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, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 33-97090
ACG HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 62-1395968
(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
100 Winners Circle
Brentwood, Tennessee 37027
(615) 377-0377
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
AMERICAN COLOR GRAPHICS, INC.
(Exact name of registrant as specified in its charter)
New York 16-1003976
(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
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 143,344 shares outstanding of its Common Stock, $.01 Par
Value, as of October 31, 1999 (all of which are privately owned and not traded
on a public market).
<PAGE>
INDEX
Part I. Financial Information Page No.
--------------------- --------
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1999 and March 31, 1999 3
Condensed Consolidated Statements of Operations for the
three months ended September 30, 1999 and 1998 5
Condensed Consolidated Statements of Operations for the
six months ended September 30, 1999 and 1998 6
Condensed Consolidated Statements of Cash Flows for the
six months ended September 30, 1999 and 1998 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 22
Part II. Other Information
-----------------
Item 1. Legal Proceedings 23
Item 2. Changes in Securities and Use of Proceeds 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
Exhibit Index 25
2
<PAGE>
ACG HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(Dollars in thousands, except par values)
September 30, 1999 March 31, 1999
------------------ --------------
(Unaudited)
Assets
- ------
Current assets:
Cash $ 0 0
Receivables:
Trade accounts, less allowance
for doubtful accounts of $2,381
and $2,860 at September 30, 1999 and
March 31, 1999, respectively 62,558 57,895
Other 2,529 2,082
--------- ---------
Total receivables 65,087 59,977
Inventories 9,681 8,343
Prepaid expenses and other current assets 3,147 3,271
--------- ---------
Total current assets 77,915 71,591
Property, plant and equipment 274,219 263,191
Less accumulated depreciation (133,325) (119,576)
--------- ---------
Net property, plant and equipment 140,894 143,615
Excess of cost over net assets acquired, less
accumulated amortization of $45,852 and
$44,587 at September 30, 1999 and
March 31, 1999, respectively 70,764 72,029
Other assets 11,454 11,765
--------- ---------
Total assets $ 301,027 299,000
========= =========
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
ACG HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(Dollars in thousands, except par values)
September 30, 1999 March 31, 1999
------------------ --------------
(Unaudited)
Liabilities and Stockholders' Deficit
- -------------------------------------
Current liabilities:
Current installments of long-term debt and
capitalized leases $ 7,682 7,994
Trade accounts payable 41,743 37,096
Accrued expenses 25,532 30,756
Income taxes 348 1,196
--------- ---------
Total current liabilities 75,305 77,042
Long-term debt and capitalized leases,
excluding current installments 278,970 281,595
Deferred income taxes 7,834 7,916
Other liabilities 51,866 51,753
--------- ---------
Total liabilities 413,975 418,306
Stockholders' deficit:
Common stock, voting, $.01 par value,
5,852,223 shares authorized, 142,393 and
134,250 shares issued and outstanding at
September 30,1999 and March 31,1999,
respectively 1 1
Preferred Stock, $.01 par value, 15,823
shares authorized, 3,622 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 58,286 58,286
Accumulated deficit (168,675) (174,905)
Other accumulated comprehensive loss, net of tax (2,560) (2,688)
--------- ---------
Total stockholders' deficit (112,948) (119,306)
--------- ---------
Commitments and contingencies
Total liabilities and stockholders' deficit $ 301,027 299,000
========= =========
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
ACG HOLDINGS, INC.
Condensed Consolidated Statements of Operations
(In thousands)
(Unaudited)
Three Months Ended September 30,
--------------------------------
1999 1998
---- ----
Sales $ 134,211 126,965
Cost of sales 111,914 106,969
--------- ---------
Gross profit 22,297 19,996
Selling, general and administrative expenses 10,616 10,861
Amortization of goodwill 639 636
--------- ---------
Operating income 11,042 8,499
Other expense (income):
Interest expense 8,626 9,135
Interest income (43) (23)
Other, net 91 513
--------- ---------
Total other expense 8,674 9,625
--------- ---------
Income (loss) from continuing operations
before income taxes 2,368 (1,126)
Income tax expense (404) (446)
--------- ---------
Net income (loss) $ 1,964 (1,572)
========= =========
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
ACG HOLDINGS, INC.
Condensed Consolidated Statements of Operations
(In thousands)
(Unaudited)
Six Months Ended September 30,
------------------------------
1999 1998
---- ----
Sales $ 257,819 254,778
Cost of sales 214,259 216,238
--------- ---------
Gross profit 43,560 38,540
Selling, general and administrative expenses 18,141 19,860
Amortization of goodwill 1,265 1,272
--------- ---------
Operating income 24,154 17,408
Other expense (income):
Interest expense 17,119 18,552
Interest income (75) (46)
Other, net (87) 576
--------- ---------
Total other expense 16,957 19,082
--------- ---------
Income (loss) from continuing operations
before income taxes and
extraordinary item 7,197 (1,674)
Income tax expense (967) (1,321)
--------- ---------
Income (loss) from continuing operations
before extraordinary item 6,230 (2,995)
Extraordinary loss on early extinguishment
of debt -- (4,020)
--------- ---------
Net income (loss) $ 6,230 (7,015)
========= =========
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
ACG HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
September 30,
-------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows provided (used) by operating activities:
Net income (loss) $ 6,230 (7,015)
Adjustments to reconcile net income (loss) to cash provided
by operating activities:
Depreciation 14,790 14,622
Amortization of goodwill and other assets 2,048 1,928
Amortization of deferred financing costs 655 740
Extraordinary non-cash charges from early retirement of debt, net -- 4,020
(Increase) decrease in working capital and other (8,517) 4,319
-------- --------
Net cash provided by operating activities 15,206 18,614
Cash flows provided (used) by investing activities:
Purchases of property, plant and equipment (11,946) (4,623)
Proceeds from sales of property, plant and equipment 2 789
Other (37) 68
-------- --------
Net cash used by investing activities (11,981) (3,766)
Cash flows provided (used) by financing activities:
Repayment of long-term debt, net, including current maturities (10,063) (62,578)
Proceeds from Term Loan Facilities -- 75,000
Net increase (decrease) in revolver borrowings 11,020 (21,257)
Repayment of capital lease obligations (3,893) (3,455)
Payment of deferred financing costs (235) (2,502)
Other, net (15) (81)
-------- --------
Net cash used by financing activities (3,186) (14,873)
Effect of exchange rates on cash and cash equivalents (39) 25
-------- --------
Net change in cash -- --
Cash:
Beginning of period -- --
-------- --------
End of period $ -- --
======== ========
Non-cash investing activity:
Equipment purchases under capital leases $ -- 2,663
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
<PAGE>
ACG HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Description of the Company
ACG Holdings, Inc. ("Holdings") has no operations or significant assets other
than its investment in American Color Graphics, Inc. ("Graphics"). Holdings is
dependent upon distributions from Graphics to fund its obligations. Under the
terms of its debt agreements at September 30, 1999, 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 segments of the commercial printing industry in which the
Company operates are (i) Print 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, 1999 are not necessarily indicative of the
results that may be expected for the fiscal year ending March 31, 2000. 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, 1999 and
the Company's Post-Effective Amendment No. 5 to Registration Statement No.
33-97090 on Form S-1.
Certain prior period amounts have been reclassified to conform with the most
recent period presentation.
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.
