UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
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 (I.R.S. employer
of 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 (I.R.S. employer
of 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 periods 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
ACG Holdings, Inc. has 130,182 shares outstanding of its Common Stock, $.01
Par Value, as of January 31, 1998 (all of which are privately owned and not
traded on a public market).
INDEX
Part I. Financial Information Page No.
--------
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
December 31, 1997 and March 31, 1997 3
Condensed Consolidated Statements of Operations for the
three months ended December 31, 1997 and 1996 5
Condensed Consolidated Statements of Operations for the
nine months ended December 31, 1997 and 1996 6
Condensed Consolidated Statements of Cash Flows for the
nine months ended December 31, 1997 and 1996 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Part II. Other Information
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
Exhibit Index 23
ACG HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(Dollars in thousands, except par values)
<TABLE>
December 31, 1997 March 31, 1997
----------------- --------------
(Unaudited)
<S> <C> <C>
Assets
- ------
Current assets:
Cash $ 0 0
Receivables:
Trade accounts, less allowance for
doubtful accounts of $2,573 and $5,879 at
December 31, 1997 and March 31, 1997,
respectively 62,857 53,510
Other 2,200 3,252
-------- --------
Total receivables 65,057 56,762
Inventories 10,663 9,711
Prepaid expenses and other current assets 3,178 3,604
-------- --------
Total current assets 78,898 70,077
Property, plant and equipment 257,646 238,167
Less accumulated depreciation (90,914) (71,270)
-------- --------
Net property, plant and equipment 166,732 166,897
Excess of cost over net assets acquired, less
accumulated amortization of $39,913 and
$33,523 at December 31, 1997 and March
31, 1997, respectively 76,703 81,964
Other assets 15,957 15,037
-------- --------
Total assets $338,290 333,975
======== =======
See accompanying notes to condensed consolidated financial statements.
</TABLE>
ACG HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(Dollars in thousands, except par values)
<TABLE>
December 31, 1997 March 31, 1997
------------------ --------------
(Unaudited)
<S> <C> <C>
Liabilities and Stockholders' Deficit
- -------------------------------------
Current liabilities:
Current installments of long-term debt and
capitalized leases $ 21,521 18,252
Trade accounts payable 30,160 29,364
Accrued expenses 32,883 30,037
Income taxes 839 1,022
--------- ---------
Total current liabilities 85,403 78,675
Long-term debt and capitalized leases, excluding
current installments 296,664 294,057
Deferred income taxes 8,615 8,713
Other liabilities 37,758 28,848
--------- ---------
Total liabilities 428,440 410,293
Stockholders' deficit
Common stock, voting, $.01 par value, 5,852,223
shares authorized, 127,408 shares issued and
outstanding at December 31, 1997 and 123,889 shares
issued and outstanding at March 31, 1997 1 1
Series A convertible preferred stock, $.01 par value,
4,000 shares authorized, issued and outstanding,
$40,000,000 liquidation preference -- --
Series B convertible preferred stock, $.01 par value,
1,750 shares authorized, issued and outstanding, -- --
$17,500,000 liquidation preference 57,675 57,499
Additional paid-in capital (145,867) (132,228)
Accumulated deficit (1,959) (1,590)
--------- ---------
Cumulative translation adjustment
Total stockholders' deficit (90,150) (76,318)
--------- ---------
Commitments and contingencies
Total liabilities and stockholders' deficit $ 338,290 333,975
========= =========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
ACG HOLDINGS, INC.
Condensed Consolidated Statements of Operations
(In thousands)
(Unaudited)
<TABLE>
Three Months Ended December 31,
-------------------------------
1997 1996
-------- --------
<S> <C> <C>
Sales $145,748 135,319
Cost of sales 125,378 115,759
-------- --------
Gross profit 20,370 19,560
Selling, general and administrative expenses 10,498 10,106
Amortization of goodwill 2,147 2,065
Restructuring costs and other special charges -- 1,171
-------- --------
Operating income 7,725 6,218
Other expense (income):
Interest expense 9,811 9,139
Interest income (25) (40)
Other, net 185 130
-------- --------
Total other expense 9,971 9,229
-------- --------
Loss from continuing operations
before income taxes (2,246) (3,011)
Income tax (expense) (39) (711)
-------- --------
Loss from continuing operations (2,285) (3,722)
Discontinued operations:
Loss from operations, net of tax -- (617)
-------- --------
Net Loss $ (2,285) (4,339)
======== ========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
ACG HOLDINGS, INC.
