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, 2000
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 143,399 shares outstanding of its Common Stock, $.01 Par
Value, as of October 31, 2000 (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, 2000 and March 31, 2000 3
Condensed Consolidated Statements of Operations for the
Three Months Ended September 30, 2000 and 1999 5
Condensed Consolidated Statements of Operations for the
Six Months Ended September 30, 2000 and 1999 6
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended September 30, 2000 and 1999 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 21
Part II. Other Information
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
Exhibit Index 24
2
<PAGE>
ACG HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(Dollars in thousands, except par values)
September 30, 2000 March 31, 2000
------------------ --------------
(Unaudited)
Assets
Current assets:
Cash $ 0 0
Receivables:
Trade accounts, less allowance
for doubtful accounts of $3,149
and $2,945 at September 30,
2000 and March 31, 2000, respectively 64,075 65,432
Other 2,350 2,447
---------- ----------
Total receivables 66,425 67,879
Inventories 13,698 11,062
Prepaid expenses and other current assets 3,569 3,329
---------- ----------
Total current assets 83,692 82,270
Property, plant and equipment 290,750 282,485
Less accumulated depreciation (158,568) (145,993)
---------- ----------
Net property, plant and equipment 132,182 136,492
Excess of cost over net assets acquired,
less accumulated amortization of $48,753
and $47,206 at September 30, 2000 and
March 31, 2000, respectively 71,234 72,781
Other assets 12,595 12,269
---------- ----------
Total assets $ 299,703 303,812
========== ==========
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, 2000 March 31, 2000
------------------- --------------
(Unaudited)
Liabilities and Stockholders' Deficit
Current liabilities:
Current installments of long-term debt
and capitalized leases $ 7,509 7,727
Trade accounts payable 45,454 45,802
Accrued expenses 26,037 31,658
Income taxes 198 56
---------- ----------
Total current liabilities 79,198 85,243
Long-term debt and capitalized leases,
excluding current installments 262,166 269,617
Deferred income taxes 7,923 8,031
Other liabilities 48,664 50,310
---------- ----------
Total liabilities 397,951 413,201
Stockholders' deficit:
Common stock, voting, $.01 par value,
5,852,223 shares authorized, 143,399
shares issued and outstanding 1 1
Preferred stock, $.01 par value, 15,823
shares authorized, 3,617 shares Series AA
convertible preferred stock issued and
outstanding, $39,425,000 liquidation
preference, and 1,606 shares Series BB
convertible preferred stock issued and
outstanding, $17,500,000 liquidation
preference -- --
Additional paid-in capital 58,337 58,303
Accumulated deficit (154,002) (165,485)
Other accumulated comprehensive loss (2,584) (2,208)
---------- ----------
Total stockholders' deficit (98,248) (109,389)
---------- ----------
Commitments and contingencies
Total liabilities and stockholders'
deficit $ 299,703 303,812
========== ==========
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,
-----------------------------------
2000 1999
---------- ----------
Sales $ 138,844 134,211
Cost of sales 114,564 111,914
---------- ----------
Gross profit 24,280 22,297
Selling, general and administrative expenses 9,791 10,616
Amortization of goodwill 774 639
---------- ----------
Operating income 13,715 11,042
Other expense (income):
Interest expense 8,414 8,626
Interest income (12) (43)
Other, net 401 91
---------- ----------
Total other expense 8,803 8,674
---------- ----------
Income before income taxes 4,912 2,368
Income tax expense (365) (404)
---------- ----------
Net income $ 4,547 1,964
========== ==========
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,
-----------------------------------
2000 1999
---------- ----------
Sales $ 280,371 257,819
Cost of sales 231,176 214,259
-------- ----------
Gross profit 49,195 43,560
Selling, general and administrative expenses 17,673 18,141
Amortization of goodwill 1,547 1,265
---------- ----------
Operating income 29,975 24,154
Other expense (income):
Interest expense 16,853 17,119
Interest income (35) (75)
Other, net 477 (87)
---------- ----------
Total other expense 17,295 16,957
---------- ----------
Income before income taxes 12,680 7,197
Income tax expense (1,197) (967)
---------- ----------
Net income $ 11,483 6,230
========== ==========
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
ACG HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended
September 30,
-----------------------------
2000 1999
---------- ----------
Cash flows provided (used) by operating
activities:
Net income $ 11,483 6,230
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation 15,385 14,790
Amortization of goodwill and other assets 2,077 2,048