8
<PAGE>
ACG HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 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, 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 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, 1999 March 31, 1999
------------------ --------------
Paper $7,804 6,525
Ink 275 232
Supplies and other 1,602 1,586
------ ------
Total Inventories $9,681 8,343
====== ======
9
<PAGE>
ACG HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 income (loss) or Stockholders' deficit. Total comprehensive
income (loss) for the three and six months ended September 30, 1999 and 1998 are
as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended September 30, Six Months Ended September 30,
-------------------------------- ------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $ 1,964 (1,572) 6,230 (7,015)(a)
Foreign currency translation
adjustment (30) (307) 128 (598)
------- ------- ------- -------
Total comprehensive income (loss) $ 1,934 (1,879) 6,358 (7,613)
======= ======= ======= =======
</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
four 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, 1999,
excluding bonuses, was approximately $3.6 million.
On December 21, 1989, Graphics sold to CPS Corp. ("CPS") its ink manufacturing
operations and facilities. Graphics remains contingently liable through January
2000 under $1.5 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 ended 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, 1999 is $26.9 million and is included
within "Other liabilities" in the condensed consolidated balance sheet.
10
<PAGE>
ACG HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 sheet at
September 30, 1999. The Company believes this amount is adequate to cover such
liability.
The Company has been named as a defendant in several legal actions arising from
its normal business activities. In the opinion of management, any liabilities
that may arise from such action will not, individually or in the aggregate, have
a material adverse effect on the consolidated financial statements of the
Company.
6. Restructuring Costs
In March 1999, the Company approved a plan for its American Color division,
which was designed to consolidate certain facilities in order to improve asset
utilization and operational efficiency, modify the organizational structure as a
result of facility consolidation and other changes and reduce overhead and other
costs. The cost of this plan is being accounted for in accordance with the
guidance set forth in Emerging Issues Task Force Issue 94-3 "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Costs Incurred in a Restructuring)" ("EITF 94-3").
The pretax costs of $4.6 million which were incurred as a direct result of this
plan (excluding other special charges related to asset write-offs and
write-downs) includes $2.5 million of employee termination costs, $1.2 million
of lease settlement costs and $0.9 million of other transition and restructuring
expenses. This restructuring charge was recorded in the quarter ended March 31,
1999. The majority of these costs will be paid or settled before March 31, 2000.
The Company made cash payments of $0.8 million, $1.2 million and $0.6 million in
the fiscal year ended March 31, 1999, the six months and three months ended
September 30, 1999, respectively related to these costs.
7. Industry Segment Information
Effective March 31, 1999, the Company adopted the provisions of Statement of
Financial Accounting Standard No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). The Company has restated its
prior period sector disclosures to conform to the requirements of SFAS 131. The
Company has significant operations principally in two industry segments: (1)
Print and (2) Digital imaging and prepress services. All of the Company's
printing business and assets are attributed to the Print division and all of the
Company's Digital imaging and prepress services business and assets are
attributed to the American Color division (American Color). The Company's
digital visual effects operations (Digiscope) and corporate expenses have been
segregated and do not constitute a reportable segment of the Company as
contemplated by SFAS 131.
The Company has two reportable segments: (1) Print and (2) Digital imaging and
prepress services. The Print business produces retail advertising inserts,
comics (newspaper Sunday comics, comic insert advertising and comic books), and
other publications. The Company's Digital imaging and prepress services business
assists customers in the capture, manipulation, transmission and distribution of
images. The majority of the Digital imaging and prepress services work leads to
the production of four-color separations in a format appropriate for use by
printers.
11
<PAGE>
ACG HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The accounting policies of the segments are the same as those described in note
1. The Company evaluates performance based on segment EBITDA that is defined as
earnings before net interest expense, income tax expense, depreciation,
amortization, other income (expense) and extraordinary items. The Company
generally accounts for intersegment revenues and transfers as if the revenues or
transfers were to third parties, that is, at current market prices.
The Company's reportable segments are business units that offer different
products and services. They are managed separately because each segment requires
different technology and marketing strategies. A substantial portion of the
revenue, long-lived assets and other assets of the Company's reportable segments
are attributed to or located in the United States.
<TABLE>
<CAPTION>
Digital
Imaging & Corporate
(In Thousands of Dollars) Print Prepress and Other Total
- --------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Six Months Ended September 30, 1999
Segment revenues $ 215,753 40,592 1,474 257,819
EBITDA $ 37,277 5,403 (1,688) 40,992
Depreciation and amortization 11,478 3,065 2,295 16,838
Interest expense -- -- 17,119 17,119
Interest income -- -- (75) (75)
Other, net 16 5 (108) (87)
Income (loss) from continuing --------- --------- --------- ---------
operations before income taxes and $ 25,783 2,333 (20,919) 7,197
extraordinary item
Total assets $ 261,279 29,047 10,701 301,027
Total capital expenditures $ 9,938 1,780 228 11,946
- -----------------------------------------------------------------------------------------------------------------------------------
Six Months Ended September 30, 1998
Segment revenues $ 210,088 42,407 2,283 254,778
EBITDA $ 29,769 5,426 (990) 34,205
Depreciation and amortization 11,194 3,229 2,127 16,550
Interest expense -- -- 18,552 18,552
Interest income -- -- (46) (46)
Other special charges -- 247 -- 247
Other, net (45) 460 161 576
Income (loss) from continuing --------- --------- --------- ---------
operations before income taxes and $ 18,620 1,490 (21,784) (1,674)
extraordinary item
Total assets $ 263,295 33,215 13,868 310,378
Total capital expenditures $ 4,466 2,722 98 7,286
</TABLE>
12
<PAGE>
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 (this "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. Forward-looking
statements include, without limitation, our expectation as to when we will
complete the remediation and testing phases of our Year 2000 program, as well as
any Year 2000 contingency plans, our estimated cost of achieving Year 2000
readiness and our belief that internal systems and equipment will be Year 2000
compliant in a timely manner. Forward-looking statements are subject to a number
of risks and uncertainties. Actual results in the future could differ materially
from those described in the forward-looking statements as a result of many
factors outside of our control, including, but not limited to:
- fluctuations in the cost of paper and other raw materials used,
- changes in the advertising and printing markets,
- actions by our competitors, particularly with respect to pricing,
- the financial condition of our customers,
- our financial condition and liquidity,
- the general condition of the United States economy,
- demand for our products and services,
- the availability of qualified personnel and other information technology
resources,
- the ability to identify and remediate all date-sensitive lines of
computer code,
- the ability to replace embedded computer chips in systems affected by
Year 2000 issues,
- the actions of government agencies or other third parties with respect
to Year 2000 issues, and
- the matters set forth in this Report generally.
Consequently, such forward-looking statements should be regarded solely as our
current plans, estimates and beliefs. We do not undertake, and specifically
decline, any obligation to publicly release the results of any revisions to
these forward-looking statements that may be made to reflect any future events
or circumstances after the date of such statements or to reflect the occurrence
of anticipated or unanticipated events.
