Prospectus Supplement
(To Prospectus dated July 11, 2000)
American Color Graphics, Inc.
12 3/4% SENIOR SUBORDINATED EXCHANGE NOTES DUE 2005
----------------
Unconditionally Guaranteed on a Senior Subordinated Basis by
ACG Holdings, Inc.
----------------
Attached hereto and incorporated by reference herein is our Quarterly
Report on Form 10-Q for the three month period ended June 30, 2000.
----------------
The Securities and Exchange Commission and state securities regulators
have not approved or disapproved these securities, or determined if this
prospectus supplement is truthful or complete. Any representation to the
contrary is a criminal offense.
----------------
Morgan Stanley & Co. Incorporated and Dean Witter Reynolds Inc.
(collectively, "Morgan Stanley Dean Witter") will use this prospectus
supplement, together with the prospectus, in connection with offers and sales of
the Notes in market-making transactions at negotiated prices related to
prevailing market prices at the time of sale. Morgan Stanley Dean Witter may act
as principal or agent in the transactions. American Color Graphics will receive
no portion of the proceeds of the sales of the Notes and will bear the expenses
incident to the registration of the Notes. If Morgan Stanley Dean Witter
conducts any market-making activities, it may be required to deliver a
"market-making prospectus" when effecting offers and sales of the Notes because
of the equity ownership of ACG Holdings by certain private investment
partnerships, which are affiliates of Morgan Stanley Dean Witter. For so long as
a market-making prospectus is required to be delivered, the ability of Morgan
Stanley Dean Witter to make a market in the Notes may be dependent, in part, on
the ability of American Color Graphics and ACG Holdings to maintain a current
market-making prospectus.
August 14, 2000
<PAGE>
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 June 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 July 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
June 30, 2000 and March 31, 2000 3
Condensed Consolidated Statements of Operations for
the Three Months Ended June 30, 2000 and 1999 5
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended June 30, 2000 and 1999 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 18
Part II. Other Information
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Exhibit Index 21
2
<PAGE>
ACG HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(Dollars in thousands, except par values)
June 30, 2000 March 31, 2000
------------- --------------
(Unaudited)
Assets
Current assets:
Cash $ 0 0
Receivables:
Trade accounts, less allowance
for doubtful accounts of $3,022
and $2,945 at June 30, 2000 and March
31, 2000, respectively 56,044 65,432
Other 2,320 2,447
--------- ---------
Total receivables 58,364 67,879
Inventories 11,799 11,062
Prepaid expenses and other current assets 3,632 3,329
--------- ---------
Total current assets 73,795 82,270
Property, plant and equipment 288,593 282,485
Less accumulated depreciation (153,470) (145,993)
--------- ---------
Net property, plant and equipment 135,123 136,492
Excess of cost over net assets acquired, less
accumulated amortization of $47,979 and
$47,206 at June 30, 2000 and March 31, 2000,
respectively 72,008 72,781
Other assets 11,960 12,269
--------- ---------
Total assets $ 292,886 303,812
========= =========
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
ACG HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(Dollars in thousands, except par values)
June 30, 2000 March 31, 2000
-------------- --------------
(Unaudited)
Liabilities and Stockholders' Deficit
Current liabilities:
Current installments of long-term debt
and capitalized leases $ 7,474 7,727
Trade accounts payable 40,500 45,802
Accrued expenses 28,950 31,658
Income taxes 410 56
--------- ---------
Total current liabilities 77,334 85,243
Long-term debt and capitalized leases,
excluding current installments 261,456 269,617
Deferred income taxes 8,057 8,031
Other liabilities 48,657 50,310
--------- ---------
Total liabilities 395,504 413,201
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 58,320 58,303
Accumulated deficit (158,549) (165,485)
Other accumulated comprehensive loss (2,390) (2,208)
--------- ---------
Total stockholders' deficit (102,618) (109,389)
--------- ---------
Commitments and contingencies
Total liabilities and stockholders'
deficit $ 292,886 303,812
========= =========
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
ACG HOLDINGS, INC.