Amortization of deferred financing costs 693 655
Increase in working capital and other (10,030) (8,517)
---------- ----------
Net cash provided by operating
activities 19,608 15,206
Cash flows provided (used) by investing
activities:
Purchases of property, plant and equipment (9,315) (11,946)
Proceeds from sales of property, plant
and equipment 170 2
Other (47) (37)
---------- ----------
Net cash used by investing activities (9,192) (11,981)
Cash flows provided (used) by financing
activities:
Repayment of long-term debt, net,
including current maturities (486) (10,063)
Net (decrease) increase in revolver
borrowings (6,107) 11,020
Repayment of capital lease obligations (3,595) (3,893)
Payment of deferred financing costs (246) (235)
Other, net (22) (15)
---------- ----------
Net cash used by financing activities (10,456) (3,186)
Effect of exchange rates on cash and cash
equivalents 40 (39)
---------- ----------
Net change in cash -- --
Cash:
Beginning of period -- --
---------- ----------
End of period $ -- --
========== ==========
Non-cash investing activity:
Equipment purchases under capital leases $ 2,529 --
========== ==========
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 owns
100% of the outstanding voting shares of Graphics. Holdings is dependent upon
distributions from Graphics to fund its obligations. Under the terms of its debt
agreements at September 30, 2000, 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, including Graphics' 12 3/4% Senior Subordinated Notes due 2005,
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, 2000 are not necessarily indicative of the
results that may be expected for the fiscal year ending March 31, 2001. 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, 2000 and
the Company's Post-Effective Amendment No. 6 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.
8
<PAGE>
ACG HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
2. Inventories
The components of inventories are as follows (in thousands):
September 30, 2000 March 31, 2000
------------------ --------------
Paper $11,673 $ 9,025
Ink 221 275
Supplies and other 1,804 1,762
------- -------
$13,698 $11,062
======= =======
Total Inventories
3. Comprehensive Income (Loss)
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("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 comprehensive income. Total
comprehensive income for the three and six months ended September 30, 2000 and
1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended September 30, Six Months Ended September 30,
-------------------------------- ------------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 4,547 1,964 $ 11,483 6,230
Foreign currency translation
adjustment (194) (30) (376) 128
-------- -------- -------- --------
Total comprehensive income $ 4,353 1,934 $ 11,107 6,358
======== ======== ======== ========
</TABLE>
4. Commitments and Contingencies
The Company has employment agreements with three of its principal officers and
ten other employees. Such agreements provide for minimum salary levels as well
as for incentive bonuses, which are payable if specified management goals are
attained. In addition, the Company has consulting agreements with two former
employees. The aggregate commitment for future salaries at September 30, 2000,
excluding bonuses, was approximately $3.6 million.
On December 21, 1989, Graphics sold to CPS Corp. ("CPS") its ink manufacturing
operations and facilities. 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.
9
<PAGE>
ACG HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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, 2000 is $27.2 million and is included
within Other liabilities in the Company's condensed consolidated balance sheet.
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, 2000. 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 actions will not, individually or in the aggregate,
have a material adverse effect on the consolidated financial statements of the
Company.
5. 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) included $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 were paid or settled before March 31, 2000.
Another $0.8 million related to these costs was paid in the six months ended
September 30, 2000. The $0.7 million balance in the related restructuring
reserve at September 30, 2000 primarily includes remaining payouts of
involuntary employee termination costs and remaining payouts under lease
commitments.
10
<PAGE>
ACG HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
6. Industry Segment Information
The Company has significant operations principally in two industry segments: (1)
print and (2) digital imaging and prepress services. All of the Company's print
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 Statement of Financial Accounting Standard No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("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.