13
<PAGE>
ACG HOLDINGS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following table summarizes our results of operations for the three months
ended September 30, 1999 (the "1999 Three-Month Period"), the three months ended
September 30, 1998 (the "1998 Three-Month Period"), the six months ended
September 30, 1999 (the "1999 Six-Month Period") and the six months ended
September 30, 1998 (the "1998 Six-Month Period"):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------------------------ ---------------------------
1999 1998 1999 1998
---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C>
Sales:
Print $ 112,642 103,641 215,753 210,088
American Color 20,828 22,071 40,592 42,407
Other (a) 741 1,253 1,474 2,283
--------- --------- --------- ---------
Total $ 134,211 126,965 257,819 254,778
Gross Profit:
Print $ 18,193 15,160 35,278 28,548
American Color 4,501 4,620 9,111 9,886
Other (a) (397) 216 (829) 106
--------- --------- --------- ---------
Total $ 22,297 19,996 43,560 38,540
Gross Margin:
Print 16.2% 14.6% 16.4% 13.6%
American Color 21.6% 20.9% 22.4% 23.3%
Total 16.6% 15.8% 16.9% 15.1%
Operating Income (Loss):
Print $ 12,188 9,647 25,799 18,575
American Color 991 537 2,338 1,950
Other (a) (b) (2,137) (1,685) (3,983) (3,117)
--------- --------- --------- ---------
Total $ 11,042 8,499 24,154 17,408
</TABLE>
(a) Other operations primarily include revenues and expenses associated with
our digital visual effects operations ("Digiscope").
(b) Also includes corporate general and administrative expenses, and
amortization expense.
14
<PAGE>
ACG HOLDINGS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Print
Sales. In the 1999 Six-Month Period, Print sales increased $5.7 million to
$215.8 million from $210.1 million in the 1998 Six-Month Period. The increase in
the 1999 Six-Month Period includes the impact of favorable changes in customer
and product mix, a decrease in sales to customers who supply their own paper and
an approximate 2% increase in Print production volume. These changes were offset
in part by declining paper prices.
In the 1999 Three-Month Period, Print sales increased $9.0 million to $112.6
million from $103.6 million in the 1998 Three-Month Period. This increase
includes a Print production volume increase of approximately 7%, favorable
changes in customer and product mix, and a decrease in sales to customers who
supply their own paper. These changes were offset in part by declining paper
prices.
Gross Profit. In the 1999 Six-Month Period, Print gross profit increased $6.8
million to $35.3 million from $28.5 million in the 1998 Six-Month Period. In the
1999 Six-Month Period, Print gross margin increased to 16.4% from 13.6% in the
1998 Six-Month Period. The increase in gross profit was primarily the result of
reduced manufacturing costs, increased production volume and favorable changes
in customer and product mix. The increase in gross margin includes these
factors, as well as the impact of declining paper prices. These changes in gross
margin were offset in part by a decrease in sales to customers who supply their
own paper.
In the 1999 Three-Month Period, Print gross profit increased $3.0 million to
$18.2 million from $15.2 million in the 1998 Three-Month Period. In the 1999
Three-Month Period, Print gross margin increased to 16.2% from 14.6% in the 1998
Three-Month Period. The increase in gross profit is primarily the result of
favorable changes in customer and product mix and increased production volume.
The increase in gross margin includes these factors, as well as the impact of
declining paper prices. These changes in gross margin were offset in part by a
decrease in sales to customers who supply their own paper.
Selling, General and Administrative Expenses. In the 1999 Six-Month Period,
Print selling, general and administrative expenses decreased $0.5 million to
$9.5 million, or 4.4% of Print sales, from $10.0 million, or 4.8% of Print sales
in the 1998 Six-Month Period. This change primarily results from decreases in
certain selling expenses during the 1999 Six-Month Period.
In the 1999 Three-Month Period, Print, selling, general and administrative
expenses increased $0.5 million to $6.0 million, or 5.3% of Print sales, from
$5.5 million, or 5.3% of Print sales in the 1998 Three-Month Period. The
increase in the 1999 Three-Month Period reflects increases in selling related
activities and incremental expenses associated with capital project
installations, offset, in part, by decreases in certain other selling expenses.
Operating Income. In the 1999 Six-Month Period, as a result of the factors
discussed above, Print operating income increased by 38.9% to $25.8 million from
$18.6 million in the 1998 Six-Month Period; and in the 1999 Three-Month Period,
increased by 26.3% to $12.2 million from $9.6 million in the 1998 Three-Month
Period.
15
<PAGE>
ACG HOLDINGS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
American Color
Sales. In the 1999 Six-Month Period, American Color's sales decreased $1.8
million to $40.6 million from $42.4 million in the 1998 Six-Month Period. The
decrease in the 1999 Six-Month Period was primarily the result of reduced
prepress production volume.
In the 1999 Three-Month Period, American Color's sales decreased $1.3 million to
$20.8 million from $22.1 million in the 1998 Three-Month Period. The decrease in
the 1999 Three-Month Period was primarily the result of reduced prepress
production volume.
Gross Profit. In the 1999 Six-Month Period, American Color's gross profit
decreased $0.8 million to $9.1 million from $9.9 million in the 1998 Six-Month
Period. In the 1999 Six-Month Period, American Color's gross margin decreased to
22.4% from 23.3% in the 1998 Six-Month Period. The 1998 Six-Month Period
included $0.9 million of nonrecurring costs associated with the consolidation of
certain production facilities. The decreases in the 1999 Six-Month Period gross
profit and gross margin results primarily from reduced sales volume and related
margins.
In the 1999 Three-Month Period, American Color's gross profit decreased $0.1
million to $4.5 million from $4.6 million in the 1998 Three-Month Period. In the
1999 Three-Month Period, American Color's gross margin increased to 21.6% from
20.9% in the 1998 Three-Month Period. The 1998 Three-Month Period included $0.9
million of nonrecurring costs associated with the consolidation of certain
production facilities. The decrease in the 1999 Three-Month Period gross profit
results primarily from reduced sales volume and related margins.
Selling, General and Administrative Expenses. In the 1999 Six-Month Period,
American Color's selling, general and administrative expenses decreased $1.1
million to $6.8 million, or 16.7% of American Color's sales from $7.9 million,
or 18.7% of American Color's sales in the 1998 Six-Month Period. This decrease
is due, in large part, to a reduced sales force as a result of cost containment
measures taken during the 1999 Six-Month Period.
In the 1999 Three-Month Period, American Color's selling, general and
administrative expenses decreased $0.6 million to $3.5 million or 16.9% of
American Color's sales from $4.1 million or 18.5% of American Color's sales in
the 1998 Three-Month Period. This decrease is primarily the result of a reduced
sales force reflecting cost containment measures taken during the quarter.
Operating Income. In the 1999 Six-Month Period, as a result of the factors
discussed above, operating income at American Color increased to $2.3 million
from $2.0 million in the 1998 Six-Month Period; and in the 1999 Three-Month
Period increased to $1.0 million from $0.5 million in the 1998 Three-Month
Period.
Other Operations
Other operations consist primarily of revenues and expenses associated with
Digiscope, corporate general and administrative expenses, other expenses and
amortization expense. Amortization expense for other operations, which primarily
includes goodwill amortization, was $1.4 million, $1.3 million, $0.7 million and
$0.6 million in the 1999 Six-Month Period, the 1998 Six-Month Period, the 1999
Three-Month Period and the 1998 Three-Month Period, respectively.
16
<PAGE>
ACG HOLDINGS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
In the 1999 Six-Month Period, operating losses from other operations increased
to a loss of $4.0 million from a loss of $3.1 million in the 1998 Six-Month
Period. In the 1999 Three-Month Period, operating losses from other operations
increased to a loss of $2.1 million from a loss of $1.7 million in the 1998
Three-Month Period. Included in this change is $0.8 million and $0.5 million of
increased operating losses at Digiscope due primarily to lower digital visual
effects sales volume in the 1999 Six-Month Period and the 1999 Three-Month
Period, respectively.
