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 September 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------ ------------------
Commission file number 33-97090
ACG HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 62-1395968
(State or other jurisdiction (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
---- ----
ACG Holdings, Inc. has 134,812 shares outstanding of its Common Stock, $.01 Par
Value, as of November 2, 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
September 30, 1998 and March 31, 1998 3
Condensed Consolidated Statements of Operations
for the three months ended September 30, 1998 and 1997 5
Condensed Consolidated Statements of Operations
for the six months ended September 30, 1998 and 1997 6
Condensed Consolidated Statements of Cash Flows for the
six months ended September 30, 1998 and 1997 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>
<CAPTION>
September 30, 1998 March 31, 1998
------------------ --------------
(Unaudited)
<S> <C> <C>
Assets
- ------
Current assets:
Cash $ 0 0
Receivables:
Trade accounts, less allowance for
doubtful accounts of $2,010 and $2,112 at
September 30, 1998 and March 31,1998,
respectively 58,190 63,185
Other 2,070 2,605
---------- ----------
Total receivables 60,260 65,790
Inventories 9,663 10,795
Prepaid expenses and other current assets 3,389 3,578
---------- ----------
Total current assets 73,312 80,163
Property, plant and equipment 261,481 256,317
Less accumulated depreciation (110,563) (96,684)
---------- ----------
Net property, plant and equipment 150,918 159,633
Excess of cost over net assets acquired, less
accumulated amortization of $43,332 and
$42,060 at September 30, 1998 and March
31, 1998, respectively 73,284 74,556
Other assets 12,864 15,606
---------- ----------
Total assets $ 310,378 329,958
========== ==========
September 30, 1998 March 31, 1998
------------------ --------------
(Unaudited)
Liabilities and Stockholders' Deficit
- -------------------------------------
Current liabilities:
Current installments of long-term debt
and capitalized leases $ 9,689 9,131
Trade accounts payable 29,047 27,381
Accrued expenses 23,718 31,539
Income taxes 773 502
---------- ----------
Total current liabilities 63,227 68,553
Long-term debt and capitalized leases,
excluding current installments 300,292 310,526
Deferred income taxes 9,621 9,443
Other liabilities 50,705 47,521
---------- ----------
Total liabilities 423,845 436,043
Stockholders' deficit:
Common stock, voting, $.01 par value,
5,852,223 shares authorized, 134,812
shares issued and outstanding 1 1
Preferred Stock, $.01 par value, 15,823
shares authorized, 3,631 shares
Series AA convertible preferred stock
issued and outstanding, $40,000,000
liquidation preference, 1,606 shares
Series BB convertible preferred stock
issued and outstanding, $17,500,000
liquidation preference -- --
Additional paid-in capital 58,480 58,249
Accumulated deficit (169,265) (162,250)
Cumulative translation adjustment (2,683) (2,085)
---------- ----------
Total stockholders' deficit (113,467) (106,085)
---------- ----------
Commitments and contingencies
Total liabilities and
stockholders' deficit $ 310,378 329,958
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<TABLE>
<CAPTION>
ACG HOLDINGS, INC.
Condensed Consolidated Statements of Operations
(In thousands)
(Unaudited)
Three Months Ended September 30,
--------------------------------
1998 1997
---- ----
<S> <C> <C>
Sales $ 126,965 135,609
Cost of sales 106,951 117,746
---------- ---------
Gross profit 20,014 17,863
Selling, general and administrative expenses 10,879 11,232
Amortization of goodwill 636 2,148
---------- ---------
Operating income 8,499 4,483
Other expense (income):
Interest expense 9,135 10,091
Interest income (23) (54)
Other, net 513 147
---------- ---------
Total other expense 9,625 10,184
---------- ---------
Loss from continuing operations
before income taxes (1,126) (5,701)
Income tax expense (446) (353)
---------- ---------
Loss from continuing operations (1,572) (6,054)
Discontinued operations:
Estimated loss on shut down, net of tax -- (350)
---------- ---------
Net loss $ (1,572) (6,404)
========== =========
<CAPTION>
Six Months Ended September 30,
--------------------------------
1998 1997
---- ----
<S> <C> <C>
Sales $ 254,778 261,737
Cost of sales 216,202 226,846
---------- ---------
Gross profit 38,576 34,891
Selling, general and administrative expenses 19,896 21,138
Amortization of goodwill 1,272 4,244
---------- ---------
Operating income 17,408 9,509
Other expense (income):
Interest expense 18,552 19,347
Interest income (46) (86)
Other, net 576 362
---------- ---------
Total other expense 19,082 19,623
---------- ---------
Loss from continuing operations
before income taxes and
extraordinary item (1,674) (10,114)
Income tax expense (1,321) (890)
---------- ---------
Loss from continuing operations before
extraordinary item (2,995) (11,004)
Discontinued operations:
Estimated loss on shut down, net of tax -- (350)
---------- ---------
Loss before extraordinary item (2,995) (11,354)
Extraordinary loss on early extinguishment
of debt, net of tax (4,020) --
---------- ---------
Net loss $ (7,015) (11,354)
========== =========
See accompanying notes to condensed consolidated financial statements.