The accounting policies of the segments are the same as those used by the
Company in its consolidated financial statements. The Company evaluates
performance based on segment EBITDA which is defined as earnings before net
interest expense, income tax expense, depreciation, amortization and other
income (expense). 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. 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 &
Prepress Corporate
(In Thousands of Dollars) Print and Other Total
--------------------------------------------------------- ------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Six Months Ended September 30, 2000
Segment revenues $ 237,174 39,786 3,411 280,371
EBITDA $ 39,310 8,669 (542) 47,437
Depreciation and amortization 11,952 3,011 2,499 17,462
Interest expense -- -- 16,853 16,853
Interest income -- -- (35) (35)
Other, net (86) 515 48 477
----------- -------------- -------------- --------------
Income (loss) before income taxes $ 27,444 5,143 (19,907) 12,680
Total assets $ 260,201 30,391 9,111 299,703
Total capital expenditures $ 9,426 2,330 88 11,844
</TABLE>
11
<PAGE>
ACG HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
<TABLE>
<CAPTION>
Digital
Imaging &
Prepress Corporate
(In Thousands of Dollars) Print 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) before income taxes $ 25,783 2,333 (20,919) 7,197
Total assets $ 261,279 29,047 10,701 301,027
Total capital expenditures $ 9,938 1,780 228 11,946
Three Months Ended September 30, 2000
Segment revenues $ 116,613 20,555 1,676 138,844
EBITDA $ 18,199 4,714 (515) 22,398
Depreciation and amortization 6,029 1,463 1,191 8,683
Interest expense -- -- 8,414 8,414
Interest income -- -- (12) (12)
Other, net (75) 465 11 401
-------------- -------------- -------------- --------------
Income (loss) before income taxes $ 12,245 2,786 (10,119) 4,912
Total assets $ 260,201 30,391 9,111 299,703
Total capital expenditures $ 3,793 1,464 17 5,27
Three Months Ended September 30, 1999
Segment revenues $ 112,642 20,828 741 134,211
EBITDA $ 17,961 2,506 (987) 19,480
Depreciation and amortization 5,773 1,515 1,150 8,438
Interest expense -- -- 8,626 8,626
Interest income -- -- (43) (43)
Other, net (1) 5 87 91
-------------- -------------- -------------- --------------
Income (loss) before income taxes $ 12,189 986 (10,807) 2,368
Total assets $ 261,279 29,047 10,701 301,027
Total capital expenditures $ 5,719 1,225 220 7,164
</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 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 print 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, 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, 2000 (the "2000 Three-Month Period"), the three months ended
September 30, 1999 (the "1999 Three-Month Period"), the six months ended
September 30, 2000 (the "2000 Six-Month Period") and the six months ended
September 30, 1999 (the "1999 Six-Month Period"):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
-------------------------------------- -------------------------------------------
2000 1999 2000 1999
---- ---- ----- ----
(dollars in thousands)
<S> <C> <C> <C> <C>
Sales:
Print $ 116,613 112,642 237,174 215,753
American Color 20,555 20,828 39,786 40,592
Other (a) 1,676 741 3,411 1,474
-------------- ----------- ------------ ------------
Total $ 138,844 134,211 280,371 257,819
Gross Profit:
Print $ 17,941 18,193 37,516 35,278
American Color 6,257 4,501 11,464 9,111
Other (a) 82 (397) 215 (829)
-------------- ----------- ------------ ------------
Total $ 24,280 22,297 49,195 43,560
Gross Margin:
Print 15.4% 16.2% 15.8% 16.4%
American Color 30.4% 21.6% 28.8% 22.4%
Total 17.5% 16.6% 17.5% 16.9%
Operating Income (Loss):
Print $ 12,170 12,188 27,358 25,799
American Color 3,251 991 5,658 2,338
Other (a) (b) (1,706) (2,137) (3,041) (3,983)
-------------- ----------- ------------ ------------
Total $ 13,715 11,042 29,975 24,154
</TABLE>
(a) Other operations primarily include revenues and expenses associated with
Digiscope, our digital visual effects operation.
(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 2000 Six-Month Period, Print sales increased $21.4 million to
$237.2 million from $215.8 million in the 1999 Six-Month Period. The increase in
the 2000 Six-Month Period includes the impact of increased paper prices and the
impact of an approximate 5% increase in Print production volume, offset in part
by certain changes in customer and product mix.
In the 2000 Three-Month Period, Print sales increased $4.0 million to $116.6
million from $112.6 million in the 1999 Three-Month Period. The increase in the
2000 Three-Month Period was primarily attributable to increased paper prices
which were offset in part by certain changes in customer and product mix.