Condensed Consolidated Statements of Operations
(In thousands)
(Unaudited)
Three Months Ended June 30,
---------------------------
2000 1999
--------- ---------
Sales $ 141,527 123,608
Cost of sales 116,612 102,345
--------- ---------
Gross profit 24,915 21,263
Selling, general and administrative expenses 7,882 7,525
Amortization of goodwill 773 626
--------- ---------
Operating income 16,260 13,112
Other expense (income):
Interest expense 8,439 8,493
Interest income (23) (32)
Other, net 76 (178)
--------- ---------
Total other expense 8,492 8,283
--------- ---------
Income before income taxes 7,768 4,829
Income tax expense (832) (563)
--------- ---------
Net income $ 6,936 4,266
========= =========
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
ACG HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended
June 30,
--------------------
2000 1999
-------- --------
Cash flows provided (used) by operating activities:
Net income $ 6,936 4,266
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation 7,753 7,357
Amortization of goodwill and other assets 1,026 1,043
Amortization of deferred financing costs 337 326
Increase in working capital and other (991) (6,473)
-------- --------
Net cash provided by operating activities 15,061 6,519
Cash flows provided (used) by investing activities:
Purchases of property, plant and equipment (5,791) (4,782)
Proceeds from sales of property, plant and equipment 95 1
Other (18) 14
-------- --------
Net cash used by investing activities (5,714) (4,767)
Cash flows provided (used) by financing activities:
(Repayment) proceeds of long-term debt, net,
including current maturities (235) 218
Net decrease in revolver borrowings (7,088) --
Repayment of capital lease obligations (1,865) (1,797)
Payment of deferred financing costs (171) (131)
Other, net (11) (6)
-------- --------
Net cash used by financing activities (9,370) (1,716)
Effect of exchange rates on cash and cash equivalents 23 (36)
-------- --------
Net change in cash -- --
Cash:
Beginning of period -- --
-------- --------
End of period $ -- --
======== ========
Non-cash investing activity:
Equipment purchases under capital leases $ 779 --
======== ========
See accompanying notes to condensed consolidated financial statements.
6
<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 June 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 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 month
period ended June 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.
7
<PAGE>
ACG HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
2. Inventories
The components of inventories are as follows (in thousands):
June 30, 2000 March 31, 2000
------------- --------------
Paper $ 9,678 9,025
Ink 204 275
Supplies and other 1,917 1,762
------- -------
Total Inventories $11,799 11,062
======= =======
3. 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 for the three months ended June 30, 2000 and 1999 are as follows (in
thousands):
Three Months Ended June 30,
---------------------------
2000 1999
------- -------
Net income $ 6,936 4,266
Foreign currency translation
adjustment (182) 158
------- -------
Total comprehensive income $ 6,754 4,424
======= =======
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 June 30, 2000,
excluding bonuses, was approximately $4.2 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.
8
<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 June 30, 2000 is $26.2 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
June 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.
The $0.9 million balance in the related restructuring reserve at June 30, 2000
primarily includes remaining payouts of involuntary employee termination costs
and remaining payouts under lease commitments.
9
<PAGE>
ACG HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
6. 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 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 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 described in note
1. 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 & Corporate
(In Thousands of Dollars) Print Prepress and Other Total
------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Three Months Ended June 30, 2000
Segment revenues $ 120,561 19,231 1,735 141,527
EBITDA $ 21,111 3,955 (27) 25,039
Depreciation and amortization 5,923 1,548 1,308 8,779
Interest expense -- -- 8,439 8,439
Interest income -- -- (23) (23)
Other, net (11) 50 37 76
--------- --------- --------- ---------
Income (loss) before income taxes $ 15,199 2,357 (9,788) 7,768
Total assets $ 254,400 29,486 9,000 292,886
Total capital expenditures $ 5,633 866 71 6,570
</TABLE>
10
<PAGE>
ACG HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
<TABLE>
<CAPTION>
Digital
Imaging & Corporate
(In Thousands of Dollars) Print Prepress and Other Total
------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Three Months Ended June 30, 1999
Segment revenues $103,111 19,764 733 123,608
EBITDA $ 19,316 2,897 (701) 21,512
Depreciation and amortization 5,705 1,550 1,145 8,400
Interest expense -- -- 8,493 8,493
Interest income -- -- (32) (32)
Other, net 17 -- (195) (178)
-------- -------- -------- --------
Income (loss) before income taxes $ 13,594 1,347 (10,112) 4,829
Total assets $247,200 29,902 11,010 288,112
Total capital expenditures $ 4,219 555 8 4,782
</TABLE>
11
<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.
