined because of greater efficiencies resulting from
increased use of technology. American Color's revenue from traditional services
are now supplemented by new revenue sources from electronic digital imaging and
prepress services such as digital image storage, facilities management,
computer-to-plate services, creative services, consulting and training services,
multimedia and internet services, and software and data-base management.
In March 1999, we approved a plan for our American Color division, which was
designed to consolidate certain facilities in order to improve asset utilization
and operational efficiency, modify the organizational structure as a result of
facility consolidation and other changes, and reduce overhead and other costs.
The cost of this plan is being accounted for in accordance with the guidelines
set forth in EITF 94-3 (see "Restructuring Costs and Other Special Charges"
below).
13
The following table summarizes our historical results of continuing operations
for Fiscal Years 1999, 1998 and 1997:
Fiscal Year Ended March 31,
----------------------------------
1999 1998 1997
---- ---- ----
(dollars in thousands)
Sales:
Printing $431,936 $446,350 $449,924
American Color 83,816 82,384 71,712
Other (a) 4,591 4,601 2,915
-------- -------- --------
Total $520,343 $533,335 $524,551
======== ======== ========
Gross Profit:
Printing $ 62,025 $ 51,278 $ 49,469
American Color 19,128 19,249 15,062
Other (a) 99 1,401 140
-------- -------- --------
Total $ 81,252 $ 71,928 $ 64,671
======== ======== ========
Gross Margin:
Printing 14.4% 11.5% 11.0%
American Color 22.8% 23.4% 21.0%
Total 15.6% 13.5% 12.3%
Operating Income (Loss):
Printing (b)(c) $ 38,994 $ 22,612 $ 25,858
American Color (b)(c) (2,542) 2,404 (1,315)
Other (a)(d)(e) (6,997) (12,913) (14,171)
-------- -------- --------
Total $29,455 $12,103 $10,372
======== ======== ========
(a) Other operations primarily include revenues and expenses associated with
our digital visual effects business ("Digiscope").
(b) Printing operating income includes the impact of $1.7 million and $0.4
million in Fiscal Year 1998 and Fiscal Year 1997, respectively, of other
special charges related to asset write-offs and write-downs. American
Color's operating loss includes the impact of other special charges
related to asset write-offs and write-downs of $0.9 million and $1.5
million in Fiscal Year 1999 and Fiscal Year 1997, respectively. See
"Restructuring Costs and Other Special Charges" below.
(c) Printing operating income includes the impact of $3.9 million of
restructuring costs in Fiscal Year 1998. American Color's operating loss
includes the impact of restructuring costs of $4.6 million and $0.9
million in Fiscal Year 1999 and Fiscal Year 1997, respectively. See
"Restructuring Costs and Other Special Charges" below. American Color's
operating (loss) income also includes $0.9 million of non-recurring
charges in Fiscal Year 1999 associated with the consolidation of certain
production facilities and $1.5 million of non-recurring charges in Fiscal
Year 1998 associated with the relocation of its corporate office and
various severance related expenses.
(d) Also includes corporate general and administrative expenses, and
amortization expense.
(e) Other operations also reflects the impact of $0.3 million of non-recurring
employee termination expenses and $0.2 million of non-cash charges
associated with an employee benefit program in Fiscal Year 1999, certain
charges associated with employee benefit programs of $0.7 million in
Fiscal Year 1998 and non-recurring employee termination expenses of $2.5
million in Fiscal Year 1997 (see note 15 to our consolidated financial
statements appearing elsewhere in this Report).
14
Historical Results of Operations
Fiscal Year 1999 vs. Fiscal Year 1998
Our sales decreased 2.4% to $520.3 million in Fiscal Year 1999 from $533.3
million in Fiscal Year 1998. This decrease includes a decrease in printing sales
of $14.5 million, or 3.2%, offset in part by an increase in American Color's
sales of $1.4 million or 1.7%. Our gross profit increased to $81.3 million or
15.6% of sales in Fiscal Year 1999 from $71.9 million or 13.5% of sales in
Fiscal Year 1998. Our operating income increased to $29.5 million or 5.7% of
sales in Fiscal Year 1999 from $12.1 million or 2.3% of sales in Fiscal Year
1998. See the discussion of these changes by segment below.
Printing
Sales. Printing sales decreased $14.5 million to $431.9 million in Fiscal Year
1999 from $446.4 million in Fiscal Year 1998. Printing production volume
increased approximately 4%. This increase was offset by an increase in sales to
customers that supply their own paper and the impact of declining paper prices.
Gross Profit. Printing gross profit increased $10.7 million to $62.0 million in
Fiscal Year 1999 from $51.3 million in Fiscal Year 1998. Printing gross margin
increased to 14.4% in Fiscal Year 1999 from 11.5% in Fiscal Year 1998. The
increase in gross profit is primarily the result of reduced manufacturing costs
and increased production volume. The increase in gross margin includes the above
mentioned factors coupled with the impact of an increase in sales to customers
that supply their own paper and declining paper prices.
Selling, General and Administrative Expenses. Printing selling, general and
administrative expenses decreased slightly to $23.0 million, or 5.3% of printing
sales, in Fiscal Year 1999 compared to $23.1 million, or 5.2% of printing sales,
in Fiscal Year 1998.
