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Quebecor World USA Inc – ‘10-K405’ for 12/27/98 – EX-13

As of:  Friday, 3/26/99   ·   For:  12/27/98   ·   Accession #:  780117-99-8   ·   File #:  1-11802

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  As Of                Filer                Filing    For·On·As Docs:Size

 3/26/99  Quebecor World USA Inc            10-K405    12/27/98   11:330K

Annual Report — [x] Reg. S-K Item 405   —   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K405     12/27/98 Form 10-K                                    25    111K 
 2: EX-10       Ex 10.21                                               1      8K 
 3: EX-10       Ex 10.32                                               4     17K 
 4: EX-10       Ex 10.33                                               4     17K 
 5: EX-10       Ex 10.34                                              17     77K 
 6: EX-10       Ex 10.35                                              18     77K 
 7: EX-10       Ex 10.36                                              20     79K 
 8: EX-13       Annual Report                                         22    141K 
 9: EX-21       Subsidiaries                                           1      6K 
10: EX-23       Exhibit 23.1                                           1      7K 
11: EX-27       Financial Data Schedule                                2     10K 


EX-13   —   Annual Report
Exhibit Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
21Net Income Per Common Share - Basic
"Net income per common share
"Net Income Per Common Share - Diluted
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EXHIBIT 13.0 PORTIONS OF THE ANNUAL REPORT [Page 19 of the Annual Report] SELECTED FINANCIAL DATA (Dollars in thousands, except per share data) The following selected financial data for the five fiscal years ended December 27, 1998 have been derived from the Company's audited consolidated financial statements. The data presented below should be read in conjunction with, and is qualified in its entirety by reference to, the Company's consolidated financial statements and the notes thereto appearing elsewhere in this report. [Download Table] FISCAL YEAR (1) ---------- ---------- ---------- ---------- -------- 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- -------- OPERATING DATA: Net sales $2,356,885 $1,981,225 $1,641,412 $1,295,582 $971,627 Cost of sales 1,927,790 1,613,938 1,349,130 1,074,785 817,934 ---------- ---------- ---------- ---------- -------- Gross profit 429,095 367,287 292,282 220,797 153,693 Selling, general and administrative expenses 214,862 188,688 153,071 125,539 90,312 Streamlining -- -- -- 40,900 -- charge(2) ---------- ---------- ---------- ---------- -------- Operating income 214,233 178,599 139,211 54,358 63,381 Interest expense and securitization fees 88,589 80,039 58,417 37,897 23,825 Income tax provision 52,054 41,341 33,533 6,584 15,822 ---------- ---------- ---------- ---------- -------- Net income $ 73,590 $ 57,219 $ 47,261 $ 9,877 $ 23,734 ========== ========== ========== ========== ======== Net income per common share (3): Basic $ 1.92 $ 1.65 $ 1.40 $ 0.31 $ 0.74 Diluted 1.84 1.60 1.35 0.29 0.69 OTHER OPERATING DATA: Depreciation and amortization $ 140,725 $ 131,710 $ 104,493 $ 74,668 $ 62,898 Capital expenditures (4) 95,533 93,145 70,639 120,339 83,875 Gross profit margin 18.2% 18.5% 17.8% 17.0% 15.8% Adjusted operating income margin (5) 9.1 9.0 8.5 7.4 6.5 BALANCE SHEET DATA (AT PERIOD END): Working capital $ 239,428 $ 168,752 $ 227,068 $ 160,835 $113,144 Property, plant and equipment, net 885,999 857,195 818,157 480,421 363,929 Total assets 2,433,886 1,933,571 1,822,432 1,150,728 837,417 Long-term debt (including current maturities) 1,255,920 819,113 897,867 487,106 293,515 Stockholders' equity 668,647 599,769 414,932 358,766 274,113 (1) The fiscal years shown each represent the 52 or 53 week period ending on the last Sunday in December. Fiscal year 1995 consisted of 53 weeks. Fiscal years 1994, 1996, 1997 and 1998 each consisted of 52 weeks. (2) Operating income in 1995 was reduced by $40,900 of a nonrecurring streamlining charge. This charge reflects the Company's strategy in 1995 to realign certain business operations. The major components of this realignment plan were to close a facility and to consolidate certain digital prepress operations and functions. (3) In accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share," the Company has calculated net income per common share - basic and diluted based on the weighted average shares and dilutive common equivalent shares outstanding, as applicable, during each period after giving effect to the change in the Company's capital structure pursuant to the Merger and the Options Adjustments (as defined in the Notes to the Company's consolidated financial statements). (4) 1998 capital expenditures are net of proceeds of approximately $88,500 from the sale and leaseback of certain equipment. (5) Adjusted operating income represents operating income before a nonrecurring streamlining charge. Adjusted operating income is not intended to represent cash flows for the period, is not presented as an alternative to operating income as an indicator of operating performance, may not be comparable to other similarly titled measures of other companies and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. See the Company's consolidated financial statements.
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[Page 20 - 24 of the Annual Report] MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share data) GENERAL We are a diversified commercial printer serving customers in the commercial, magazine, catalog, direct mail, book and directory markets. We operate in one business segment, the management and distribution of print and digital information. Our revenues are derived primarily from the sale of services and materials to our customers, including digital and prepress services, press and binding services and distribution and logistics services. There continues to be significant pricing pressure on all printers, including us. Our net sales include sales to certain customers of paper we purchased. The price of paper, our primary raw material, is volatile over time and may cause significant swings in net sales and cost of sales. We generally are able to pass on increases in the cost of paper to our customers, while declines in paper costs result in lower prices to our customers. During 1996, paper prices decreased significantly from the prior year and availability was at normal levels. The paper market firmed in pricing from early 1997 to late 1997. The paper market in 1998 softened from late 1997 and prices continued to decline throughout 1998, as availability became plentiful for most grades of paper. We anticipate that this trend will continue in 1999. Our contracts with our customers generally provide for price adjustments to reflect price changes for other materials, wages and outside services. ACQUISITIONS In the first quarter of fiscal year 1999, we acquired two businesses serving customers in the commercial market for an aggregate purchase price of approximately $60,000, including assumed indebtedness. These acquisitions will be accounted for as purchases and are not expected to have a material effect, either individually or in the aggregate, on our results of operations. In the first four months of 1998, we acquired four businesses serving customers in the commercial, direct mail and book markets for an aggregate purchase price of approximately $200,000. These companies have been included in results of operations since their respective acquisition dates and have not had a material effect on our results of operations, nor are they expected to on a continuing basis. These acquisitions were accounted for as purchases. In January 1997, we purchased Rand McNally Book Services Group ("Book Services"), an operating unit of Rand McNally, for approximately $155,000. Book Services was the third largest producer of hardcover books in the United States and provided manufacturing and other value-added services to book club, trade, professional, educational, reference and mail-order publishers. In addition, we acquired another business in 1997 whose contribution was not significant to our results of operations for the periods presented, nor is it expected to have a material effect on our results on a continuing basis. These acquisitions were accounted for as purchases. In June 1996, we acquired from Ringier A.G. all of the issued and outstanding capital stock of Krueger Acquisition Corporation, including all of the issued and outstanding capital stock of Ringier Holdings, Inc., Ringier America, Inc., Krueger Ringier, Inc., Ringier Print U.S., Inc. and W.A. Krueger Co. Olathe (collectively, "Ringier America"), for approximately $128,000. In addition, we assumed approximately $287,000 of Ringier America's indebtedness, of which approximately $281,000 was liquidated upon consummation of the acquisition. This acquisition was accounted for as a purchase. Ringier America was a leading diversified commercial printer whose business included the printing of catalogs, magazines and mass-market, racksize books. We acquired certain other businesses in 1996 whose contributions were not significant to our results of operations for the periods presented, nor are they expected to have a material effect on our results on a continuing basis. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 27, 1998 COMPARED TO YEAR ENDED DECEMBER 28, 1997 Net sales increased $375,660 or 19.0% to $2,356,885 in 1998 from $1,981,225 in 1997. The increase was due to the inclusion of both a full year of results from the acquisitions in 1997 and results from the acquisitions in 1998, higher paper prices and volume and improved sales in our base business.