Condensed Consolidated Statements of Operations
(In thousands)
(Unaudited)
<TABLE>
Nine Months Ended December 31,
-------------------------------
1997 1996
-------- -------
<S> <C> <C>
Sales $407,485 409,210
Cost of sales 352,224 358,558
-------- -------
Gross profit 55,261 50,652
Selling, general and administrative expenses 31,636 31,830
Amortization of goodwill 6,391 6,164
Restructuring costs and other special charges -- 1,659
-------- -------
Operating income 17,234 10,999
Other expense (income):
Interest expense 29,158 27,233
Interest income (111) (131)
Other, net 547 85
-------- -------
Total other expense 29,594 27,187
-------- -------
Loss from continuing operations
before income taxes (12,360) (16,188)
Income tax (expense) (929) (2,302)
-------- -------
Loss from continuing operations (13,289) (18,490)
Discontinued operations:
Loss from operations, net of tax -- (1,001)
Estimated loss on shut down, net of tax (350) --
-------- -------
Net Loss $(13,639) (19,491)
======== =======
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<TABLE>
ACG HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
December 31,
--------------------------
1997 1996
--------- --------
<S> <C> <C>
Cash flows provided (used) by operating activities:
Net loss (13,639) (19,491)
Adjustments to reconcile net loss to cash provided by
operating activities:
Depreciation 20,780 18,467
Depreciation and amortization related to SMC -- 246
Amortization of goodwill and other assets 7,481 7,043
Amortization of deferred financing costs 1,681 1,327
Other special charges - non-cash -- 1,019
Decrease in working capital and other 1,639 17,573
-------- -------
Net cash provided by operating activities 17,942 26,184
Cash flows provided (used) by investing activities:
Purchases of property, plant and equipment (8,825) (7,123)
Proceeds from sales of property, plant and equipment 225 21
Other (209) (192)
-------- -------
Net cash used by investing activities (8,809) (7,294)
Cash flows provided (used) by financing activities:
Repayment of long-term debt, including current maturities (9,337) (7,522)
Proceeds from Term Loan Facility 25,000 --
Net decrease in revolver borrowings (18,248) (8,559)
Payments under capital lease obligations (4,555) (2,169)
Payment of deferred financing costs (2,513) (644)
Other, net 520 4
-------- -------
Net cash used by financing activities (9,133) (18,890)
-------- -------
Net change in cash -- --
Cash:
Beginning of period -- --
-------- -------
End of period $ -- --
======== =======
Noncash investing activity:
Equipment purchases under capital leases $ 12,366 25,330
======== =======
See accompanying notes to condensed consolidated financial statements.
</TABLE>
ACG HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Description of the Company
In July 1997, Sullivan Communications, Inc. changed its name to ACG Holdings,
Inc. ("Holdings") and its wholly-owned subsidiary, Sullivan Graphics, Inc.
changed its name to American Color Graphics, Inc. ("Graphics"). Holdings and
Graphics are collectively referred to in this document as the "Company".
Holdings has no operations or significant assets other than its investment in
Graphics. Holdings is dependent upon distributions from Graphics to fund its
obligations. Under the terms of its debt agreements at December 31, 1997,
Graphics' ability to pay dividends or lend to Holdings was either restricted or
prohibited, except that Graphics may pay specified amounts to Holdings (i) to
pay the repurchase price payable to any officer or employee (or their estates)
of Holdings, Graphics or any of their respective subsidiaries in respect of
their stock or options to purchase stock in Holdings upon the death, disability
or termination of employment of such officers and employees (so long as no
default, or event of default, as defined, has occurred under the terms of the
Bank Credit Agreement, as defined below, and provided the aggregate amount of
all such repurchases does not exceed $2 million) and (ii) to fund the payment
of Holdings' operating expenses incurred in the ordinary course of business,
other corporate overhead costs and expenses (so long as the aggregate amount of
such payments does not exceed $250,000 in any fiscal year) and Holdings'
obligations pursuant to a tax sharing agreement with Graphics. A substantial
portion of Graphics' long-term obligations have been fully and unconditionally
guaranteed by Holdings.
The two business sectors of the commercial printing industry in which the
Company operates are printing and digital imaging and prepress services
conducted by its American Color division ("American Color").
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and are in accordance with instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation have been included. The operating results
for the three and nine month periods ended December 31, 1997 are not
necessarily indicative of the results that may be expected for the fiscal year
ended March 31, 1998. These unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and footnotes thereto included in the Company's Form 10-K for the
fiscal year ended March 31, 1997 and the Company's Post-Effective Amendment No.
3 to Registration Statement No. 33-97090 on Form S-1.