Operating Income. As a result of the above factors and the incurrence of both
restructuring costs associated with the printing restructuring plan of $3.9
million in Fiscal Year 1998 and other special charges related to asset
write-offs and write-downs of $1.7 million in Fiscal Year 1998 (see
"Restructuring Costs and Other Special Charges" below), operating income from
the printing business increased to $39.0 million in Fiscal Year 1999 from $22.6
million in Fiscal Year 1998.
American Color
Sales. American Color's sales increased $1.4 million, or 1.7%, to $83.8 million
in Fiscal Year 1999 from $82.4 million in Fiscal Year 1998. The increase in
Fiscal Year 1999 was primarily the result of higher packaging prepress sales and
increased digital imaging and prepress production volume.
Gross Profit. American Color's gross profit decreased $0.1 million to $19.1
million in Fiscal Year 1999 from $19.2 million in Fiscal Year 1998. American
Color's gross margin decreased to 22.8% in Fiscal Year 1999 from 23.4% in Fiscal
Year 1998. Included were decreases resulting from increased costs associated
with new operations servicing the packaging prepress industry and $0.9 million
of non-recurring costs associated with the consolidation of certain production
facilities, offset in part by an increase in volume and other material and
payroll savings.
Selling, General and Administrative Expenses. American Color's selling, general
and administrative expenses decreased to $16.2 million, or 19.3% of American
Color's sales in Fiscal Year 1999 from $16.8 million, or 20.4% of American
Color's sales in Fiscal Year 1998. This decrease is primarily a result of $1.5
million of non-recurring charges associated with the relocation of American
Color's corporate office and various severance related expenses in Fiscal Year
1998, partially offset by increased selling expenses for packaging prepress and
other operations in Fiscal Year 1999.
Operating (Loss) Income. As a result of the above factors and the incurrence of
both restructuring costs associated with the American Color restructuring plan
of $4.6 million in Fiscal Year 1999 and other special charges related to asset
write-offs and write-downs of $0.9 million in Fiscal Year 1999 (see
"Restructuring Costs and Other Special Charges" below), operating (loss) income
at American Color decreased to a loss of $2.5 million in Fiscal Year 1999 from
income of $2.4 million in Fiscal Year 1998.
15
Fiscal Year 1998 vs. Fiscal Year 1997
Our sales increased 1.7% to $533.3 million in Fiscal Year 1998 from $524.6
million in Fiscal Year 1997. This increase includes an increase in American
Color sales of $10.7 million, or 14.9%, offset in part by a decrease in printing
sales of $3.5 million, or 0.8%. Our gross profit increased to $71.9 million or
13.5% of sales in Fiscal Year 1998 from $64.7 million or 12.3% of sales in
Fiscal Year 1997. Our operating income increased to $12.1 million or 2.3% of
sales in Fiscal Year 1998 from $10.4 million or 2% of sales in Fiscal Year 1997.
See the discussion of these changes by segment below.
Printing
Sales. Printing sales decreased $3.5 million to $446.4 million in Fiscal Year
1998 from $449.9 million in Fiscal Year 1997. This decrease is primarily the
result of an increase in sales to customers that supply their own paper offset
in part by an increase in production volume of approximately 2.5%.
Gross Profit. Printing gross profit increased $1.8 million to $51.3 million in
Fiscal Year 1998 from $49.5 million in Fiscal Year 1997. Printing gross margin
increased to 11.5% in Fiscal Year 1998 from 11.0% in Fiscal Year 1997. The
increase in gross profit includes reduced manufacturing costs, improved mix and
pricing, along with an increase in production volume. These gains were partially
offset by an increase in depreciation and amortization expense. The increase in
gross margin includes the above mentioned factors and the impact of an increase
in sales to customers that supply their own paper.
Selling, General and Administrative Expenses. Printing selling, general and
administrative expenses remained relatively unchanged at $23.1 million, or 5.2%
of printing sales, in Fiscal Year 1998 compared to $23.1 million, or 5.1% of
printing sales, in Fiscal Year 1997.
Operating Income. As a result of the above factors and the incurrence of both
restructuring costs associated with the printing restructuring plan of $3.9
million in Fiscal Year 1998 and other special charges related to asset
write-offs and write-downs of $1.7 million and $0.4 million in Fiscal Year 1998
and 1997, respectively (see "Restructuring Costs and Other Special Charges"
below), operating income from the printing business decreased to $22.6 million
in Fiscal Year 1998 from $25.9 million in Fiscal Year 1997.
American Color
Sales. American Color's sales increased $10.7 million, or 14.9%, to $82.4
million in Fiscal Year 1998 from $71.7 million in Fiscal Year 1997. The increase
in Fiscal Year 1998 was primarily the result of higher digital imaging and
prepress production volume due to American Color's implementation of various
digital prepress technologies, including facilities management, packaging
prepress, software and image management services.
Gross Profit. American Color's gross profit increased $4.1 million to $19.2
million in Fiscal Year 1998 from $15.1 million in Fiscal Year 1997. American
Color's gross margin increased to 23.4% in Fiscal Year 1998 from 21.0% in Fiscal
Year 1997. These improvements resulted from increased volume (primarily from
increased facilities management sales) and material and payroll cost savings
offset in part by costs associated with new operations servicing the packaging
industry.
