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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, 1998
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
incorporation or organization) identification number)
100 Winners Circle
Brentwood, Tennessee 37027
(615) 377-0377
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
AMERICAN COLOR GRAPHICS, INC.
(Exact name of registrant as specified in its charter)
New York 16-1003976
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
100 Winners Circle
Brentwood, Tennessee 37027
(615) 377-0377
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
Aggregate market value of the voting and non-voting Common Stock of ACG
Holdings, Inc. held by non-affiliates: Not applicable.
ACG Holdings, Inc. has 134,812 shares outstanding of its Common Stock, $.01
Par Value, as of June 11, 1998 (all of which are privately owned and not
traded on a public market).
DOCUMENTS INCORPORATED BY REFERENCE
None
INDEX
Page
Referenced
Form 10-K
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PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 8
Item 3. Legal proceedings........................................... 8
Item 4. Submission of matters to a vote of security holders......... 9
PART II
Item 5. Market for registrant's common equity and related stockholder
matters..................................................... 10
Item 6. Selected financial data..................................... 11
Item 7. Management's discussion and analysis of financial condition
and results of operations................................... 15
Item 8. Financial statements and supplementary data................. 28
Item 9. Changes in and disagreements with accountants on accounting
and financial disclosure.................................... 60
PART III
Item 10. Directors and executive officers............................ 61
Item 11. Executive compensation...................................... 62
Item 12. Security ownership of certain beneficial owners and
management...................................................67
Item 13. Certain relationships and related transactions.............. 68
PART IV
Item 14. Exhibits, financial statement schedules and reports on
Form 8-K.................................................... 70
Signatures.................................................. 81
PART I
Special Note Regarding Forward Looking Statements
This Annual Report on Form 10-K (the "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 and 7 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. Such 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., (collectively the "Company"), including
fluctuations in the cost of paper and other raw materials used by the Company,
changes in the advertising and printing markets, actions by the Company's
competitors particularly with respect to pricing, the financial condition of the
Company's customers, the financial condition and liquidity of the Company, the
general condition of the United States economy, demand for the Company's
products and services and the matters set forth in this Report generally.
Consequently, such forward-looking statements should be regarded solely as the
Company's current plans, estimates and beliefs. The Company does not
undertake and specifically declines 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
The Company is a successor to a business that commenced operations in 1926, and
is one of the largest national diversified commercial printers in North America
with ten printing plants in eight states and Canada and fifteen prepress
facilities located throughout the United States. The Company operates primarily
in two business sectors of the commercial printing industry: printing (which
accounted for approximately 84% of total sales during the fiscal year ended
March 31, 1998 ("Fiscal Year 1998")) and digital imaging and prepress services
conducted through its American Color division (which accounted for approximately
16% of total sales in Fiscal Year 1998). The Company's printing business and
American Color division are both headquartered in Nashville, Tennessee.
Partnerships affiliated with Morgan Stanley Dean Witter & Co. currently own
61.4% of the outstanding common stock and 72.5% of the outstanding preferred
stock of Holdings.
On April 8, 1993 (the "Acquisition Date"), pursuant to an Agreement and
Plan of Merger dated March 12, 1993, as amended (the "Merger Agreement"),
between Communications and SGI Acquisition Corp. ("Acquisition Corp."),
Acquisition Corp. was merged with and into Communications (the "1993
Acquisition"). Acquisition Corp. was formed by The Morgan Stanley
Leveraged Equity Fund II, L.P. ("MSLEF II"), certain institutional
investors and certain members of management (the "Purchasing Group") for
the purpose of acquiring a majority interest in Communications.
Acquisition Corp. acquired a substantial and controlling majority interest
in Communications in exchange for $40 million in cash. In the 1993
Acquisition, Communications continued as the surviving corporation and the
separate corporate existence of Acquisition Corp. was terminated.
On August 15, 1995, the Company completed a merger transaction (the
"Shakopee Merger") with Shakopee Valley Printing, Inc. ("Shakopee").
Shakopee was formed to effect the purchase of certain assets and assumption
of certain liabilities of Shakopee Valley Printing, a division of Guy
Gannett Communications. On December 22, 1994, pursuant to an Agreement for
the Purchase of Assets between Guy Gannett Communications (the "Seller")
and Shakopee (the "Buyer"), the Seller agreed to sell (effective at the
close of business on December 22, 1994) certain assets and transfer certain
liabilities of Shakopee Valley Printing to the Buyer for a total purchase
price of approximately $42.6 million, primarily financed through the
issuance of 35,000 shares of common stock and bank borrowings. The 35,000
shares were purchased by Morgan Stanley Capital Partners III, L.P., Morgan
Stanley Capital Investors, L.P. and MSCP III 892 Investors, L.P.
(collectively, the "MSCP III Entities"), together with First Plaza Group
Trust and Leeway & Co. Each of the MSCP III Entities is affiliated with
Morgan Stanley Dean Witter & Co. In addition, the other stockholders of
Shakopee were also stockholders of the Company.
On March 11, 1996, Graphics sold its 51% interest in National Inserting
Systems, Inc. ("NIS"). The proceeds from the sale were used to repay
indebtedness under the Bank Credit Agreement (as defined below).
On March 12, 1996, Graphics acquired the assets of Gowe, Inc., a Medina,
Ohio regional printer of newspapers, T.V. books and retail advertising
inserts and catalogs (the "Medina Facility") for cash and assumption of
certain liabilities of Gowe, Inc. (the "Medina Acquisition").
During March 1996, the Company completed the construction and start-up of a
plant in Hanover, Pennsylvania ("Flexi-Tech"). Flexi-Tech is dedicated to
the production of commercial flexi books (a form of advertising inserts)
serving various segments of the retail advertising market and the
production of T.V. listing guides serving the newspaper market.
In February of the fiscal year ended March 31, 1997 ("Fiscal Year 1997"),
the Company made a strategic decision to shut down the operations of its
wholly-owned subsidiary Sullivan Media Corporation ("SMC"). SMC's shut
down was accounted for as a discontinued operation, and accordingly, SMC's
operations are segregated in the Company's consolidated financial
statements. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Discontinued Operations" and note 5 of
the Company's consolidated financial statements.
Market data used throughout this report was obtained from industry
publications and internal Company estimates. While the Company believes
such information is reliable, the accuracy of such information has not been
independently verified and cannot be guaranteed.
Printing
The Company's printing business, which accounted for approximately 84%, 86%
and 85% of the Company's sales in Fiscal Year 1998, Fiscal Year 1997 and
the fiscal year ending March 31, 1996 ("Fiscal Year 1996"), respectively,
produces retail advertising inserts, comics (newspaper Sunday comics, comic
insert advertising and comic books), and other publications.
Retail Advertising Inserts (80% of printing sales in Fiscal Year 1998 and
Fiscal Year 1997 and 75% in Fiscal Year 1996). The Company believes that
it is one of the largest printers of retail advertising inserts in the
United States. 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. The Company prints advertising inserts for
approximately 300 retailers.
Comics (14% of printing sales in Fiscal Year 1998 and Fiscal Year 1997 and
16% in Fiscal Year 1996, include newspaper Sunday comics, comic insert
advertising and comic books). The Company believes that it is one of the
largest printers of comics in the United States. The Company prints Sunday
comics for over 300 newspapers in the United States and Canada and prints a
significant share of the annual comic book requirements of Marvel
Entertainment Group, Inc. ("Marvel").
Other Publications (6% of printing sales in Fiscal Year 1998 and Fiscal
Year 1997 and 9% in Fiscal Year 1996). The Company prints local
newspapers, T.V. guide listings and other publications.
In January 1998, the Company approved a plan for its 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 19 to the Company's
consolidated financial statements.
