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, 2002
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 incorporation or organization) (I.R.S. Employer 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, 2002 (all of which are privately owned and not traded on a
public market).
INDEX
-----
Part I. Financial Information Page No.
- --------- --------------------- --------
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 2002 and March 31, 2002 3
Condensed Consolidated Statements of Income for
the Three Months Ended June 30, 2002 and 2001 5
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended June 30, 2002 and 2001 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
ACG HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(In thousands)
Assets June 30, 2002 March 31, 2002
- ------ ------------- --------------
(Unaudited)
Current assets:
Cash $ -- 4,547
Receivables:
Trade accounts, less allowance for
doubtful accounts of $2,753 and $2,557
at June 30, 2002 and March 31,
2002, respectively 46,245 50,870
Income tax receivable 984 1,015
Other 2,329 2,060
----- -----
Total receivables 49,558 53,945
Inventories 9,526 9,137
Deferred income taxes 7,564 7,564
Prepaid expenses and other current assets 4,381 3,839
----- -----
Total current assets 71,029 79,032
Property, plant and equipment 313,781 303,166
Less accumulated depreciation (186,644) (180,676)
-------- --------
Net property, plant and equipment 127,137 122,490
Excess of cost over net assets acquired, less
accumulated amortization of $53,274 at June
30, 2002 and March 31, 2002 66,548 66,548
Other assets 12,289 12,443
------ ------
Total assets $ 277,003 280,513
======= =======
See accompanying notes to condensed consolidated financial statements.
3
ACG HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(Dollars in thousands, except par values and liquidation preference)
June 30, 2002 March 31, 2002
------------- --------------
(Unaudited)
Liabilities and Stockholders' Deficit
- -------------------------------------
Current liabilities:
Current installments of long-term debt and
capitalized leases $ 22,476 19,946
Trade accounts payable 31,712 25,906
Accrued expenses 30,060 34,045
------ ------
Total current liabilities 84,248 79,897
Long-term debt and capitalized leases,
excluding current installments 220,676 232,846
Deferred income taxes 2,974 2,933
Other liabilities 59,961 60,857
------ ------
Total liabilities 367,859 376,533
Commitments and contingencies (Note 4)
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,
$39,442,551 liquidation preference, and
1,606 shares Series BB convertible preferred
stock issued and outstanding, $17,500,000
liquidation preference -- --
Additional paid-in capital 58,557 58,500
Accumulated deficit (135,881) (140,340)
Other accumulated comprehensive loss, net of tax (13,533) (14,181)
-------- --------
Total stockholders' deficit (90,856) (96,020)
-------- --------
Total liabilities and stockholders' deficit $ 277,003 280,513
======= =======
See accompanying notes to condensed consolidated financial statements.
4
ACG HOLDINGS, INC.
Condensed Consolidated Statements of Income
(In thousands)
(Unaudited)
Three Months Ended
June 30,
--------------------
2002 2001
---- ----
Sales $ 128,181 140,115
Cost of sales 107,785 119,205
------- -------
Gross profit 20,396 20,910
Selling, general and administrative expenses 7,898 6,758
Amortization of goodwill -- 765
------ ------
Operating income 12,498 13,387
Other expense (income):
Interest expense 7,209 7,754
Interest income (56) (45)
Other, net 269 (169)
------ ------
Total other expense 7,422 7,540
------ ------
Income before income taxes 5,076 5,847
Income tax expense 617 807
------ ------
Net income $ 4,459 5,040
===== =====
See accompanying notes to condensed consolidated financial statements
5
ACG HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended
June 30
--------------------
2002 2001
---- ----
Cash flows provided (used) by operating activities:
Net income $ 4,459 5,040
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation 5,782 6,694
Amortization of goodwill and other assets 138 1,071
Amortization of deferred financing costs 382 354
Decrease (increase) in working capital and other 4,361 (192)
------- -------
Net cash provided by operating activities 15,122 12,967
Cash flows provided (used) by investing activities:
Purchases of property, plant and equipment (9,210) (10,919)
Proceeds from sales of property, plant and equipment 40 163
Other 98 5
------- -------
Net cash used by investing activities (9,072) (10,751)
Cash flows provided (used) by financing activities:
Repayment of long-term debt, net (8,408) (240)
Repayment of capital lease obligations (1,963) (1,719)
Payment of deferred financing costs (204) (221)
Other, net 4 2
------- -------
Net cash used by financing activities (10,571) (2,178)
Effect of exchange rates on cash and cash equivalents (26) (38)
------- -------
Net change in cash (4,547) --
Cash:
Beginning of period 4,547 --
------- -------
End of period $ -- --
======= =======
Non-cash investing activity:
Equipment purchases under capital leases $ 725 186
======= =======
See accompanying notes to condensed consolidated financial statements.