Gross Profit. In the 2000 Six-Month Period, Print gross profit increased $2.2
million to $37.5 million from $35.3 million in the 1999 Six-Month Period. In the
2000 Six-Month Period, Print gross margin decreased to 15.8% from 16.4% in the
1999 Six-Month Period. The increase in gross profit is largely attributable to
the increased production volume. The decrease in gross margin is attributable to
the impact of increased paper prices reflected in sales.
In the 2000 Three-Month Period, Print gross profit decreased $0.3 million to
$17.9 million from $18.2 million in the 1999 Three-Month Period. In the 2000
Three-Month Period, Print gross margin decreased to 15.4% from 16.2% in the 1999
Three-Month Period. The decrease in gross margin is attributable to the impact
of increased paper prices reflected in sales.
Selling, General and Administrative Expenses. In the 2000 Six-Month Period,
Print selling, general and administrative expenses increased $0.7 million to
$10.2 million, or 4.3% of Print sales, from $9.5 million, or 4.4% of Print sales
in the 1999 Six-Month Period. The increase in the 2000 Six-Month Period includes
increases in certain selling expenses and employee related expenses.
In the 2000 Three-Month Period, Print selling, general and administrative
expenses decreased $0.2 million to $5.8 million, or 5.0% of Print sales, from
$6.0 million, or 5.3% of Print sales in the 1999 Three-Month Period.
Operating Income. As a result of the factors discussed above, Print operating
income increased by 6.0% to $27.4 million in the 2000 Six-Month Period from
$25.8 million in the 1999 Six-Month Period; and was $12.2 million in both the
2000 Three-Month Period and the 1999 Three-Month Period.
American Color (Digital Imaging and Prepress Services)
Sales. In the 2000 Six-Month Period, American Color's sales decreased $0.8
million to $39.8 million from $40.6 million in the 1999 Six-Month Period. The
decrease in the 2000 Six-Month Period was primarily the result of reduced
prepress production volume.
In the 2000 Three-Month Period, American Color's sales decreased $0.2 million to
$20.6 million from $20.8 million in the 1999 Three-Month Period.
15
<PAGE>
ACG HOLDINGS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Gross Profit. In the 2000 Six-Month Period, American Color's gross profit
increased $2.4 million to $11.5 million from $9.1 million in the 1999 Six-Month
Period. In the 2000 Six-Month Period, American Color's gross margin increased to
28.8% from 22.4% in the 1999 Six-Month Period. The increases in the 2000
Six-Month Period gross profit and gross margin are primarily the result of
reduced manufacturing costs related to various cost containment programs at the
facilities and the consolidation of certain production sites. These increases
were offset in part by reduced prepress production volume.
In the 2000 Three-Month Period, American Color's gross profit increased $1.8
million to $6.3 million from $4.5 million in the 1999 Three-Month Period. In the
2000 Three-Month Period, American Color's gross margin increased to 30.4% from
21.6% in the 1999 Three-Month Period. The increases in the 2000 Three-Month
Period gross profit and gross margin are primarily the result of reduced
manufacturing costs related to various cost containment programs at the
facilities and the consolidation of certain production sites.
Selling, General and Administrative Expenses. In the 2000 Six-Month Period,
American Color's selling, general and administrative expenses decreased $1.0
million to $5.8 million, or 14.6% of American Color's sales, from $6.8 million,
or 16.7% of American Color's sales in the 1999 Six-Month Period. These decreases
include the impact of various cost containment measures implemented during
Fiscal Year 2000.
In the 2000 Three-Month Period, American Color's selling, general and
administrative expenses decreased $0.5 million to $3.0 million, or 14.6% of
American Color's sales, from $3.5 million, or 16.9% of American Color's sales in
the 1999 Three-Month Period. These decreases include the impact of various cost
containment measures implemented during Fiscal Year 2000.