<CAPTION>
ACG HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended
September 30,
--------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows provided (used) by operating activities:
Net loss $ (7,015) (11,354)
Adjustments to reconcile net loss to cash provided
(used) by operating activities:
Depreciation 14,622 13,614
Amortization of goodwill and other assets 1,928 4,852
Amortization of deferred financing costs 740 1,065
Extraordinary non-cash charges from early retirement
of debt, net 4,020 --
Decrease (increase) in working capital and other 4,319 (11,106)
---------- ----------
Net cash provided (used) by operating activities 18,614 (2,929)
Cash flows provided (used) by investing activities:
Purchases of property, plant and equipment (4,623) (6,239)
Proceeds from sales of property, plant and equipment 789 156
Other 68 (308)
---------- ----------
Net cash used by investing activities (3,766) (6,391)
Cash flows provided (used) by financing activities:
Repayment of long-term debt, including current maturities (62,578) (5,744)
Proceeds from Term Loan Facilities 75,000 25,000
Net decrease in revolver borrowings (21,257) (4,949)
Repayment of capital lease obligations (3,455) (3,193)
Payment of deferred financing costs (2,502) (2,435)
Other, net (81) 641
---------- ----------
Net cash (used) provided by financing activities (14,873) 9,320
Effect of exchange rates on cash and cash equivalents 25 --
---------- ----------
Net change in cash -- --
Cash:
Beginning of period -- --
---------- ----------
End of period $ -- --
========== ==========
Noncash investing activity:
Equipment purchases under capital leases $ 2,663 5,376
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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 September 30, 1998,
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 and
other corporate overhead costs and expenses (so long as the aggregate amount of
such payments does not exceed $250,000 in any fiscal year) and Holdings'
obligations pursuant to a tax sharing agreement with Graphics. A significant
portion of Graphics' long-term obligations have been fully and unconditionally
guaranteed by Holdings.
The two business sectors of the commercial printing industry in which the
Company operates are (i) printing and (ii) 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 six month periods ended September 30, 1998 are not necessarily indicative
of the results that may be expected for the fiscal year ending March 31, 1999.
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, 1998
and the Company's Post-Effective Amendment No. 4 to Registration Statement No.
33-97090 on Form S-1.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. Refinancing Transaction
On May 8, 1998, the Company completed a refinancing transaction (the "1998
Refinancing") which included the following: (1) the Company entered into a $145
million credit facility with Bankers Trust Company, Morgan Stanley Senior
Funding, Inc., General Electric Capital Corporation and a syndicate of lenders
(the "Bank Credit Agreement") providing for a $70 million revolving credit
facility which is not subject to a borrowing base limitation (the "Revolving
Credit Facility") maturing on March 31, 2004, a $25 million amortizing term
loan facility maturing on March 31, 2004 (the "A Term Loan Facility") and a $50
million amortizing term loan facility maturing on March 31, 2005 (the "B Term
Loan Facility"); (2) the repayment of all $57.0 million of indebtedness
outstanding under the Company's previous credit agreement with BT Commercial
Corporation, as amended (the "Old Bank Credit Agreement") (plus accrued
interest to the date of repayment); (3) the repayment of all $25.0 million of
indebtedness outstanding under the $25 million term loan facility which
included a $5 million participation by Morgan Stanley Senior Funding, Inc., a
related party, which was to mature on March 31, 2001 (the "Old Term Loan
Facility") (plus accrued interest to the date of repayment) and (4) the payment
of fees and expenses associated with the 1998 Refinancing. In addition, the
Company recorded an extraordinary loss related to early extinguishment of debt
of $4.0 million, net of taxes associated with the write-off of deferred
financing costs related to refinanced indebtedness in the quarter ended June
30, 1998.