6
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"), (collectively
the "Company"). Holdings owns 100% of the outstanding voting shares of Graphics.
The two business segments of the commercial printing industry in which the
Company operates are (i) print and (ii) premedia 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 accounting principles generally accepted
in the United States 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, 2002 are not necessarily
indicative of the results that may be expected for the fiscal year ending March
31, 2003. 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,
2002 and the Company's Post-Effective Amendment No. 8 to Registration Statement
No. 33-97090 on Form S-1.
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
2. Inventories
The components of inventories are as follows (in thousands):
June 30, March 31,
2002 2002
-------- ---------
Paper $ 7,522 7,158
Ink 146 169
Supplies and other 1,858 1,810
----- -----
Total inventories $ 9,526 9,137
===== =====
7
ACG HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
3. Comprehensive Income
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" 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 months ended June 30, 2002 and 2001 are as follows (in thousands):
Three Months Ended June 30,
-----------------------------
2002 2001
------- --------
Net income $ 4,459 5,040
Foreign currency translation
adjustment 648 300
Minimum pension liability -- (179)
------ ------
Total comprehensive income $ 5,107 5,161
====== ======
4. Commitments and Contingencies
The Company has employment agreements with one 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. In addition, the Company has consulting agreements with three former
employees. The aggregate commitment for future compensation at June 30, 2002,
excluding bonuses, was approximately $1.3 million.
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, 2002 is $33.1 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 reserve of approximately $0.1 million in
connection with this liability on its condensed consolidated balance sheet at
June 30, 2002. 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 condensed consolidated financial
statements of the Company.
8
ACG HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
5. Restructuring Costs
In January 2002, the Company's Board of Directors approved a restructuring plan
for the print and premedia services segments designed to improve asset
utilization, operating efficiency and profitability. This plan included the
closing of a print facility in Hanover, Pennsylvania and a premedia services
facility in West Palm Beach, Florida, the downsizing of a Buffalo, New York
premedia services facility and the elimination of certain administrative
personnel. This action resulted in the elimination of 189 positions within the
Company.
As a result of this plan, the Company recorded a pretax restructuring charge of
approximately $8.6 million in the fourth quarter of the fiscal year ended March
31, 2002. This charge was classified within restructuring costs and other
special charges in the consolidated statement of income in the fiscal year ended
March 31, 2002. The cost of this restructuring plan was accounted for in
accordance with the guidance set forth in Emerging Issues Task Force Issue 94-3
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (Including Certain Costs Incurred in a Restructuring)"
("EITF 94-3"). The restructuring charge included severance and related
termination benefits, lease termination costs primarily related to future lease
commitments, equipment deinstallation costs directly associated with the
disassembly of certain printing presses and other equipment, and other costs
primarily including legal fees, site clean-up costs and the write-off of certain
press related parts that provide no future use or functionality.