Printing Production
The Company's network of ten printing plants in the United States and
Canada is strategically positioned to service major metropolitan centers
and provide the Company with distribution efficiencies and shorter
turnaround times; two factors instrumental in continuing the Company's
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. The Company principally uses heatset offset and flexographic
web printing equipment in its printing operations. The Company owns a
substantial majority of its printing equipment, which currently consists of
36 heatset offset presses, 5 coldset offset presses and 11 flexographic
presses. Most of the Company's advertising inserts and all of its other
publications and comic books are printed using the heatset offset process,
while some advertising inserts and substantially all of the Company's
newspaper Sunday comics and comic advertising inserts are printed using the
flexographic process.
In the 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, the ink solvents are absorbed into the paper.
Because heatset offset presses can print on a wide variety of papers and
produce sharper reproductions, the heatset offset process provides a more
colorful and attractive product than cold offset presses.
The flexographic process differs from offset printing in that it utilizes
flexible plates and rapid-drying, water-based (as opposed to solvent-based)
inks. The flexographic image area results from a raised surface on a
polymer plate which is transferred directly to the paper surface.
Flexography is used extensively in printing high quality consumer goods
packaging. The Company's flexographic printing generally provides vibrant
color reproduction at 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 set up times make the process
suited to commercial customers with shorter runs and extensive regional
versioning.
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. The Company believes that its mix and
configuration of presses and press services allows for efficient tailoring
of printing services to customers' product needs.
Digital Imaging and Prepress Services
The Company's digital imaging and prepress services business is conducted
by its American Color division ("American Color") which accounted for
approximately 16%, 14% and 13% of the Company's Fiscal Year 1998, Fiscal
Year 1997 and Fiscal Year 1996 sales, respectively. The Company believes
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 15 full service locations nationwide.
American Color assists its customers in the capture, manipulation,
transmission and distribution of images. The majority of its work leads to
the production of four-color separations in a format appropriate for use by
printers. In recent years, technological advances have made it possible to
replace largely manual and photography-based production methods with
computer-based, electronic means for producing four-color films faster and
at lower costs. 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 and software
and data 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 April 1995, the Company implemented a plan for its American Color
division designed to improve productivity, increase customer service and
responsiveness, and provide increased growth in this business. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Restructuring Costs and Other Special Charges" and note 19 to
the Company's consolidated financial statements.
Competitive Advantages and Strategy
Competitive Advantages. The Company believes that it has the following
competitive advantages in its printing and digital imaging and prepress
services businesses:
Modern Equipment. The Company believes that its web heatset
offset and flexographic web printing equipment is among the most advanced
in the industry and that the average age of its equipment is significantly
less than the majority of its regional competitors and is comparable to its
major national competitors. The Company is also committed to a
comprehensive, long-term maintenance program which enhances the reliability
and extends the life of its presses and other production equipment. It
also believes that its digital imaging and prepress equipment is
significantly more advanced than many of its smaller regional competitors,
many of whom have not incorporated digital prepress technologies to the
same extent as the Company, nor adopted an open systems environment which
allows greater flexibility and more efficient maintenance.
Strong Customer Base. The Company provides printing services to a
diverse base of customers, including approximately 300 retailers and over
300 newspapers in the United States and Canada. The customer base includes
a significant number of the major national retailers and larger newspaper
chains as well as numerous smaller regional retailers. The Company's
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 retail, publishing and
catalog businesses, many of whom also have long-term relationships with the
Company. Although the digital imaging and prepress services business has
generally been on a spot bid basis in the past, the Company has been
successful in continuing to increase the proportion of its business under
long-term contracts.
Competitive Cost Structure. The Company has reduced the variable
and fixed costs of production at its printing facilities over the past
several years and believes it is well positioned to maintain its
competitive cost structure in the future due to economies of scale. The
Company has also reduced both labor and material costs (the principal
variable production costs) in its digital imaging and prepress services
business primarily through the adoption of new digital prepress production
methodologies.
Strong Management Team. Since the 1993 Acquisition, the Company
has strengthened its printing management group by hiring experienced
managers with a clear focus on growth and continued cost reduction,
resulting in an improved cost structure and a well-defined strategy for
future expansion. The Company also has strengthened its management group
in its digital imaging and prepress services business, filling a number of
senior, regional and plant management positions with individuals who the
Company believes will manage the digital imaging and prepress services
business for growth and profitability and will continue to upgrade its
capabilities.
National Presence. The Company's nine printing plants in the
United States and one plant in Canada provide the Company with distribution
efficiencies, strong customer service, flexibility and short turnaround
times, all of which are instrumental in the Company's continued success in
servicing its large national and regional retail accounts. The Company's
expanded sales and marketing groups provide greater customer coverage and
enable it to more successfully penetrate regional markets. The Company
believes that its 15 digital imaging and prepress facilities provide it
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. The Company's objective is to increase shareholder value by
growing its revenues, increasing its market share and reducing costs. The
Company's strategy to achieve this objective is as follows:
Grow Unit Volume. Management believes that the Company's level of
national sales coverage, when coupled with its significant industry
experience and customer-focused sales force, will result in unit growth.
In an effort to stimulate unit volume growth, the Company has strengthened
its printing sales group. Unit volume growth is also expected to result
from continued capital expansion and selective printing acquisitions. In
addition, in its digital imaging and prepress services business, the
Company has expanded its sales force, strengthened training, more closely
focused its marketing efforts on new, larger customers and implemented a
revised incentive compensation program.
Continue to Improve Product Mix. The Company intends to increase
its share of the retail advertising insert market. In addition, the
Company expects to continue to adjust the mix of its customers and products
within the retail advertising insert market to those that are more
profitable and less seasonable and to maximize the use of the Company's
equipment. The Company is also continuing expansion of its printing
facilities' capabilities for in-plant prepress and postpress services. The
Company's 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 the Company has to offer. Additionally, the Company 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. The
Company intends to further reduce its production costs at its printing
facilities through its Total Quality Management Process, an ongoing cost
reduction and continuous quality improvement process. Additionally, the
Company plans to continue to maximize scale advantages in the purchasing,
technology and engineering areas. The Company also intends to continue to
gain variable cost efficiencies in its digital imaging and prepress
services business by using its technical resources to improve digital
prepress workflows at its various facilities. The Company also believes it
will be able to reduce its per unit technical, sales and management costs
as its sales volumes increase in this business.
Continue to Make Opportunistic Acquisitions. An integral part of
the Company's long-term growth strategy includes a plan to selectively
assess and acquire other printing and digital imaging and prepress services
companies that the Company believes will enhance its leadership position in
these industries.
Customers and Distribution
Customers. The Company sells its 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. The
Company performs a portion of its printing work, primarily the printing of
Sunday comics and comic books, under long-term contracts with its
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 its printing work, the
Company obtains varying time commitments from its customers ranging from
job to job to annual allocations. Printing prices are generally fixed
during such commitments; however, the Company's 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 retailers, magazine publishers,
newspaper publishers, printers, catalog sales organizations, 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 results in an increasing amount of contractual
business related to facilities management arrangements with customers. The
Company's 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 the Company 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 the Company's
consolidated sales in Fiscal Year 1998. The Company's top ten customers
accounted for approximately 34% of consolidated sales in Fiscal Year 1998.
Distribution. The Company distributes its 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 the Company competes 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.
The Company believes that competition in the printing business is based
primarily on quality and service at a competitive price. The advertising
insert business is a large, fragmented industry in which the Company
competes for national accounts with several large national printers,
several of whom are larger and better capitalized than the Company. In
addition, the Company also competes with numerous regional printers for the
printing of advertising inserts. Although the Company faces competition
principally from one other company (Big Flower Press Holdings, Inc.) in the
printing of Sunday newspaper comics in the United States, there are
numerous newspapers that print their own Sunday comics. The Company's
other publication business competes with many large national and regional
commercial printers.