Certain prior period amounts have been reclassified to conform with current
period presentation.
ACG HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
2. Indebtedness Transactions
On June 30, 1997, the Company entered into a $25 million term loan facility
with Bankers Trust Company and a syndicate of lenders including a $5 million
participation by Morgan Stanley Senior Funding, Inc., a related party, which
matures on March 31, 2001 (the "Term Loan Facility"). Net proceeds under this
facility of approximately $23.5 million (after loan fees and other transaction
costs) were received and used to reduce outstanding borrowings under the
existing $75 million revolving credit facility maturing in 2000 (the "Revolving
Credit Facility"). Interest under the Term Loan Facility is floating based
upon existing market rates plus agreed upon margin levels which escalate over
the initial 24 months of the facility. In addition, the Company is required to
pay certain additional cash fees on the 6, 9, 12, 18, 24 and 30 month
anniversary dates of the facility based upon the then outstanding principal
amounts. The obligations under this facility are guaranteed on the same basis
and by the same guarantors as the Company's amended Credit Agreement with BT
Commercial Corporation (the "Bank Credit Agreement") although such guarantees
are secured by second priority security interests in the tangible and
intangible assets of the Company and such guarantors. Covenants under this
agreement are substantially similar to, but in certain respects are more
restrictive than, existing covenants under the Senior Subordinated Notes
Indenture. Morgan Stanley Senior Funding, Inc. received transaction fees of
approximately $0.3 million. In connection with the Term Loan Facility, the
Company obtained amendments to the Bank Credit Agreement with respect to
certain financial covenants and an amendment that decreased the Borrowing Base
through March 30, 1998. After giving effect to such amendments, the Company is
currently in compliance with all financial covenants set forth in the Bank
Credit Agreement, as amended.
3. Discontinued Operations
In February 1997, the Company made a strategic decision to shut down the
operations of its wholly-owned subsidiary Sullivan Media Corporation ("SMC").
The shut down of SMC has been accounted for as a discontinued operation, and
accordingly, its operating results are segregated and reported as a
discontinued operation in the accompanying unaudited condensed consolidated
financial statements. The assets of SMC and any resulting gain or loss on the
disposal of those assets, is immaterial to the results of operations and
financial position of the Company.
4. Inventories
The components of inventories are as follows (in thousands):
<TABLE>
December 31, 1997 March 31, 1997
------------------- ----------------
<S> <C> <C>
Paper $9,038 7,831
Ink 222 324
Supplies and other 1,403 1,556
------- -------
Total Inventories $10,663 9,711
======= =======
</TABLE>
ACG HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
5. Restructuring Costs and Other Special Charges
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 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 Restructuring)"
("EITF 94-3"). The pretax costs of $5 million which were incurred as a part of
this plan represented 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 the fiscal year ended March 31, 1997 of which $0.4 million,
$0.1 million and $0.1 million was incurred in the quarters ended June 30, 1996,
September 30, 1996 and December 31, 1996, respectively.
During the quarter ended December 31, 1996, the Company recorded special
charges totaling $1.0 million to adjust the carrying values of idle, disposed
and under-performing assets of the Company's American Color sector to estimated
fair values. The provision was based on a review of Company wide 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. Such special charges are classified
within restructuring costs and other special charges in the consolidated
statement of operations.
Printing
In January 1998, the Company approved a plan for its printing division which is
designed to improve responsiveness to customer requirements, increase asset
utilization and reduce overhead costs. The cost of this plan will be accounted
for in accordance with the guidance set forth in EITF 94-3. The estimated
pretax costs associated with this plan of approximately $5.5 million represents
$3.2 million of employee termination costs, $1.7 million related to the
adjustment of carrying values of certain idle, disposed and under-performing
assets and $0.6 million of relocation and other transition expenses. This
restructuring charge will be reported in the quarter ending March 31, 1998.
The majority of these costs should be paid or settled before March 31, 1999.
6. Vendor Supply Agreements; Deferred Income
In the quarter ending December 31, 1997, the Company entered into
multi-year contracts to purchase a portion of the Company's raw materials to be
used in its normal operations. In connection with such purchase agreements,
pricing for a portion of the Company's raw materials is adjusted for certain
movements in market prices, changes in raw material costs and other specific
price increases. The Company is deferring certain contractual provisions over
the life of the contracts which are being recognized as the purchase
commitments are achieved. The amount deferred at December 31, 1997 is $9.8
million and is included within other liabilities in the Condensed Consolidated
Balance Sheets.