The following table summarizes the activity related to this restructuring plan
for the three months ended June 30, 2002 (in thousands):
03/31/02 Current 06/30/02
Restructuring Quarter Restructuring
Reserve Activity Reserve
------------- -------- ------------
Severance and other employee costs $ 3,519 (1,027) 2,492
Lease termination costs 1,289 (241) 1,048
Other costs 423 (190) 233
------------- -------- ------------
$ 5,231 (1,458) 3,773
============= ======== ============
As of June 30, 2002, the Company believes the restructuring reserve of $3.8
million is adequate. The process of closing two facilities and downsizing one
facility, including equipment deinstallation and relocation of that equipment to
other facilities within the Company, was completed by March 31, 2002. The
majority of all remaining costs will be paid or settled before March 31, 2003.
These costs will be funded through cash generated from operations and borrowings
under the Company's $70 million revolving credit facility.
6. Industry Segment Information
The Company has significant operations principally in two industry segments: (1)
print and (2) premedia services. All of the Company's print business and assets
are attributed to the print division and all of the Company's premedia services
business and assets are attributed to the American Color division. The Company's
digital visual effects operations ("Digiscope") and corporate expenses have been
aggregated 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".
The Company has two reportable segments: (1) print and (2) premedia services.
The print business produces retail advertising inserts, comics (newspaper Sunday
comics, comic insert advertising and comic books), and other publications. The
Company's premedia services business assists customers in the capture,
manipulation, transmission and distribution of images. The majority of the
premedia services work leads to the production of four-color separations in a
format appropriate for use by printers.
9
ACG HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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
expense (income). 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. Certain reclassifications have been made to prior year
balances to conform with the current year presentation.
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.
(In thousands) Premedia Corporate
Print Services and Other Total
- --------------------------------------------------------------------------------
Three Months Ended June 30, 2002
Segment revenues $112,575 14,880 726 128,181
EBITDA $ 16,926 2,516 (1,024) 18,418
Depreciation and amortization 4,723 1,074 123 5,920
Interest expense -- -- 7,209 7,209
Interest income -- -- (56) (56)
Other, net 52 116 101 269
-------- ------- -------- --------
Income (loss) before income taxes $ 12,151 1,326 (8,401) 5,076
Total assets $243,103 19,935 13,965 277,003
Total capital expenditures $ 9,707 228 -- 9,935
- --------------------------------------------------------------------------------
Three Months Ended June 30, 2001
Segment revenues $119,252 19,220 1,643 140,115
EBITDA $ 17,040 4,196 (84) 21,152
Depreciation and amortization 5,378 1,398 989 7,765
Interest expense -- -- 7,754 7,754
Interest income -- -- (45) (45)
Other, net 11 91 (271) (169)
------- ------- -------- --------
Income (loss) before income taxes $ 11,651 2,707 (8,511) 5,847
Total assets $245,173 27,990 16,616 289,779
Total capital expenditures $ 9,898 976 231 11,105
10
ACG HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
7. Impact of Recently Issued Accounting Pronouncements
Goodwill was amortized on a straight-line basis by business segment through the
fiscal year ended March 31, 2002. Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), is effective for
fiscal years beginning after December 15, 2001. In compliance with this
pronouncement, the Company adopted SFAS 142 on April 1, 2002. Application of the
non-amortization provisions of SFAS 142 is expected to result in an increase in
pre-tax income of approximately $2.8 million in the fiscal year ending March 31,
2003. The Company expects to perform the first of the required impairment tests
of goodwill during the fiscal year ending March 31, 2003. The Company does not
anticipate that these tests will have a material effect on its results of
operations or financial position.
11
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:
- failure to achieve improvements in operating efficiency or income from
the consolidation of our operations,
- 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
ACG HOLDINGS, INC.