Operating Income. As a result of the factors discussed above, American Color's
operating income increased to $5.7 million in the 2000 Six-Month Period from
$2.3 million in the 1999 Six-Month Period; and increased to $3.3 million in the
2000 Three-Month Period from $1.0 million in the 1999 Three-Month Period.
Other Operations
Other operations consist primarily of revenues and expenses associated with
Digiscope, corporate general, administrative and other expenses including
amortization expense. Amortization expense associated with other operations,
which primarily includes goodwill amortization, was $1.6 million, $1.4 million,
$0.8 million and $0.7 million in the 2000 Six-Month Period, the 1999 Six-Month
Period, the 2000 Three-Month Period and the 1999 Three-Month Period,
respectively.
In the 2000 Six-Month Period, operating losses from other operations improved to
a loss of $3.0 million from a loss of $4.0 million in the 1999 Six-Month Period.
In the 2000 Three-Month Period, operating losses from other operations improved
to a loss of $1.7 million from a loss of $2.1 million in the 1999 Three-Month
Period. This improvement includes $1.0 million and $0.5 million of decreased
operating losses at Digiscope due primarily to higher digital visual effects
production volume during the 2000 Six-Month Period and the 2000 Three-Month
Period, respectively.
16
<PAGE>
ACG HOLDINGS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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), included $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 were paid or
settled before March 31, 2000. Another $0.8 million related to these costs was
paid in the 2000 Six-Month Period. The $0.7 million balance in the related
restructuring reserve at September 30, 2000 primarily includes remaining payouts
of involuntary employee termination costs and remaining payouts under lease
commitments.
Interest Expense
In the 2000 Six-Month Period, interest expense decreased to $16.9 million from
$17.1 million in the 1999 Six-Month Period; and, in the 2000 Three-Month Period,
interest expense decreased to $8.4 million from $8.6 million in the 1999
Three-Month Period. These decreases reflect lower levels of indebtedness, offset
in part by increased borrowing costs.
Other, Net
In the 2000 Six-Month Period, other, net decreased to expense of $0.5 million
from income of $0.1 million in the 1999 Six-Month Period; and, in the 2000
Three-Month Period, increased to expense of $0.4 million from expense of $0.1
million in the 1999 Three-Month Period. Included in both the 2000 Six-Month
Period and the 2000 Three-Month Period is a $0.4 million non-cash write-off of
certain fixed assets.
Income Tax Expense
In the 2000 Six-Month Period, income tax expense increased to $1.2 million from
$1.0 million in the 1999 Six-Month Period; and was $0.4 million in both the 2000
Three-Month Period and the 1999 Three-Month Period. The increase in the 2000
Six-Month Period is primarily due to greater amounts of U.S. and foreign taxable
income, offset in part by an increased reduction in the valuation allowance.
Net Income
As a result of the factors discussed above, the 2000 Six-Month Period net income
improved to $11.5 million from $6.2 million in the 1999 Six-Month Period; and,
in the 2000 Three-Month Period, net income improved to $4.5 million from $2.0
million in the 1999 Three-Month Period.
17
<PAGE>
ACG HOLDINGS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources
We have a $145 million credit facility with a syndicate of lenders (the "Bank
Credit Agreement") that provides for:
(1) a $25 million amortizing term loan facility maturing on March 31, 2004
(the "A Term Loan Facility"),
(2) a $50 million amortizing term loan facility maturing on March 31, 2005
(the "B Term Loan Facility"), and
(3) a revolving credit facility providing for a maximum of $70 million
borrowing availability maturing on March 31, 2004 (the "Revolving
Credit Facility").
The Revolving Credit Facility's availability includes a provision for up to $40
million of letters of credit. At September 30, 2000, we had total borrowings and
letters of credit outstanding under the Revolving Credit Facility of
approximately $29.1 million, and therefore, additional borrowing availability of
approximately $40.9 million.
During the fiscal year ended March 31, 2000 ("Fiscal Year 2000"), we voluntarily
prepaid $15 million of our bank indebtedness, reducing the A Term Loan Facility
by $10.9 million and the B Term Loan Facility by $4.1 million. At September 30,
2000, $9.6 million of the A Term Loan Facility and $39.6 million of the B Term
Loan Facility remained outstanding. As a result of the voluntary prepayments, we
have no scheduled maturities due under either the A Term Loan Facility or B Term
Loan Facility until March 31, 2002. Scheduled repayments of existing capital
lease obligations and other senior indebtedness during the remainder of the
fiscal year ending March 31, 2001 ("Fiscal Year 2001") are approximately $3.3
million and $0.5 million, respectively.