ACG HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
7. Non-recurring Charge Related to Resignation of Chief Executive Officer
A non-recurring charge of $1.9 million relating to the resignation of the
Company's former Chief Executive Officer was recorded in the quarter ended
September 30, 1996, and is classified as a selling, general and administrative
expense in the condensed consolidated statement of operations for the nine
month period ended December 31, 1996. Payments under the related agreement
continue through 2001, subject to certain requirements.
8. Commitments and Contingencies
The Company has employment agreements with two of its principal officers and
five other employees. Such agreements provide for minimum salary levels as
well as for incentive bonuses which are payable if specified management goals
are attained. The aggregate commitment for future salaries at December 31,
1997, excluding bonuses, was approximately $3.3 million.
On December 21, 1989, Graphics sold to CPS Corp. ("CPS") its ink manufacturing
operations and facilities. Graphics remains contingently liable under $2.7
million of industrial revenue bonds assumed by CPS. CPS assumed these
liabilities and has agreed to indemnify Graphics for any resulting obligation
and has also provided an irrevocable letter of credit in favor of the holders
of such bonds. Accordingly, management believes that any obligation of Graphics
under this contingency is unlikely.
Concurrent with the sale of its ink manufacturing facility, Graphics entered
into a long-term ink supply contract with CPS. The supply contract requires
Graphics to purchase a significant portion of its ink requirements, within
certain limitations and minimums, from CPS. Graphics believes that prices for
products under this contract approximate market prices at the time of purchase
of such products.
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 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 recorded a reserve of approximately $0.1
million in connection with this liability on its consolidated balance sheet at
December 31, 1997. The Company believes this amount is adequate to cover such
liability.
The Company has been named as a defendant in several other 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 consolidated financial statements of the Company.
ACG HOLDINGS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Special Note Regarding Forward Looking Statements
This Quarterly Report on Form 10-Q (the "Report") contains forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934. Discussions containing such forward-looking statements may be found in
this section 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"), together with its wholly-owned subsidiary,
American Color Graphics, Inc. ("Graphics"), 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.
Results of Operations
General
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 Unaudited Condensed Consolidated
Financial Statements. Sales, costs of sales and selling, general and
administrative expenses attributable to SMC for the three months ended December
31, 1996 (the "1996 Three Month Period") and nine months ended December 31,
1996 (the "1996 Nine Month Period") have been reclassified to discontinued
operations.
ACG HOLDINGS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following table summarizes the Company's results of operations for the
three months ended December 31, 1997 (the "1997 Three Month Period"), the 1996
Three Month Period, the nine months ended December 31, 1997 (the "1997 Nine
Month Period") and the 1996 Nine Month Period:
<TABLE>
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------------ ----------------------------
1997 1996 1997 1996
-------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C>
Sales:
Printing $122,547 115,290 343,442 353,218
American Color 23,201 20,029 64,043 55,992
-------- -------- -------- --------
Total $145,748 135,319 407,485 409,210
Gross Profit:
Printing $ 14,950 14,924 39,727 38,801
American Color 5,421 4,639 15,538 11,779
Other (1) (3) (4) 72
-------- -------- -------- --------
Total $ 20,370 19,560 55,261 50,652
Gross Margin:
Printing 12.2% 12.9% 11.6% 11.0%
American Color 23.4% 23.2% 24.3% 21.0%
Total 14.0% 14.5% 13.6% 12.4%
Operating Income (Loss):
Printing $ 9,562 9,731 23,417 22,737
American Color 1,300 (364)(a)(d) 2,964 (833)(a)(d)
Other (b) (3,137) (3,149)(c) (9,147) (10,905)(c)
-------- -------- -------- --------
Total $ 7,725 6,218 17,234 10,999
</TABLE>
(a) Includes the impact of restructuring costs of $0.1 million in the 1996
Three Month Period and $0.6 million in the 1996 Nine Month Period.
(b) Consists primarily of corporate general and administrative expenses, and
amortization expense.
(c) Also reflects non-recurring employee termination expenses of $2.5 million
in the 1996 Nine Month Period (including $1.9 million related to the
resignation of the Company's former Chief Executive Officer-see note 7 to
the Unaudited Condensed Consolidated Financial Statements) and $0.6 million
in the 1996 Three Month Period.
(d) Includes the impact of $1.0 million of other special charges related to
non-cash fixed asset write-offs and write-downs (see note 5 to the
Unaudited Condensed Consolidated Financial Statements).
ACG HOLDINGS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Printing
Sales. Printing sales decreased $9.8 million to $343.4 million in the 1997
Nine Month Period from $353.2 million in the 1996 Nine Month Period. This
decrease is the result of a decrease in paper prices and an increase in sales
to customers that supply their own paper.