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 inability to
keep pace with the technological advances required to service increasingly
complex customer demands. The Company believes 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 the Company's printing business are paper
and ink. The Company purchases substantially all of its ink and related
products under long-term ink supply contracts. Throughout the fiscal year
ended March 31, 1995 ("Fiscal Year 1995") and the majority of Fiscal Year
1996, the printing industry experienced substantial increases in the cost
of paper. In late Fiscal Year 1996 and throughout Fiscal Year 1997,
however, the overall cost of paper declined. During Fiscal Year 1998,
paper prices remained relatively stable. Management expects that, as a
result of the Company's strong relationships with key suppliers, its
material costs will remain competitive within the industry. In accordance
with industry practice, the Company generally passes through changes in the
cost of paper to its customers. The primary inputs in prepress services
processes are film and proofing materials.
In both of the Company's business sectors, there is an adequate supply of
the necessary materials available from multiple vendors. The Company is
not dependent on any single supplier and has had no significant problems in
the past obtaining necessary materials.
Seasonality
Some of the Company's 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."
Backlog
Because the Company's printing, digital imaging and prepress services
products are required to be delivered soon after final customer orders are
received, the Company does not experience any backlog of unfilled customer
orders.
Employees
As of May 31, 1998, the Company had a total of approximately 2,800
employees, of which approximately 200 employees are represented by a
collective bargaining agreement that will expire on December 31, 2001. The
Company considers its relations with its employees to be excellent.
Governmental and Environmental Regulations
The Company is 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. The Company believes that it is 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, the Company does not anticipate that such expenditures will
be material. See "Legal Proceedings - Environmental Matters."
ITEM 2. PROPERTIES
The Company operates in 25 locations in 16 states and Canada. The Company
owns seven printing plants in the United States and one in Canada and
leases two printing plants, one in California and one in Pennsylvania. The
American Color division of the Company has 15 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, the Company
maintains one small executive office and its Nashville headquarter
facility, both of which are leased. The Company believes that its plants
and facilities are adequately equipped and maintained for present and
planned operations.
ITEM 3. LEGAL PROCEEDINGS
The Company has been named as a defendant in several legal actions arising
from its normal business activities. In the opinion of management, any
liability that may arise from such actions will not have a material adverse
effect on the financial condition or results of operations of the Company.
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 the Company's 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, the
Company has a reserve of approximately $0.1 million in connection with this
liability on its consolidated balance sheet at March 31, 1998. The Company
believes this amount is adequate to cover such liability.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 16, 1998, a majority of the shareholders of Holdings approved a
recapitalization plan for Holdings (see note 14 to the Company's
consolidated financial statements) pursuant to Section 228 of the General
Corporation Law of the State of Delaware and the By-laws of Holdings. All
other shareholders were notified of the recapitalization plan.
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 11, 1998, there were approximately 96 shareholders 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 the Company's consolidated
financial statements.
Recent Sales of Unregistered Securities
During the fourth quarter of Fiscal Year 1998, certain officers of
the Company exercised options to purchase Holdings' Common Stock
for $0.01/share. The sold securities 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, 1994, 1995, 1996, 1997 and 1998. The balance sheet data as
of March 31, 1994, 1995, 1996, 1997 and 1998 and the statement of
operations data for the fiscal years ended March 31, 1994, 1995, 1996, 1997
and 1998 are derived from the audited consolidated financial statements for
such periods and at such dates. The selected financial data below also
reflects the Company's discontinued wholly-owned subsidiary, SMC and its
coupon free standing insert ("FSI") operation previously conducted by its
discontinued wholly-owned subsidiary SMI. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Discontinued
Operations" and note 5 of the Company's consolidated financial statements.
This data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
Company's consolidated financial statements appearing elsewhere in this
annual report.
Selected Financial Data
ACG Holdings, Inc.
Fiscal Year Ended March 31,
----------------------------------------------------
1998 1997 1996 1995(a) 1994
----------------------------------------------------
Statement of Operations Data: (dollars in thousands)
Sales $ 533,335 524,551 529,523 433,198 414,673
Cost of Sales 461,407 459,880 465,110 370,267 369,520
------- ------- ------- ------- -------
Gross Profit 71,928 64,671 64,413 62,931 45,153
Selling, general and administrative expenses (b) 54,227 51,418 44,164 41,792 39,343
Restructuring costs and other special charges (c) 5,598 2,881 7,533 -- --
Gain from curtailment and establishment of defined benefit
pension plans, net (d) -- -- -- (3,311) --
------- ------- ------- ------- -------
Operating income 12,103 10,372 12,716 24,450 5,810
Interest expense, net 38,813 36,132 32,425 25,334 23,737
Other expense (income) 412 245 1,722 985 2,369
Income tax expense 2,106 2,591 4,874 2,552 2,380
------- ------- ------- ------- -------
Loss from continuing operations before extraordinary items (29,228) (28,596) (26,305) (4,421) (22,676)
------- ------- ------- ------- -------
Discontinued operations: (e)
Loss from operations, net of tax -- (1,557) (1,364) (912) (23,272)
Estimated (loss) on shut down and gain on settlement, net of tax (667) (1,550) 2,868 18,495 (38,412)
Loss on early extinguishment of debt (f) -- -- (4,526) -- --
------- ------- ------- ------- -------
Net (loss) income $ (29,895) (31,703) (29,327) 13,162 (84,360)
======= ======= ======= ======= =======
Balance Sheet Data (at end of period):
Cash and cash equivalents $ 0 0 0 4,635 8,839
Working capital (deficit) 11,610 (8,598) 9,612 4,958 6,956
Total assets 329,958 333,975 351,181 328,368 305,521
Long-term debt and capitalized leases, including current installments (g) 319,657 312,309 297,617 258,201 250,439
Stockholders' deficit (106,085) (76,318) (44,396) (14,970) (45,485)
Other Data:
Net cash provided (used) by operating activities $ 18,625 24,313 (4,187) 30,510 (27,329)
Net cash used by investing activities (10,024) (10,997) (24,436) (17,580) (1,332)
Net cash (used) provided by financing activities (8,587) (13,312) 23,982 (17,527) 23,113
Capital expenditures (including lease obligations entered into) 23,713 37,767 28,022 20,415 15,722
EBITDA (h) $ 52,367 46,972 46,847 51,719 33,068
NOTES TO SELECTED FINANCIAL DATA
(a) On August 15, 1995, 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 common control with
the Company). 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 expenses include
(1) $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 (2) $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 (including $1.9 million
related to the resignation of the Company's former Chief Executive
Officer - see note 21 to the Company's consolidated financial
statements).
(c) In January 1998, the Company approved a restructuring plan for its
printing division designed to improve responsiveness to customer
requirements, increase asset utilization and reduce overhead costs.
The Company recognized $3.9 million of costs under such plan in Fiscal
Year 1998.
In April 1995, the Company implemented a restructuring plan for its
American Color division which was designed to improve productivity,
increase customer service and responsiveness and provide increased
growth in the business. The Company recognized $0.9 million and $4.1
million of costs under such plan in Fiscal Year 1997 and Fiscal Year
1996, respectively.
In addition, the Company recorded $1.7 million, $1.9 million and $3.4
million of other special charges related to asset write-offs and
write-downs in its printing and American Color divisions in Fiscal
Year 1998, Fiscal Year 1997 and Fiscal Year 1996, respectively (see
note 19 to the Company's consolidated financial statements).