Interest under the Bank Credit Agreement is floating based upon existing market
rates plus agreed upon margin levels. In addition, the Company is obligated to
pay specific commitment and letter of credit fees. Such margin levels and fees
reduce over the term of the agreement subject to the achievement of certain
Leverage Ratio measures.
Borrowings under the Bank Credit Agreement are secured by substantially all of
the Company's assets. In addition, Holdings has guaranteed the indebtedness
under the Bank Credit Agreement, which guarantee is secured by a pledge of all
of Graphics' and its subsidiaries' stock. The new agreement (1) requires
satisfaction of certain financial covenants including Minimum Consolidated
EBITDA, Consolidated Interest Coverage Ratio and Leverage Ratio requirements,
(2) requires prepayments in certain circumstances including excess cash flows,
proceeds from asset dispositions in excess of prescribed levels and certain
capital structure transactions and (3) contains various restrictions and
limitations on the following items: (a) the level of capital spending, (b) the
incurrence of additional indebtedness, (c) mergers, acquisitions, investments
and similar transactions and (d) dividends and other distributions. In
addition, the agreement includes various other customary affirmative and
negative covenants.
3. Inventories
The components of inventories are as follows (in thousands):
September 30, 1998 March 31, 1998
------------------ --------------
Paper $ 7,618 9,161
Ink 300 227
Supplies and other 1,745 1,407
------ -----
Total Inventories $ 9,663 10,795
====== ======
4. Comprehensive Income (Loss)
Effective April 1, 1998 the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
requires foreign currency translation adjustments, minimum pension liability
adjustments and unrealized gains or losses on available-for-sale securities to
be included in new disclosures related to comprehensive income. Prior to
adoption of SFAS 130, the Company disclosed such items when applicable
separately in Stockholders' deficit. The adoption of SFAS 130 had no impact on
the Company's Net loss or Stockholders' deficit. Total comprehensive loss for
the three and six months ended September 30, 1998 and 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended September 30, Six Months Ended September 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $ (1,572) (6,404) (7,015) (a) (11,354)
Foreign currency translation
adjustment (307) (63) (598) (107)
---------- ------ ------ -------
Total comprehensive loss $ (1,879) (6,467) (7,613) (11,461)
========== ====== ====== =======
</TABLE>
(a) Includes $4.0 million extraordinary loss related to early extinguishment
of debt associated with the 1998 Refinancing (see note 2 to the unaudited
condensed consolidated financial statements).
5. 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 September 30, 1998,
excluding bonuses, was approximately $4.1 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.
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 September 30, 1998 is $23.1 million and is
included within Other liabilities in the Condensed Consolidated Balance Sheets.
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 maintains a balance sheet reserve of approximately
$0.1 million in connection with this liability on its consolidated balance
sheets at March 31, 1998 and September 30, 1998. 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
liabilities that may arise from such actions will not, individually or in the
aggregate, 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
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.
The following table summarizes the Company's results of operations for the three
months ended September 30, 1998 (the "1998 Three Month Period"), the three
months ended September 30, 1997 (the "1997 Three Month Period"), the six months
ended September 30, 1998 (the "1998 Six Month Period") and the six months ended
September 30, 1997 (the "1997 Six Month Period"):
<TABLE>
<CAPTION>
Three Months Ended September 30, Six Months Ended September 30,
------------------------------------ -----------------------------------
1998 1997 1998 1997
---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C>
Sales:
Printing $ 103,641 114,291 210,088 220,895
American Color 23,324 21,318 44,690 40,842
-------- -------- --------- --------
Total $ 126,965 135,609 254,778 261,737
Gross Profit:
Printing $ 15,160 12,617 28,548 24,777
American Color 4,843 5,248 10,019 10,117
Other 11 (2) 9 (3)
-------- -------- --------- --------
Total $ 20,014 17,863 38,576 34,891
Gross Margin:
Printing 14.6% 11.0% 13.6% 11.2%
American Color 20.8% 24.6% 22.4% 24.8%
Total 15.8% 13.2% 15.1% 13.3%
Operating Income (Loss):
Printing $ 9,647 6,944 18,575 13,855
American Color 414 668 1,554 1,664
Other (a) (1,562) (3,129) (2,721) (6,010)
-------- -------- --------- --------
Total $ 8,499 4,483 17,408 9,509
</TABLE>
(a) Consists primarily of corporate general and administrative expenses,
and amortization expense.
Printing
Sales. Printing sales decreased $10.8 million to $210.1 million in the 1998 Six
Month Period from $220.9 million in the 1997 Six Month Period. Printing
production volume increased approximately 6.5% in the 1998 Six Month Period.