Restructuring Costs
In March 1999, we approved a plan for the American Color division, which was
designed to consolidate certain facilities in order to improve asset utilization
and operational efficiency, modify the organizational structure as a result of
facility consolidation and other changes and reduce overhead and other costs.
The cost of this plan is being accounted for in accordance with the guidance set
forth in EITF 94-3. The pretax costs of $4.6 million, which were incurred as a
direct result of this plan (excluding other special charges related to asset
write-offs and write-downs), include $2.5 million of employee termination costs,
$1.2 million of lease settlement costs and $0.9 million of other transition and
restructuring expenses. This restructuring charge was recorded in the quarter
ended March 31, 1999. The majority of these costs will be paid or settled before
March 31, 2000. We made cash payments of $0.8 million in the fiscal year ended
March 31, 1999, $1.2 million in the 1999 Six-Month Period and $0.6 million in
the 1999 Three-Month Period related to these costs.
Interest Expense
In the 1999 Six-Month Period, interest expense decreased 7.7% to $17.1 million
from $18.6 million in the 1998 Six-Month Period; and, in the 1999 Three-Month
Period, interest expense decreased 5.6% to $8.6 million from $9.1 million in the
1998 Three-Month Period. These decreases are primarily the result of lower
levels of indebtedness and reduced borrowing costs associated with our 1998
refinancing.
Other, Net
In the 1999 Six-Month Period, other, net improved to income of $0.1 million from
expense of $0.6 million in the 1998 Six-Month Period; and, in the 1999
Three-Month Period, improved to expense of $0.1 million from expense of $0.5
million in the 1998 Three-Month Period.
Income Tax Expense
In the 1999 Six-Month Period, income tax expense decreased to $1.0 million from
$1.3 million in the 1998 Six-Month Period; and was $0.4 million in both the 1999
and 1998 Three-Month Periods. The decrease in the 1999 Six-Month Period is
primarily due to smaller amounts of taxable income in foreign jurisdictions and
changes in the deferred tax valuation allowance.
Extraordinary Loss on Early Extinguishment of Debt
As part of the 1998 Refinancing (see note 2 to our unaudited condensed
consolidated financial statements), we recorded an extraordinary loss related to
early extinguishment of debt of $4.0 million, net of taxes. This extraordinary
loss primarily consisted of the write-off of deferred financing costs related to
refinanced indebtedness in the quarter ended June 30, 1998.
17
<PAGE>
ACG HOLDINGS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Net Income (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 1999 Six-Month Period net income (loss) improved to
income of $6.2 million from a loss of $7.0 million in the 1998 Six-Month Period;
and, in the 1999 Three-Month Period, improved to income of $2.0 million from a
loss of $1.6 million in the 1998 Three-Month Period.
Liquidity and Capital Resources
On May 8, 1998, we refinanced all of our existing bank indebtedness in the 1998
Refinancing (see note 2 to our unaudited condensed consolidated financial
statements). The primary objectives of the refinancing were to gain greater
financial and operating flexibility, to reduce our overall cost of capital and
to provide greater opportunity for internal growth and growth through
acquisitions.
The 1998 Refinancing transaction included the following:
(1) We entered into a $145 million credit facility with a syndicate of
lenders (the "Bank Credit Agreement") providing for:
- a $70 million revolving credit facility, which is not subject to a
borrowing base limitation, maturing on March 31, 2004 (the "Revolving
Credit Facility"),
- a $25 million amortizing term loan facility maturing on March 31,
2004 (the "A Term Loan Facility"), and
- a $50 million amortizing term loan facility maturing on March 31,
2005 (the "B Term Loan Facility"),
(2) The repayment of all $57.0 million of indebtedness outstanding under our
previous credit agreement as amended (the "Old Bank Credit Agreement")
(plus accrued interest to the date of repayment);
(3) The repayment of all $25.0 million of indebtedness outstanding under the
Old Term Loan Facility (plus accrued interest to the date of repayment);
and
(4) The payment of fees and expenses associated with the refinancing
transaction.
The Revolving Credit Facility provides for a maximum of $70 million borrowing
availability. This availability includes a provision for up to $40 million of
letters of credit. At September 30, 1999, we had total borrowings and letters of
credit outstanding under the Revolving Credit Facility of approximately $35.1
million and, therefore, additional borrowing availability of approximately $34.9
million.
At September 30, 1999, we had total indebtedness outstanding of $286.7 million,
including capital lease obligations, as compared to $310.0 million at September
30, 1998. Of the total indebtedness outstanding at September 30, 1999, $65.3
million was outstanding under the Bank Credit Agreement at a weighted average
interest rate of 7.6%. Indebtedness under the Bank Credit Agreement bears
interest at floating rates. At September 30, 1999, we had indebtedness other
than obligations under the Bank Credit Agreement of $221.4 million (including
$185 million of the 12 3/4% Senior Subordinated Notes Due 2005, the "Notes"). We
are currently in compliance with all financial covenants set forth in the Bank
Credit Agreement.
18
<PAGE>
ACG HOLDINGS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
At September 30, 1999, $14.2 million of the A Term Loan Facility and $40.0
million of the B Term Loan Facility remained outstanding. On July 12, 1999, we
made a $10 million voluntary prepayment of our bank indebtedness which reduced
the A Term Loan Facility by $6.3 million and the B Term Loan Facility by $3.7
million to these levels. As a result of this voluntary prepayment, we have no
scheduled maturities due under either the A Term Loan Facility or B Term Loan
Facility until June 30, 2001. Scheduled repayments of existing capital lease
obligations and other senior indebtedness during the remainder of the fiscal
year ending March 31, 2000 ("Fiscal Year 2000") will approximate $3.5 million
and $0.4 million, respectively.
During the 1999 Six-Month Period, net cash provided by operating activities of
$15.2 million (see our condensed consolidated statements of cash flows), net
revolver borrowings of $11.0 million, and proceeds from long-term debt of $0.4
million were primarily used to (1) fund principal repayments of indebtedness and
financing costs of $14.6 million (including capital lease obligations of $3.9
million and voluntary prepayments on the A Term Loan Facility and B Term Loan
Facility of $6.3 million and $3.7 million, respectively) and (2) fund cash
capital expenditures of $12.0 million. We plan to continue our program of
upgrading our printing and prepress equipment and currently anticipate that full
year Fiscal Year 2000 cash capital expenditures will approximate $19.3 million,
and equipment acquired under capital leases will approximate $3.0 million. Our
cash-on-hand of approximately $1.2 million is presented net of outstanding
checks within trade accounts payable at September 30, 1999. Accordingly, cash is
presented at a balance of $0 in the September 30, 1999 balance sheet.
Our primary sources of liquidity are cash provided by operating activities and
borrowings under the Revolving Credit Facility. We anticipate that our primary
needs for liquidity will be to conduct our business, meet our debt service
requirements, make capital expenditures and, if we elect, repay, redeem or
repurchase outstanding indebtedness.
A significant portion of Graphics' long-term obligations, including indebtedness
under the Bank Credit Agreement and the Notes, has been fully and
unconditionally guaranteed by Holdings. Holdings is subject to certain
restrictions under its guarantee of indebtedness under the Bank Credit
Agreement, including, among other things, restrictions on mergers, acquisitions,
incurrence of additional debt and payment of cash dividends.