Selling, General and Administrative Expenses. American Color's selling, general
and administrative expenses increased to $16.8 million, or 20.4% of American
Color's sales in Fiscal Year 1998 from $14.0 million, or 19.5% of American
Color's sales in Fiscal Year 1997. This increase includes relocation costs
related to the move of American Color's corporate office from Phoenix to
Nashville and various severance related expenses of $1.5 million in Fiscal Year
1998. In addition, the increase includes increased sales and marketing expenses,
including the costs of the new packaging sales group.
Operating Income (Loss). As a result of the above factors and the incurrence of
both restructuring costs associated with the American Color restructuring plan
of $0.9 million in Fiscal Year 1997 and other special charges related to asset
write-offs and write-downs of $1.5 million in Fiscal Year 1997 (see
"Restructuring Costs and Other Special Charges" below), operating income (loss)
at American Color increased to income of $2.4 million in Fiscal Year 1998 from a
loss of $1.3 million in Fiscal Year 1997.
16
Other Operations (Fiscal Year 1999 vs. Fiscal Year 1998 and Fiscal Year 1998 vs.
Fiscal Year 1997)
Other operations consist primarily of revenues and expenses associated with our
digital visual effects business, corporate general and administrative expenses,
other expenses and amortization expense. Amortization expenses for other
operations, including goodwill amortization (see below), were $2.6 million, $8.7
million and $8.4 million in Fiscal Years 1999, 1998 and 1997, respectively.
Operating losses from other operations improved to a loss of $7.0 million in
Fiscal Year 1999 from a loss of $12.9 million in Fiscal Year 1998. This decrease
is primarily attributable to a $6.0 million reduction in goodwill amortization
expense. This reduction results from full amortization of the original 1993
acquisition goodwill related to American Color as of March 31, 1998.
Operating losses from other operations improved to a loss of $12.9 million in
Fiscal Year 1998 from a loss of $14.2 million in Fiscal Year 1997. This
improvement includes non-recurring employee termination expenses of $2.5 million
in Fiscal Year 1997 (see note 15 to our consolidated financial statements
appearing elsewhere in this Report) and improved digital visual effects
operating results in Fiscal Year 1998. These improvements were offset in part by
$0.7 million of certain expenses associated with employee benefit programs in
Fiscal Year 1998 and increases in amortization expenses and certain corporate
general and administrative expenses during Fiscal Year 1998.
Goodwill Amortization
Amortization expense associated with goodwill was $2.5 million, $8.5 million and
$8.3 million for Fiscal Years 1999, 1998 and 1997, respectively.
Restructuring Costs and Other Special Charges
Restructuring Costs:
American Color. In March 1999, we approved a plan for our American Color
division, which was designed to consolidate certain facilities in order to
improve asset utilization and operational efficiency, modify the organizational
structure as a result of facility consolidation and other changes and reduce
overhead and other costs. The cost of this plan is being accounted for in
accordance with the guidance set forth in EITF 94-3. The pretax costs of $4.6
million which were incurred as a direct result of this plan (excluding other
special charges related to asset write-offs and write-downs - see below)
includes $2.5 million of employee termination costs, $1.2 million of lease
settlement costs and $0.9 million of other transition and restructuring
expenses. This restructuring charge was recorded in the quarter ended March 31,
1999. The majority of these costs will be paid or settled before March 31, 2000.
In addition, approximately $0.9 million of restructuring costs (primarily
relocation expenses) were recognized in Fiscal Year 1997. These costs were
associated with a plan implemented in Fiscal Year 1996 for our American Color
division.
Printing. In January 1998, we approved a plan for our printing division which
was designed to improve responsiveness to customer requirements, increase asset
utilization and reduce overhead costs. The cost of this plan was accounted for
in accordance with the guidance set forth in EITF 94-3. The pretax costs of $3.9
million which were incurred as a direct result of this plan (excluding other
special charges related to asset write-offs and write-downs - see below)
includes $3.3 million of employee termination costs and $0.6 million of
relocation and other transition expenses. This restructuring charge was recorded
in the quarter ended March 31, 1998. These costs were paid or settled before
March 31, 1999.
Other Special Charges:
During the quarter ended March 31, 1999, we recorded special charges totaling
$0.9 million to adjust the carrying values of idle, disposed and
under-performing assets of the American Color division to estimated fair values.
The provision was based on a review of our long-lived assets in accordance with
Financial Accounting Standards Board Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS 121"). Fair value was based on our estimate of held and used and idle
assets based on current market conditions using the best information available.
17
During the quarter ended March 31, 1998, we recorded special charges totaling
$1.7 million to adjust the carrying values of idle, disposed and
under-performing assets of the printing segment to estimated fair values. The
provision was based on a review of our long-lived assets in accordance with SFAS
121. Fair value was based on our estimate of held and used and idle assets based
on current market conditions using the best information available.
During Fiscal Year 1997, we recorded special charges totaling $1.9 million, for
impaired long-lived assets and to adjust the carrying values of idle, disposed
and under-performing assets to estimated fair values. The provisions were based
on a review of long-lived assets in connection with the initial adoption of SFAS
121. Of the Fiscal Year 1997 total of long-lived assets that were adjusted based
on being idle, disposed of or under-performing, approximately $0.4 million and
$1.5 million related to the printing and American Color divisions, respectively.