This increase was offset by an increase in sales to customers that supply their
own paper and certain changes in customer and product mix.
Printing sales decreased $10.7 million to $103.6 million in the 1998 Three
Month Period from $114.3 million in the 1997 Three Month Period. Printing
production volume increased approximately 4% in the 1998 Three Month Period.
This increase was offset by an increase in sales to customers that supply their
own paper and certain changes in customer and product mix.
Gross Profit. Printing gross profit increased $3.7 million to $28.5 million in
the 1998 Six Month Period from $24.8 million in the 1997 Six Month Period.
Printing gross margin increased to 13.6% in the 1998 Six Month Period from
11.2% in the 1997 Six Month Period. The increase in gross profit includes
reduced manufacturing costs and increased production volume offset in part by
certain changes in customer and product mix. The increase in gross margin
includes the above mentioned factors and an increase in sales to customers that
supply their own paper.
Printing gross profit increased $2.6 million to $15.2 million in the 1998 Three
Month Period from $12.6 million in the 1997 Three Month Period. Printing gross
margin increased to 14.6% in the 1998 Three Month Period from 11.0% in the 1997
Three Month Period. The increase in gross profit includes reduced manufacturing
costs and increased production volume offset in part by certain changes in
customer and product mix. The increase in gross margin includes the above
mentioned factors and an increase in sales to customers that supply their own
paper.
Selling, General and Administrative Expenses. Printing selling, general and
administrative expenses decreased $0.9 million to $10.0 million, or 4.8% of
printing sales, in the 1998 Six Month Period compared to $10.9 million, or 4.9%
of printing sales, in the 1997 Six Month Period. This decrease includes the
impact of certain general and administrative cost saving initiatives.
Printing selling, general and administrative expenses decreased $0.2 million to
$5.5 million, or 5.3% of printing sales, in the 1998 Three Month Period from
$5.7 million, or 5.0% of printing sales, in the 1997 Three Month Period.
Operating Income. As a result of the factors discussed above, operating income
from the printing business increased by 34.1% to $18.6 million in the 1998 Six
Month Period from $13.9 million in the 1997 Six Month Period and increased by
38.9% to $9.6 million in the 1998 Three Month Period from $6.9 million in the
1997 Three Month Period.
American Color
Sales. American Color's sales increased $3.9 million to $44.7 million in the
1998 Six Month Period from $40.8 million in the 1997 Six Month Period. The
increase in the 1998 Six Month Period was primarily the result of higher
digital imaging and prepress production volume due to American Color's
expansion of facilities management, packaging prepress and consulting services.
American Color's sales increased $2.0 million to $23.3 million in the 1998
Three Month Period from $21.3 million in the 1997 Three Month Period. The
increase in the 1998 Three Month Period was primarily the result of higher
digital imaging and prepress production volume due to American Color's
expansion of facilities management, packaging prepress and consulting services.
Gross Profit. American Color's gross profit remained relatively unchanged at
$10.0 million in the 1998 Six Month Period compared to $10.1 million in the
1997 Six Month Period. Gross profit for the 1998 Six Month Period includes the
above noted increase in volume offset by (1) increased costs associated with
new operations servicing the packaging prepress industry, (2) increased
manufacturing costs related to digital visual effects work and (3) $0.9 million
of non recurring costs, incurred in the 1998 Six Month Period, associated with
the consolidation of certain production facilities. American Color's gross
margin decreased to 22.4% in the 1998 Six Month Period from 24.8% in the 1997
Six Month Period. This decrease in gross margin results primarily from the $0.9
million of non recurring facility consolidation costs.
American Color's gross profit decreased $0.4 million to $4.8 million in the
1998 Three Month Period from $5.2 million in the 1997 Three Month Period. This
decrease is primarily the result of the following: (1) increased costs
associated with new operations servicing the packaging prepress industry, (2)
increased manufacturing costs related to digital visual effects work and (3)
$0.9 million of non recurring costs associated with the consolidation of
certain production facilities. These increases in costs were partially offset
by increased volume in the 1998 Three Month Period. American Color's gross
margin decreased to 20.8% in the 1998 Three Month Period from 24.6% in the 1997
Three Month Period. This decrease in gross margin results primarily from the
$0.9 million of non recurring facility consolidation costs.