12
<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 June 30, 2000 (the "2000 Three-Month Period"), and the three months ended
June 30, 1999 (the "1999 Three-Month Period"):
Three Months Ended
June 30,
------------------------------
2000 1999
--------- ---------
(dollars in thousands)
Sales:
Print $ 120,561 103,111
American Color 19,231 19,764
Other (a) 1,735 733
--------- ---------
Total $ 141,527 123,608
Gross Profit:
Print $ 19,575 17,085
American Color 5,207 4,610
Other (a) 133 (432)
--------- ---------
Total $ 24,915 21,263
Gross Margin:
Print 16.2% 16.6%
American Color 27.1% 23.3%
Total 17.6% 17.2%
Operating Income (Loss):
Print $ 15,188 13,611
American Color 2,407 1,347
Other (a) (b) (1,335) (1,846)
--------- ---------
Total $ 16,260 13,112
(a) Other operations primarily include revenues and expenses associated with
Digiscope, our digital visual effects operations.
(b) Also includes corporate general and administrative expenses, and
amortization expense.
13
<PAGE>
ACG HOLDINGS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Print
Sales. In the 2000 Three-Month Period, Print sales increased $17.5 million to
$120.6 million from $103.1 million in the 1999 Three-Month Period. The increase
in the 2000 Three-Month Period includes the impact of an approximate 12%
increase in Print production volume and the impact of increased paper prices.
Gross Profit. In the 2000 Three-Month Period, Print gross profit increased $2.5
million to $19.6 million from $17.1 million in the 1999 Three-Month Period. In
the 2000 Three-Month Period, Print gross margin decreased to 16.2% from 16.6% in
the 1999 Three-Month Period. The increase in gross profit was largely
attributable to the increased production volume. The decrease in gross margin
includes the impact of increased paper prices reflected in sales.
Selling, General and Administrative Expenses. In the 2000 Three-Month Period,
Print, selling, general and administrative expenses increased $0.9 million to
$4.4 million, or 3.6% of Print sales, from $3.5 million, or 3.4% of Print sales
in the 1999 Three-Month Period. The increase in the 2000 Three-Month Period
includes increases in certain employee related expenses and selling expenses.
Operating Income. As a result of the factors discussed above, Print operating
income increased by 11.6% to $15.2 million in the 2000 Three-Month Period from
$13.6 million in the 1999 Three-Month Period.
American Color (Digital Imaging and Prepress Services)
Sales. In the 2000 Three-Month Period, American Color's sales decreased $0.6
million to $19.2 million from $19.8 million in the 1999 Three-Month Period. The
decrease in the 2000 Three-Month Period was primarily the result of reduced
prepress production volume.
Gross Profit. In the 2000 Three-Month Period, American Color's gross profit
increased $0.6 million to $5.2 million from $4.6 million in the 1999 Three-Month
Period. In the 2000 Three-Month Period, American Color's gross margin increased
to 27.1% from 23.3% 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
plants and the consolidation of certain production facilities. These increases
were offset in part by reduced prepress production volume.
Selling, General and Administrative Expenses. In the 2000 Three-Month Period,
American Color's selling, general and administrative expenses decreased $0.5
million to $2.8 million or 14.6% of American Color's sales from $3.3 million or
16.5% 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, operating income
at American Color increased to $2.4 million in the 2000 Three-Month Period from
$1.3 million in the 1999 Three-Month Period.
14
<PAGE>
ACG HOLDINGS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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 associated with other operations,
which primarily includes goodwill amortization, was $0.8 million and $0.7
million in the 2000 Three-Month Period and the 1999 Three-Month Period,
respectively.
In the 2000 Three-Month Period, operating losses from other operations improved
to a loss of $1.3 million from a loss of $1.8 million in the 1999 Three-Month
Period. This improvement includes $0.5 million of decreased operating losses at
Digiscope due primarily to higher digital visual effects production volume
during the 2000 Three-Month Period.
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. The $0.9 million balance in the related
restructuring reserve at June 30, 2000 primarily includes remaining payouts of
involuntary employee termination costs and remaining payouts under lease
commitments.