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Gross profit increased $61,808 or 16.8% to $429,095 in 1998 from $367,287 in 1997, due primarily to the inclusion of the 1997 and 1998 acquisitions and improved operating efficiencies in our base business. Gross profit margin decreased to 18.2% in 1998 from 18.5% in 1997 due to increased sales resulting from higher paper prices and volume, slightly offset by the benefits of certain cost reduction initiatives and other synergies resulting from the integration of the acquired businesses. Selling, general and administrative expenses increased $26,174 or 13.9% to $214,862 in 1998 from $188,688 in 1997. The increase was due to the 1997 and 1998 acquisitions, including the related additional amortization expense for goodwill, offset by benefits derived from cost saving initiatives and a decrease in the 1998 provision for bad debts. The 1997 provision for bad debts was higher than usual because of bad debts related to a customer that entered into bankruptcy. Interest expense and securitization fees increased $8,550 or 10.7% to $88,589 in 1998 from $80,039 in 1997. The increase was due to higher average borrowings incurred to fund acquisitions, capital expenditures and working capital requirements, offset by a lower average cost of funds. The 1998 and 1997 amounts included $11,888 and $5,133, respectively, of fees resulting from the asset securitization agreement entered into in June 1997. The effective tax rate, primarily composed of the combined federal and state statutory rates, was approximately 41.4% for 1998 and 42.0% for 1997. YEAR ENDED DECEMBER 28, 1997 COMPARED TO YEAR ENDED DECEMBER 29, 1996 Net sales increased $339,813 or 20.7% to $1,981,225 in 1997 from $1,641,412 in 1996. The increase was due to the inclusion of both a full year of results from the 1996 acquisitions and results from the 1997 acquisitions, as well as improved sales in our base business. Gross profit increased $75,005 or 25.7% to $367,287 in 1997 from $292,282 in 1996, due primarily to the inclusion of the 1996 and 1997 acquisitions. Gross profit margin improved to 18.5% in 1997 from 17.8% in 1996. This improvement was a result of the 1996 and 1997 acquisitions, including the benefits of certain cost reduction initiatives and other synergies resulting from the integration of the acquired businesses. Selling, general and administrative expenses increased $35,617 or 23.3% to $188,688 in 1997 from $153,071 in 1996. The increase was due to the 1996 and 1997 acquisitions, including the related additional amortization expense for goodwill, offset by benefits derived from cost saving initiatives. In addition, in 1997 we incurred a higher than usual provision for bad debts related to a customer that entered into bankruptcy. Interest expense and securitization fees increased $21,622 or 37.0% to $80,039 in 1997 from $58,417 in 1996. The increase was due to higher average borrowings incurred to fund acquisitions, capital expenditures and working capital requirements. The 1997 amount included $5,133 of fees resulting from the asset securitization agreement entered into in June 1997. The effective tax rate, primarily composed of the combined federal and state statutory rates, was approximately 42.0% for 1997 and 41.5% for 1996. LIQUIDITY AND CAPITAL RESOURCES On February 22, 1999, we issued Senior Subordinated Notes in the aggregate principal amount of $300,000, receiving net proceeds of approximately $294,000. Interest on the notes is payable semi-annually at the annual rate of 7.75%. The notes do not have required principal payments prior to maturity on February 15, 2009. The net proceeds from the notes issuance were used to repay certain indebtedness under the credit agreement. In connection with the issuance of these notes, we amended our credit agreement resulting in, among other modifications, a $95,000 permanent reduction as of March 9, 1999 in borrowings and commitments under the credit agreement. As a result, aggregate total commitments decreased from $920,000 to $825,000. The amendment and related permanent reduction in total borrowings and commitments resulted in a substantial modification of the terms under the credit agreement. Accordingly, we will recognize an extraordinary charge for the early extinguishment of debt of approximately $5,900, net of tax, in the first quarter of fiscal year 1999. In November 1998, we issued Senior Subordinated Notes in the aggregate principal amount of $300,000 for net proceeds of approximately $291,700. Interest on the notes is payable semi-annually at the annual rate of 8.375%. Principal payments on the notes are not required prior to maturity on November 15, 2008. We used a portion of the net proceeds to repay certain indebtedness incurred under the credit agreement. The remaining net proceeds were invested in money market securities through December 27, 1998. In the beginning of fiscal year 1999, we used the remaining net proceeds to redeem all of our outstanding 9.125% Senior Subordinated Notes due 2003 (the "Notes") in an aggregate principal amount of $150,000. The Notes were redeemed for approximately $160,800, including the redemption premium and accrued interest. This early extinguishment of debt generated an extraordinary charge in the first quarter of fiscal year 1999 of approximately $6,000, net of tax. The Notes were included in current maturities of long-term debt at December 27, 1998.
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In July and October 1998, we entered into agreements for the sale and leaseback of certain printing equipment for which we received approximately $88,500 of proceeds. The equipment used for the sale and leaseback transaction was primarily composed of 1998 capital expenditures. The lease expires in July 2010 and has been classified as an operating lease. The proceeds were used to repay certain indebtedness incurred under the credit agreement. In August 1998, the Board of Directors authorized the repurchase of up to 1,800,000 shares of our common stock. The repurchase of shares commenced in August 1998 and may occur over the next three years in the open market at prevailing market prices or in negotiated transactions, depending on market conditions. We will repurchase shares to satisfy commitments under certain employee benefit plans. As of December 27, 1998, we had repurchased 486,501 shares at a weighted average cost of $30.80 and reissued 466,255 shares. In October 1997, we issued 4,600,000 shares of our common stock, receiving net proceeds of approximately $127,600. Concurrent with the stock offering, we issued $151,800 aggregate principal amount of Convertible Senior Subordinated Notes, receiving net proceeds of approximately $147,900. Interest on the convertible notes is payable semi-annually at the annual rate of 6%. The convertible notes have no required principal payments prior to maturity on October 1, 2007. The convertible notes in the aggregate are convertible into 3,660,477 shares of our common stock at $41.47 per share, subject to adjustment upon the occurrence of certain events. We used the net proceeds from the stock offering and convertible notes offering to repay certain indebtedness incurred under the credit agreement. In June 1997, we entered into an agreement to sell, on a revolving basis for a period of up to five years, certain of our accounts receivable to a wholly-owned subsidiary, which entered into an agreement to transfer, on a revolving basis, an undivided percentage ownership interest in a designated pool of accounts receivable to a maximum of $204,000. In 1997, we received the proceeds from the sale of $200,000 of accounts receivable. Accordingly, accounts receivable was reduced by $200,000 at December 27, 1998 and December 28, 1997. We used the net proceeds primarily to repay certain indebtedness incurred under the credit agreement. Fees associated with the asset securitization vary based on commercial paper rates plus a margin, providing a lower effective rate than that available from our traditional funding sources. Net income plus depreciation and amortization and deferred income taxes was $232,212 in 1998 compared to $203,201 in 1997, an increase of $29,011 or 14.3%. Cash flow from operations was primarily used to fund working capital requirements, capital expenditures and acquisitions. Working capital was $239,428 at December 27, 1998 and $168,752 at December 28, 1997. Working capital increased $70,676 or 41.9% primarily due to the 1998 acquisitions and an increase in inventory levels. Capital expenditures totaled $95,533, net of the proceeds from the sale and leaseback transaction, and $93,145 in 1998 and 1997, respectively. These capital expenditures reflect the purchase of additional press and bindery equipment which increased our capacity and are part of our ongoing program to maintain modern, efficient plants and continually increase productivity. We expect capital expenditures in 1999 to approximate 4% to 5% of net sales. Additional expenditures in 1999 are possible in line with growth in earnings and cash flows, or expansion opportunities in certain markets. Our capital expenditures and acquisitions have been funded in part through operations and borrowings under our Second Amended and Restated Credit Agreement dated as of June 6, 1996, as amended. At the beginning of 1997, aggregate total commitments under the credit agreement were $975,000. During 1997, concurrent with the liquidation of certain indebtedness, we amended the credit agreement to provide aggregate total commitments of $920,000, comprised of $95,000 in term loan commitments, $250,000 of revolving loan commitments and $575,000 in acquisition term loan commitments. The credit agreement provides for varying semi-annual reductions in commitments through maturity on December 31, 2002, and the borrowings bear interest at rates that fluctuate with the prime rate and the Eurodollar rate. As of December 27, 1998, the weighted average borrowing rate was 6.1%, and $70,200 of acquisition term loan commitments and $227,020 of revolving loan commitments were unused. As discussed above, in the first quarter of fiscal year 1999, the aggregate total commitments under the credit agreement were reduced by $95,000.