Printing sales increased $7.2 million to $122.5 million in the 1997 Three Month
Period from $115.3 million in the 1996 Three Month Period. This increase
includes the impact of an increase in production volume partially offset by a
decrease in paper prices and an increase in sales to customers that supply
their own paper.
Gross Profit. Printing gross profit increased $0.9 million to $39.7 million in
the 1997 Nine Month Period from $38.8 million in the 1996 Nine Month Period.
Printing gross margin increased to 11.6% in the 1997 Nine Month Period from
11.0% in the 1996 Nine Month Period. The increase in gross profit includes
reduced manufacturing costs including continued cost containment at the
printing plants and the effect of costs in the 1996 Nine Month Period related
to the start-up of Flexi-Tech, a plant in Hanover, Pennsylvania. The increase
in gross margin includes the above mentioned factors, the impact of lower paper
prices and an increase in sales to customers that supply their own paper.
Printing gross profit remained relatively unchanged at $14.9 million in both
the 1997 and 1996 Three Month Periods. Printing gross margin decreased to 12.2%
in the 1997 Three Month Period from 12.9% in the 1996 Three Month Period. The
decrease in gross margin includes the impact of certain changes in product mix
related to the incremental volume produced.
Selling, General and Administrative Expenses. Printing selling, general and
administrative expenses were $16.3 million, or 4.7% of printing sales, in the
1997 Nine Month Period compared to $16.1 million, or 4.6% of printing sales, in
the 1996 Nine Month Period.
Printing selling, general and administrative expenses also remained relatively
unchanged at $5.4 million, or 4.4% of printing sales, in the 1997 Three Month
Period compared to $5.2 million, or 4.5% of printing sales, in the 1996 Three
Month Period.
Operating Income. As a result of these factors, operating income from the
printing business increased to $23.4 million in the 1997 Nine Month Period from
$22.7 million in the 1996 Nine Month Period and remained relatively unchanged
at $9.6 million in the 1997 Three Month Period compared to $9.7 million in the
1996 Three Month Period.
American Color
Sales. American Color's sales increased $8.0 million to $64.0 million in the
1997 Nine Month Period from $56.0 million in the 1996 Nine Month Period. The
increase in the 1997 Nine Month Period 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.
ACG HOLDINGS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
American Color's sales increased $3.2 million to $23.2 million in the 1997
Three Month Period from $20.0 million in the 1996 Three Month Period. The
increase in the 1997 Three Month Period 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.
Gross Profit. American Color's gross profit increased $3.7 million to $15.5
million in the 1997 Nine Month Period from $11.8 million in the 1996 Nine Month
Period. American Color's gross margin increased to 24.3% in the 1997 Nine
Month Period from 21.0% in the 1996 Nine Month Period. These increases include
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.
American Color's gross profit increased $0.8 million to $5.4 million in the
1997 Three Month Period from $4.6 million in the 1996 Three Month Period.
American Color's gross margin increased to 23.4% in the 1997 Three Month Period
from 23.2% in the 1996 Three Month Period. These increases include increased
volume, primarily from increased facilities management sales, 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 $12.6 million, or 19.6% of
American Color's sales in the 1997 Nine Month Period from $11.0 million, or
19.6% of American Color's sales in the 1996 Nine Month Period. These increases
include relocation costs related to the move of American Color's corporate
office from Phoenix to Nashville, increased sales and marketing expenses,
including the costs of the new packaging sales group.
American Color's selling, general and administrative expenses increased to $4.1
million, or 17.8% of American Color's sales in the 1997 Three Month Period
compared to $3.8 million, or 19.1% of American Color's sales in the 1996 Three
Month Period. This increase includes increased sales and marketing expenses,
including costs of the new packaging sales group.
Operating Income (Loss). Operating income (loss) at American Color increased
to income of $3.0 million in the 1997 Nine Month Period from a loss of $0.8
million in the 1996 Nine Month Period. This increase includes the above
factors and the incurrence of other special charges of $1.0 million related to
non-cash fixed asset write-offs and write-downs in the 1996 Nine Month Period
and restructuring costs associated with the American Color restructuring plan
of $0.6 million in the 1996 Nine Month Period.
Operating income (loss) at American Color increased to income of $1.3 million
in the 1997 Three Month Period from a loss of $0.4 million in the 1996 Three
Month Period. This increase includes the above factors and the incurrence of
other special charges of $1.0 million related to non-cash fixed asset
write-offs and write-downs in the 1996 Three Month Period and restructuring
costs associated with the American Color restructuring plan of $0.1 million in
the 1996 Three Month Period.