EBITDA
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
----------------------------- ----------------------------
1999 1998 1999 1998
---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C>
EBITDA:
Print $ 17,961 15,274 37,277 29,769
American Color 2,506 2,407 5,403 5,426
Other (a) (987) (616) (1,688) (990)
-------- ------- -------- --------
Total $ 19,480 17,065 40,992 34,205
EBITDA Margin:
Print 15.9% 14.7% 17.3% 14.2%
American Color 12.0% 10.9% 13.3% 12.8%
Total 14.5% 13.4% 15.9% 13.4%
</TABLE>
(a) Other operations primarily include revenues and expenses associated with
our digital visual effects business and corporate general and
administrative expenses.
19
<PAGE>
ACG HOLDINGS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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) and extraordinary items. "EBITDA Margin" is defined as
EBITDA as a percentage of net sales. EBITDA is not a measure of financial
performance under generally accepted accounting principles and should not be
considered an alternative to net income (or any other measure of performance
under generally accepted accounting principles) as a measure of performance or
to cash flows from operating, investing or financing activities as an indicator
of cash flows or as a measure of liquidity. Certain covenants in the Indenture
and the Bank Credit Agreement are based on EBITDA, subject to certain
adjustments.
Print. As a result of the reasons previously described under "--Print"
(excluding changes in depreciation and amortization expense), Print EBITDA
increased to $37.3 million in the 1999 Six-Month Period from $29.8 million in
the 1998 Six-Month Period, representing an increase of $7.5 million or 25.2%.
The Print EBITDA Margin increased to 17.3% in the 1999 Six-Month Period from
14.2% in the 1998 Six-Month Period. Print EBITDA increased to $18.0 million in
the 1999 Three-Month Period from $15.3 million in the 1998 Three-Month Period,
representing an increase of $2.7 million or 17.6%. The Print EBITDA Margin
increased to 15.9% in the 1999 Three-Month Period from 14.7% in the 1998
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 was $5.4 million in both the 1999
and 1998 Six-Month Periods. American Color EBITDA Margin increased to 13.3% in
the 1999 Six-Month Period from 12.8% in the 1998 Six-Month Period. EBITDA
increased to $2.5 million in the 1999 Three-Month Period from $2.4 million in
the 1998 Three-Month Period, representing an increase of $0.1 million or 4.1%.
American Color EBITDA Margin increased to 12.0% in the 1999 Three-Month Period
from 10.9% in the 1998 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 increased to $1.7 million in the 1999 Six-Month Period from
negative EBITDA of $1.0 million in the 1998 Six-Month Period. Other operations
negative EBITDA increased to $1.0 million in the 1999 Three-Month Period from
negative EBITDA of $0.6 million in the 1998 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, we initiated our review of our Year 2000 information and
manufacturing systems compliance ("Y2K Project"). Our Y2K Project includes four
phases: assessment, remediation, testing, and implementation. Over the past
year, we have made significant progress in each of these areas and have
substantially completed implementation.
Information Technology Systems. To date, we have fully completed our assessment
of all information technology systems that could be significantly affected by
the Year 2000. We have completed the remediation and testing phases of our
information technology systems, including software reprogramming and
replacement. We have substantially completed the implementation phase and
currently are operating these systems.
20
<PAGE>
ACG HOLDINGS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Production and Manufacturing Systems. Our strategy includes an ongoing program
that focuses on the need to upgrade and maintain our production and
manufacturing systems. As such, we believe our production and manufacturing
systems to be reasonably current and do not anticipate significant Year 2000
issues in this area. We have completed the assessment, remediation and testing
phases in this area and are substantially complete with the implementation phase
of our operating equipment and systems, and are currently operating these
systems.
We have substantially completed the process of gathering information about the
Year 2000 compliance of our significant suppliers and subcontractors (external
agents). To date, we are not aware of any external agent with a Year 2000 issue
that would materially impact our results of operations, liquidity, or capital
resources. In addition, as a printer and graphics prepress supplier, our
products and services are not generally impacted by the Year 2000 issue.
We are utilizing both internal and external resources to reprogram, or replace,
test, and implement the software and operating equipment necessary for Year 2000
compliance. The total cost of the Y2K Project is estimated at $4.0 million and
is being funded through operating cash flows and our Revolving Credit Facility.
To date, we have incurred costs of approximately $3.7 million, relating to all
phases of the Y2K Project. The Y2K Project has been within planned expenditures
and has not been material to the Company's consolidated financial condition.
We believe we have an effective program in place to resolve the Year 2000
compliance issue in a timely manner and are monitoring the progress of the Y2K
Project closely. We believe we have corrected all Year 2000 deficiencies, and
continue to test remediated systems. Any significant disruption in services such
as electrical power, telecommunications and banking, or disruption in the
general retail economy, however, could materially adversely affect us. Although
there can be no assurance that our efforts will prevent a material adverse
impact on our results of operations or financial condition, we believe that none
of these scenarios are likely.
21
<PAGE>
ACG HOLDINGS, INC.
Quantitative and Qualitative
Disclosures About Market Risk
There have been no significant changes since March 31, 1999. Reference is made
to Item 7A (Quantitative and Qualitative Disclosures About Market Risk)
disclosure in our Form 10-K filed for the fiscal year ended March 31, 1999.
22
<PAGE>
ACG HOLDINGS, INC.
Part II Other Information
Item 1. (a) Legal Proceedings
Reference is made to Item 3 (Legal Proceedings) disclosure in our
Form 10-K filed for the fiscal year ended March 31, 1999.
Item 2. Changes in Securities and Use of Proceeds
Recent Sales of Unregistered Securities
In October 1999, certain officers exercised options to purchase an
aggregate of 951 shares of Holdings' common stock for $.01/share.
During the quarter ended June 30, 1999, certain officers exercised
options to purchase an aggregate of 8,143 shares of Holdings'
common stock for $.01/share.
During the fourth quarter of the fiscal year ending March 31,
1998, certain officers exercised options to purchase an aggregate
of 8,254 shares of Holdings' common stock for $.01/share.
The issuance of shares was made pursuant to Section 4(2) of the
Securities Act of 1933.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
10.1 Employment Agreement, dated as of August 1, 1999, between
Graphics and M.J. Anderson
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, 1999.
23
<PAGE>
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 12, 1999 By /s/ Joseph M. Milano
---------------------- -----------------------------------------
Joseph M. Milano
Executive Vice President and
Chief Financial Officer
(Authorized Officer and
Principal Financial Officer)
Date November 12, 1999 By /s/ Patrick W. Kellick
---------------------- -----------------------------------------
Patrick W. Kellick
Senior Vice President - Corporate Controller
(Chief Accounting Officer)
24
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page
- ----------- ----------- ----
10.1 Employment Agreement, dated as of August 1, 1999,
between Graphics and M.J. Anderson 26
12.1 Statement Re: Computation of Ratio of Earnings to
Fixed Charges 34
27.0 Financial Data Schedule 35
25
EXHIBIT 10.1
EMPLOYMENT AGREEMENT dated as of August 1, 1999 (the
"Agreement"), between AMERICAN COLOR GRAPHICS, INC., a New York corporation (the
"Company") and M.J. ANDERSON (the "Executive").