Management's Discussion
and Analysis of Financial Condition and Results of Operations
The following table, including certain reclassifications in prior year results
to conform with current year presentation, summarizes our results of operations
for the three months ended June 30, 2002 (the "2002 Three-Month Period") and the
three months ended June 30, 2001 (the "2001 Three-Month Period"):
Three Months Ended
June 30,
------------------
2002 2001
---- ----
(Dollars in thousands)
Sales:
Print $ 112,575 119,252
American Color 14,880 19,220
Other (a) 726 1,643
--------- --------
Total $ 128,181 140,115
Gross Profit:
Print $ 17,129 15,354
American Color 3,511 5,148
Other (a) (244) 408
--------- --------
Total $ 20,396 20,910
Gross Margin:
Print 15.2% 12.9%
American Color 23.6% 26.8%
Total 15.9% 14.9%
Operating Income (Loss):
Print $ 12,203 11,662
American Color 1,442 2,798
Other (a) (b) (1,147) (1,073)
--------- --------
Total $ 12,498 13,387
(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.
13
ACG HOLDINGS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Sales. In the 2002 Three-Month Period, print sales decreased $6.7 million to
$112.6 million from $119.3 million in the 2001 Three-Month Period. The decrease
in the 2002 Three-Month Period is primarily attributable to the impact of
decreased paper prices and an increase in customer supplied paper. These
decreases were offset in part by an approximate 6% increase in print production
volume and favorable changes in product and customer mix.
Gross Profit. In the 2002 Three-Month Period, print gross profit increased $1.7
million to $17.1 million from $15.4 million in the 2001 Three-Month Period. In
the 2002 Three-Month Period, print gross margin increased to 15.2% from 12.9% in
the 2001 Three-Month Period. The increase in gross profit is largely related to
the increased print production volume. The increase in gross margin includes the
impact of decreased paper prices and an increase in customer supplied paper.
Selling, General and Administrative Expenses. In the 2002 Three-Month Period,
print selling, general and administrative expenses increased $1.2 million to
$4.9 million, or 4.4% of print sales, from $3.7 million, or 3.1% of print sales
in the 2001 Three-Month Period. The increase in the 2002 Three-Month Period
includes the impact of increases in certain selling and employee related
expenses.
Operating Income. As a result of the factors discussed above, print operating
income increased to $12.2 million in the 2002 Three-Month Period from $11.7
million in the 2001 Three-Month Period.
American Color (Premedia Services)
Sales. In the 2002 Three-Month Period, American Color's sales decreased $4.3
million to $14.9 million from $19.2 million in the 2001 Three-Month Period. The
decrease in the 2002 Three-Month Period was primarily the result of reduced
premedia production volume.
Gross Profit. In the 2002 Three-Month Period, American Color's gross profit
decreased $1.6 million to $3.5 million from $5.1 million in the 2001 Three-Month
Period. In the 2002 Three-Month Period, American Color's gross margin decreased
to 23.6% from 26.8% in the 2001 Three-Month Period. The decreases in gross
profit and gross margin for the 2002 Three-Month Period are primarily the result
of reduced premedia production volume, offset in part by reduced manufacturing
costs related to various cost containment programs.
Selling, General and Administrative Expenses. In the 2002 Three-Month Period,
American Color's selling, general and administrative expenses decreased $0.3
million to $2.1 million, or 13.9% of American Color's sales, from $2.4 million,
or 12.2% of American Color's sales in the 2001 Three-Month Period. The decrease
in the 2002 Three-Month Period is primarily attributable to decreased selling
expenses.
Operating Income. As a result of the factors discussed above, American
Color's operating income decreased to $1.4 million in the 2002 Three-Month
Period from $2.8 million in the 2001 Three-Month Period.
14
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 and corporate general, administrative and other expenses, including
amortization expense. In both the 2002 Three-Month Period and the 2001
Three-Month Period, the operating loss from other operations was $1.1 million.
Included is a reduction in goodwill amortization expense of $0.8 million (see
below), offset by increased operating losses at Digiscope of $0.6 million and
increased corporate expenses.