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At December 27, 1998, we had net operating loss carryforwards from business acquisitions for federal income tax purposes of $7,643 available to reduce future taxable income, expiring from 2007 to 2010. We also had federal tax credits of $1,177 expiring primarily from 1999 to 2002 and state tax credits of $3,893 expiring from 2001 to 2013. In addition, we had alternative minimum tax carryover credits of $20,801 which do not expire and may be applied against regular tax in the future, in the event that the regular tax expense exceeds the alternative minimum tax. Concentrations of credit risk with respect to accounts receivable are limited due to our diverse operations and large customer base. As of December 27, 1998, we had no significant concentrations of credit risk. In the normal course of business, we are exposed to changes in interest rates. However, we manage this exposure by having a balanced variety of debt maturities as well as a combination of fixed and variable rate obligations. In addition, we have entered into interest rate cap and swap agreements in order to further reduce the exposure on our variable rate obligations. Our interest rate cap agreements have a notional value of $400,000 and expire in the third quarter of fiscal year 1999. Our interest rate swap agreements have a notional value of $75,000 and exchange floating rate for fixed interest payments periodically over five years. The swap agreements are cancelable by the respective counterparties in September and December 1999. These agreements did not have a material impact on the consolidated financial statements for the periods presented. While the counterparties of these agreements expose us to credit loss in the event of nonperformance, we believe that the possibility of incurring such a loss is remote due to the creditworthiness of the counterparties. We do not hold or issue any derivative financial instruments for trading purposes. We believe that our liquidity, capital resources and cash flows from operations are sufficient to fund planned capital expenditures, working capital requirements and interest and principal payments for the foreseeable future. RECENT ACCOUNTING PRONOUNCEMENTS In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This SOP requires certain costs related to computer software developed or obtained for internal use to be expensed or capitalized depending on the stage of development and the nature of the costs. We will adopt this SOP in the first quarter of fiscal year 1999. We do not expect the adoption of SOP 98-1 to have a material effect on our consolidated financial statements. In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up Activities," which requires costs of start-up activities and organization costs to be expensed as incurred. We will adopt this SOP in the first quarter of fiscal year 1999. We estimate that the adoption of this SOP will result in the recognition of a charge of approximately $10,500, net of tax, as the cumulative effect of a change in accounting principle in the first quarter of fiscal year 1999. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement requires companies to recognize all derivatives as either assets or liabilities and measure those instruments at fair value. We would account for gains or losses resulting from changes in the values of those derivatives depending on the use of the derivative and whether it qualifies for hedge accounting. We plan to adopt this statement in the first quarter of fiscal year 2000. Based on our current portfolio of derivative financial instruments, we do not expect the adoption of SFAS No. 133 to have a material impact on our consolidated financial statements. YEAR 2000 The Year 2000 issue, which affects virtually all corporations, arises due to the inability of certain computer software and hardware and embedded chips found in manufacturing and other equipment to properly recognize dates beyond 1999. This inability may cause errors in information and/or system failures. We have a comprehensive effort underway to address the Year 2000 issue. As discussed below, we are, among other things, evaluating our present information technology and non-information technology systems (i.e. equipment with embedded chips), monitoring and addressing our vendor and customer Year 2000 issues and engaging in remediative measures as necessary.
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In connection with our readiness program, we have endeavored to inventory and assess the state of compliance of all information systems and non-information systems. We commenced remediation of our information systems in 1994. As a result, the majority of our information systems, including our financial, human resources and payroll functions, are Year 2000 compliant. We estimate that all of our information systems will be substantially compliant by mid-1999. With respect to our non-information systems, we have substantially completed an inventory of facilities (HVAC, safety and security) and manufacturing (press, bindery and finishing) systems. We are working with the outside suppliers of such systems as well as with an outside consultant to identify and remediate non-compliant components. We have targeted mid-1999 for substantial completion of our readiness efforts with respect to our non-information systems, including selective testing procedures. As part of our readiness program, we are communicating with our major customers and vendors to assess such parties' respective efforts to identify and remediate their own Year 2000 issues in a timely and comprehensive manner. We are also requesting our vendors to certify to the compliancy of their systems and equipment that we currently own or lease. We intend to follow up with non- compliant vendors through 1999 in order to continually assess the extent of such third parties' Year 2000 exposure and to adjust our contingency plans accordingly. The costs incurred to date solely related to our Year 2000 efforts have not been material to us, and based upon current estimates, we do not believe that the total cost of our Year 2000 readiness programs will have a material adverse effect upon our operating results or financial condition. While we cannot make assurances as to the impact of the Year 2000 issue on our operations, we currently anticipate that any adverse consequences of the Year 2000 issue on our systems will not create a significant disruption to our operations. However, the failure or delay by us, our customers and/or vendors to identify and remediate each respective instance of Year 2000 non-compliance could result in a material adverse effect on our results of operations, liquidity or financial condition. Our readiness program includes the development of contingency plans addressing potential business interruptions arising from Year 2000-related disruptions. Such plans include assessing the movement of work among our facilities. In 1999, we will hone our contingency plans, taking into account, among other things, the state of readiness of our vendors, including, without limitation, utility suppliers, as well as our major customers. The statements set forth herein concerning Year 2000 issues which are not historical facts are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. In particular, the costs associated with our Year 2000 programs, the time-frame in which we plan to complete Year 2000 modifications and the potential impact of the Year 2000 issues on us are based upon our best estimates. These estimates were derived from internal assessments and numerous assumptions of future events. These estimates may be adversely affected by, among other things, the continued availability of personnel and system resources, the accurate identification of all relevant computer codes, the success of remediation efforts, the effectiveness of our contingency plans and by the failure of significant third parties to properly address Year 2000 issues. Therefore, we cannot guarantee that any estimates or other forward- looking statements will be achieved and actual results could differ significantly from those contemplated. SEASONALITY The operations of our business are seasonal with approximately two-thirds of historical operating income recognized in the second half of the fiscal year, primarily due to the higher number of magazine pages, new product launches and back-to-school and holiday catalog promotions. FORWARD-LOOKING STATEMENTS Except for historical information contained herein, the statements in this document are forward-looking and made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause our actual results in future periods to differ materially from forecasted results. Those risks include, among others, changes in customers' demand for our products, changes in raw material and equipment costs and availability, seasonal changes in customer orders, pricing actions by our competitors, changes in estimates of our readiness or the readiness of our vendors and customers with regard to Year 2000 issues and the significance of costs thereof, and general changes in economic condition.
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[Page 25 of the Annual Report] INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of World Color Press, Inc.: We have audited the accompanying consolidated balance sheets of World Color Press, Inc. and subsidiaries as of December 27, 1998 and December 28, 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 27, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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, such consolidated financial statements present fairly, in all material respects, the financial position of World Color Press, Inc. and subsidiaries at December 27, 1998 and December 28, 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 27, 1998 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP New York, New York February 3, 1999 (except for the last paragraph of Note 14, as to which the date is February 26, 1999, and except for Note 18, as to which the date is March 9, 1999)
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[Page 26 of the Annual Report] [Download Table] WORLD COLOR PRESS, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 27, 1998 AND DECEMBER 28, 1997 (Dollars in thousands, except per share data) ---------------------------------------------------------------------- ASSETS 1998 1997 Current assets: Cash and cash equivalents $ 199,932 $ 37,676 Accounts receivable - net of allowances for doubtful accounts of $10,638 and $9,287, respectively 229,209 166,747 Inventories 276,111 204,889 Deferred income taxes 16,986 31,297 Other 63,729 33,625 ---------- ---------- Total current assets 785,967 474,234 Property, plant and equipment - net 885,999 857,195 Goodwill - net 647,085 535,416 Other 114,835 66,726 ---------- ---------- TOTAL ASSETS $2,433,886 $1,933,571 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 171,683 $ 163,710 Accrued expenses 149,525 132,802 Current maturities of long-term debt 225,331 8,970 ---------- ---------- Total current liabilities 546,539 305,482 Long-term debt 1,030,589 810,143 Deferred income taxes 94,793 100,045 Other long-term liabilities 93,318 118,132 ---------- ---------- Total liabilities 1,765,239 1,333,802 ========== ========== Stockholders' equity: Common stock, $.01 par value - authorized, 100,000,000 shares in 1998 and 1997; shares outstanding,38,639,642 in 1998 and 38,353,853 in 1997 386 384 Additional paid-in capital 721,913 711,292 Accumulated deficit (49,310) (111,907) Treasury stock, at cost: 20,246 shares (613) -- Unamortized restricted stock compensation (3,729) -- ---------- ---------- Total stockholders' equity 668,647 599,769 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,433,886 $1,933,571 ========== ========== See notes to consolidated financial statements.