WHEREAS, the Company and the Executive have entered into an
Employment Agreement dated as of September 8, 1995, as amended (the "1995
Agreement"); and
WHEREAS, the parties hereto desire to replace the 1995
Agreement with this Agreement;
NOW, THEREFORE, in consideration of the covenants and
agreements hereinafter set forth, the parties hereto agree as follows:
1. Effectiveness of Agreement
This Agreement shall become effective as of August 1, 1999.
2. Employment and Duties
2.1. General. The Company hereby employs the Executive,
and the Executive agrees to serve, as President of the Company's Print Division
("Print"), upon the terms and conditions herein contained. The Executive's
primary responsibilities shall be the active management of Print, subject to the
direction and control of the Company's Chief Executive Officer. The Executive
shall perform such other duties and services for the Company as may be
reasonably designated from time to time by the Company's Chief Executive
Officer. The Executive agrees to serve the Company faithfully and to the best of
his ability.
2.2. Exclusive Services. Except as may otherwise be
approved in advance by the Company's Chief Executive Officer, and except during
vacation periods and reasonable periods of absence due to sickness, personal
injury or other disability (or as otherwise permitted under the Company's Human
Resources Policy and Procedures Manual), the Executive shall devote his full
working time throughout the Employment Term (as defined in Section 2.3) to the
services required of him hereunder. The Executive shall render his services
exclusively to the Company during the Employment Term, and shall use his best
efforts, judgment and energy to improve and advance the business and interests
of the Company in a manner consistent with the duties of his position.
2.3. Term of Employment. The Executive's employment under
this Agreement shall commence as of the date hereof and shall terminate on the
earlier of (i) March 31, 2002 or (ii) termination of the Executive's employment
pursuant to this Agreement. Such period is hereinafter referred to as the
"Employment Term", provided that Article 7, and any other provisions of this
Agreement as they relate to Article 7, shall continue through the Consulting
Period.
2.4. Reimbursement of Expenses. The Company shall
reimburse the Executive for reasonable travel and other business expenses
incurred by him in the fulfillment of his duties hereunder upon presentation by
the Executive of an itemized account of such expenditures, in accordance with
Company practices consistently applied.
<PAGE>
- 2 -
3. Annual Compensation
3.1. Base Salary. During his employment under this
Agreement, the Executive shall be entitled to receive a base salary ("Base
Salary") at a rate of $350,000 per annum, payable in accordance with the
Company's payroll practices. The amount of the Base Salary shall be reviewed
annually by the Company, and may, in the Company's discretion, be increased.
3.2. Annual Bonus. During his employment under this
Agreement, the Executive shall be entitled to participate in an annual bonus
plan, under which the Executive shall be entitled to receive a bonus of up to
50% of his Base Salary, payable in accordance with the terms of such bonus plan
if the budget performance criteria for Print (as determined by the Board of
Directors of the Company from time to time) are satisfied.
4. Executive Benefits
The Executive shall, during his employment under this
Agreement, be included to the extent eligible thereunder in all executive
benefit plans, programs or arrangements (including, without limitation, any
plans, programs or arrangements providing for retirement benefits, profit
sharing, disability benefits, health and life insurance and paid holidays, but
not including bonus plans (except as provided in Section 3.2)) which shall be
established by the Company for, or made available to, Executives of the Company
generally.
5. Termination of Employment
5.1. Termination Without Cause; Resignation for Good
Reason.
5.1.1. General. Subject to the provisions of Sections
5.1.2 and 8, if, prior to the expiration of the Employment Term, the Executive's
employment is terminated by the Company without Cause (as defined in Section
5.3) or the Executive terminates his employment hereunder for Good Reason (as
defined in Section 5.4), the Company shall (w) continue to pay the Executive the
Base Salary (at the rate in effect on the date of such termination) for a period
of two years beginning as of the date of termination (such period being referred
to hereinafter as the 'Severance Period"), at such intervals as the same would
have been paid had the Executive remained in the active service of the Company;
(x) pay the Executive a pro rata portion of the bonus to which the Executive
would have been entitled for the year of termination pursuant to Section 3.2 had
the Executive remained employed for the entire year, which bonus shall be
payable at the time bonuses under the applicable bonus plan is paid to the
Company's executives generally; (y) provide the Executive, during the Severance
Period, with health insurance benefits substantially equivalent to the health
insurance benefits made available by the Company to active Executives of the
Company generally; and (z) make the payments referred to in Section 7.4 below at
such intervals as the same would have been paid had the Executive served as a
Consultant to the Company. The Company shall contribute to the cost of such
health insurance benefits to the same extent it contributes to the cost of such
benefits for such active Executives. The Executive shall have no further right
to receive any other compensation or benefits after such termination or
resignation of employment except as determined in accordance with the terms of
the Executive benefit plans or programs of the Company.
<PAGE>
- 3 -
5.1.2. Conditions Applicable to the Severance Period. If,
during the Severance Period, the Executive materially breaches his obligations
under Section 9 of this Agreement, the Company may, upon written notice to the
Executive, terminate the Severance Period and cease to make any further payments
or provide any benefits described in Section 5.1.1.
5.1.3. Date of Termination. The date of termination of
employment without Cause shall be the date specified in a written notice of
termination to the Executive. The date of resignation for Good Reason shall be
the date specified in the written notice of resignation from the Executive to
the Company; provided, however, that no such written notice shall be effective
unless the cure period specified in Section 5.4 has expired without the Company
having corrected, to the reasonable satisfaction of the Executive, the event or
events subject to cure. If no date of resignation is specified in the written
notice from the Executive to the Company, the date of termination shall be the
first day following such expiration of such cure period.
5.2. Termination for Cause: Resignation Without Good
Reason.
5.2.1. General. If, prior to the expiration of the
Employment Term, the Executive's employment is terminated by the Company for
Cause, or the Executive resigns from his employment hereunder other than for
Good Reason, the Executive shall be entitled only to payment of his Base Salary
as then in effect through and including the date of termination or resignation.
The Executive shall have no further right to receive any other compensation,
payments or benefits after such termination or resignation of employment, except
as determined in accordance with the terms of the Executive benefit plans or
programs of the Company.
5.2.2. Date of Termination. Subject to the proviso to
Section 5.3, the date of termination for Cause shall be the date specified in a
written notice of termination to the Executive. The date of resignation without
Good Reason shall be the date specified in the written notice of resignation
from the Executive to the Company, or if no date is specified therein, 10
business days after receipt by the Company of written notice of resignation from
the Executive.
5.3. Cause. Termination for "Cause" shall mean termination
of the Executive's employment because of:
(i) any act or omission that constitutes a material
breach by the Executive of any of his obligations under this Agreement;
(ii) the continued failure or refusal of the
Executive to substantially perform the duties reasonably required of him as an
Executive or consultant of the Company;
(iii) any willful and material violation by the
Executive of any Federal or state law or regulation applicable to the business
of the Company, ACG Holdings, Inc. ("ACG Holdings") or any of their respective
subsidiaries, or the Executive's conviction of a felony, or any willful
perpetration by the Executive of a common law fraud; or
(iv) any other willful misconduct by the Executive
which is materially injurious to the financial condition or business reputation
of, or is otherwise materially injurious to the Company, ACG Holdings or any of
their respective subsidiaries or affiliates (it being understood that the good
faith performance by the Executive of the duties required of him pursuant to
Sections 2.1 shall not constitute "misconduct" for purposes of this clause
(iv)); provided, however, that if any such Cause relates to the Executive's
obligations under this Agreement, the Company shall not terminate the
Executive's employment hereunder unless the Company first gives the Executive
notice of its intention to terminate and of the grounds for such termination,
and the Executive has not, within 20 business days following receipt of the
notice, cured such Cause, or in the event such Cause is not susceptible to cure
within such 20 business day period, the Executive has not taken all reasonable
steps within such 20 business day period to cure such Cause as promptly as
practicable thereafter.