See discussion below and note 5 to the Unaudited Condensed Consolidated
Financial Statements for information regarding the American Color restructuring
plan and other special charges related to the non-cash write-off and write-down
of fixed assets.
ACG HOLDINGS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Other Operations
Other operations primarily include corporate general and administrative and
other expenses and amortization expense. This amortization expense, including
goodwill amortization, was $6.5 million, $6.2 million, $2.2 million and $2.1
million in the 1997 Nine Month Period, the 1996 Nine Month Period, the 1997
Three Month Period and the 1996 Three Month Period, respectively.
Operating losses from other operations decreased to a loss of $9.1 million in
the 1997 Nine Month Period from a loss of $10.9 million in the 1996 Nine Month
Period. This decrease 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 7 to the
Unaudited Condensed Consolidated Financial Statements) in the 1996 Nine Month
Period. This decrease was partially offset by increases in certain corporate
general and administrative expenses in the 1997 Nine Month Period.
Operating losses from other operations remained relatively unchanged at $3.1
million in both the 1997 and 1996 Three Month Periods. The 1996 Three Month
Period includes the non-recurring charge of $0.6 million related to other
employee termination expenses. The 1997 Three Month Period includes increases
in certain corporate general and administrative expenses.
Restructuring Costs and Other Special Charges
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 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 Restructuring)"
("EITF 94-3"). The pretax costs of $5 million which were incurred as a part of
this plan represented 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 the fiscal year ended March 31, 1997 of which $0.4 million,
$0.1 million and $0.1 million was incurred in the quarters ended June 30, 1996,
September 30, 1996 and December 31, 1996, respectively.
During the quarter ended December 31, 1996, the Company recorded special
charges totaling $1.0 million to adjust the carrying values of idle, disposed
and under-performing assets of the Company's American Color sector to estimated
fair values. The provision was based on a review of Company wide 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. Such special charges are classified
within restructuring costs and other special charges in the consolidated
statement of operations.
ACG HOLDINGS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Printing
In January 1998, the Company approved a plan for its printing division which is
designed to improve responsiveness to customer requirements, increase asset
utilization and reduce overhead costs. The cost of this plan will be accounted
for in accordance with the guidance set forth in EITF 94-3. The estimated
pretax costs associated with this plan of approximately $5.5 million represents
$3.2 million of employee termination costs, $1.7 million related to the
adjustment of carrying values of certain idle, disposed and under-performing
assets and $0.6 million of relocation and other transition expenses. This
restructuring charge will be reported in the quarter ending March 31, 1998.
The majority of these costs should be paid or settled before March 31, 1999.
Interest Expense
Interest expense increased 7.1% to $29.2 million in the 1997 Nine Month Period
from $27.2 million in the 1996 Nine Month Period and interest expense increased
7.4% to $9.8 million in the 1997 Three Month Period from $9.1 million in the
1996 Three Month Period. These increases include the impact of increased
obligations under capital leases and incremental costs related to the Term Loan
Facility (see note 2 to the Unaudited Condensed Consolidated Financial
Statements).
Other, Net
Other, net increased to expense of $0.5 million in the 1997 Nine Month Period
from expense of $0.1 million in the 1996 Nine Month Period. This increase
includes losses recognized on the sale of certain assets in the 1997 Nine Month
Period. Other, net increased to expense of $0.2 million in the 1997 Three
Month Period from expense of $0.1 million in the 1996 Three Month Period.
Income Tax Expense
Income tax expense decreased to $0.9 million in the 1997 Nine Month Period from
$2.3 million in the 1996 Nine Month Period and decreased to $0 million in the
1997 Three Month Period from $0.7 million in the 1996 Three Month Period. These
decreases are primarily due to smaller amounts of taxable income in foreign
jurisdictions and changes in the deferred tax valuation allowance.
Net Loss
As a result of the factors discussed above, the Company's net loss decreased to
$13.6 million in the 1997 Nine Month Period from $19.5 million in the 1996
Nine Month Period and decreased to $2.3 million in the 1997 Three Month Period
from $4.3 million in the 1996 Three Month Period.
ACG HOLDINGS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources
The Company's Bank Credit Agreement includes a revolving credit facility which
matures on September 30, 2000 (the "Revolving Credit Facility") providing for a
maximum of $75 million of borrowing availability, subject to a borrowing base
which approximated $45.5 million at January 31, 1998. As of January 31,
1998, the Company had loans and letters of credit of approximately $28.5
million outstanding under the Revolving Credit Facility.