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[Page 27 of the Annual Report] [Download Table] WORLD COLOR PRESS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 27, 1998, DECEMBER 28, 1997 AND DECEMBER 29, 1996 (In thousands, except per share data) -------------------------------------------------------------------------------- 1998 1997 1996 Net sales $2,356,885 $1,981,225 $1,641,412 Cost of sales 1,927,790 1,613,938 1,349,130 ---------- ---------- ---------- Gross profit 429,095 367,287 292,282 Selling, general and administrative expenses 214,862 188,688 153,071 ---------- ---------- ---------- Operating income 214,233 178,599 139,211 Interest expense and securitization fees 88,589 80,039 58,417 ---------- ---------- ---------- Income before income taxes 125,644 98,560 80,794 Income tax provision 52,054 41,341 33,533 ---------- ---------- ---------- Net income $ 73,590 $ 57,219 $ 47,261 ========== ========== ========== Net income per common share - basic $ 1.92 $ 1.65 $ 1.40 Net income per common share - diluted $ 1.84 $ 1.60 $ 1.35 See notes to consolidated financial statements.
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[Page 28 of the Annual Report] [Download Table] WORLD COLOR PRESS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 27, 1998, DECEMBER 28, 1997 AND DECEMBER 29, 1996 (In thousands) -------------------------------------------------------------------------------- UNAMORTIZED ADDITIONAL RESTRICTED COMMON PAID-IN ACCUMULATED TREASURY STOCK STOCK CAPITAL DEFICIT STOCK COMPENSATION BALANCE DECEMBER 31, 1995 $ 322 $ 574,831 $ (216,387) $ -- $ -- Net income -- -- 47,261 -- -- Common stock issued 15 8,890 -- -- -- -------- ---------- ---------- -------- ------------ BALANCE DECEMBER 29, 1996 337 583,721 (169,126) -- -- Net income -- -- 57,219 -- -- Common stock issued 47 127,571 -- -- -- -------- ---------- ---------- -------- ----------- BALANCE DECEMBER 28, 1997 384 711,292 (111,907) -- -- Net income -- -- 73,590 -- -- Common stock issued 1 6,544 (10,993) 14,371 -- Common stock repurchased -- -- -- (14,984) -- Restricted stock issued 1 4,077 -- -- (4,078) Amortization of restricted stock -- -- -- -- 349 -------- ---------- ---------- -------- ------------ BALANCE DECEMBER 27, 1998 $ 386 $ 721,913 $ (49,310) $ (613) $ (3,729) ======== ========== ========== ======== ============ See notes to consolidated financial statements.
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[Page 29 of the Annual Report] [Download Table] WORLD COLOR PRESS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 27, 1998, DECEMBER 28, 1997 AND DECEMBER 29, 1996 (In thousands) ----------------------------------------------------------------------- 1998 1997 1996 OPERATING ACTIVITIES: Net income $ 73,590 $ 57,219 $ 47,261 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 140,725 131,710 104,493 Deferred income tax provision 17,897 14,272 13,573 Changes in operating assets and abilities: Proceeds from sale of accounts receivable -- 200,000 -- Other changes in accounts receivable - net (16,031) (13,812) (30,062) Inventories (58,029) (53,936) 29,495 Accounts payable and accrued expenses (26,700) (43,577) 35,178 Other assets and liabilities - net (119,567) (52,571) (53,355) --------- ---------- --------- Net cash provided by operating activities 11,885 239,305 146,583 --------- ---------- --------- INVESTING ACTIVITIES: Additions to property, plant and equipment (184,004) (93,145) (70,639) Proceeds from sale and leaseback of equipment 88,471 -- -- Proceeds from sale of property, plant and equipment 9,533 2,006 1,345 Acquisitions of businesses, net of cash acquired (190,095) (172,539) (167,283) --------- ---------- --------- Net cash used in investing activities (276,095) (263,678) (236,577) --------- ---------- --------- FINANCING ACTIVITIES: Proceeds from borrowings 451,553 285,775 562,120 Payments on long-term debt (20,026) (384,526) (456,751) Proceeds from issuance of common stock 6,545 127,618 8,905 Repurchases of common stock - net (11,606) -- -- --------- ---------- --------- Net cash provided by financing activities 426,466 28,867 114,274 --------- ---------- --------- INCREASE IN CASH AND CASH EQUIVALENTS 162,256 4,494 24,280 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 37,676 33,182 8,902 --------- ---------- --------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 199,932 $ 37,676 $ 33,182 ========= ========== ========= See notes to consolidated financial statements.
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[Page 30 - 40 of the Annual Report] WORLD COLOR PRESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 27, 1998, DECEMBER 28, 1997 AND DECEMBER 29, 1996 (Dollars in thousands, except per share data) -------------------------------------------------------------------------------- 1. ORGANIZATION World Color Press, Inc. and subsidiaries (the "Company") specializes in the production and distribution of data for customers in the commercial, magazine, catalog, direct mail, book and directory markets. Prior to November 20, 1995, the Company was wholly-owned by Printing Holdings, L.P. ("PHLP"), a nonoperating affiliate of Kohlberg Kravis Roberts & Co. L.P. ("KKR"), whose holdings consisted solely of the Company. On November 20, 1995, PHLP was merged with and into the Company, with the Company as the survivor (the "Merger"). In connection with the Merger, PHLP partnership units (aggregating approximately 65,500,000 units) were converted into approximately 32,200,000 shares of the Company's common stock, principally at a ratio of one PHLP partnership unit to 0.50 shares of common stock. Accordingly, the common stock and additional paid-in capital amounts presented on the consolidated statements of stockholders' equity have been restated to reflect the change in the Company's capital structure pursuant to the Merger. Also pursuant to the Merger, the shares of the Company's common stock owned by PHLP immediately prior to the Merger were canceled. On November 20, 1995, the Company also amended and restated its Certificate of Incorporation increasing the authorized number of shares of common stock to 100,000,000 shares and newly authorizing 50,000,000 shares of preferred stock, par value $0.01 per share. At December 27, 1998 and December 28, 1997, there were no shares of preferred stock issued or outstanding. On January 25, 1996, 15,861,568 shares of the Company's common stock were sold at $19 per share in an initial public equity offering (the "Offering"). All of the shares in the Offering were sold by existing stockholders. The Company did not receive any of the proceeds from the sale of the shares, except that certain members of former management elected to participate in the Offering by exercising certain stock options granted to them by the Company. An aggregate of 1,531,290 shares underlying such options were sold in the Offering, generating proceeds to the Company of approximately $8,900. These proceeds were used to pay expenses of the Offering and for general corporate purposes. On October 8, 1997, the Company issued 4,600,000 common shares through a public offering, resulting in net proceeds of approximately $127,600. These proceeds were utilized to repay certain indebtedness incurred under the Credit Agreement (as defined in Note 2). 2. BUSINESS ACQUISITIONS In the first four months of 1998, the Company acquired four businesses serving customers in the commercial, direct mail and book markets for an aggregate purchase price of approximately $200,000. These acquisitions were funded using proceeds from the Company's acquisition term loans under the Second Amended and Restated Credit Agreement dated as of June 6, 1996, as amended (the "Credit Agreement"). These acquisitions were accounted for as purchases and the consolidated financial statements include the results of their operations from the respective acquisition dates. The excess of purchase cost over estimated fair value of net assets acquired was approximately $130,000 and is being amortized using the straight-line method over 35 years. In 1997, the Company acquired two businesses operating in the book, magazine and catalog markets. These companies were acquired for an aggregate purchase price of approximately $173,000, which was funded using proceeds from the Company's acquisition term loans under the Credit Agreement. The Company liquidated approximately $20,000 of the acquired companies' indebtedness. These acquisitions were accounted for as purchases and the consolidated financial statements include the results of their operations from the respective acquisition dates. The excess of purchase cost over estimated fair value of net assets acquired was approximately $126,000 and is being amortized using the straight-line method over 35 years. In June 1996, the Company acquired from Ringier A.G. all of the issued and outstanding capital stock of Krueger Acquisition Corporation, including all of the issued and outstanding capital stock of Ringier Holdings, Inc., Ringier America, Inc., Krueger Ringier, Inc., Ringier Print U.S., Inc. and W.A. Krueger Co. Olathe (collectively, "Ringier America"), for approximately $128,000 (the "Acquisition"). In addition, the Company assumed approximately $287,000 of Ringier America's indebtedness, of which approximately $281,000 was liquidated upon consummation of the Acquisition. Ringier America was a leading diversified commercial printer whose business included the printing of catalogs, magazines and mass-market, racksize books. The Acquisition and liquidation of certain indebtedness were funded using proceeds from acquisition term loans under the Credit Agreement. The Acquisition was accounted for as a purchase and the consolidated financial statements include the results of Ringier America's operations from the acquisition date. The excess of purchase cost over estimated fair value of net assets acquired was approximately $160,000, and is being amortized using the straight-line method over 35 years. During 1996 the Company acquired certain other businesses whose contributions were not significant to the Company's results of operations for the periods presented, nor are they expected to have a material effect on the Company's results on a continuing basis.