Selling, General and Administrative Expenses. American Color's selling, general
and administrative expenses remained unchanged at $8.5 million, or 18.9% of
American Color's sales in the 1998 Six Month Period and $8.5 million, or 20.7%
of American Color's sales in the 1997 Six Month Period. The 1998 Six Month
Period includes increased sales and marketing expenses, including the costs
associated with the new packaging prepress sales group. The 1997 Six Month
Period includes relocation costs associated with moving American Color's
corporate office from Phoenix to Nashville.
American Color's selling, general and administrative expenses decreased $0.2
million to $4.4 million, or 19.0% of American Color's sales in the 1998 Three
Month Period from $4.6 million, or 21.5% of American Color's sales in the 1997
Three Month Period. This decrease is due in large part to non recurring
relocation costs in the 1997 Three Month Period associated with moving American
Color's corporate office from Phoenix to Nashville, partially offset by
increased selling expenses in the 1998 Three Month Period as a result of
expanding the sales force and increased costs associated with the new packaging
prepress sales group.
Operating Income. Excluding the $0.9 million of non recurring facility
consolidation costs incurred during the 1998 Three and Six Month Periods and
the $0.7 million of non-recurring relocation costs incurred during the 1997
Three and Six Month Periods, operating income at American Color increased to
$2.5 million in the 1998 Six Month Period from $2.4 million in the 1997 Six
Month Period and operating income decreased to $1.3 million in the 1998 Three
Month Period from $1.4 million in the 1997 Three Month Period.
Other Operations
Other operations primarily include corporate, general and administrative and
other expenses and amortization expense. Amortization expense from other
operations, which primarily includes goodwill amortization, was $1.3 million,
$4.3 million, $0.6 million and $2.2 million in the 1998 Six Month Period, the
1997 Six Month Period, the 1998 Three Month Period and the 1997 Three Month
Period, respectively.
Operating losses from other operations decreased to a loss of $2.7 million in
the 1998 Six Month Period from a loss of $6.0 million in the 1997 Six Month
Period. Operating losses from other operations decreased to a loss of $1.6
million in the 1998 Three Month Period from a loss of $3.1 million in the 1997
Three Month Period. These decreases are primarily attributable to reduced
goodwill amortization expense. The reduction in goodwill amortization expense
is attributable to full amortization of the original 1993 acquisition goodwill
related to American Color as of March 31, 1998.
Interest Expense
Interest expense decreased 4.1% to $18.6 million in the 1998 Six Month Period
from $19.3 million in the 1997 Six Month Period and interest expense decreased
9.5% to $9.1 million in the 1998 Three Month Period from $10.1 million in the
1997 Three Month Period. These decreases include the impact of both lower
levels of indebtedness and reduced borrowing costs associated with the
Company's 1998 Refinancing.
Other, Net
Other, net increased to expense of $0.6 million in the 1998 Six Month Period
from expense of $0.4 million in the 1997 Six Month Period. Other, net increased
to expense of $0.5 million in the 1998 Three Month Period from expense of $0.1
million in the 1997 Three Month Period.
Income Tax Expense
Income tax expense increased to $1.3 million in the 1998 Six Month Period from
$0.9 million in the 1997 Six Month Period and approximated $0.4 million in both
the 1998 Three Month Period and 1997 Three Month Period. The increase in the
1998 Six Month Period is primarily due to larger amounts of taxable income in
foreign jurisdictions and changes in the deferred tax valuation allowance.
Extraordinary Loss on Early Extinguishment of Debt, Net of Tax
As part of the 1998 Refinancing (see note 2 to the unaudited condensed
consolidated financial statements), the Company recorded an extraordinary loss
related to early extinguishment of debt of $4.0 million, net of $0.1 million
taxes. This extraordinary loss consisted of the write-off of deferred financing
costs related to refinanced indebtedness.
Net Loss
As a result of the factors discussed above, including the $4.0 million
extraordinary loss related to the early extinguishment of debt in the 1998 Six
Month Period, the Company's net loss decreased to $7.0 million in the 1998 Six
Month Period from $11.4 million in the 1997 Six Month Period, and decreased to
$1.6 million in the 1998 Three Month Period from $6.4 million in the 1997 Three
Month Period.
Liquidity and Capital Resources
On May 8, 1998, the Company refinanced all of its existing bank indebtedness in
the 1998 Refinancing (see note 2 to the Company's unaudited condensed
consolidated financial statements). The primary objectives of the 1998
Refinancing were to gain greater financial and operating flexibility, to reduce
the Company's overall cost of capital and to provide greater opportunity for
internal growth and growth through acquisitions.