On June 30, 1997, the Company entered into a $25 million term loan facility
which matures on March 31, 2001 (the "Term Loan Facility") (see note 2 to the
Company's Unaudited Condensed Consolidated Financial Statements). Net proceeds
under this facility of approximately $23.5 million (after loan fees and other
transaction costs) were used to reduce outstanding borrowings under the
Revolving Credit Facility.
The Bank Credit Agreement also provides for a reducing term loan with a final
maturity on September 30, 2000 (the "Term Loan"). At January 31, 1998, $39.5
million of the Term Loan was outstanding. The remaining scheduled principal
payment due under the Term Loan for the fiscal year ending March 31, 1998
("Fiscal Year 1998") is approximately $3.0 million. In addition, it is
anticipated that capital lease obligation repayments will approximate $1.8
million during the remainder of Fiscal Year 1998.
During the 1997 Nine Month Period, cash flow from operations and proceeds from
the Term Loan Facility were used to reduce borrowings under the Revolving
Credit Facility by $18.2 million and to pay $13.9 million in scheduled
principal payments on indebtedness (including capital lease obligations).
Additionally, these cash sources were used to fund the Company's cash capital
expenditures of $8.8 million for the 1997 Nine Month Period, meet additional
investing and financing needs of $2.0 million (including transaction costs
associated with the Term Loan Facility) and to fund interest costs, general
working capital and other operating cash needs of the Company. The Company
plans to continue its program of upgrading its printing and prepress equipment
and expanding production capacity and currently anticipates that Fiscal Year
1998 cash capital expenditures will approximate $11 million and equipment
acquired under capital leases will approximate $15 million during Fiscal Year
1998. The Company had zero cash on hand at December 31, 1997 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 December 31, 1997, the Company had total indebtedness outstanding of $318.2
million, including capital lease obligations. Of the total indebtedness
outstanding at December 31, 1997, $61.9 million was outstanding under the Bank
Credit Agreement at a weighted average interest rate of 8.60% and $25 million
was outstanding under the Term Loan Facility at a weighted average interest
rate of 10.25%. Indebtedness under the Bank Credit Agreement and Term Loan
Facility bears interest at floating rates, causing the Company to be sensitive
to prevailing interest rates. At December 31, 1997, the Company had
indebtedness other than obligations under the Bank Credit Agreement and Term
Loan Facility of $231.3 million (including $185 million of the 12 3/4% Senior
Subordinated Notes Due 2005). In connection with the Term Loan Facility, the
Company obtained amendments to the Bank Credit Agreement with respect to
certain financial covenants and an amendment that decreased the Borrowing Base
through March 30, 1998. The Company is currently in compliance with all
financial covenants set forth in the Bank Credit Agreement, as amended.
ACG HOLDINGS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
<TABLE>
EBITDA
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------------- ------------------------
1997 1996 1997 1996
-------- ---------- ------- ----------
(dollars in thousands)
<S>
EBITDA: <C> <C> <C> <C>
Printing $15,306 14,826 39,979 37,641
American Color 3,179 2,236 (a) 8,195 4,549 (a)
Other (b) (965) (1,058)(c) (2,679) (4,663)(c)
------- ------- ------- -------
Total $17,520 16,004 45,495 37,527
EBITDA Margin:
Printing 12.5% 12.9% 11.6% 10.7%
American Color 13.7% 11.2% 12.8% 8.1%
Total 12.0% 11.8% 11.2% 9.2%
</TABLE>
(a) Includes the impact of restructuring costs of $0.1 million in the 1996
Three Month Period and $0.6 million in the 1996 Nine Month Period.
(b) Consists primarily of corporate general and administrative expenses.
(c) Also reflects non-recurring employee termination expenses of $2.5 million
in the 1996 Nine Month Period (including $1.9 million related to the
resignation of the Company's former Chief Executive Officer - see note 7 to
the Unaudited Condensed Consolidated Financial Statements) and $0.6 million
in the 1996 Three Month Period.
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, depreciation, amortization,
other special charges related to asset write-offs and write-downs, other income
(expense) and discontinued operations. "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 Notes and the Bank
Credit Agreement are based on EBITDA, subject to certain adjustments.