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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of World Color Press, Inc. and its subsidiaries. Intercompany transactions have been eliminated. CASH AND CASH EQUIVALENTS - Cash equivalents consist of highly liquid instruments with original maturities of three months or less. ACCOUNTING PERIOD - The Company's fiscal year is the 52 or 53-week period ending on the last Sunday in December. Fiscal years 1998, 1997 and 1996 each included 52 weeks. CONSOLIDATED STATEMENTS OF CASH FLOWS - During 1998, 1997 and 1996, the Company borrowed and repaid $599,100, $563,200 and $407,200, respectively, pursuant to the terms of credit agreements. See also Note 7. Such amounts have not been reflected in the consolidated statements of cash flows because of the short-term nature of the borrowings. Cash paid for interest by the Company during the years 1998, 1997 and 1996 was $82,392, $75,738 and $54,037, respectively, net of capitalized interest of $2,374, $941 and $252, respectively. Cash paid for taxes during the years 1998, 1997 and 1996 was $35,145, $28,266 and $18,068, respectively. REVENUE RECOGNITION - In accordance with trade practice, sales are recognized by the Company on the basis of production and service activity at the pro rata billing value of work completed. INVENTORIES - The Company's raw materials of paper and ink and the related raw material component of work-in-process are valued at the lower of cost, as determined using the first-in, first-out ("FIFO") method, or market. The remainder of the work-in-process is valued at the pro rata billing value of work completed. DEPRECIATION AND AMORTIZATION - Property, plant and equipment is stated at cost. Depreciation is recorded principally on the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized on the straight-line method over the lesser of the useful life of the improvement or the lease term. Estimated useful lives used in computing depreciation and amortization expense are 3 to 15 years for machinery and equipment and 15 to 40 years for buildings and leasehold improvements. GOODWILL - Goodwill is amortized using the straight-line method primarily over 35 years. Amortization of goodwill for the years 1998, 1997 and 1996 was $20,008, $16,424 and $10,757, respectively, and is included in selling, general and administrative expenses. Accumulated amortization of goodwill was $71,236, and $51,228 as of year-end 1998 and 1997, respectively. The Company evaluates goodwill by reviewing current and estimated undiscounted cash flows whenever significant events or changes occur indicating the asset may not be recoverable. NET INCOME PER COMMON SHARE - In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which establishes new standards for computing and presenting net income per common share. The Company adopted SFAS No. 128 in the fourth quarter of 1997, and has calculated "net income per common share - basic" based on the weighted average common shares outstanding during each period and "net income per common share - diluted" based on the weighted average common and dilutive common equivalent shares outstanding during each period. Weighted average shares were adjusted to give effect to the change in the Company's capital structure pursuant to the Merger and the Options Adjustments, as described in Notes 1 and 12. RECLASSIFICATIONS - Certain reclassifications have been made to prior years' amounts to conform with the current presentation.
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USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. ACCOUNTING FOR STOCK-BASED COMPENSATION - In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 encourages companies to account for stock compensation awards based on their fair value at the date they are granted. The resulting compensation cost would be shown as an expense on the income statement. Companies choosing not to apply the new accounting method are permitted to continue following current accounting requirements, however, they are required to disclose in the notes to the financial statements the effect on net income and earnings per share had the new accounting method been applied. The Company has adopted only the disclosure provisions of SFAS No. 123. Accordingly, the Company has disclosed in Note 12 the pro forma effect on net income and net income per common share - basic and diluted. INTEREST RATE SWAP AGREEMENTS - The Company enters into interest rate swap agreements from time to time to reduce exposures to market risks resulting from fluctuations in interest rates. The Company does not hold or issue any derivative financial instruments for trading purposes. Gains and losses on interest rate agreements are recognized through income and offset the transactions which they are intended to hedge. RECENT ACCOUNTING PRONOUNCEMENTS - In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income and its components in the financial statements. The Company adopted this statement in the first quarter of fiscal year 1998. The adoption of SFAS No. 130 did not have a material effect on the Company's consolidated financial statements. In June 1997, the Financial Accounting Standards Board also issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for reporting information on operating segments in the financial statements. The Company adopted this statement for the fiscal year ended 1998. In accordance with this standard, the Company has determined that, while it offers services to a diverse group of customers in different industries, the Company itself operates in one business segment, the management and distribution of print and digital information. In accordance with the management approach prescribed in the statement, there are no discernable operating segments that management evaluates separately on a regular basis. In February 1998, the Financial Accounting Standards Board issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," which standardizes the disclosure requirements for pensions and other postretirement benefits. The Company has adopted this statement for the fiscal year ended 1998. See Note 11. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement requires companies to recognize all derivatives as either assets or liabilities and measure those instruments at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The Company plans to adopt this statement in the first quarter of fiscal year 2000. Based on the Company's current portfolio of derivative financial instruments, it does not expect the adoption of SFAS No. 133 to have a material impact on its consolidated financial statements. In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This SOP requires certain costs related to computer software developed or obtained for internal use to be expensed or capitalized depending on the stage of development and the nature of the costs. The Company will adopt this SOP in the first quarter of fiscal year 1999. The Company does not expect the adoption of SOP 98-1 to have a material effect on its consolidated financial statements. In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start- Up Activities," which requires costs of start-up activities and organization costs to be expensed as incurred. The Company will adopt this SOP in the first quarter of fiscal year 1999. The Company estimates that the adoption of SOP 98-5 will result in the recognition of a charge of approximately $10,500, net of tax, as the cumulative effect of a change in accounting principle in the first quarter of fiscal year 1999.
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4. INVENTORIES [Download Table] Inventories are summarized as follows: 1998 1997 Work-in-process $ 139,259 $ 111,326 Raw materials 136,852 93,563 ----------- ----------- Total $ 276,111 $ 204,889 =========== =========== 5. PROPERTY, PLANT AND EQUIPMENT [Download Table] Property, plant and equipment is as follows: 1998 1997 Land $ 17,041 $ 16,252 Buildings and leasehold improvements 303,051 292,092 Machinery and equipment 1,291,658 1,180,297 Leased property under capitalized leases 1,924 6,692 ------------ ------------ 1,613,674 1,495,333 Accumulated depreciation and amortization 727,675 638,138 ------------ ------------ Total $ 885,999 $ 857,195 ============ ============ Depreciation expense related to property, plant and equipment was $120,250, $114,819 and $91,186 for the years 1998, 1997 and 1996, respectively. 6. ACCRUED EXPENSES [Download Table] Accrued expenses are as follows: 1998 1997 Compensation $ 55,727 $ 50,239 Employee health and welfare benefits 9,858 9,696 Deferred revenue 12,408 10,956 Interest 14,794 10,368 Other 56,738 51,543 ----------- ----------- Total $ 149,525 $ 132,802 =========== =========== 7. LONG-TERM DEBT [Download Table] Long-term debt is summarized as follows: 1998 1997 8.375% Senior Subordinated Notes $ 300,000 $ -- Convertible Senior Subordinated Notes 151,800 151,800 9.125% Senior Subordinated Notes 150,000 150,000 Borrowings under credit agreements 599,800 450,500 Notes payable, average of 9.16% due 2004 - 2005 33,008 36,729 Capitalized lease obligations, weighted average imputed interest rate of 9.60% due 1999 - 2002 527 3,540 Other debt, average of 7.88% due 2001 - 2008 20,785 26,544 ------------ ------------ Total 1,255,920 819,113 Less current maturities 225,331 8,970 ------------ ------------ Noncurrent portion $ 1,030,589 $ 810,143 ============ ============ 8.375% SENIOR SUBORDINATED NOTES - On November 20, 1998, the Company issued Senior Subordinated Notes in the aggregate principal amount of $300,000, receiving net proceeds of approximately $291,700. Interest on the Senior Subordinated Notes is payable semi-annually at the annual rate of 8.375%. The notes do not have required principal payments prior to maturity on November 15, 2008. The fair value of the notes approximated carrying value at December 27, 1998. The Company utilized a portion of the net proceeds from the issuance of these notes to repay revolving loan commitments incurred under the Credit Agreement. On December 28, 1998 the Company utilized the remainder of the net proceeds to redeem all of its outstanding 9.125% Senior Subordinated Notes. CONVERTIBLE SENIOR SUBORDINATED NOTES - On October 8, 1997, the Company issued $151,800 aggregate principal amount of Convertible Senior Subordinated Notes (the "Convertible Notes"), receiving net proceeds of approximately $147,900. Interest on the Convertible Notes is payable semi- annually at the annual rate of 6.00%. The Convertible Notes have no required principal payments prior to maturity on October 1, 2007. The Convertible Notes in the aggregate are convertible into 3,660,477 shares of the Company's common stock at $41.47 per share, subject to adjustment upon the occurrence of certain events. The Convertible Notes are redeemable at the option of the holder at any time and at the option of the Company, at specified prices, subsequent to October 4, 2000. The net proceeds from the Convertible Notes offering were utilized to repay certain indebtedness incurred under the Credit Agreement. The fair value of the notes was approximately $149,000 and $146,000 at December 27, 1998 and December 28, 1997, respectively, based on quoted market prices.