The 1998 Refinancing included the following (1) the Company entered into a $145
million credit facility providing for (a) a $70 million Revolving Credit
Facility which matures on March 31, 2004, and is not subject to a borrowing
base limitation, (b) a $25 million amortizing A Term Loan Facility which
matures on March 31, 2004 and (c) a $50 million amortizing B Term Loan Facility
which matures on March 31, 2005; (2) the repayment of all $57.0 million of
indebtedness outstanding under the Old Bank Credit Agreement (plus accrued
interest to the date of repayment); (3) the repayment of all $25.0 million of
indebtedness outstanding under the Old Term Loan Facility (plus accrued
interest to the date of repayment) and (4) the payment of fees and expenses
associated with the refinancing transaction.
The Revolving Credit Facility provides for a maximum of $70 million borrowing
availability and includes a $40 million letter of credit sub-limit. At October
31, 1998, the Company had total borrowings and letters of credit outstanding
under the Revolving Credit Facility of approximately $24 million and,
therefore, additional borrowing availability of approximately $46 million.
At September 30, 1998, $24.9 million of the A Term Loan Facility and $49.6
million of the B Term Loan Facility remained outstanding. Scheduled A Term Loan
Facility and B Term Loan Facility payments due over the remainder of the fiscal
year ending March 31, 1999 ("Fiscal Year 1999") are $0 and $0.2 million,
respectively. In addition, it is anticipated that repayments of capital lease
obligations and other senior indebtedness during the remainder of Fiscal Year
1999 will approximate $3.7 million and $1.1 million, respectively.
During the 1998 Six Month Period, net cash provided by operating activities of
$18.6 million (see Condensed Consolidated Statements of Cash Flows), proceeds
from sales of property, plant and equipment of $0.8 million and proceeds from
the 1998 Refinancing of $84.8 million ($75 million from the A Term Loan and B
Term Loan facilities and $9.8 million of initial net borrowings under the
Revolving Credit Facility) were used to (1) repay $84.2 million of indebtedness
outstanding under the Old Bank Credit Agreement and Old Term Loan Facility
(including related transaction fees), (2) fund scheduled principal repayments
of indebtedness and financing costs of $5.3 million (including capital lease
obligations), (3) fund cash capital expenditures of $4.6 million, and (4)
further reduce outstanding revolver borrowings by $10.1 million. The Company
plans to continue its program of upgrading its printing and prepress equipment
and currently anticipates that full year Fiscal Year 1999 cash capital
expenditures will approximate $10 million and equipment acquired under capital
leases will approximate $6 million.
At September 30, 1998, the Company had total indebtedness outstanding of $310.0
million, including capital lease obligations as compared to $329.5 million at
September 30, 1997. Of the total indebtedness outstanding at September 30,
1998, $82.5 million was outstanding under the Bank Credit Agreement at a
weighted average interest rate of 7.97%. Indebtedness under the Bank Credit
Agreement bears interest at floating rates, causing the Company to be sensitive
to prevailing market interest rates. At September 30, 1998, the Company had
indebtedness other than obligations under the Bank Credit Agreement of $227.5
million (including $185 million of the 12 3/4% Senior Subordinated Notes Due
2005, the "Notes"). The Company is currently in compliance with all financial
covenants set forth in the Bank Credit Agreement.
<TABLE>
<CAPTION>
EBITDA
Three Months Ended Six Months Ended
September 30, September 30,
--------------------------------- ------------------------------
1998 1997 1998 1997
---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C>
EBITDA:
Printing $ 15,274 12,400 29,769 24,673
American Color 2,705 2,437 5,868 5,016
Other (a) (914) (955) (1,432) (1,714)
------- ------- ------- -------
Total $ 17,065 13,882 34,205 27,975
EBITDA Margin:
Printing 14.7% 10.8% 14.2% 11.2%
American Color 11.6% 11.4% 13.1% 12.3%
Total 13.4% 10.2% 13.4% 10.7%
</TABLE>
(a) Consists primarily of corporate general and administrative expenses.
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 income (expense), discontinued operations and extraordinary items. "EBITDA
Margin" is defined as EBITDA as a percentage of net sales. EBITDA is not a
measure of financial performance under generally accepted accounting principles
and should not be considered an alternative to net income (or any other measure
of performance under generally accepted accounting principles) as a measure of
performance or to cash flows from operating, investing or financing activities
as an indicator of cash flows or as a measure of liquidity. Certain covenants in
the Notes and the Bank Credit Agreement are based on EBITDA, subject to certain
adjustments.