(d) In October 1994, the Company amended its defined benefit pension
plans, which resulted in the freezing of additional defined benefits
for future services under the plans effective January 1, 1995. The
Company 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. The Company
recognized a $0.4 million expense associated with the establishment of
the SERP.
(e) In February of Fiscal Year 1997, the Company made a strategic decision
to shut down the operation of its wholly-owned subsidiary SMC. SMC's
shut down has been accounted for as a discontinued operation, and
accordingly, SMC's operations are segregated in the Company's
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
5 of the Company's consolidated financial statements.
On February 16, 1994, the Company assigned the coupon FSI contracts of
its subsidiary, Sullivan Marketing, Inc. ("SMI"), to News America
FSI, Inc. ("News America"). In June 1994, the Company 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.
In Fiscal Year 1996, the Company 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 5 of the Company's
consolidated financial statements.
(f) As part of the Shakopee Merger and the refinancing transactions (the
"Refinancing"), collectively (the "Transactions"), the Company
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 and 1994
includes an additional $9.7 million and $11.3 million, respectively,
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 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 (the "Indenture") and the
Company's Credit Agreement with BT Commercial Corporation (the "Bank
Credit Agreement") are based on EBITDA, subject to certain adjustments.
EBITDA includes (1) $1.5 million of non-recurring charges associated
with the relocation of American Color's corporate office and various
severance related expenses, and (2) $0.6 million of non-cash charges
associated with an employee benefit program in Fiscal Year 1998.
EBITDA includes $3.9 million in restructuring costs related to its
printing division in Fiscal Year 1998 and $0.9 million and $4.1
million of restructuring costs related to its American Color division
in Fiscal Year 1997 and Fiscal Year 1996, respectively (see note 19 to
the Company's consolidated financial statements).
EBITDA includes non-recurring employee termination expenses of $2.5
million in Fiscal Year 1997 (including $1.9 million related to the
resignation of the Company's former Chief Executive Officer - see note
21 to the Company's consolidated financial statements).
EBITDA in Fiscal Year 1995 includes a $3.3 million net gain related to
a change in the Company's defined benefit pension plans (as discussed
in note (d) above).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
On August 15, 1995, 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 common control with the Company).
On March 11, 1996, the Company sold its 51% interest in NIS for
approximately $2.5 million in cash and a note for approximately $0.2
million. This transaction resulted in a net gain on disposal of
approximately $1.3 million, which is classified as Other, net in the
consolidated statement of operations. The proceeds of the sale were used
to repay indebtedness under the Bank Credit Agreement.
On March 12, 1996, Graphics acquired the assets of Gowe, Inc., a Medina,
Ohio based regional printer of newspapers, T.V. books and retail
advertising inserts and catalogs (the "Medina Facility") for cash and
assumption of certain liabilities of Gowe, Inc. (the "Medina
Acquisition"). The Medina Acquisition was accounted for under the purchase
method of accounting applying the provisions of Accounting Principles Board
Opinion No. 16 ("APB 16"). The Medina Facility's results of operations are
included in the Company's consolidated financial statements subsequent to
March 11, 1996.
During March 1996, the Company completed the construction and start-up of
Flexi-Tech, a new plant in Hanover, Pennsylvania. Flexi-Tech is dedicated
to the production of commercial flexi books (a form of advertising inserts)
serving various segments of the retail advertising market and the
production of T.V. listing guides serving the newspaper market.
In Fiscal Year 1997, the Company began to present certain costs of its
American Color production facilities within cost of sales rather than as
selling, general and administrative expenses. This new presentation is
consistent with the Company's presentation of the printing sector's
financial information, and the Company believes that this is a more
accurate measure of the gross margin of the business. The financial
information for Fiscal Year 1996 has been reclassified to conform with this
presentation.
In February of Fiscal Year 1997, the Company made a strategic decision to
shut down the operations of its wholly-owned subsidiary SMC. SMC's shut
down has been accounted for as a discontinued operation, and accordingly,
SMC's operations are segregated in the Company's consolidated financial
statements. Sales, cost of sales and selling, general and administrative
expenses attributable to SMC for Fiscal Year 1996 have been reclassified to
discontinued operations.
Printing. In recent years, the Company has taken a number of steps which
have resulted in improved printing sector performance including the hiring
of several key managers in the manufacturing, purchasing, quality,
technical services, production planning and customer service departments
(see "EBITDA" below). Comprehensive quality improvement and cost reduction
programs have also been implemented for all the Company's printing
processes. As a result of these measures, the Company has been successful
in lowering its manufacturing costs within the printing sector, while
improving product quality.
Additionally, in order to grow sales and improve gross margins, the Company
increased the geographic and industry scope of its sales force and shifted
the mix of its business toward retail customers and away from the printing
of certain lower margin publications. The Shakopee Merger, Medina
Acquisition and Flexi-Tech operations (see "Business - Printing") are
consistent with the Company's overall strategy to continue to increase
profitability by growing its revenues, increasing its market share and
reducing costs.
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 the Company's cost reduction
programs has had favorable impact on printing gross profit levels.
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 the Company, 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 the Company's sales will continue to be subject to changes
in retailers' demands for printed products.
The cost of paper is a principal factor in the Company's overall pricing to
its customers. The level of paper costs also has a significant impact on
the Company's reported sales. Beginning in Fiscal Year 1994 and throughout
Fiscal Year 1995 and the majority of Fiscal Year 1996, the paper industry
experienced increased demand and high capacity utilization in various
grades of paper. This led to a global tightening of the paper supply, and
as a result, the printing industry experienced substantial increases in the
cost of paper. In late Fiscal Year 1996 and throughout Fiscal Year 1997,
the overall cost of paper declined. During Fiscal Year 1998, paper prices
remained relatively stable. In accordance with industry practice, the
Company generally passes through changes in the cost of paper to its
customers. Although the Company has been successful in passing through
paper price increases to its customers in the past, there can be no
assurances that the Company will be able to pass through future paper price
increases.
In January 1998, the Company approved a plan for its 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 largely 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 and software
and data-base management.
In April 1995, the Company implemented a plan for its American Color
division which was designed to improve productivity, increase customer
service and responsiveness, and provide increased growth in this business.
The cost of this plan was accounted for in accordance with the guidelines
set forth in EITF 94-3 (see "Restructuring Costs and Other Special Charges"
below).
The following table summarizes the Company's historical results of continuing
operations for Fiscal Year 1998, 1997 and 1996.
Fiscal Year Ended March 31,
-----------------------------------------------
1998 1997 1996
------------ ----------- -----------
(dollars in thousands)
Sales:
Printing $446,350 $449,924 $453,381
American Color 86,985 74,627 72,461
Other (a) -- -- 3,681
------- ------- -------
Total $533,335 $524,551 $529,523
======= ======= =======
Gross Profit:
Printing $51,278 $49,469 $49,015
American Color 20,628 15,133 13,687
Other (a) 22 69 1,711
------- ------- -------
Total $71,928 $64,671 $64,413
======= ======= =======
Gross Margin:
Printing 11.5% 11.0% 10.8%
American Color 23.7% 20.3% 18.9%
Total 13.5% 12.3% 12.2%
Operating Income (Loss):
Printing (b)(c) $22,612 $25,858 $28,239
American Color (b) (c) 2,509 (1,576) (3,975)
Other (a) (d) (13,018) (e) (13,910) (e) (11,548)
------- ------- -------
Total $12,103 $10,372 $12,716
======= ======= =======
(a) Other operations in Fiscal Year 1996 include revenues and expenses
associated with the Company's 51% owned subsidiary, NIS (sold on March
11, 1996, see note 4 to the Company's consolidated financial
statements).