During the 2000 Six-Month Period, net cash provided by operating activities of
$19.6 million (see our condensed consolidated statements of cash flows appearing
elsewhere in this report) and proceeds from the sale of fixed assets of $0.2
million were primarily used to fund the following expenditures:
(1) $6.1 million in net revolver repayments,
(2) $9.3 million in cash capital expenditures, and
(3) $4.4 million in principal repayments of indebtedness and financing
costs (including capital lease obligations of $3.6 million).
We plan to continue our program of upgrading our print and prepress equipment
and currently anticipate that full year Fiscal Year 2001 cash capital
expenditures will approximate [$20.0] million, and equipment acquired under
capital leases will approximate [$7.7] million. Our cash-on-hand of
approximately $2.5 million is presented net of outstanding checks within trade
accounts payable at September 30, 2000. Accordingly, cash is presented at a
balance of $0 in the September 30, 2000 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, redeem, repay or
repurchase outstanding indebtedness, including repurchases of Notes in privately
negotiated transactions, or in open market purchases to the extent permitted by
our Bank Credit Agreement.
At September 30, 2000, we had total indebtedness outstanding of $269.7 million,
including capital lease obligations, as compared to $286.7 million at September
30, 1999. Of the total indebtedness outstanding at September 30, 2000, $51.9
million (excluding letters of credit) was outstanding under the Bank Credit
18
<PAGE>
ACG HOLDINGS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Agreement at a weighted-average interest rate of 8.4%. Indebtedness under the
Bank Credit Agreement bears interest at floating rates. At September 30, 2000,
we had indebtedness other than obligations under the Bank Credit Agreement of
$217.8 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.
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.
<TABLE>
<CAPTION>
EBITDA
Three Months Ended Six Months Ended
September 30, September 30,
-------------------------------------------- -----------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C>
EBITDA:
Print 18,199 17,961 39,310 37,277
American Color 4,714 2,506 8,669 5,403
Other (a) (515) (987) (542) (1,688)
------------ --------- ------------ -----------
Total 22,398 19,480 47,437 40,992
EBITDA Margin:
Print 15.6% 15.9% 16.6% 17.3%
American Color 22.9% 12.0% 21.8% 13.3%
Total 16.1% 14.5% 16.9% 15.9%
</TABLE>
(a) Other operations primarily include revenues and expenses associated with
our digital visual effects business and 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, and
other income (expense). "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 $39.3 million in the 2000 Six-Month Period from $37.3 million in
the 1999 Six-Month Period, representing an increase of $2.0 million, or 5.5%.
The Print EBITDA Margin decreased to 16.6% in the 2000 Six-Month Period from
17.3% in the 1999 Six-Month Period. Print EBITDA increased to $18.2 million in
the 2000 Three-Month Period from $18.0 million in the 1999 Three-Month Period,
representing an increase of $0.2 million, or 1.3%. The Print EBITDA Margin
decreased to 15.6% in the 2000 Three-Month Period from 15.9% in the 1999
Three-Month Period. The decreases in EBITDA Margin in both the 2000 Six-Month
Period and the 2000 Three-Month Period are attributable to the impact of
increased paper prices reflected in sales.
19
<PAGE>
ACG HOLDINGS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
American Color (Digital Imaging and Prepress Services). 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 $8.7 million in the 2000 Six-Month Period from $5.4 million in the
1999 Six-Month Period, representing an increase of $3.3 million, or 60.5%. The
American Color EBITDA Margin increased to 21.8% in the 2000 Six-Month Period
from 13.3% in the 1999 Six-Month Period. American Color EBITDA increased to $4.7
million in the 2000 Three-Month Period from $2.5 million in the 1999 Three-Month
Period, representing an increase of $2.2 million, or 88.1%. American Color
EBITDA Margin increased to 22.9% in the 2000 Three-Month Period from 12.0% in
the 1999 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 improved to $0.5 million in the 2000 Six-Month Period from
negative EBITDA of $1.7 million in the 1999 Six-Month Period. Other operations
negative EBITDA improved to $0.5 million in the 2000 Three-Month Period from
negative EBITDA of $1.0 million in the 1999 Three-Month Period.