Fair value was based on our estimate of held and used and idle assets based on
current market conditions using the best information available.
These special charges are classified within restructuring costs and other
special charges in the consolidated statements of operations.
Interest Expense
Interest expense decreased 7.0% to $36.2 million in Fiscal Year 1999 from $39.0
million in Fiscal Year 1998. This decrease includes the impact of both lower
levels of indebtedness and reduced borrowing costs associated with our 1998
Refinancing. See note 6 to our consolidated financial statements appearing
elsewhere in this Report.
Interest expense increased 7.3% to $39.0 million in Fiscal Year 1998 from $36.3
million in Fiscal Year 1997. This increase includes the impact of increased
obligations under capital leases and incremental costs related to the $25
million term loan facility entered into on June 30, 1997 (the "Old Term Loan
Facility"). See note 6 to our consolidated financial statements appearing
elsewhere in this Report.
Other Expense (Income) and Taxes
Other expenses, net increased to $1.2 million in Fiscal Year 1999 from $0.4
million in Fiscal Year 1998. Other expenses, net in Fiscal Year 1999 include
various non-recurring legal settlements and related fees of approximately $0.8
million.
Other expenses, net increased to $0.4 million in Fiscal Year 1998 from $0.2
million in Fiscal Year 1997.
Our effective tax rates for Fiscal Years 1999, 1998, and 1997 exceeded the
federal statutory rate due primarily to increases in the valuation allowance,
amortization of nondeductible goodwill, and foreign tax expense.
Discontinued Operations
Sullivan Media Corporation
Our Fiscal Year 1998 and Fiscal Year 1997 net loss includes the estimated net
loss on shut down of approximately $0.4 million and $1.5 million, respectively,
related to our discontinued wholly-owned subsidiary SMC. Our net loss in Fiscal
Year 1997 includes the loss from operations of SMC of approximately $1.6
million. See note 2 to our consolidated financial statements appearing elsewhere
in this Report.
Extraordinary Loss on Early Extinguishment of Debt
As part of the 1998 Refinancing which was consummated in Fiscal Year 1999 (see
note 6 to our consolidated financial statements appearing elsewhere in this
Report), 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 the quarter ended June 30, 1998.
18
Net Loss
As a result of the factors discussed above, our net loss improved to a loss of
$12.5 million in Fiscal Year 1999 from a loss of $29.9 million in Fiscal Year
1998. The Fiscal Year 1999 net loss includes the $4.1 million extraordinary loss
related to early extinguishment of debt, $4.6 million of restructuring costs and
$0.9 million of other special charges related to asset write-offs and
write-downs associated with our American Color division. Our net loss decreased
to a loss of $29.9 million in Fiscal Year 1998 from a loss of $31.7 million in
Fiscal Year 1997. The Fiscal Year 1998 net loss includes $3.9 million of
restructuring costs and $1.7 million of other special charges related to asset
write-offs and write-downs associated with our printing division. In addition,
Fiscal Year 1998 includes $1.5 million of non-recurring charges related to the
relocation of American Color's corporate office and various severance related
expenses, certain charges associated with employee benefit programs of $0.7
million and an approximate $0.7 million loss from discontinued operations
related to SMC and SMI. The Fiscal Year 1997 net loss includes $0.9 million of
expense related to the American Color restructuring, $1.9 million of other
special charges related to asset write-offs and write-downs, $2.5 million of
non-recurring employee termination expenses (see note 15 to our consolidated
financial statements appearing elsewhere in this Report) and an approximate $3.1
million loss from discontinued operations related to SMC.
Liquidity and Capital Resources
On May 8, 1998, we refinanced all of our existing bank indebtedness in the 1998
Refinancing (see note 6 to our consolidated financial statements appearing
elsewhere in this Report). The primary objectives of the refinancing were to
gain greater financial and operating flexibility, to reduce our overall cost of
capital and to provide greater opportunity for internal growth and growth
through acquisitions.
The 1998 Refinancing transaction included the following:
(1) We entered into a $145 million credit facility with a syndicate of
lenders (the "Bank Credit Agreement") providing for:
- a $70 million revolving credit facility, which is not subject to a
borrowing base limitation, maturing on March 31, 2004 (the
"Revolving Credit Facility"),
- a $25 million amortizing term loan facility maturing on March 31,
2004 (the "A Term Loan Facility"), and
- a $50 million amortizing term loan facility maturing on March 31,
2005 (the "B Term Loan Facility");
(2) The repayment of all $57.0 million of indebtedness outstanding under
our previous credit agreement as amended (the "Old Bank Credit
Agreement") (plus accrued interest to the date of repayment);
(3) The repayment of all $25.0 million of indebtedness outstanding under
the Old Term Loan Facility (plus accrued interest to the date of
repayment); and
(4) The payment of fees and expenses associated with the refinancing
transaction.
The Revolving Credit Facility provides for a maximum of $70 million borrowing
availability and includes a $40 million letter of credit sub-limit. At May 31,
1999, we had total borrowings and letters of credit outstanding under the
Revolving Credit Facility of approximately $24.5 million, and therefore,
additional borrowing availability of approximately $45.5 million.