Goodwill was amortized on a straight-line basis by business segment through the
fiscal year ended March 31, 2002 ("Fiscal Year 2002"). Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS
142"), is effective for fiscal years beginning after December 15, 2001. In
compliance with this pronouncement, we adopted SFAS 142 on April 1, 2002. As a
result, we did not amortize goodwill during the 2002 Three-Month period. In the
2001 Three-Month period, goodwill amortization expense within other operations
was $0.8 million. Application of the non-amortization provisions of SFAS 142 is
expected to result in an increase in pre-tax income of approximately $2.8
million in fiscal year ending March 31, 2003 ("Fiscal Year 2003"). We expect to
perform the first of the required impairment tests of goodwill during Fiscal
Year 2003. We do not anticipate that these tests will have a material effect on
our results of operations or financial position.
Interest Expense
In the 2002 Three-Month Period, interest expense decreased to $7.2 million from
$7.8 million in the 2001 Three-Month Period. This decrease reflects both lower
levels of indebtedness and lower borrowing costs.
Income Taxes
In the 2002 Three-Month Period, income tax expense decreased to $0.6 million
from $0.8 million in the 2001 Three-Month Period. The decrease in the 2002
Three-Month Period is primarily due to lower amounts of U.S. and foreign taxable
income, offset in part by a decreased reduction in the valuation allowance.
Management continues to evaluate the need for a valuation allowance for deferred
tax assets. In the 2002 Three-Month Period there has been no change in
circumstances that would cause a change in judgment with respect to the
realization of deferred tax assets in future years.
Net Income
As a result of the factors discussed above, net income decreased to $4.5 million
in the 2002 Three-Month Period from $5.0 million in the 2001 Three-Month Period.
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, subject to certain customary conditions,
maturing on March 31, 2004, including up to $40 million for letters of
credit, (the "Revolving Credit Facility").
15
ACG HOLDINGS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
At June 30, 2002, we had no borrowings outstanding under the Revolving Credit
Facility and had letters of credit outstanding of approximately $21.0 million.
As a result, we had additional borrowing availability of approximately $49.0
million.
At June 30, 2002, $7.4 million of the A Term Loan Facility and $35.2 million of
the B Term Loan Facility remained outstanding. The scheduled A Term Loan
Facility and B Term Loan Facility payments due over the remainder of Fiscal Year
2003 are $3.2 million and $0.2 million, respectively. Scheduled repayments of
existing capital lease obligations and other senior indebtedness during the
remainder of Fiscal Year 2003 are approximately $6.4 million and $1.5 million,
respectively.
During the 2002 Three-Month Period, we repurchased in the open market, an
aggregate principal amount of $1.7 million of our 12 3/4% Senior Subordinated
Notes Due 2005 (the "Notes") for approximately $1.7 million.
During the 2002 Three-Month Period, we primarily used net cash provided by
operating activities of $15.1 million, the $4.5 million cash balance from March
31, 2002 and $0.1 million of proceeds from the sale of fixed assets to fund the
following expenditures:
(1) $10.5 million in principal repayments of indebtedness and financing
costs (including capital lease obligations of $2.0 million and
repurchase of the Notes of $1.7 million), and
(2) $9.2 million in cash capital expenditures.
Our cash-on-hand of approximately $13.9 million is presented net of outstanding
checks within trade accounts payable at June 30, 2002. Accordingly, cash is
presented at a balance of $0 in the June 30, 2002 balance sheet. We plan to
continue our program of upgrading our print and premedia equipment and currently
anticipate that full year Fiscal Year 2003 cash capital expenditures will be
approximately $28.3 million and equipment acquired under capital leases will be
approximately $0.7 million.
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, 2002, we had total indebtedness, including capital lease
obligations, of $243.2 million, as compared to $259.9 million at June 30, 2001,
representing a net reduction in total indebtedness of $16.7 million. Of the
total debt outstanding at June 30, 2002, $42.6 million (excluding letters of
credit) was outstanding under the Bank Credit Agreement at a weighted-average
interest rate of 4.1%. Indebtedness under the Bank Credit Agreement bears
interest at floating rates. At June 30, 2002, we had indebtedness other than
obligations under the Bank Credit Agreement of $200.6 million (including $170.1
million of 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.