ACG HOLDINGS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Printing. As a result of the reasons previously described under "Printing"
(excluding changes in depreciation and amortization expense and other special
charges related to non-cash fixed asset write-offs and write-downs), printing
EBITDA increased to $40.0 million in the 1997 Nine Month Period from $37.6
million in the 1996 Nine Month Period, representing an increase of $2.4
million, and the printing EBITDA Margin increased to 11.6% in the 1997 Nine
Month Period from 10.7% in the 1996 Nine Month Period. Printing EBITDA
increased to $15.3 million in the 1997 Three Month Period from $14.8 million in
the 1996 Three Month Period, representing an increase of $0.5 million and the
printing EBITDA Margin decreased to 12.5% in the 1997 Three Month Period from
12.9% in the 1996 Three Month Period. The EBITDA Margin increase in the 1997
Nine Month Period included the impact of reduced paper prices and an increase
in sales to customers that supply their own paper. The EBITDA Margin decrease
in the 1997 Three Month Period includes the impact of certain changes in
product mix related to the incremental volume produced.
American Color. As a result of the reasons previously described under
"American Color" (excluding changes in depreciation and amortization expense),
American Color's EBITDA increased to $8.2 million in the 1997 Nine Month Period
from $4.5 million in the 1996 Nine Month Period, representing an increase of
$3.7 million, and the American Color EBITDA Margin increased to 12.8% in the
1997 Nine Month Period from 8.1% in the 1996 Nine Month Period. American Color
EBITDA in the 1996 Nine Month Period included restructuring costs of $0.6
million. American Color's EBITDA increased to $3.2 million in the 1997 Three
Month Period from $2.2 million in the 1996 Three Month Period, representing an
increase of $1.0 million. American Color EBITDA Margin increased to 13.7% in
the 1997 Three Month Period from 11.2% in the 1996 Three Month Period. American
Color EBITDA in the 1996 Three Month Period included restructuring costs of
$0.1 million.
Other. As a result of the reasons previously described under "Other
Operations" (excluding changes in depreciation and amortization expense), other
operations decreased to negative EBITDA of $2.7 million in the 1997 Nine Month
Period from negative EBITDA of $4.7 million in the 1996 Nine Month Period.
Other operations negative EBITDA decreased to negative EBITDA of $1.0 million
in the 1997 Three Month Period from negative EBITDA of $1.1 million in the 1996
Three Month Period. EBITDA for the 1996 Nine Month Period includes the impact
of a $1.9 million non-recurring charge related to the resignation of the
Company's former Chief Executive Officer (see note 7 to the Unaudited Condensed
Consolidated Financial Statements) and a $0.6 million non-recurring charge
related to other employee termination expenses. EBITDA for the 1996 Three Month
Period includes the $0.6 million non-recurring charge related to other employee
termination expenses.
ACG HOLDINGS, INC.
Part II Other Information
Item 1. (a) Legal Proceedings
Reference is made to Item 3 (Legal Proceedings) disclosure in the
Company's Form 10-K filed for the fiscal year ended March 31,
1997.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
27.0 Financial Data Schedule
(b) Reports on Form 8-K
None filed in the quarter ended December 31, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Holdings and Graphics have duly caused this report to be signed on their behalf
by the undersigned thereunto duly authorized.
ACG Holdings, Inc.
American Color Graphics, Inc.
Date February 13, 1998 By /s/ Joseph M. Milano
---------------------------- ------------------------------
Joseph M. Milano
Executive Vice President and
Chief Financial Officer
(Authorized Officer and
Principal Financial Officer)
Date February 13, 1998 By /s/ Patrick W. Kellick
----------------------------- -----------------------------
Patrick W. Kellick
Senior Vice President -
Corporate Controller
(Chief Accounting Officer)
EXHIBIT INDEX
Exhibit No. Description Page
- ----------- ----------- ----
27.0 Financial Data Schedule 24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ACG
HOLDINGS, INC.'S UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR
THE NINE MONTH PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000856710
<NAME> ACG HOLDINGS, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 67,630
<ALLOWANCES> 2,573
<INVENTORY> 10,663
<CURRENT-ASSETS> 78,898
<PP&E> 257,646
<DEPRECIATION> 90,914
<TOTAL-ASSETS> 338,290
<CURRENT-LIABILITIES> 85,403
<BONDS> 185,000
0
0
<COMMON> 1
<OTHER-SE> (90,150)
<TOTAL-LIABILITY-AND-EQUITY> 338,290
<SALES> 407,485
<TOTAL-REVENUES> 407,485
<CGS> 352,224
<TOTAL-COSTS> 352,224
<OTHER-EXPENSES> 436
<LOSS-PROVISION> 948
<INTEREST-EXPENSE> 29,158
<INCOME-PRETAX> (12,360)
<INCOME-TAX> 929
<INCOME-CONTINUING> (13,289)
<DISCONTINUED> 350
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,639)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