20
<PAGE>
ACG HOLDINGS, INC.
Quantitative and Qualitative
Disclosures About Market Risk
There have been no significant changes since March 31, 2000. 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, 2000.
21
<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, 2000.
Item 2. Changes in Securities and Use of Proceeds
Recent Sales of Unregistered Securities
During the first and third quarters of Fiscal Year 2000 certain
officers exercised options to purchase an aggregate of 8,143 and
1,106 shares of Holdings' common stock, respectively, for
$.01/share. The securities that were sold were exempt from
registration on the basis that all such officers are "accredited
investors" as defined by the rules of the Securities Act of 1933,
as amended.
During the fourth quarter of Fiscal Year 1998 certain officers
exercised options to purchase an aggregate of 8,254 shares of
Holdings' common stock for $.01/share. The securities that were
sold were exempt from registration on the basis that all such
officers are "accredited investors" as defined by the rules of the
Securities Act of 1933, as amended.
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, 2000.
22
<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 13, 2000 By /s/ Joseph M. Milano
---------------- -----------------------------------
Joseph M. Milano
Executive Vice President and
Chief Financial Officer
(Authorized Officer and
Principal Financial Officer)
Date November 13, 2000 By /s/ Patrick W. Kellick
---------------- ------------------------------------
Patrick W. Kellick
Senior Vice President - Corporate
Controller (Chief Accounting Officer)
23
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page
12.1 Statement Re: Computation of Ratio of Earnings
to Fixed Charges 25
27.0 Financial Data Schedule 26
24
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 12.1
STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Thousands)
Six Months
Ended Year Ended Year Ended
September 30, March 31, 2000 March 31, 1999
2000
---------------- --------------- -----------------
<S> <C> <C> <C>
Consolidated pretax income (loss) from
Continuing operations $ 12,680 11,659 (7,839)
Net amortization of debt issuance expense 693 1,326 1,412
Interest expense 16,160 32,637 34,830
Interest portion of rental expense 1,067 2,134 2,301
---------------- --------------- -----------------
Earnings $ 30,600 47,756 30,704
================ =============== =================
Interest expense $ 16,160 32,637 34,830
Net amortization of debt issuance expense 693 1,326 1,412
Interest portion of rental expense 1,067 2,134 2,301
---------------- --------------- -----------------
Fixed Charges $ 17,920 36,097 38,543
================ =============== =================
Ratio of Earnings to Fixed Charges 1.71x 1.32x (a)
================ =============== =================
</TABLE>
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
March 31, 1998 March 31, 1997 March 31, 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
Consolidated pretax income (loss) from
Continuing operations (27,122) (26,005) (21,431)
Net amortization of debt issuance expense 2,292 1,784 2,139
Interest expense 36,664 34,505 30,549
Interest portion of rental expense 2,130 1,799 1,618
---------------- ---------------- ----------------
Earnings 13,964 12,083 12,875
================ ================ ================
Interest expense 36,664 34,505 30,549
Net amortization of debt issuance expense 2,292 1,784 2,139
Interest portion of rental expense 2,130 1,799 1,618
---------------- ---------------- ----------------
Fixed Charges 41,086 38,088 34,306
================ ================ ================
Ratio of Earnings to Fixed Charges (a) (a) (a)
================ ================ ================
</TABLE>
(a) The deficiency in earnings required to cover fixed charges for the
fiscal years ended March 31, 1999, 1998, 1997 and 1996 was $7,839,
$27,122, $26,005 and, $21,431 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 Fiscal Year Ended March 31,
-----------------------------------------------------
September 30, 2000 2000 1999 1998
-------------------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
Depreciation $ 15,385 $ 30,067 29,651 28,124
Amortization 2,077 3,719 4,025 10,413
Non-cash charges (gain) -- 17 945 2,301
-------------------- -------------- ----------- -------------
Total $ 17,462 $ 33,803 34,621 40,838
==================== ============== =========== =============
</TABLE>
--------------------------
1997 1996
------------ -----------
Depreciation 25,282 21,385
Amortization 9,374 9,311
Non-cash charges (gain) 1,944 3,435
------------ -----------
Total 36,600 34,131
============ ===========
25