(b) Printing operating income includes the impact of $1.7 million, $0.4
million and $2 million in Fiscal Year 1998, Fiscal Year 1997 and
Fiscal Year 1996, respectively, of other special charges related to
asset write-offs and write-downs. American Color's operating loss
includes the impact of $1.5 million and $1.4 million in Fiscal Year
1997 and Fiscal Year 1996, respectively, of other special charges
related to asset write-offs and write-downs (see note 19 to the
Company's consolidated financial statements).
(c) Printing operating income includes the impact of $3.9 million of
restructuring costs in Fiscal Year 1998. American Color's operating
income (loss) includes the impact of restructuring costs of $0.9
million and $4.1 million in Fiscal Year 1997 and Fiscal Year 1996,
respectively (see note 19 to the Company's consolidated financial
statements) 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) Also reflects non-cash charges associated with an employee benefit
program of $0.6 million in Fiscal Year 1998 and non-recurring employee
termination expenses of $2.5 million in Fiscal Year 1997 (including $1.9
million related to the resignation of the Company's former Chief Executive
Officer-see note 21 to the Company's consolidated financial statements).
Historical Results of Operations
Fiscal Year 1998 vs. Fiscal Year 1997
The Company's 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 $12.4 million, or 16.6%, offset in part
by a decrease in printing sales of $3.5 million, or 0.8%. The Company's
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. The
Company's 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 sector 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 $12.4 million, or 16.6%, to $87.0
million in Fiscal Year 1998 from $74.6 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 and increases in digital visual effects work.
Gross Profit. American Color's gross profit increased $5.5 million to
$20.6 million in Fiscal Year 1998 from $15.1 million in Fiscal Year 1997.
American Color's gross margin increased to 23.7% in Fiscal Year 1998 from
20.3% 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 $18.1 million, or 20.8% of
American Color's sales in Fiscal Year 1998 from $14.3 million, or 19.2% 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
$2.5 million in Fiscal Year 1998 from a loss of $1.6 million in Fiscal Year
1997.
Fiscal Year 1997 vs. Fiscal Year 1996
The Company's sales decreased 0.9% to $524.6 million in Fiscal Year 1997
from $529.5 million in Fiscal Year 1996. This decrease includes a decrease
in printing sales of $3.5 million, or 0.8%, an increase in American Color
sales of $2.2 million, or 3% and a $3.7 million decrease in other sales.
The Company's gross profit increased to $64.7 million or 12.3% of sales in
Fiscal Year 1997 from $64.4 million or 12.2% of sales in Fiscal Year 1996.
The Company's operating income decreased to $10.4 million or 2% of sales in
Fiscal Year 1997 from $12.7 million or 2.4% of sales in Fiscal Year 1996.
See the discussion of these changes by sector below.
Printing
Sales. Printing sales decreased to $449.9 million in Fiscal Year 1997 from
$453.4 million in Fiscal Year 1996. This decrease includes a decrease in
paper prices and the effect of an increase in customer supplied paper.
These decreases were partially offset by $46.2 million of incremental sales
from the Medina Facility and Flexi-Tech and an increase in production
volume of approximately 3% (excluding the Medina Facility and Flexi-Tech).
Gross Profit. Printing gross profit increased $0.5 million, or 0.9%, to
$49.5 million in Fiscal Year 1997 from $49 million in Fiscal Year 1996.
Printing gross margin increased to 11% in Fiscal Year 1997 from 10.8% in
Fiscal Year 1996. The increase in gross profit primarily reflects
incremental gross profit from the Medina Facility and an increase in
production volume. In addition, the gross profit improvement includes
reduced variable production and certain other manufacturing costs due to
continued cost containment programs at the printing plants. These gains
were partially offset by an increase in depreciation expense, a reduction
in the price of scrap paper and incremental costs related to the start-up
of Flexi-Tech. The increase in gross margin as a percentage of sales is
due primarily to the impact of the above described items and the impact of
lower paper prices on sales in Fiscal Year 1997.
Selling, General and Administrative Expenses. Printing selling, general
and administrative expenses increased 23.2% to $23.1 million, or 5.1% of
printing sales, in Fiscal Year 1997 from $18.8 million, or 4.1% of printing
sales, in Fiscal Year 1996. The increase in Fiscal Year 1997 was primarily
the result of increased sales and marketing expenses and incremental
selling, general and administrative costs at the Medina Facility and Flexi-
Tech.
Operating Income. As a result of the above factors and the incurrence of
other special charges related to asset write-offs and write-downs of $0.4
million and $2 million in Fiscal Year 1997 and 1996, respectively (see
"Restructuring Costs and Other Special Charges" below), operating income
from the printing business decreased to $25.9 million in Fiscal Year 1997
from $28.2 million in Fiscal Year 1996.
American Color
Sales. American Color's sales increased 3% to $74.6 million in Fiscal Year
1997 from $72.5 million in Fiscal Year 1996. The increase in Fiscal Year
1997 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 and software and
image management services and increases in digital visual effects work
partially offset by lower equipment sales.
Gross Profit. American Color's gross profit increased $1.4 million to
$15.1 million in Fiscal Year 1997 from $13.7 million in Fiscal Year 1996.
American Color's gross margin was 20.3% in Fiscal Year 1997, up from 18.9%
in Fiscal Year 1996. These increases were primarily the result of
increased volume and material cost savings offset in part by increased
facilities management costs.
Selling, General and Administrative Expenses. American Color's selling,
general and administrative expenses increased 18% to $14.3 million or 19.2%
of American Color sales in Fiscal Year 1997 from $12.1 million or 16.7% of
American Color sales in Fiscal Year 1996, primarily as a result of the
addition of sales and marketing and administrative support personnel and
related expenses, including expenses related to its digital visual effects
group.
Operating 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 $4.1 million in Fiscal Year
1996 and other special charges related to asset write-offs and write-downs
of $1.5 million and $1.4 million in Fiscal Year 1997 and 1996, respectively
(see "Restructuring Costs and Other Special Charges" below), operating loss
at American Color decreased to $1.6 million in Fiscal Year 1997 from $4
million in Fiscal Year 1996.
Other Operations (Fiscal Year 1998 vs. Fiscal Year 1997 and Fiscal Year
1997 vs. Fiscal Year 1996)
Other operations primarily include corporate general and administrative
expenses, other expenses and amortization expense. Fiscal Year 1996 also
included revenues and expenses associated with the Company's 51% owned
subsidiary, NIS (sold on March 11, 1996). Amortization expenses for other
operations, including goodwill amortization (see below), were $8.6 million,
$8.4 million and $8.7 million in Fiscal Year 1998, 1997 and 1996,
respectively.
Operating losses from other operations decreased $0.9 million to a loss of
$13.0 million in Fiscal Year 1998 from a loss of $13.9 million in Fiscal
Year 1997. This decrease includes non-recurring employee termination
expenses of $2.5 million in Fiscal Year 1997 (including $1.9 million
related to the resignation of the Company's former Chief Executive Officer
- - see note 21 to the Company's consolidated financial statements) offset in
part by $0.6 million of non-cash expenses associated with an employee
benefit program in Fiscal Year 1998, a $0.2 million increase in
amortization expenses and increases in certain corporate general and
administrative expenses during Fiscal Year 1998.
Operating losses from other operations increased $2.4 million to a loss of
$13.9 million in Fiscal Year 1997 from a loss of $11.5 million in Fiscal
Year 1996. This increase primarily reflects non-recurring employee
termination expenses of $2.5 million in Fiscal Year 1997 (including $1.9
million related to the resignation of the Company's former Chief Executive
Officer - see note 21 to the Company's consolidated financial statements).