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9.125% SENIOR SUBORDINATED NOTES - On May 10, 1993, the Company issued Senior Subordinated Notes in the aggregate principal amount of $150,000. Interest on the Senior Subordinated Notes was payable semi-annually at the annual rate of 9.125%. The notes did not have required principal payments prior to maturity on March 15, 2003. The fair value of the notes was approximately $157,000 and $156,000 at December 27, 1998 and December 28, 1997, respectively, based on quoted market prices. The Company redeemed the 9.125% Senior Subordinated Notes on December 28, 1998 for approximately $160,800, including the redemption premium and accrued interest. This early extinguishment of the notes generated an extraordinary charge in the first quarter of fiscal year 1999 of approximately $6,000, net of tax. The redemption of the notes was financed by the net proceeds of the 8.375% Senior Subordinated Notes issued on November 20, 1998. The 9.125% Senior Subordinated Notes were classified as current maturities of long-term debt in the December 27, 1998 consolidated balance sheet. BORROWINGS UNDER CREDIT AGREEMENTS - In June and October 1997, concurrent with the liquidation of indebtedness utilizing proceeds from the Asset Securitization (as defined in Note 8), equity offering and Convertible Notes offering, the Credit Agreement was amended to provide and subsequently maintain the aggregate total commitments of $920,000, comprised of $95,000 in term loan commitments, $250,000 of revolving loan commitments and $575,000 in acquisition term loan commitments. All other significant financial provisions of the Credit Agreement remained substantially unchanged. The Credit Agreement provides for varying semi-annual reductions in commitments, and the borrowings bear interest at rates that fluctuate with the prime rate and the Eurodollar rate which ranged from 5.69% to 8.50% in 1998 and 6.25% to 8.63% in 1997. The Credit Agreement includes a commitment fee of .25% per annum based on the daily average unutilized revolving credit commitment. Borrowings under the Credit Agreement mature at December 31, 2002. At December 27, 1998, $70,200 of acquisition term loan commitments and $227,020 of the revolving loan commitments were unutilized. The amount unutilized under the revolving loan commitments has been reduced by outstanding letters of credit of $22,980, not reflected in the accompanying consolidated financial statements, for which the Company was contingently liable under the Credit Agreement. Such letters of credit primarily guarantee various insurance reserves. Borrowings under the terms of the Credit Agreement are secured by pledges of various assets of the Company. The Credit Agreement has covenants which, among other things, restrict the incurrence of additional indebtedness by the Company and limit its ability to make payments to affiliated parties. The Credit Agreement also restricts the repurchase amount of treasury stock and the payment of dividends or other distributions of capital. The Company was in compliance with these covenants as of December 27, 1998. The fair value of the Company's remaining debt approximated its carrying value, based upon the Company's current incremental borrowing rates for similar types of borrowing arrangements. Aggregate annual maturities of long-term debt subsequent to December 27, 1998 are as follows: [Download Table] YEAR AMOUNT 1999 $ 225,331 2000 125,630 2001 146,370 2002 287,067 2003 9,557 2004 and thereafter 461,807 ----------- 1,255,762 Noncurrent portion of capitalized lease obligations 158 ----------- Total $ 1,255,920 =========== 8. ASSET SECURITIZATION In conjunction with the amended Credit Agreement described in Note 7, on June 30, 1997, the Company entered into an agreement to sell, on a revolving basis for a period of up to five years, certain of its accounts receivable to a wholly-owned subsidiary, which entered into an agreement to transfer, on a revolving basis, an undivided percentage ownership interest in a designated pool of accounts receivable to a maximum of $204,000 (the "Asset Securitization"). At December 27, 1998 and December 28, 1997, accounts receivable was reduced by $200,000 for amounts sold. Fees arising from the securitization transaction of $11,888 and $5,133 are included in interest expense and securitization fees in the consolidated statements of operations for the years ended December 27, 1998 and December 28, 1997, respectively. These fees vary based on commercial paper rates plus a margin, providing a lower effective rate than that available under the Company's Credit Agreement. The Company maintains an allowance for doubtful accounts based on the expected collectibility of all accounts receivable, including receivables sold.
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9. LEASES CAPITAL LEASES - The Company is a lessee under several noncancellable capital lease agreements for certain fixed assets. The leases extend for periods up to 4 years and contain purchase provisions. OPERATING LEASES - The Company leases certain equipment, warehouse facilities and office space under noncancellable operating leases which expire over the next 12 years. Most of these operating leases provide the Company with the option, after the initial lease term, either to purchase the equipment or renew its lease based upon the fair value of the property at the option date. In 1998, the Company entered into interest rate swap agreements to exchange floating rate for fixed interest payments. The agreements effectively convert a notional principal amount of $75,000 variable rate, quarterly operating lease payments into fixed. The net cash amount paid or received on the agreement is accrued and recognized as an adjustment to lease expense. The variable interest rates are based on LIBOR. At December 27, 1998, the weighted average variable interest rate was 5.22% and the fixed swap rate was 4.84%. The swap agreements have a maximum life of five years and are cancelable by the counterparties in September and December 1999. The fair value of the swap agreements was not recognized in the consolidated financial statements since the agreements are accounted for as hedges. The estimated fair value of the interest rate swap agreements, which was based on quotes from brokers, was not material to the consolidated financial statements at December 27, 1998. While the Company is exposed to credit loss in the event of nonperformance by the counterparties of these agreements, management believes that the possibility of incurring such a loss is remote due to the creditworthiness of the counterparties. SALE AND LEASEBACK OF EQUIPMENT - In 1998, the Company entered into agreements for the sale and leaseback of certain printing equipment for which it received approximately $88,500 of proceeds. The lease, which expires in July 2010, has been classified as an operating lease. The proceeds were utilized to repay revolving loan commitments incurred under the Credit Agreement. Future minimum rental payments required under noncancellable leases at December 27, 1998 were as follows: [Download Table] YEAR CAPITAL OPERATING 1999 $ 473 $ 49,739 2000 64 46,337 2001 64 42,199 2002 48 37,866 2003 -- 32,386 2004 and thereafter -- 128,286 --------- ---------- Total minimum lease payments 649 $ 336,813 Less imputed interest 122 ========== --------- Capitalized lease obligations 527 Less current maturities 369 --------- Noncurrent portion $ 158 ========= Rental expense for operating leases was $49,697, $44,703 and $36,299 for the years 1998, 1997 and 1996, respectively. Assets recorded under capital leases amounted to $1,567 and $4,828, net of accumulated amortization of $357 and $1,864 at the end of 1998 and 1997, respectively. 10.INCOME TAXES The provision (benefit) for income taxes is summarized as follows: [Download Table] 1998 1997 1996 Current: Federal $ 27,429 $ 21,178 $ 16,542 State 6,728 5,891 3,418 ------------ ----------- ------------ 34,157 27,069 19,960 ------------ ----------- ------------ Deferred: Federal 17,450 14,525 12,491 State 447 (253) 1,082 ------------ ----------- ------------ 17,897 14,272 13,573 ------------ ----------- ------------ Total $ 52,054 $ 41,341 $ 33,533 ============ =========== ============