<PAGE>
- 4 -
5.4. Good Reason. For purposes of this Agreement, "Good
Reason' shall mean any of the following (without the Executive's prior written
consent):
(i) a decrease in the Executive's base rate of
compensation or a failure by the Company to pay material compensation due and
payable to the Executive in connection with his employment;
(ii) a material diminution of the responsibilities of
the Executive with the Company; or
(iii) the Executive is required to be based at an
office or location more than 25 miles from his current principal employment
location; or
(iv) a material breach by the Company of any term or
provision of this Agreement,
provided, however, that no event or condition described in this Section 5.4
shall constitute Good Reason unless (X) the Executive gives the Company written
notice of his objection to such event or condition, (Y) such event or condition
is not corrected by the Company within 20 business days of its receipt of such
notice (or in the event that such event or condition is not susceptible to
correction within such 20 business-day period, the Company has not taken all
reasonable steps within such 20 business-day period to correct such event or
condition as promptly as practicable thereafter) and (Z) the Executive resigns
his employment with the Company and its subsidiaries not more than 60 days
following the expiration of the 20 business-day period described in the
foregoing clause (Y).
6. Death, Disability or Retirement
In the event of termination of employment by reason of
death, Permanent Disability (as hereinafter defined) or retirement, the
Executive (or his estate, as applicable) shall be entitled to (x) Base Salary
and benefits determined under Sections 3.1 and 4 hereof through the date of
termination and (y) a pro rata portion of the bonus to which the Executive would
have been entitled for the year of termination pursuant to Section 3.2 had the
Executive remained employed for the entire year, which bonus shall be payable at
the time bonuses under the applicable bonus plan is paid to the Company's
executives generally. Other benefits shall be determined in accordance with the
benefit plans maintained by the Company, and the Company shall have no further
obligation hereunder. For purposes of this Agreement, "Permanent Disability"
means a physical or mental disability or infirmity of the Executive that
prevents the normal performance of substantially all his duties as an Executive
of the Company, which disability or infirmity shall exist for any continuous
period of 180 days.
7. Consulting Engagement
7.1 General. Effective April 1, 2002, the Company hereby
agrees to engage the Executive as a consultant to the Company and the Executive
hereby accepts such engagement with the Company for the period set forth in
Section 7.2 below, with the responsibilities determined pursuant to Section 7.3
below, all in accordance with the terms and conditions hereof.
7.2 Consulting Period. The period during which the
Executive shall be engaged as a consultant by the Company (the "Consulting
Period") shall commence on April 1, 2002, subject to Section 7.1 above, and
shall terminate on the second anniversary thereof; provided, however, that the
Company may, upon written notice to the Executive, terminate the Consulting
Period and cease to make any payments described in Section 7.4 upon the
occurrence of any event that constitutes Cause (including without limitation,
any material breach by the Executive of his obligations under Section 9).
<PAGE>
- 5 -
7.3 Consulting Services. The Executive's services
hereunder during the Consulting Period shall consist of such consulting and
advisory services, and shall be provided at such times, as may be requested from
time to time by the Board or the President of the Company; provided, however,
that such services shall not be required for more than 50 working days during
any one-year period.
7.4 Compensation During Consulting Period. During the
Consulting Period, as compensation for the consulting services to be performed
by the Executive hereunder, and in lieu of the payments set forth in Article 3
above, the Company shall pay the Executive a fee of $125,000 per annum, payable
in equal installments not less frequently than bi-weekly in accordance with the
Company's payroll practices. In addition to the compensation provided for
herein, Executive shall be entitled to be reimbursed for all reasonable and
necessary expenses incurred in connection with and while performing his duties
under this Agreement.
7.5 Independent Contractor Status During Consulting
Period. The Company and the Executive agree that the Executive shall not be an
Executive of the Company or any of its affiliates during the Consulting Period
but shall act in the capacity of an independent contractor. Consequently, the
Executive shall not (except as required by applicable law) be entitled to
participate during the Consulting Period in any of the Executive benefit plans,
programs or arrangements of the Company or any of its affiliates other than in
the Company's health plan, until such time as Executive is 65 years of age,
provided that Executive pays the Executive portion of the premiums under such
plan.
8. Mitigation Of Damages
Any payment to Executive provided for in Section 5.1 above
will be reduced by any amounts which the Executive receives or is entitled to
receive from another employer with respect to the Severance Period. The
Executive shall promptly notify the Company in writing in the event that other
employment is obtained during the Severance Period, and of the amounts which the
Executive receives or is entitled to receive from such other employment.
9. Non-solicitation; Confidentiality; Non-competition.
9.1. Non-solicitation. For so long as the Executive is
employed or retained as a consultant by the Company and continuing for two years
thereafter, the Executive shall not, without the prior written consent of the
Company, directly or indirectly, as a sole proprietor, member of a partnership,
stockholder or investor, officer or director of a corporation, or as an
Executive, associate, consultant or agent of any person, partnership,
corporation or other business organization or entity other than the Company: (x)
solicit, hire, have contact with, or endeavor to entice away from the Company,
ACG Holdings or any of their respective subsidiaries any person or entity who
is, or, during the then most recent 12-month period, was employed by, or had
served as an agent or key consultant of, the Company, ACG Holdings or any of
their respective subsidiaries; or (y) solicit, hire, have contact with, or
endeavor to entice away from the Company, ACG Holdings or any of their
respective subsidiaries any person or entity who is, or was within the then most
recent 12-month period, a customer or client (or reasonably anticipated (to the
general knowledge of the Executive or the public) to become a customer or
client) of the Company, ACG Holdings or any of their respective subsidiaries.
9.2. Confidentiality. The Executive covenants and agrees
with the Company that he will not at any time, except in performance of his
obligations to the Company hereunder or with the prior written consent of the
Company, directly or indirectly, disclose any secret or confidential information
that he may learn or has learned by reason of his association with the Company,
ACG Holdings or any of their respective subsidiaries and affiliates. The term
"confidential information" includes information not previously disclosed to the
public or to the trade by the Company's management, or otherwise in the public
<PAGE>
- 6 -
domain, with respect to the Company's, Communication's or any of their
respective affiliates' or subsidiaries', products, facilities, applications and
methods, trade secrets and other intellectual property, systems, procedures,
manuals, confidential reports, product price lists, customer lists, technical
information, financial information (including the revenues, costs or profits
associated with any of the Company's or products), business plans, prospects or
opportunities, but shall exclude any information which (i) is or becomes
available to the public or is generally known in the industry or industries in
which the Company or operates other than as a result of disclosure by the
Executive in violation of his agreements under this Section 9.2 or (ii) the
Executive is required to disclose under any applicable laws, regulations or
directives of any government agency, tribunal or authority having jurisdiction
in the matter or under subpoena or other process of law.