Goodwill Amortization
Amortization expense associated with goodwill was $8.5 million, $8.3
million and $8.6 million for Fiscal Year 1998, 1997 and 1996, respectively.
Restructuring Costs and Other Special Charges
Restructuring Costs:
Printing In January 1998, the Company approved a plan for its printing
division which was designed to improve responsiveness to customer
requirements, increase asset utilization and reduce overhead 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 $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. The majority of these costs will be paid or
settled before March 31, 1999.
American Color In April 1995, the Company implemented a plan for its
American Color division which was designed to improve productivity,
increase customer service and responsiveness, and provide increased growth
in the digital imaging and prepress services business. The cost of this
plan was accounted for in accordance with the guidance set forth in EITF
94-3. The pretax costs of $5 million which were incurred as a part of this
plan (excluding other special charges related to asset write-offs and write
downs - see below) represent employee termination, goodwill write-down and
other related costs that were incurred as a direct result of the plan.
Approximately $0.9 million of restructuring costs primarily related to
relocation expenses were recognized in Fiscal Year 1997. In Fiscal Year
1996 the Company recognized $4.1 million of such restructuring charges,
which included $0.9 million of goodwill write-down related to certain
facilities that were either shut down or relocated in conjunction with the
American Color restructuring and $3.2 million primarily for severance and
other personnel related costs.
Other Special Charges:
During the quarter ended March 31, 1998, the Company recorded special
charges totaling $1.7 million to adjust the carrying values of idle,
disposed and under-performing assets of the Company's printing sector to
estimated fair values. The provision was based on a review of Company
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" ("FASB 121"). Fair value was
based on the Company's estimate of held and used and idle assets based on
current market conditions using the best information available.
During Fiscal Year 1997 and Fiscal Year 1996, the Company recorded special
charges totaling $1.9 million and $3.4 million, respectively, 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 adoption of
FASB 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 the
Company's estimate of held and used and idle assets based on current market
conditions using the best information available. Approximately $2 million
of the Fiscal Year 1996 total related to the printing sectors long-lived
assets that were adjusted based on being idle, disposed of or under
performing. The remaining $1.4 million of the Fiscal Year 1996 total
related to the American Color division. The estimated undiscounted future
cash flows attributable to certain American Color division identifiable
long-lived assets held and used was less than their carrying value
principally as a result of high levels of ongoing technological change.
The methodology used to assess the recoverability of the American Color
division long-lived assets involved projecting aggregate cash flows. Based
on this evaluation, the Company determined in Fiscal Year 1996 that long-
lived assets with a carrying amount of $2.2 million were impaired and such
assets were then written down by $1.4 million to their fair value. Fair
value was based on Company estimates and appraisals.
These special charges are classified within restructuring costs and other
special charges in the consolidated statements of operations.
Interest Expense
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 "Term
Loan Facility") (see note 9 to the Company's consolidated financial
statements).
Interest expense increased 11% to $36.3 million in Fiscal Year 1997 from
$32.7 million in Fiscal Year 1996. This increase includes the impact of
increased average indebtedness levels including indebtedness related to the
Transactions and obligations under capital leases. The increased
indebtedness includes the additional indebtedness related to the Shakopee
Merger and indebtedness incurred to fund the fees and expenses associated
with the Refinancing (see notes 2 and 9 to the Company's consolidated
financial statements).
Nonrecurring Charges Related to Terminated Merger
The Company recognized $1.5 million of expenses related to a terminated
merger in Fiscal Year 1996.
Other Expense (Income) and Taxes
Other expenses net, increased to $0.4 million in Fiscal Year 1998 from $0.2
million in Fiscal Year 1997, which was relatively unchanged from Fiscal
Year 1996.
Income tax expense decreased to $2.1 million in Fiscal Year 1998 from $2.6
million in Fiscal Year 1997. This change is primarily due to smaller
amounts of taxable income in foreign jurisdictions and changes in the
deferred tax valuation allowance. During Fiscal Year 1998, the Company
increased its valuation allowance by $7.1 million to $37.2 million.
Income tax expense decreased to $2.6 million in Fiscal Year 1997 from $4.9
million in Fiscal Year 1996. This change is primarily due to smaller
amounts of taxable income in foreign jurisdictions, the Shakopee Merger and
the sale of NIS, partially offset by changes in the deferred tax valuation
allowance. During Fiscal Year 1997, the Company increased its valuation
allowance by $8.9 million to $30.1 million.
Discontinued Operations
SMC
The Company's 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. See note 5 to the Company's consolidated financial
statements. The Company's net loss in Fiscal Year 1997 and Fiscal Year
1996 includes the loss from operations of its discontinued wholly-owned
subsidiary SMC of approximately $1.6 million and $1.4 million,
respectively.
SMI
In Fiscal Year 1998, the Company recorded an additional $0.3 million
estimated loss on shut down. In Fiscal Year 1996, the Company recognized
the settlement of 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.
Loss on Early Extinguishment of Debt, Net of Tax
As part of the Shakopee Merger and the Refinancing in Fiscal Year 1996 (see
notes 2 and 9 to the Company's consolidated financial statements), the
Company 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 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.
Net Loss
As a result of the factors discussed above, the Company's 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. As discussed above, Fiscal Year 1998
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
the Company's 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, non-cash
charges of $0.6 million associated with an employee benefit program and an
approximate $0.7 million loss from discontinued operations related to SMC
and SMI. The Company's net loss increased to a loss of $31.7 million in
Fiscal Year 1997 from a loss of $29.3 million in Fiscal Year 1996. Fiscal
Year 1997 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 (including $1.9 million related to the resignation of
the Company's former Chief Executive Officer - see note 21 to the Company's
consolidated financial statements) and an approximate $3.1 million loss
from discontinued operations related to SMC. The Company's net loss in
Fiscal Year 1996 includes $4.1 million of expense related to the American
Color restructuring, $3.4 million of other special charges related to asset
write-offs and write-downs, a $1.5 million non-recurring expense associated
with a terminated merger, a $4.5 million extraordinary loss on early
extinguishment of debt and approximately $2.9 million of income and a $1.4
million loss from discontinued operations related to SMI and SMC,
respectively.
Liquidity and Capital Resources
On May 8, 1998, the Company refinanced all of its existing bank
indebtedness (see notes 9 and 23 to the Company's consolidated financial
statements). The primary objectives of the refinancing were to gain
greater financial and operating flexibility, reduce the Company's overall
cost of capital and provide greater opportunity for internal growth and
growth through acquisitions.
The 1998 refinancing transaction included the following (1) the Company
entered into a $145 million credit facility with Bankers Trust Company,
Morgan Stanley Senior Funding, Inc., General Electric Capital Corporation,
and a syndicate of lenders (the "Amended and Restated Credit Agreement")
providing for a $70 million revolving credit facility which is not subject
to a borrowing base limitation (the "New Revolving Credit Facility")
maturing on March 31, 2004, a $25 million amortizing term loan facility
maturing on March 31, 2004 (the "A Term Loan Facility") and a $50 million
amortizing term loan facility maturing on March 31, 2005 (the "B Term Loan
Facility"); (2) the repayment of all $57.0 million of indebtedness
outstanding under the existing Bank Credit Agreement (plus $0.4 million of
accrued interest to the date of repayment); (3) the repayment of all $25.0
million of indebtedness outstanding under the existing Term Loan Facility
(plus $0.6 million of accrued interest to the date of repayment) and (4)
the payment of approximately $2.2 million in fees and expenses associated
with the refinancing transaction.
The New Revolving Credit Facility provides for a maximum of $70 million
borrowing availability and includes a $40 million letter of credit sub-
limit. As of May 31, 1998, the Company had total borrowings and letters of
credit outstanding under the New Revolving Credit Facility of approximately
$33.3 million, and therefore, additional borrowing availability of
approximately $36.7 million.