At May 31, 1999, $20.5 million of the A Term Loan Facility and $43.8 million of
the B Term Loan Facility remained outstanding. Scheduled A Term Loan Facility
and B Term Loan Facility payments due in the fiscal year ending March 31, 2000
("Fiscal Year 2000") are de minimus. Scheduled repayments of capital lease
obligations and other senior indebtedness during Fiscal Year 2000 will
approximate $7.4 million and $0.8 million, respectively.
19
In Fiscal Year 1999, net cash provided by operating activities of $48.1 million
(see consolidated statements of cash flows appearing elsewhere in this Report),
proceeds from sales of property, plant and equipment of $0.8 million and
proceeds from the 1998 Refinancing of $84.8 million ($75 million from the A Term
Loan and B Term Loan facilities and $9.8 million of initial net borrowings under
the Revolving Credit Facility) were used to:
(1) Repay $84.2 million of indebtedness outstanding under the Old Bank
Credit Agreement and Old Term Loan Facility (including related
transaction fees),
(2) Fund scheduled principal repayments of indebtedness and financing costs
of $20.3 million (including capital lease obligations of $6.9 million
and voluntary prepayments on the A Term Loan Facility and B Term Loan
Facility of $4.4 million and $5.6 million, respectively),
(3) Fund cash capital expenditures of $11.1 million, and
(4) Further reduce outstanding revolver borrowings by $18.1 million.
We plan to continue our program of upgrading our printing and prepress equipment
and currently anticipate that Fiscal Year 2000 cash capital expenditures will
approximate $19.3 million and equipment acquired under capital leases will
approximate $3.0 million. Our cash on hand of approximately $2.6 million is
presented net of outstanding checks within trade accounts payable at March 31,
1999. Accordingly, cash is presented at a balance of $0 in the March 31, 1999
balance sheet.
Our primary sources of liquidity are cash provided by operating activities and
borrowings under the Revolving Credit Facility. We anticipate that our primary
needs for liquidity will be to conduct our business, meet our debt service
requirements, make capital expenditures and, if we elect, redeem, repay or
repurchase outstanding indebtedness.
At March 31, 1999, we had total indebtedness outstanding of $289.6 million,
including capital lease obligations as compared to $319.7 million at March 31,
1998, representing a reduction of indebtedness during Fiscal Year 1999 of $30.1
million. Of the total debt outstanding at March 31, 1999, $64.3 million was
outstanding under the Bank Credit Agreement at a weighted-average interest rate
of 7.1%. Indebtedness under the Bank Credit Agreement bears interest at floating
rates. At March 31, 1999, we had indebtedness other than obligations under the
Bank Credit Agreement of $225.3 million (including $185 million of the Notes).
We are currently in compliance with all financial covenants set forth in the
Bank Credit Agreement. See note 6 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, 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.
20
EBITDA
Fiscal Year Ended March 31,
----------------------------------------------------------
1999 1998 1997
------------- ------------- ------------
(dollars in thousands)
EBITDA:
Printing (a) $ 61,627 $ 46,838 $ 46,755
American Color (a) 5,283 8,405 5,180
Other (b) (c) (2,624) (2,876) (4,963)
=========== =========== ===========
Total $ 64,286 $ 52,367 $ 46,972
=========== =========== ===========
EBITDA Margin:
Printing 14.3% 10.5% 10.4%
American Color 6.3% 10.2% 7.2%
Total 12.4% 9.8% 9.0%
(a) Printing EBITDA includes the impact of $3.9 million of restructuring costs
in Fiscal Year 1998. American Color EBITDA for Fiscal Year 1999 and Fiscal
Year 1997 includes the impact of restructuring costs of $4.6 million and
$0.9 million, respectively. See "Restructuring Costs and Other Special
Charges" above. American Color EBITDA also includes $0.6 million of
non-recurring charges in Fiscal Year 1999 associated with the consolidation
of certain production facilities and $1.5 million of non-recurring charges
in Fiscal Year 1998 associated with the relocation of American Color's
corporate office and various severance related expenses.
(b) Other operations include revenues and expenses associated with our digital
visual effects business and corporate general and administrative expenses.
(c) Other operations also reflects the impact of $0.3 million of non-recurring
employee termination expenses and $0.2 million of non-cash charges
associated with an employee benefit program in Fiscal Year 1999, certain
charges associated with employee benefit programs of $0.7 million in Fiscal
Year 1998 and non-recurring employee termination expenses of $2.5 million
in Fiscal Year 1997 (see note 15 to our consolidated financial statements
appearing elsewhere in this Report).
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, depreciation, amortization, other special
charges related to asset write-offs and write-downs, other income (expense),
discontinued operations and extraordinary items. "EBITDA Margin" is defined as
EBITDA as a percentage of net sales. EBITDA is not a measure of financial
performance under generally accepted accounting principles and should not be
considered an alternative to net income (or any other measure of performance
under generally accepted accounting principles) as a measure of performance or
to cash flows from operating, investing or financing activities as an indicator
of cash flows or as a measure of liquidity. Certain covenants in the Indenture
and the Bank Credit Agreement are based on EBITDA, subject to certain
adjustments.