Printing. As a result of the reasons previously described under "Printing"
(excluding changes in depreciation and amortization expense), Printing EBITDA
increased to $29.8 million in the 1998 Six Month Period from $24.7 million in
the 1997 Six Month Period, representing an increase of $5.1 million or 20.7%,
and the Printing EBITDA Margin increased to 14.2% in the 1998 Six Month Period
from 11.2% in the 1997 Six Month Period. Printing EBITDA increased to $15.3
million in the 1998 Three Month Period from $12.4 million in the 1997 Three
Month Period, representing an increase of $2.9 million or 23.2%, and the
Printing EBITDA Margin increased to 14.7% in the 1998 Three Month Period from
10.8% in the 1997 Three Month Period.
American Color. As a result of the reasons previously described under "American
Color" (excluding changes in depreciation, amortization and other non-cash
expenses), American Color's EBITDA increased to $5.9 million in the 1998 Six
Month Period from $5.0 million in the 1997 Six Month Period, representing an
increase of $0.9 million or 17.0%, and the American Color EBITDA Margin
increased to 13.1% in the 1998 Six Month Period from 12.3% in the 1997 Six
Month Period. American Color's EBITDA increased to $2.7 million in the 1998
Three Month Period from $2.4 million in the 1997 Three Month Period,
representing an increase of $0.3 million or 11.0%. American Color EBITDA Margin
increased to 11.6% in the 1998 Three Month Period from 11.4% in the 1997 Three
Month Period.
Other. As a result of the reasons previously described under "Other Operations"
(excluding changes in depreciation and amortization expense), other operations
negative EBITDA decreased to $1.4 million in the 1998 Six Month Period from
negative EBITDA of $1.7 million in the 1997 Six Month Period. Other Operations
negative EBITDA decreased to negative EBITDA of $0.9 million in the 1998 Three
Month Period from negative EBITDA of $1.0 million in the 1997 Three Month
Period.
Year 2000 Issue
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Computer programs or
hardware that have date-sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the year 2000 which could result
in a system failure or miscalculations causing disruptions of operations. In
the spring of 1997 the Company initiated its review of the Company's Year 2000
information and manufacturing systems compliance ("Y2K Project"). The Company's
Y2K Project includes four phases: assessment, remediation, testing, and
implementation. Over the past year the Company has made significant progress in
each of these areas and believes it will complete the Y2K Project by September
of 1999.
Information Technology Systems. To date, the Company has fully completed its
assessment of all information technology systems that could be significantly
affected by the Year 2000. The Company has completed 80% of the remediation
phase of its information technology systems and expects to complete software
reprogramming and replacement no later than April of 1999. To date, the Company
has completed 60% of its testing and has implemented 20% of its remediated
systems. Completion of the testing phase for all significant systems is
expected by May of 1999, with all remediated systems anticipated to be fully
tested by June of 1999, with 100% implementation targeted for September of
1999.
Production and Manufacturing Systems. The Company's strategy includes an
on-going program that focuses on the need to upgrade and maintain its
production and manufacturing systems. As such, the Company believes its
production and manufacturing systems to be reasonably current and does not
anticipate significant Year 2000 issues in this area. The Company is 70%
complete with the assessment phase in this area and 40% complete in the
remediation phase of its operating equipment. To date, the required remediation
has been minimal and costs associated with such remediation have been de
minimus. The Company does not expect full remediation of its operating
equipment to be costly or extensive. The Company is 20% complete with the
testing of its remediated operating equipment. Once testing is complete, the
operating equipment in most cases will be ready for immediate use. The Company
expects to complete its remediation efforts by March 31, 1999. Testing and
implementation of affected equipment is expected to be 100% completed by June
30, 1999.
The Company is in the process of gathering information about the Year 2000
compliance of its significant suppliers and subcontractors (external agents).
To date, the Company is not aware of any external agent with a Year 2000 issue
that would materially impact the Company's results of operations, liquidity, or
capital resources. In addition, as a printer and graphics prepress supplier,
the Company's products and services are not generally impacted by the Year 2000
issue.
The Company is utilizing both internal and external resources to reprogram, or
replace, test, and implement the software and operating equipment necessary for
Year 2000 compliance. The total cost of the Y2K Project is estimated at $3.5
million and is being funded through operating cash flows and the Company's
Revolving Credit Facility. To date, the Company has incurred approximately $1
million, relating to all phases of the Y2K Project. Of the remaining project
costs, approximately $2 million is attributable to the purchase of new software
and operating equipment, which will be capitalized. The remaining $0.5 million
relates to repair of hardware and software and will be expensed as incurred.