At May 31, 1998, the $25 million of the A Term Loan Facility and $50
million of the B Term Loan Facility remained outstanding. Scheduled A Term
Loan Facility and B Term Loan Facility payments due over the remainder of
fiscal year ending March 31, 1999 ("Fiscal Year 1999") are $0 and $0.5
million, respectively. In addition, scheduled repayments of capital lease
obligations and other senior indebtedness during Fiscal Year 1999 are
approximately $7 million and $2.3 million, respectively.
In Fiscal Year 1998, cash flow from operations and proceeds from the Term
Loan Facility (see the consolidated statements of cash flows) were used to
reduce borrowings under the Revolving Credit Facility of $11.5 million and
to pay $19.8 million in scheduled principal payments on indebtedness
(including capital lease obligations). Additionally, these cash sources
were used to fund the Company's Fiscal Year 1998 cash capital expenditures
of $10.8 million and meet additional investing and financing needs of $1.5
million. The Company plans to continue its program of upgrading its
printing and prepress equipment and currently anticipates that cash capital
expenditures will approximate $8 million and equipment acquired under
capital leases will approximate $7 million during Fiscal Year 1999. The
Company had zero cash on hand at March 31, 1998 due to a requirement under
the Bank Credit Agreement that the Company's daily available funds be used
to reduce borrowings under the Revolving Credit Facility.
At March 31, 1998, the Company had total indebtedness outstanding of $319.7
million, including capital lease obligations. Of the total debt
outstanding at March 31, 1998, $65.2 million was outstanding under the Bank
Credit Agreement at a weighted average interest rate of 8.48% and $25
million was outstanding under the Term Loan Facility at a weighted average
interest rate of 10.63%. Indebtedness under the Amended and Restated
Credit Agreement (effective May 8, 1998) had interest at floating rates.
At March 31, 1998, the Company had indebtedness other than obligations
under the Bank Credit Agreement and Term Loan Facility of $229.5 million
(including $185 million of the Notes). The Company was in compliance with
all financial covenants set forth in the Bank Credit Agreement, as amended,
at March 31, 1998. The Company is currently in compliance with all
financial covenants set forth in the Amended and Restated Credit Agreement.
See notes 9 and 23 to the Company's consolidated financial statements.
A significant portion of Graphics long-term obligations, including
indebtedness under the Amended and Restated Credit Agreement, has been
fully and unconditionally guaranteed by Holdings. Holdings is subject to
certain restrictions under its guarantee of indebtedness under the Amended
and Restated Credit Agreement, including among other things, restrictions
on merges, acquisitions, incurrence of additional debt and payment of cash
dividends. See Notes 1 and 23 to the Company's consolidated financial
statements.
EBITDA
Fiscal Year Ended March 31,
--------------------------------------------------
1998 1997 1996
-------- -------- --------
(dollars in thousands)
EBITDA:
Printing (a) $ 46,838 $ 46,755 $ 46,597
American Color (a) 9,927 5,770 2,907
Other (b) (c) (4,398) (d) (5,553) (d) (2,657)
--------- --------- ---------
Total $ 52,367 $ 46,972 $ 46,847
========= ========= =========
EBITDA Margin:
Printing 10.5% 10.4% 10.3%
American Color 11.4% 7.7% 4.0%
Total 9.8% 9.0% 8.8%
(a) Printing EBITDA includes the impact of $3.9 million of restructuring
costs in Fiscal Year 1998. American Color EBITDA for Fiscal Year 1997
and 1996 includes the impact of restructuring costs of $0.9 million
and $4.1 million, respectively (see note 19 to the Company's
consolidated financial statements and discussion above) 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.
(b) Other operations in Fiscal Year 1996 include revenues and expenses
associated with the Company's 51% owned subsidiary, NIS (sold on March
11, 1996; see note 4 to the Company's consolidated financial
statements).
(c) Also includes corporate general and administrative expenses.
(d) Also reflects non-cash charges associated with an employee benefit
program of $0.6 million in Fiscal Year 1998 and non-recurring employee
termination expenses of $2.5 million in Fiscal Year 1997 (including
$1.9 million related to the resignation of the Company's former Chief
Executive Officer - see note 21 to the Company's consolidated
financial statements).
EBITDA is presented and discussed because management believes that
investors regard EBITDA as a key measure of a leveraged company's
performance and ability to meet its future debt service requirements.
"EBITDA" is defined as earnings before net interest expense, income tax
expense (benefit), depreciation, amortization, other 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, the Bank Credit Agreement and the
Amended and Restated 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 was $46.8 million in both Fiscal Year 1998 and Fiscal Year
1997 and printing EBITDA increased to $46.8 million in Fiscal Year 1997
from $46.6 million in Fiscal Year 1996, representing an increase of $0.2
million. Printing EBITDA Margin increased to 10.5% in Fiscal Year 1998
from 10.4% in Fiscal Year 1997 and printing EBITDA Margin increased to
10.4% in Fiscal Year 1997 from 10.3% in Fiscal Year 1996. 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).
American Color. As a result of the reasons previously described
under "--American Color," (excluding changes in depreciation and
amortization expense and other special charges related to asset write-offs
and write-downs), American Color EBITDA increased to $9.9 million in Fiscal
Year 1998 from $5.8 million in Fiscal Year 1997, representing an increase
of $4.1 million. EBITDA Margin increased to 11.4% in Fiscal Year 1998 from
7.7% in Fiscal Year 1997. American Color EBITDA increased to $5.8 million
in Fiscal Year 1997 from $2.9 million in Fiscal Year 1996, representing an
increase of $2.9 million. EBITDA Margin increased to 7.7% in Fiscal Year
1997 from 4% in Fiscal Year 1996. 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 and Fiscal
Year 1996 EBITDA and EBITDA Margin is the impact of restructuring costs of
$0.9 million and $4.1 million, respectively (see discussion above).
Other Operations. As a result of the reasons previously described
under "--Other Operations," (excluding changes in depreciation and
amortization expense), other operations negative EBITDA decreased to
negative EBITDA of $4.4 million in Fiscal Year 1998 from negative EBITDA of
$5.6 million in Fiscal Year 1997. EBITDA from other operations increased
to negative EBITDA of $5.6 million in Fiscal Year 1997 from negative EBITDA
of $2.7 million in Fiscal Year 1996. Negative EBITDA for Fiscal Year 1998
includes the impact of non-cash charges of $0.6 million associated with an
employee benefit program. Negative EBITDA for Fiscal Year 1997 includes
the impact of non-recurring employee termination expenses of $2.5 million
(including $1.9 million related to the resignation of the Company's former
Chief Executive Officer - see note 21 to the Company's consolidated
financial statements).
Amortization of Goodwill
The goodwill is amortized on a straight-line basis by business sector.
Goodwill amortization expense will be approximately $2.5 million in Fiscal
Year 1999.
Impact of Inflation
Generally, the Company believes it has been able to pass along increases in
its costs to its customers (primarily paper and ink) through increased
prices of its printed products. Throughout the majority of Fiscal Year
1996, the printing industry experienced substantial increases in the cost
of paper. In late Fiscal Year 1996 and throughout Fiscal Year 1997,
however, the overall cost of paper began to decline. During Fiscal Year
1998, paper prices remained relatively stable. Management expects that, as
a result of the Company's strong relationship with key suppliers, its
material costs will remain competitive within the industry.
Seasonality
Some of the Company's printing and digital imaging and prepress services
business is seasonal in nature, particularly those revenues derived from
advertising inserts. Generally, the Company's 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 the Company 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. The Company's strategy has been and will continue
to include the mitigation of the seasonality of its printing business by
increasing its 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.