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The tax effects of significant items comprising the Company's net deferred tax liability as of December 27, 1998 and December 28, 1997 are as follows: [Download Table] 1998 1997 Deferred tax assets: Operating loss carryforwards $ 6,422 $ 8,219 Tax credit carryforwards 25,871 39,602 Employee health and welfare benefits 10,917 16,328 Postretirement benefits other than pensions 16,213 15,445 Pension accrual 4,533 7,232 Vacation accrual 9,232 7,172 Other differences 12,603 10,119 ------------ ------------ Gross deferred tax assets 85,791 104,117 ------------ ------------ Deferred tax liabilities: Differences between book and tax bases of property (125,184) (138,066) Other differences (33,319) (27,959) ------------ ------------ Gross deferred tax liabilities (158,503) (166,025) ------------ ------------ Deferred tax asset valuation allowance (5,095) (6,840) ------------ ------------ Net deferred tax liability (77,807) (68,748) Less current deferred tax asset 16,986 31,297 ------------ ------------ Noncurrent deferred tax liability $ (94,793) $ (100,045) ============ ============ The 1998 and 1997 amounts above include a valuation allowance of $5,095 and $6,840, respectively, relating to a capital loss carryforward that potentially may not be realized for tax purposes and for the limitations of certain state net operating loss carryforwards. The following table reconciles the difference between the U.S. federal statutory tax rates and the rates used by the Company in the determination of net income: [Download Table] 1998 1997 1996 Income tax provision, at 35% $ 43,975 $ 34,496 $ 28,278 State and local income taxes, net of federal income tax benefit 4,664 3,665 2,941 Release of deferred tax asset valuation allowance (1,745) -- -- Other, primarily goodwill amortization 5,160 3,180 2,314 --------- -------- --------- Total $ 52,054 $ 41,341 $ 33,533 ========= ========= ========= At December 27, 1998, the Company had net operating loss carryforwards from business acquisitions for federal income tax purposes of $7,643 available to reduce future taxable income, expiring from 2007 to 2010. The Company also had federal tax credits of $1,177 expiring primarily from 1999 to 2002 and state tax credits of $3,893 expiring from 2001 to 2013. In addition, the Company had alternative minimum tax carryover credits of $20,801 which do not expire and may be applied against regular tax in the future, in the event that the regular tax expense exceeds the alternative minimum tax. 11.EMPLOYEE BENEFIT PLANS In February 1998, the Financial Accounting Standards Board issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," which standardizes the disclosure requirements for pensions and other postretirement benefits. The Company has adopted this statement for the fiscal year ended 1998 and as required by SFAS No. 132, has restated the prior year disclosure for comparative purposes. PENSION PLANS - The Company has defined benefit pension plans in effect which cover certain employees who meet minimum eligibility requirements. The Company contributes annually amounts sufficient to satisfy the government's minimum standards. Net periodic pension cost is determined based upon years of service and compensation levels, using the projected unit credit method. Prior year service costs and unrecognized gains and losses are amortized over the estimated future service periods of active employees in the respective plan. Effective January 1, 1997, several of the Company's defined benefit plans were merged into the World Color Press, Inc. Retirement Plan, which was then amended to form the World Color Press Cash Balance Plan (the "Cash Balance Plan"), which provides for a new benefit formula applicable to all participants. Under the Cash Balance Plan, each participant's account is credited with both interest and a fixed percentage of the participant's annual compensation. POSTRETIREMENT PLANS - The Company provides postretirement medical benefits to eligible employees. The Company's postretirement health care plans are unfunded. As of January 1, 1998, the Company amended employer subsidized coverage for postretirement benefits for certain active participants in a company acquired in 1997.
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The following table provides a reconciliation of the changes in the plans' benefit obligations and fair value of plan assets for the fiscal years ended December 27, 1998 and December 28, 1997 and a statement of the funded status as of December 27, 1998 and December 28, 1997: [Download Table] PENSION BENEFITS POSTRETIREMENT BENEFITS ---------------- ----------------------- 1998 1997 1998 1997 CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $ 191,849 $ 144,864 $ 44,665 $ 27,362 Service cost 5,603 5,201 945 1,365 Interest cost 14,568 14,066 2,946 3,158 Plan participants' contributions -- -- 329 369 Plan amendments -- -- (2,345) -- Acquisitions -- 28,832 741 11,881 Curtailment gain -- -- (740) -- Actuarial (gain) or loss 8,932 14,103 (815) 3,080 Benefits paid (15,107) (15,217) (2,651) (2,550) ---------- ---------- --------- --------- Benefit obligation at end of year $ 205,845 $ 191,849 $ 43,075 $ 44,665 ========== ========== ========= ========= CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year $ 168,625 $ 135,899 $ -- $ -- Actual return on plan assets 22,089 14,947 -- -- Employer contributions 5,058 5,663 2,322 2,181 Plan participants' contributions -- -- 329 369 Acquisitions -- 27,333 -- -- Benefits paid (15,107) (15,217) (2,651) (2,550) ---------- ---------- --------- --------- Fair value of plan assets at end of year $ 180,665 $ 168,625 $ -- $ -- ========== ========== ========= ========= RECONCILIATION OF FUNDED STATUS Funded status $ (25,180) $ (23,224) $ (43,075) $ (44,665) Unrecognized actuarial loss 20,417 15,474 2,539 3,162 Unrecognized net transition asset (182) (408) -- -- Unrecognized prior service cost (11,962) (11,125) (3,327) (2,578) ---------- ---------- --------- --------- Net amount recognized $ (16,907) $ (19,283) $ (43,863) $ (44,081) ========== ========== ========= ========= The unrecognized net transition asset is being amortized over the average expected future service periods of employees. Plan assets consist principally of common stocks and U.S. government and corporate obligations. The plans' assets included common stock of the Company totaling $8,934 and $4,614 at December 27, 1998 and December 28, 1997, respectively. The following table provides the amounts recognized in the consolidated balance sheets as of December 27, 1998 and December 28, 1997: [Download Table] PENSION BENEFITS POSTRETIREMENT BENEFITS ---------------- ----------------------- 1998 1997 1998 1997 Accrued benefit liability $ (22,621) $ (22,767) $(43,863) $(44,081) Intangible asset 5,714 3,484 -- -- --------- --------- -------- -------- Net amount recognized $ (16,907) $ (19,283) $(43,863) $(44,081) ========= ========= ======== ======== The following table provides the components of net periodic benefit cost for the fiscal years ended December 27, 1998 and December 28, 1997: [Download Table] PENSION BENEFITS POSTRETIREMENT BENEFITS ---------------- ----------------------- 1998 1997 1998 1997 Service cost $ 5,603 $ 5,201 $ 945 $ 1,365 Interest cost 14,568 14,066 2,946 3,158 Expected return on plan assets (16,584) (15,616) -- -- Amortization of prior service cost (1,015) (866) (1,596) (1,289) Amortization of transitional asset (226) (226) -- -- Curtailment gain -- -- (740) -- Recognized actuarial loss 336 49 136 -- ---------- ---------- --------- --------- Net periodic cost $ 2,682 $ 2,608 $ 1,691 $ 3,234 ========== ========== ========= ========= The weighted average assumptions used in the measurement of the Company's benefit obligation are as follows: [Download Table] PENSION BENEFITS POSTRETIREMENT BENEFITS ---------------- ----------------------- 1998 1997 1998 1997 Discount rate 7.25% 7.50% 7.25% 7.50% Expected return on plan assets 10.25% 10.00% -- -- Rate of compensation increase 3.50% 3.50% -- --
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At December 27, 1998 and December 28, 1997, accumulated benefit obligations exceeded plan assets for all pension plans. The market value of plan assets was used to calculate the expected return on plan assets. The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 5% at the end of 1997 and 1998, and is expected to remain constant at that rate for future periods. A one percentage point increase in the assumed health care cost trend rate would increase the accumulated postretirement benefit obligation as of December 27, 1998 by $4,083 and the annual postretirement benefit expense by approximately $491. A one percentage point decrease in the assumed health care cost trend rate would decrease the accumulated postretirement benefit obligation as of December 27, 1998 by $3,715 and the annual postretirement benefit expense by approximately $406. Certain union employees of the Company participate in multiemployer plans. Amounts charged to benefit expense relating to the multiemployer plans for 1998, 1997 and 1996 totaled $3,685, $3,352 and $3,185, respectively. In addition, the Company has various deferred savings and profit sharing plans for certain employees who meet eligibility requirements. Amounts charged to benefit expense related to these plans for 1998, 1997 and 1996 totaled $2,993, $1,977 and $1,044, respectively. 