Printing. As a result of the reasons previously described under "--Printing,"
(excluding changes in depreciation and amortization expense and other special
charges related to asset write-offs and write-downs), printing EBITDA increased
$14.8 million to $61.6 million in Fiscal Year 1999 from $46.8 million in Fiscal
Year 1998. Printing EBITDA was $46.8 million in both Fiscal Year 1998 and Fiscal
Year 1997. Printing EBITDA Margin increased to 14.3% in Fiscal Year 1999 from
10.5% in Fiscal Year 1998. Printing EBITDA Margin increased to 10.5% in Fiscal
Year 1998 from 10.4% in Fiscal Year 1997. Included in the Fiscal Year 1998
EBITDA and EBITDA Margin is $3.9 million of restructuring costs related to the
printing restructuring plan (see discussion above).
21
American Color. As a result of the reasons previously described under
"--American Color," (excluding changes in depreciation, amortization expense,
other non-cash expenses and other special charges related to asset write-offs
and write-downs), American Color EBITDA decreased $3.1 million to $5.3 million
in Fiscal Year 1999 from $8.4 million in Fiscal Year 1998. American Color EBITDA
Margin decreased to 6.3% in Fiscal Year 1999 from 10.2% in Fiscal Year 1998.
Included in the Fiscal Year 1999 EBITDA and EBITDA Margin is the impact of $0.6
million of non-recurring charges associated with the consolidation of certain
production facilities and $4.6 million of restructuring costs (see discussion
above). American Color EBITDA increased to $8.4 million in Fiscal Year 1998 from
$5.2 million in Fiscal Year 1997, representing an increase of $3.2 million.
EBITDA Margin increased to 10.2% in Fiscal Year 1998 from 7.2% in Fiscal Year
1997. American Color EBITDA and EBITDA Margin in Fiscal Year 1998 includes $1.5
million of non-recurring charges associated with the relocation of its corporate
office and various severance related expenses. Included in the Fiscal Year 1997
EBITDA and EBITDA Margin is the impact of restructuring costs of $0.9 million
(see discussion above).
Other Operations. As a result of the reasons previously described under "--Other
Operations," (excluding changes in depreciation and amortization expense), other
operations negative EBITDA improved to negative EBITDA of $2.6 million in Fiscal
Year 1999 from negative EBITDA of $2.9 million in Fiscal Year 1998. EBITDA from
other operations improved to negative EBITDA of $2.9 million in Fiscal Year 1998
from negative EBITDA of $5.0 million in Fiscal Year 1997. Other operations
negative EBITDA for Fiscal Year 1999 includes the impact of $0.3 million of
non-recurring employee termination expenses and $0.2 million of non-cash charges
associated with an employee benefit program and negative EBITDA for Fiscal Year
1998 includes the impact of $0.7 million of certain charges associated with
employee benefit programs. Negative EBITDA for Fiscal Year 1997 includes the
impact of non-recurring employee termination expenses of $2.5 million (see note
15 to our consolidated financial statements appearing elsewhere in this Report).
Amortization of Goodwill
Our goodwill is amortized on a straight-line basis by business segment. Goodwill
amortization expense will be approximately $2.5 million in Fiscal Year 2000.
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. Throughout Fiscal Year 1997, the overall cost of paper declined.
During Fiscal Year 1998, paper prices increased slightly through mid year and
then declined to near beginning of the year levels. In Fiscal Year 1999, as most
grades of paper became more plentiful, paper prices declined. Management expects
that, as a result of our strong relationship with key suppliers, our material
costs will remain competitive within the industry.
Seasonality
Some of our printing and digital imaging and prepress 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 15 -- May 15); Back-to-School (July 15 -- August 15); and
Thanksgiving/Christmas (October 15 -- December 15). One of the reasons we chose
to enter the comic book printing market is that it is not subject to significant
seasonal fluctuations. Sales of newspaper Sunday comics are also not subject to
significant seasonal fluctuations. Our strategy has been and will continue to
include the mitigation of the seasonality of our printing business by increasing
our sales to customers whose own sales are less seasonal (i.e., food and drug
companies).
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, 1999, 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.
22
Accounting
There are no pending accounting pronouncements that, when adopted, are expected
to have a material effect in our results of operations or its financial
position.
Year 2000 Issue
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Computer programs or
hardware that have date-sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the Year 2000 which could result in
a system failure or miscalculations causing disruptions of operations. In the
spring of 1997, we initiated our review of our Year 2000 information and
manufacturing systems compliance ("Y2K Project"). Our Y2K Project includes four
phases: assessment, remediation, testing, and implementation. Over the past
year, we have made significant progress in each of these areas and believe we
will complete the Y2K Project by October 1999.
Information Technology Systems. To date, we have fully completed our assessment
of all information technology systems that could be significantly affected by
the Year 2000. We have completed 85% of the remediation phase of our information
technology systems and expect to complete software reprogramming and replacement
by July 1999. To date, we have completed 85% of our testing and have implemented
65% of our remediated systems. Completion of the testing phase for all
significant systems is expected by July 1999, all remediated systems are
anticipated to be fully tested by August 1999, with 100% implementation targeted
for September 1999.
Production and Manufacturing Systems. Our strategy includes an on-going program
that focuses on the need to upgrade and maintain our production and
manufacturing systems. As such, we believe our production and manufacturing
systems to be reasonably current and do not anticipate significant Year 2000
issues in this area. We have completed the assessment phase in this area and are
90% complete in the remediation phase of our operating equipment. To date, the
required remediation has been within planned expenditures, and has not been
material to our consolidated financial results. We do not expect full
remediation of our operating equipment to be costly or extensive. We are 70%
complete with the testing of our remediated operating equipment. Once testing is
complete, the operating equipment in most cases will be ready for immediate use.