The Company believes that environmental liabilities, currently and in the
prior periods discussed herein, are not material. The Company has recorded
an environmental reserve of approximately $0.1 million in connection with a
Superfund site in its consolidated statement of financial position at March
31, 1998 which the Company believes to be adequate. See "Legal Proceedings
- - Environmental Matters". The Company does 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 the consolidated financial position
or results of operations of the Company.
Accounting
There are no pending accounting pronouncements that, when adopted, are
expected to have a material effect in the Company's results of operations
or its financial position.
Year 2000 Compliance
The Year 2000 issue is the result of certain computer programs being
written using two digits rather than four digits to define the applicable
year. Software that is not Year 2000 compliant recognizes a date using
"00" as the year 1900 rather than 2000, which could result in system
failures, miscalculations or temporary inability to engage in normal
business activity. The Company is currently working to resolve the
potential impact of this issue. The Company has determined that certain
software programs and computer hardware will need to be modified or
replaced. Although there can be no assurance, the Company believes such
modification or replacement will mitigate the potential impact of this
issue. The Company will utilize both internal and external resources to
accomplish this task. Based upon management's best estimate, the cost
associated with these modifications and/or replacement is not expected to
be material to the Company.
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........................................... 29
Consolidated balance sheets - March 31, 1998 and 1997.................... 30
For the Years Ended March 31, 1998, 1997 and 1996:
Consolidated statements of operations.......................... 32
Consolidated statements of stockholders' deficit............... 33
Consolidated statements of cash flows.......................... 34
Notes to Consolidated Financial Statements............................... 36
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, 1998, 1997,
and 1996, and as of March 31, 1998 and 1997
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.
Report of Independent Auditors
The Board of Directors
ACG Holdings, Inc.
We have audited the accompanying consolidated balance sheets of ACG Holdings,
Inc. (formerly Sullivan Communications, Inc.) as of March 31, 1998 and 1997, 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,
1998. Our audits also included the financial statement schedules listed in the
Index at Item 14(a). These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with 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, 1998 and 1997, and the consolidated results of their
operations and their cash flows for each of the three fiscal years in the period
ended March 31, 1998, 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 15 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."
ERNST & YOUNG LLP
Nashville, Tennessee
May 22, 1998
ACG HOLDINGS, INC.
Consolidated Balance Sheets
(Dollars in thousands, except par values)
March 31,
--------------------------------------------
1998 1997
----------------- -----------------
Assets
Current assets:
Cash $ 0 0
Receivables:
Trade accounts, less allowance for doubtful accounts of
$2,112 and $5,879 at March 31, 1998 and 1997, respectively 63,185 53,510
Other 2,605 3,252
----------------- -----------------
Total receivables 65,790 56,762
Inventories 10,795 9,711
Prepaid expenses and other current assets 3,578 3,604
----------------- -----------------
Total current assets 80,163 70,077
Property, plant and equipment:
Land and improvements 3,148 3,278
Buildings and improvements 19,426 17,837
Machinery and equipment 178,713 175,196
Furniture and fixtures 5,379 3,625
Leased assets under capital leases 48,039 35,113
Equipment installations in process 1,612 3,118
----------------- -----------------
256,317 238,167
Less accumulated depreciation (96,684) (71,270)
----------------- -----------------
Net property, plant and equipment 159,633 166,897
Excess of cost over net assets acquired, less accumulated
amortization of $42,060 and $33,523 at March 31, 1998 and 1997, respectively 74,556 81,964
Other assets 15,606 15,037
----------------- -----------------
Total assets $ 329,958 333,975
================= =================
See accompanying notes to consolidated financial statements.
ACG HOLDINGS, INC.
Consolidated Balance Sheets
(Dollars in thousands, except par values)
March 31,
--------------------------------------------
1998 1997
----------------- -----------------
Liabilities and Stockholders' Deficit
Current liabilities:
Current installments of long-term debt and capitalized leases $ 9,131 18,252
Trade accounts payable 27,381 29,364
Accrued expenses 31,539 30,037
Income taxes 502 1,022
------------------- ------------------
Total current liabilities 68,553 78,675
Long-term debt and capitalized leases, excluding current installments 310,526 294,057
Deferred income taxes 9,443 8,713
Other liabilities 47,521 28,848
------------------- ------------------
Total liabilities 436,043 410,293
Stockholders' deficit:
Common stock, voting, $.01 par value, 5,852,223 shares authorized,
134,812 shares issued and outstanding at March 31, 1998 and
123,889 shares issued and outstanding at March 31, 1997 1 1
Preferred Stock, $.01 par value, 5,750 shares authorized, 4,000 shares
Series A convertible preferred stock issued and outstanding at
March 31, 1997, $40,000,000 liquidation preference, 1,750 shares
Series B convertible preferred stock issued and outstanding at
March 31, 1997, $17,500,000 liquidation preference -- --
Preferred Stock, $.01 par value, 15,823 shares authorized, 3,631 shares
Series AA convertible preferred stock issued and outstanding at
March 31, 1998, $40,000,000 liquidation preference, 1,606 shares
Series BB convertible preferred stock issued and outstanding at March
31, 1998, $17,500,000 liquidation preference -- --
Additional paid-in capital 58,249 57,499
Accumulated deficit (162,250) (132,228)
Cumulative translation adjustment (2,000) (1,590)
Unfunded pension liability (85) --
------------------- ------------------
Total stockholders' deficit (106,085) (76,318)
------------------- ------------------
Commitments and contingencies
Total liabilities and stockholders' deficit $ 329,958 333,975
=================== ==================
See accompanying notes to consolidated financial statements.
ACG HOLDINGS, INC.
Consolidated Statements of Operations
(In thousands)
Year ended March 31,
-------------------------------------------------------
1998 1997 1996
----------- ------------ ------------
Sales $ 533,335 524,551 529,523
Cost of sales 461,407 459,880 465,110
--------- --------- ---------
Gross profit 71,928 64,671 64,413
Selling, general and administrative expenses 45,690 43,164 35,533
Amortization of goodwill 8,537 8,254 8,631
Restructuring costs and other special charges 5,598 2,881 7,533
--------- --------- ---------
Operating income 12,103 10,372 12,716
--------- --------- ---------
Other expense (income):
Interest expense 38,956 36,289 32,688
Interest income (143) (157) (263)
Nonrecurring charge related to terminated merger -- -- 1,534
Other, net 412 245 188
--------- --------- ---------
Total other expense 39,225 36,377 34,147
--------- --------- ---------
Loss from continuing operations before income
taxes and extraordinary item (27,122) (26,005) (21,431)
Income tax expense (2,106) (2,591) (4,874)
--------- --------- ---------
Loss from continuing operations before
extraordinary item (29,228) (28,596) (26,305)
Discontinued operations:
Loss from operations, net of tax -- (1,557) (1,364)
Estimated (loss) on shut down and gain
on SMI settlement, net of tax (667) (1,550) 2,868
--------- --------- ---------
Loss before extraordinary item (29,895) (31,703) (24,801)
Loss on early extinguishment of debt, net of tax -- -- (4,526)
--------- --------- ---------
Net loss $ (29,895) (31,703) (29,327)
========= ========= =========
See accompanying notes to consolidated financial statements.
ACG HOLDINGS, INC.
Consolidated Statements of Stockholders' Deficit
(In thousands)
Series AA Series A
and BB and B
Voting Convertible Convertible Additional Cumulative Unfunded
common preferred preferred paid-in Accumulated translation Pension
stock stock stock capital deficit adjustment Liability Total
------ ----------- ----------- ---------- ----------- ----------- --------- -----