Management of the Company believes it has an effective project in place to
resolve the Year 2000 compliance issue in a timely manner and is monitoring the
progress of its Y2K Project closely. Moreover, the Company is not presently
aware of any reasonably likely worst case Year 2000 scenarios which could
materially impact its financial statements. As noted above, the Company has not
yet completed all necessary phases of the Y2K Project. The Company plans to
evaluate the status of completion of all phases of the Y2K Project in June of
1999 and determine if and when contingency plans are necessary.
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, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
12.1 Statement Re: Computation of Ratio of Earnings
to Fixed Charges
27.0 Financial Data Schedule
(b) Reports on Form 8-K
None filed in the quarter ended September 30, 1998.
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 November 13, 1998 By /s/ Joseph M. Milano
---------------------- --------------------------
Joseph M. Milano
Executive Vice President and
Chief Financial Officer
(Authorized Officer and
Principal Financial Officer)
Date November 13, 1998 By /s/ Patrick W. Kellick
---------------------- --------------------------
Patrick W. Kellick
Senior Vice President -
Corporate Controller
(Chief Accounting Officer)
EXHIBIT INDEX
Exhibit No. Description Page
- ----------- ----------- ----
12.1 Statement Re: Computation of Ratio of
Earnings to Fixed Charges 24
27.0 Financial Data Schedule 25
EXHIBIT 12.1
<TABLE>
<CAPTION>
STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Thousands)
Six Months
Ended Year Ended Year Ended
September 30, 1998 March 31, 1998 March 31, 1997
------------------- ---------------- -----------------
<S> <C> <C> <C>
Consolidated pretax loss from
continuing operations (1,674) (27,122) (26,005)
Net amortization of debt issuance expense 740 2,292 1,784
Interest expense 17,812 36,664 34,505
Interest portion of rental expense 1,065 2,130 1,799
------- ------- -------
Earnings 17,943 13,964 12,083
======= ======= =======
Interest expense 17,812 36,664 34,505
Net amortization of debt issuance
expense 740 2,292 1,784
Interest portion of rental expense 1,065 2,130 1,799
------- ------- -------
Fixed Charges 19,617 41,086 38,088
======= ======= =======
Ratio of Earnings to Fixed Charges (a) (a) (a)
======= ======= =======
<CAPTION>
Year Ended Year Ended Year Ended
March 31, 1996 March 31, 1995 March 31, 1994
---------------- ---------------- ---------------
<S> <C> <C> <C>
Consolidated pretax loss from
continuing operations (21,431) (1,869) (20,296)
Net amortization of debt issuance expense 2,139 2,174 1,837
Interest expense 30,549 23,578 22,212
Interest portion of rental expense 1,618 1,392 1,229
------- ------- -------
Earnings 12,875 25,275 4,982
======= ======= =======
Interest expense 30,549 23,578 22,212
Net amortization of debt issuance
expense 2,139 2,174 1,837
Interest portion of rental expense 1,618 1,392 1,229
------- ------- -------
Fixed Charges 34,306 27,144 25,278
======= ======= =======
Ratio of Earnings to Fixed Charges (a) (a) (a)
======= ======= =======
</TABLE>
(a) The deficiency in earnings required to cover fixed charges for the six
months ended September 30, 1998 was $1,674 and for the fiscal years ended
March 31, 1998, 1997, 1996, 1995 and 1994 was $27,122, $26,005, $21,431,
$1,869 and $20,296, respectively.
<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
SIX MONTH PERIOD ENDED SEPTEMBER 30, 1998 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> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 62,270
<ALLOWANCES> 2,010
<INVENTORY> 9,663
<CURRENT-ASSETS> 73,312
<PP&E> 261,481
<DEPRECIATION> 110,563
<TOTAL-ASSETS> 310,378
<CURRENT-LIABILITIES> 63,227
<BONDS> 185,000
0
0
<COMMON> 1
<OTHER-SE> (113,467)
<TOTAL-LIABILITY-AND-EQUITY> 310,378
<SALES> 254,778
<TOTAL-REVENUES> 254,778
<CGS> 216,202
<TOTAL-COSTS> 216,202
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,143
<INTEREST-EXPENSE> 18,552
<INCOME-PRETAX> (1,674)
<INCOME-TAX> 1,321
<INCOME-CONTINUING> (2,995)
<DISCONTINUED> 0
<EXTRAORDINARY> (4,020)
<CHANGES> 0
<NET-INCOME> (7,015)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