We expect to complete our remediation efforts by August 1999. Testing and
implementation of affected equipment is expected to be completed by October
1999.
We have nearly completed the process of gathering information about the Year
2000 compliance of our significant suppliers and subcontractors (external
agents). To date, we are not aware of any external agent with a Year 2000 issue
that would materially impact our results of operations, liquidity, or capital
resources. In addition, as a printer and graphics prepress supplier, our
products and services are not generally impacted by the Year 2000 issue.
We are utilizing both internal and external resources to reprogram, or replace,
test, and implement the software and operating equipment necessary for Year 2000
compliance. The total cost of the Y2K Project is estimated at $4.0 million and
is being funded through operating cash flows and our Revolving Credit Facility.
To date, we have incurred costs of approximately $1.9 million, relating to all
phases of the Y2K Project. Of the remaining project costs, approximately $1.9
million is attributable to the purchase of new software and operating equipment,
which will be capitalized. The remaining $0.2 million relates to repair of
hardware and software and will be expensed as incurred.
Management believes they have an effective program in place to resolve the Year
2000 compliance issue in a timely manner and is monitoring the progress of the
Y2K Project closely. As noted above, we have not yet completed all necessary
phases of the Y2K Project. In the unlikely event that we do not complete any
additional phases, (1) the printing segment would be forced to manually enter
customer orders, pay its employees, order and track its paper needs, and collect
certain cost, sales history and operating data of a non-critical nature, and (2)
certain digital workflows in our American Color division would be diverted to
existing, less efficient digital workflows, thereby reducing capacity in
affected locations and the American Color division would have to pay its
employees manually. In addition, disruption in services such as electrical
power, telecommunications and banking, or disruption in the general retail
economy environment could materially adversely affect us. Although there can be
no assurance that our efforts will prevent a material adverse impact on the
results of operations or financial conditions, we believe that none of these
scenarios are likely. We plan to evaluate the completion status of all phases of
the Y2K Project in September 1999 and determine if and when contingency plans
are necessary.
23
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 foreign
printing facility (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, 1999 and March 31, 1998, 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, 1999 and March 31,
1998. At our March 31, 1999 and March 31, 1998 borrowing levels, a
hypothetical 10% adverse change in interest rates on the variable rate debt
would have been immaterial. Approximately 75% and 68% of our long-term debt
(excluding capitalized lease obligations) was fixed rate at March 31, 1999 and
March 31, 1998, 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.
24
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......................................... 26
Consolidated balance sheets - March 31, 1999 and 1998.................. 27
For the Years Ended March 31, 1999, 1998 and 1997:
Consolidated statements of operations............................. 29
Consolidated statements of stockholders' deficit.................. 30
Consolidated statements of cash flows............................. 31
Notes to Consolidated Financial Statements............................. 33
The following consolidated financial statement schedules of ACG Holdings, Inc.
are included in Part IV, Item 14:
I. Condensed Financial Information of Registrant
Condensed Consolidated Financial Statements (parent company only)
for the years ended March 31, 1999, 1998, and 1997, and as of
March 31, 1999 and 1998
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.
25
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, 1999 and 1998, and the related consolidated statements of
operations, stockholders' deficit, and cash flows for each of the three fiscal
years in the period ended March 31, 1999. Our audits also included the financial
statement schedules listed in the Index at Item 14(a). These financial
statements and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, 1999 and 1998, and the consolidated results of their
operations and their cash flows for each of the three fiscal years in the period
ended March 31, 1999, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
As discussed in Note 10 to the consolidated financial statements, in fiscal year
1998 the Company adopted the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 123, "Accounting for
Stock Based Compensation."
Nashville, Tennessee
May 25, 1999
26
ACG HOLDINGS, INC.
Consolidated Balance Sheets
(Dollars in thousands)
March 31,
-----------------------------
1999 1998
----------- ------------
Assets
Current assets:
Cash $ 0 0
Receivables:
Trade accounts, less allowance for doubtful accounts of
$2,860 and $2,112 at March 31, 1999 and 1998,
respectively 57,895 63,185
Other 2,082 2,605
--------- ---------
Total receivables 59,977 65,790
Inventories 8,343 10,795
Prepaid expenses and other current assets 3,271 3,578
--------- ---------
Total current assets 71,591 80,163
Property, plant and equipment:
Land and improvements 2,907 3,148
Buildings and improvements 18,895 19,426
Machinery and equipment 177,851 178,713
Furniture and fixtures 6,549 5,379
Leased assets under capital leases 52,843 48,039
Equipment installations in process 4,146 1,612
--------- ---------
263,191 256,317
Less accumulated depreciation (119,576) (96,684)
--------- ---------
Net property, plant and equipment 143,615 159,633
Excess of cost over net assets acquired,
less accumulated amortization of $44,587
and $42,060 at March 31, 1999
and 1998, respectively 72,029 74,556
Other assets 11,765 15,606
--------- ---------
Total assets $ 299,000 329,958
========= =========
See accompanying notes to consolidated financial statements.
27
ACG HOLDINGS, INC.