16
ACG HOLDINGS, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
EBITDA
Three Months Ended
June 30,
-------------------------
2002 2001
---- ----
(Dollars in thousands)
EBITDA:
Print $ 16,926 17,040
American Color 2,516 4,196
Other (a) (1,024) (84)
------- -------
Total $ 18,418 21,152
EBITDA Margin:
Print 15.0% 14.3%
American Color 16.9% 21.8%
Total 14.4% 15.1%
(a) Other operations 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 expense (income). "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 Senior Subordinated Notes
Indenture and the Bank Credit Agreement are based on EBITDA, subject to certain
adjustments.
17
ACG HOLDINGS, INC.
Quantitative and Qualitative
Disclosures About Market Risk
There have been no significant changes since March 31, 2002. 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, 2002.
18
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, 2002.
Item 2. Changes in Securities and Use of Proceeds
Recent Sales of Unregistered Securities
---------------------------------------
During the third quarter of the fiscal year ended March 31, 2000
certain officers exercised options to purchase an aggregate of 1,106
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
99.1 CEO and CFO Certification
(b) Reports on Form 8-K
None filed in the quarter ended June 30, 2002.
Form 8-K filed with the Securities Exchange Commission on July 16, 2002
under Item 5 to announce Holdings' financial results for the three
months ended June 30, 2002.
19
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 13, 2002 By /s/ Joseph M. Milano
----------------- ---------------------
Joseph M. Milano
Executive Vice President and
Chief Financial Officer
(Authorized Officer and
Principal Financial Officer)
Date August 13, 2002 By /s/ Patrick W. Kellick
----------------- ----------------------
Patrick W. Kellick
Senior Vice President/Corporate
Controller and Assistant Secretary
(Chief Accounting Officer)
20
EXHIBIT INDEX
Exhibit No. Description Page
- ----------- ----------- ----
12.1 Statement Re: Computation of Ratio of Earnings to 22
Fixed Charges
99.1 CEO and CFO Certification 23
21
EXHIBIT 12.1
STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in thousands)
Three Months
Ended Year Ended Year Ended Year Ended Year Ended Year Ended
June 30, March 31, March 31, March 31, March 31, March 31,
2002 2002 2001 2000 1999 1998
------------- ---------- ----------- ---------- ---------- ----------
Consolidated pretax income (loss) from
continuing operations $ 5,076 (4,351) 19,496 11,659 (7,839) (27,122)
Net amortization of debt issuance expense 382 1,420 1,389 1,326 1,412 2,292
Interest expense 6,827 28,553 31,653 32,637 34,830 36,664
Interest portion of rental expense 431 1,722 1,950 2,015 2,301 2,130
-------- -------- ------- ------- -------- -------
Earnings $12,716 27,344 54,488 47,637 30,704 13,964
======== ======== ======= ======= ======== =======
Interest expense $ 6,827 28,553 31,653 32,637 34,830 36,664
Net amortization of debt issuance expense 382 1,420 1,389 1,326 1,412 2,292
Interest portion of rental expense 431 1,722 1,950 2,015 2,301 2,130
-------- -------- ------- ------- -------- -------
Fixed Charges $ 7,640 31,695 34,992 35,978 38,543 41,086
======== ======== ======= ======= ======== =======
Ratio of Earnings to Fixed Charges 1.66x (a) 1.56x 1.32x (a) (a)
-------- -------- ------- ------- -------- -------
(a) The deficiency of earnings required to cover fixed charges for the fiscal
years ended March 31, 2002, 1999 and 1998 was $4,351, $7,839 and $27,122,
respectively. The deficiency of 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 of 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):
Fiscal Year Ended March 31,
---------------------------
2002 1999 1998
---- ---- ----
Depreciation $ 27,024 29,651 28,124
Amortization 4,175 4,025 10,413
Non-cash charges 4,723 945 2,301
------- ------ ------
Total $ 35,922 34,621 40,838
======= ====== ======
22