12.STOCK-BASED COMPENSATION PLANS STOCK OPTION PLANS - Upon consummation of the Merger described in Note 1, the Stock Option Committee of the Board of Directors (the "Stock Option Committee") adjusted all of the outstanding options so that each option became exercisable for five times the number of shares of common stock for which it had been exercisable immediately prior to the Merger at an exercise price per share equal to one-fifth of the exercise price per share immediately prior to the Merger (the "Options Adjustments"). Accordingly, the following stock option data has been presented on a post-Merger basis. The Company has stock option plans that permit the Stock Option Committee to grant up to an aggregate of 7,750,000 options to purchase shares of the Company's common stock to certain key employees of the Company. Options granted under the plans generally vest ratably over a five-year period. Vested options may generally be exercised up to ten years from the date of grant. Information related to the Company's stock option plans is presented below. [Download Table] NUMBER OF OPTIONS OPTION PRICE Outstanding at December 31, 1995 3,815,320 $5.49 to $15.00 Granted 354,000 $22.00 Exercised (1,532,290) $5.49 to $6.95 Rescinded/Canceled (74,725) $8.97 to $15.00 --------- Outstanding at December 29, 1996 2,562,305 $5.49 to $22.00 --------- Granted 804,000 $23.75 to $26.75 Exercised (12,000) $6.89 Rescinded/Canceled (45,365) $11.20 to $22.00 --------- Outstanding at December 28, 1997 3,308,940 $5.49 to $26.75 --------- Granted 937,500 $29.13 to $32.56 Exercised (617,044) $5.49 to $26.75 Rescinded/Canceled (166,500) $15.00 to $32.56 --------- Outstanding at December 27, 1998 3,462,896 $5.49 to $30.75 --------- EXERCISABLE RESERVED FOR FUTURE GRANTS December 27, 1998 1,600,600 2,009,800 December 28, 1997 1,861,934 396,770 December 29, 1996 1,655,640 1,155,405 As permitted by SFAS No. 123, the Company has not recorded compensation expense for stock options granted to employees, but rather has determined the pro forma net income and net income per common share - basic and diluted amounts for fiscal years 1998, 1997 and 1996, had compensation expense been recorded for options granted during those years under the applicable fair value method described in the statement. For options granted during 1998, 1997 and 1996, the fair value at the date of grant was estimated using the Black-Scholes option pricing model. Under the Black-Scholes model, a volatility factor of .281, .310 and .312 was used for 1998, 1997 and 1996, respectively. The following weighted average assumptions were used in calculating the fair value of the options granted in 1998, 1997 and 1996, respectively: risk-free interest rates of 5.13%, 6.33% and 6.80%; an assumed dividend yield of zero; and an expected life of the options of ten years. For purposes of the pro forma disclosures, the estimated fair value of the options granted is amortized to compensation expense over the options' vesting period. The Company's pro forma information is as follows:
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[Download Table] 1998 1997 1996 Net income: As reported $ 73,590 $ 57,219 $ 47,261 Pro forma $ 71,319 $ 55,893 $ 46,668 Net income per common share - basic: As reported $ 1.92 $ 1.65 $ 1.40 Pro forma $ 1.86 $ 1.61 $ 1.39 Net income per common share - diluted: As reported $ 1.84 $ 1.60 $ 1.35 Pro forma $ 1.79 $ 1.57 $ 1.34 Weighted average fair value of options granted during the year $ 15.00 $ 14.39 $ 12.81 RESTRICTED STOCK - Restricted shares of the Company's stock have been issued in 1998 to certain key employees under a restricted stock plan. The stock vests ratably over five years and is contingent upon employment. The market value of the stock at the time of grant is recorded as unamortized restricted stock compensation in stockholders' equity and is amortized to expense over the five year vesting period. In 1998, the Company issued 135,000 restricted shares of common stock at a weighted average price of $30.21 per share. The fair value of the restricted shares was $3,662 at December 27, 1998. Compensation expense resulting from the amortization of the restricted stock totaling $349 is included in the 1998 consolidated statement of operations. 13.TREASURY STOCK In August 1998, the Board of Directors authorized the repurchase of up to 1,800,000 shares of the Company's common stock. The repurchase of shares commenced in August 1998 and may occur over the next three years in the open market at prevailing market prices or in negotiated transactions, depending on market conditions. The shares are being repurchased to satisfy commitments under certain employee benefit plans. When treasury shares are reissued, the Company uses the weighted average cost method and the excess of repurchase cost over reissuance price is treated as a reduction of retained earnings. As of December 27, 1998, the Company had repurchased 486,501 shares at a weighted average cost of $30.80 and reissued 466,255 shares. 14.NET INCOME PER COMMON SHARE The following represents the reconciliation between net income per common share - basic and diluted: (In thousands, except per share data) [Download Table] NET PER INCOME SHARES SHARE FOR THE YEAR ENDED 1998: Net income per common share - basic $ 73,590 38,378 $ 1.92 Effect of dilutive securities: Stock options -- 967 Convertible debt 5,569 3,660 --------- -------- Net income per common share - diluted $ 79,159 43,005 $ 1.84 ========= ======== FOR THE YEAR ENDED 1997: Net income per common share - basic $ 57,219 34,773 $ 1.65 Effect of dilutive securities: Stock options -- 863 Convertible debt 1,264 815 --------- -------- Net income per common share - diluted $ 58,483 36,451 $ 1.60 ========= ======== FOR THE YEAR ENDED 1996: Net income per common share - basic $ 47,261 33,642 $ 1.40 Effect of dilutive securities: Stock options -- 1,361 --------- -------- Net income per common share - diluted $ 47,261 35,003 $ 1.35 ========= ======== Options to purchase 429,000 shares of common stock were outstanding in 1997, but were not included in the computation of net income per common share - diluted because the exercise price of the options was greater than the average market price of the common shares. In February 1999, the Company issued options to purchase 875,000 shares of its common stock. At the date of grant the exercise price of the options equaled the fair market value of the Company's common stock. 15.TRANSACTIONS WITH AFFILIATES The Company has incurred expenses of $750 in each of the fiscal years ending 1998, 1997 and 1996 for management services provided by affiliated companies. 16.COMMITMENTS AND CONTINGENT LIABILITIES The Company is subject to legal proceedings and other claims arising in the ordinary course of operations. In the opinion of management, ultimate resolution of proceedings currently pending will not have a material effect on the results of operations or financial position of the Company.
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17.UNAUDITED QUARTERLY FINANCIAL INFORMATION [Download Table] NET NET INCOME INCOME PER PER COMMON COMMON GROSS SHARE SHARE QUARTER ENDED NET SALES PROFIT NET INCOME -BASIC -DILUTED ------------- --------- ------ ---------- ------ -------- March 29, 1998 $ 550,407 $ 87,573 $ 9,358 $ 0.24 $ 0.24 June 28, 1998 546,503 94,211 9,772 0.25 0.25 September 27, 1998 635,980 127,037 28,987 0.76 0.71 December 27, 1998 623,995 120,274 25,473 0.66 0.63 ---------- -------- ---------- $2,356,885 $429,095 $ 73,590 1.92 1.84 ========== ======== ========== March 30, 1997 $ 458,351 $ 75,315 $ 6,903 $ 0.20 $ 0.20 June 29, 1997 425,647 76,052 6,580 0.19 0.19 September 28, 1997 557,268 110,701 22,873 0.68 0.66 December 28, 1997 539,959 105,219 20,863 0.55 0.53 ---------- -------- ---------- $1,981,225 $367,287 $ 57,219 1.65 1.60 ========== ======== ========== 18.SUBSEQUENT EVENT On February 22, 1999, the Company issued Senior Subordinated Notes in the aggregate principal amount of $300,000, receiving net proceeds of approximately $294,000. Interest on the notes is payable semi-annually at the annual rate of 7.75%. The notes do not have required principal payments prior to maturity on February 15, 2009. The net proceeds from the notes issuance were utilized to repay certain indebtedness under the Credit Agreement. In connection with the issuance of these notes, the Company amended its Credit Agreement resulting in, among other modifications, a $95,000 permanent reduction as of March 9, 1999 in borrowings and commitments under the Credit Agreement. As a result, aggregate total commitments decreased from $920,000 to $825,000. The amendment and related permanent reduction in total borrowings and commitments resulted in a substantial modification of the terms under the Credit Agreement. Accordingly, the Company will recognize an extraordinary charge for the early extinguishment of debt of approximately $5,900, net of tax, in the first quarter of fiscal year 1999.

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