Consolidated Balance Sheets
(Dollars in thousands, except par values)
March 31,
-----------------------------
1999 1998
----------- ------------
Liabilities and Stockholders' Deficit
Current liabilities:
Current installments of long-term debt and
capitalized leases $ 7,994 9,131
Trade accounts payable 37,096 27,381
Accrued expenses 30,756 31,539
Income taxes 1,196 502
--------- --------
Total current liabilities 77,042 68,553
Long-term debt and capitalized leases, excluding
current installments 281,595 310,526
Deferred income taxes 7,916 9,443
Other liabilities 51,753 47,521
--------- --------
Total liabilities 418,306 436,043
Stockholders' deficit:
Common stock, voting, $.01 par value, 5,852,223
shares authorized, 134,250 shares and 134,812
shares issued and outstanding at March 31, 1999
and 1998, respectively 1 1
Preferred Stock, $.01 par value, 15,823 shares
authorized, 3,622 shares and 3,631 shares
Series AA convertible preferred stock issued
and outstanding at March 31, 1999 and
1998, respectively, $40,000,000 liquidation
preference, 1,606 shares Series BB convertible
preferred stock issued and outstanding at March 31,
1999 and 1998, $17,500,000 liquidation preference -- --
Additional paid-in capital 58,286 58,249
Accumulated deficit (174,905) (162,250)
Other accumulated comprehensive loss, net of tax (2,688) (2,085)
--------- --------
Total stockholders' deficit (119,306) (106,085)
--------- --------
Commitments and contingencies
Total liabilities and stockholders' deficit $ 299,000 329,958
========= ========
See accompanying notes to consolidated financial statements.
28
ACG HOLDINGS, INC.
Consolidated Statements of Operations
(In thousands)
Year ended March 31,
----------------------------------------
1999 1998 1997
----------- ---------- ---------
Sales $ 520,343 533,335 524,551
Cost of sales 439,091 461,407 459,880
---------- ---------- --------
Gross profit 81,252 71,928 64,671
Selling, general and
administrative expenses 43,806 45,690 43,164
Amortization of goodwill 2,527 8,537 8,254
Restructuring costs and other
special charges 5,464 5,598 2,881
---------- ---------- --------
Operating income 29,455 12,103 10,372
---------- ---------- --------
Other expense (income):
Interest expense 36,242 38,956 36,289
Interest income (165) (143) (157)
Other, net 1,217 412 245
---------- ---------- --------
Total other expense 37,294 39,225 36,377
---------- ---------- --------
Loss from continuing operations before
income taxes and extraordinary item (7,839) (27,122) (26,005)
Income tax expense (523) (2,106) (2,591)
---------- ---------- --------
Loss from continuing operations
before extraordinary item (8,362) (29,228) (28,596)
Discontinued operations:
Loss from operations, net of tax -- -- (1,557)
Estimated loss on shut down, net of tax -- (667) (1,550)
---------- ---------- --------
Loss before extraordinary item (8,362) (29,895) (31,703)
Extraordinary loss on early
extinguishment of debt (4,106) -- --
---------- ---------- --------
Net loss $ (12,468) (29,895) (31,703)
========== ========== ========
See accompanying notes to consolidated financial statements.
29
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 loss Total
---------- ----------- ---------- ----------- ------------- ---------
Balances, March 31, 1996 $ 1 -- 57,499 (100,525) (1,371) $ (44,396)
---------
Net loss -- -- -- (31,703) -- (31,703)
Change in cumulative
translation adjustment,
net of tax -- -- -- -- (219) (219)
---------
Comprehensive loss (31,922)
--------- ----------- ---------- ----------- ------------- ---------
Balances, March 31, 1997 $ 1 -- 57,499 (132,228) (1,590) $ (76,318)
---------
Net loss -- -- -- (29,895) -- (29,895)
Other comprehensive loss,
net of tax:
Change in cumulative
translation adjustment -- -- -- -- (410) (410)
Unfunded pension liability -- -- -- -- (85) (85)
---------
Comprehensive loss (30,390)
Treasury stock -- -- -- (127) -- (127)
Exercise of stock options -- -- 176 -- -- 176
Executive stock compensation -- -- 574 -- -- 574
--------- ----------- ---------- ----------- ------------- ---------
Balances, March 31, 1998 $ 1 -- 58,249 (162,250) (2,085) $(106,085)
---------
Net loss -- -- -- (12,468) -- (12,468)
Other comprehensive loss,
net of tax:
Change in cumulative
translation adjustment -- -- -- -- (504) (504)
Unfunded pension liability -- -- -- -- (99) (99)
---------
Comprehensive loss (13,071)
Treasury stock -- -- -- (187) -- (187)
Executive stock compensation -- -- 37 -- -- 37
--------- ----------- ---------- ----------- ------------- ---------
Balances, March 31, 1999 $ 1 -- 58,286 (174,905) (2,688) $ (119,306)
========= =========== ========== =========== ============= =========
See accompanying notes to consolidated financial statements.
30
ACG HOLDINGS, INC.
Consolidated Statements of Cash Flows
(In thousands)
Year ended March 31,
----------------------------------------
1999 1998 1997
----------- ---------- ---------
Cash flows from operating activities:
Net loss $ (12,468) (29,895) (31,703)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Extraordinary item - non-cash 4,106 --