Interest Expense
Interest expense decreased 0.6% to $8.4 million in the 2000 Three-Month Period
from $8.5 million in the 1999 Three-Month Period. These decreases are primarily
the result of lower levels of indebtedness.
Other, Net
In the 2000 Three-Month Period, other, net decreased to expense of $0.1 million
from income of $0.2 million in the 1999 Three-Month Period.
Income Tax Expense
Income tax expense increased to $0.8 million in the 2000 Three-Month Period from
$0.6 million in the 1999 Three-Month Period. The increase in the 2000
Three-Month Period is primarily due to greater amounts of U.S. and foreign
taxable income, offset in part by a greater reduction in the valuation
allowance.
Net Income
As a result of the factors discussed above, the 2000 Three-Month Period net
income improved to $6.9 million from $4.3 million in the 1999 Three-Month
Period.
15
<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 June 30, 2000, we had total borrowings and
letters of credit outstanding under the Revolving Credit Facility of
approximately $26.3 million, and therefore, additional borrowing availability of
approximately $43.7 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 June 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") will approximate $4.9 million
and $0.8 million, respectively.
During the 2000 Three-Month Period, net cash provided by operating activities of
$15.1 million (see our condensed consolidated statements of cash flows appearing
elsewhere in this report) and proceeds from the sale of fixed assets of $0.1
million were primarily used to fund the following expenditures:
(1) $7.1 million in net revolver repayments,
(2) $5.8 million in cash capital expenditures, and
(3) $2.3 million in principal repayments of indebtedness and financing costs
(including capital lease obligations of $1.9 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 $20.2 million, and equipment acquired under
capital leases will approximate $8.5 million. Our cash-on-hand of approximately
$2.7 million is presented net of outstanding checks within trade accounts
payable at June 30, 2000. Accordingly, cash is presented at a balance of $0 in
the June 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 June 30, 2000, we had total indebtedness outstanding of $268.9 million,
including capital lease obligations, as compared to $288.0 million at June 30,
1999. Of the total indebtedness outstanding at June 30, 2000, $51.0 million was
outstanding under the Bank Credit Agreement at a weighted-average interest rate
of 8.4%. Indebtedness under the Bank Credit Agreement bears interest at floating
rates. At June 30, 2000, we had indebtedness other than obligations under the
Bank Credit Agreement of $217.9 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.
16
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ACG HOLDINGS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
A significant portion of Graphics' long-term obligations, including indebtedness
under the Bank Credit Agreement, 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
Three Months Ended June 30,
---------------------------
2000 1999
------ ------
(dollars in thousands)
EBITDA:
Print $ 21,111 19,316
American Color 3,955 2,897
Other (a) (27) (701)
-------- --------
Total $ 25,039 21,512
EBITDA Margin:
Print 17.5% 18.7%
American Color 20.6% 14.7%
Total 17.7% 17.4%
(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 $21.1 million in the 2000 Three-Month Period from $19.3 million in
the 1999 Three-Month Period, representing an increase of $1.8 million or 9.3%.
The Print EBITDA Margin decreased to 17.5% in the 2000 Three-Month Period from
18.7% in the 1999 Three-Month Period. The decrease in EBITDA Margin includes the
impact of increased paper prices reflected in sales.
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 $4.0 million in the 2000 Three-Month Period from $2.9 million in
the 1999 Three-Month Period, representing an increase of $1.1 million or 36.5%.
The American Color EBITDA Margin increased to 20.6% in the 2000 Three-Month
Period from 14.7% 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 less than $0.1 million in the 2000 Three-Month
Period from negative EBITDA of $0.7 million in the 1999 Three-Month Period.
17
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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.
18
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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 June 30, 2000.
19
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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 August 14, 2000 By /s/ Joseph M. Milano
--------------- ---------------------
Joseph M. Milano
Executive Vice President and
Chief Financial Officer
(Authorized Officer and
Principal Financial Officer)
Date August 14, 2000 By /s/ Patrick W. Kellick
--------------- -----------------------
Patrick W. Kellick
Senior Vice President - Corporate Controller
(Chief Accounting Officer)
20
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EXHIBIT INDEX
Exhibit No. Description Page
----------- ----------- ----
12.1 Statement Re: Computation of Ratio of Earnings to
Fixed Charges 22
27.0 Financial Data Schedule 23
21