9.3. No Competing Employment. For so long as the Executive
is employed or retained as a consultant by the Company, and continuing for two
years thereafter, Executive shall not, directly or indirectly, as a sole
proprietor, member of a partnership, stockholder or investor (other than a
stockholder or investor owning not more than a 5% interest), officer or director
of a corporation, or as an Executive, associate, consultant or agent of any
person, partnership, corporation or other business organization or entity other
than the Company, render any service to or in any way be affiliated with a
competitor (or any person or entity that is reasonably anticipated (to the
general knowledge of the Executive or the public) to become a competitor) of the
Company, ACG Holdings or any of their respective subsidiaries.
9.4. Exclusive Property. The Executive confirms that all
confidential information is and shall remain the exclusive property of the
Company. All business records, papers and documents kept or made by the
Executive relating to the business of the Company shall be and remain the
property of the Company, except for such papers customarily deemed to be the
personal copies of the Executive.
9.5 Injunctive Relief. Without intending to limit the
remedies available to the Company, the Executive acknowledges that a breach of
any of the covenants contained in this Section 8 may result in material and
irreparable injury to the Company, ACG Holdings or their respective affiliates
or subsidiaries for which there is no adequate remedy at law, that it will not
be possible to measure damages for such injuries precisely and that, in the
event of such a breach or threat thereof, the Company shall be entitled to seek
a temporary restraining order and/or a preliminary or permanent injunction
restraining the Executive from engaging in activities prohibited by this Section
9 or such other relief as may be required specifically to enforce any of the
covenants in this Section 9. If for any reason, it is held that the restrictions
under this Section 9 are not reasonable or that consideration therefor is
inadequate, such restrictions shall be interpreted or modified to include as
much of the duration and scope identified in this Section 8 as will render such
restrictions valid and enforceable.
10. Miscellaneous
10.1. Notices. All notices or communications hereunder
shall be in writing, addressed as follows:
To the Company:
American Color Graphics, Inc.
100 Winners Circle
Brentwood, TN 37027
Telecopier No.: 615-377-0372
Attention: Steve Compton, Esq.
<PAGE>
- 7 -
with a copy to:
ACG Holdings, Inc.
225 High Ridge Road
Stamford, CT 06905
Telecopier No.: 203-978-5408
Attention: Timothy M. Davis, Esq.
To the Executive:
M.J. Anderson
294 Barefield Court
Lynchburg, TN 37352
with a copy to:
All such notices shall be conclusively deemed to be
received and shall be effective, (i) if sent by hand delivery, upon receipt,
(ii) if sent by telecopy or facsimile transmission, upon confirmation of receipt
by the sender of such transmission or (iii) if sent by registered or certified
mail, on the fifth day after the day on which such notice is mailed.
10.2. Severability. Each provision of this Agreement shall
be interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be prohibited by or invalid
under applicable law, such provision will be ineffective only to the extent of
such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.
10.3. Assignment. This Agreement shall be binding upon and
inure to the benefit of the heirs and representatives of the Executive and the
assigns and successors of the Company, but neither this Agreement nor any rights
hereunder shall be assignable or otherwise subject to hypothecation by the
Executive.
10.4. Entire Agreement. This Agreement represents the
entire agreement of the parties and shall supersede any and all previous
contracts, arrangements or understandings between the Company, and the
Executive. This Agreement may be amended at any time by mutual written agreement
of the parties hereto.
10.5 Withholding. The payment of any amount pursuant to
this Agreement shall be subject to applicable withholding and payroll taxes, and
such other deductions as may be required under the Company's Executive benefit
plans, if any.
10.6 Governing Law. This Agreement shall be governed by,
and construed in accordance with, the laws of the state of Tennessee applicable
to contracts executed in and to be performed entirely within that state.
<PAGE>
- 8 -
IN WITNESS WHEREOF, the Company has caused this Agreement to
be duly executed and the Executive has hereunto set his hand, as of the day and
year first above written.
AMERICAN COLOR GRAPHICS, INC.
By: Stephen M. Dyott
-----------------------------------------
Stephen M. Dyott
Chairman and Chief Executive Officer
EXECUTIVE
By: M.J. Anderson
-----------------------------------------
M.J. Anderson
EXHIBIT 12.1
STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Thousands)
<TABLE>
<CAPTION>
Six Months
Ended Year Ended Year Ended Year Ended Year Ended Year Ended
September 30, March 31, March 31, March 31, March 31, March 31,
1999 1999 1998 1997 1996 1995
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Consolidated pretax income (loss) from
Continuing operations $ 7,197 (7,839) (27,122) (26,005) (21,431) (1,869)
Net amortization of debt issuance expense 655 1,412 2,292 1,784 2,139 2,174
Interest expense 16,464 34,830 36,664 34,505 30,549 23,578
Interest portion of rental expense 1,151 2,301 2,130 1,799 1,618 1,392
------- ------- ------- ------- ------- -------
Earnings $25,467 30,704 13,964 12,083 12,875 25,275
======= ======= ======= ======= ======= =======
Interest expense $16,464 34,830 36,664 34,505 30,549 23,578
Net amortization of debt issuance expense 655 1,412 2,292 1,784 2,139 2,174
Interest portion of rental expense 1,151 2,301 2,130 1,799 1,618 1,392
------- ------- ------- ------- ------- -------
Fixed Charges $18,270 38,543 41,086 38,088 34,306 27,144
======= ======= ======= ======= ======= =======
Ratio of Earnings to Fixed Charges 1.39 (a) (a) (a) (a) (a)
======= ======= ======= ======= ======= =======
</TABLE>
(a) The deficiency in earnings required to cover fixed charges for the fiscal
years ended March 31, 1999, 1998, 1997, 1996 and 1995 was $7,839, $27,122,
$26,005, $21,431, and $1,869 respectively. The deficiency in earnings to
cover fixed charges is computed by subtracting earnings before fixed
charges, income taxes, discontinued operations and extraordinary items from
fixed charges. Fixed charges consist of interest expense and one-third of
operating lease rental expense, which is deemed to be representative of the
interest factor. The deficiency in earnings required to cover fixed charges
includes depreciation of property, plant and equipment and amortization of
goodwill and other assets and non-cash charges which are reflected in cost
of sales and selling, general and administrative expenses, in the following
amounts (in thousands):
<TABLE>
<CAPTION>
Six Months
Ended
September 30, Fiscal Year Ended March 31,
--------------- ----------------------------------------------------------------
1999 1999 1998 1997 1996 1995
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Depreciation $14,790 29,651 28,124 25,282 21,385 18,327
Amortization 2,048 4,025 10,413 9,374 9,311 8,941
Non-cash charges(gain) -- 1,150 2,301 1,944 3,435 (3,311)
------- ------- ------- ------- ------- -------
Total $16,838 34,826 40,838 36,600 34,131 23,957
======= ======= ======= ======= ======= =======
</TABLE>
<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, 1999 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-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 67,468
<ALLOWANCES> 2,381
<INVENTORY> 9,681
<CURRENT-ASSETS> 77,915
<PP&E> 274,219
<DEPRECIATION> 133,325
<TOTAL-ASSETS> 301,027
<CURRENT-LIABILITIES> 75,305
<BONDS> 185,000
0
0
<COMMON> 1
<OTHER-SE> (112,949)
<TOTAL-LIABILITY-AND-EQUITY> 301,027
<SALES> 257,819
<TOTAL-REVENUES> 257,819
<CGS> 214,259
<TOTAL-COSTS> 214,259
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (9)
<INTEREST-EXPENSE> 17,119
<INCOME-PRETAX> 7,197
<INCOME-TAX> 967
<INCOME-CONTINUING> 6,230
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,230
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
