UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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 December 31, 2003 | ||
| 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.
| Delaware (State or other jurisdiction of incorporation or organization) |
62-1395968 (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)
AMERICAN COLOR GRAPHICS, INC.
| New York (State or other jurisdiction of incorporation or organization) |
16-1003976 (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 period 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2) of the Exchange Act.
Yes [ ] No [X]
ACG Holdings, Inc. has 160,067 shares outstanding of its Common Stock, $.01 Par Value, as of January 31, 2004 (all of which are privately owned and not traded on a public market).
INDEX
| Page No. | ||||||||
| Part I. | Financial Information | |||||||
| Item 1. | Financial Statements | |||||||
| Condensed Consolidated Balance Sheets as of December 31, 2003 and March 31, 2003 |
3 | |||||||
| Condensed Consolidated Statements of Operations for the Three Months Ended December 31, 2003 and 2002 |
5 | |||||||
| Condensed Consolidated Statements of Operations for the Nine Months Ended December 31, 2003 and 2002 |
6 | |||||||
| Condensed Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2003 and 2002 |
7 | |||||||
| Notes to Condensed Consolidated Financial Statements | 8 | |||||||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 18 | ||||||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 30 | ||||||
| Item 4. | Controls and Procedures | 30 | ||||||
| Part II. | Other Information | |||||||
| Item 1. | Legal Proceedings | 31 | ||||||
| Item 2. | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities | 31 | ||||||
| Item 6. | Exhibits and Reports on Form 8-K | 31 | ||||||
| Signatures | 32 | |||||||
| Exhibit Index | 33 | |||||||
2
ACG HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(In thousands)
| December 31, 2003 | March 31, 2003 | ||||||||||
| (Unaudited) | |||||||||||
Assets |
|||||||||||
Current assets: |
|||||||||||
Cash |
$ | — | — | ||||||||
Receivables: |
|||||||||||
Trade accounts, less allowance for
doubtful accounts of $2,933 and $2,544
at December 31, 2003 and March 31,
2003, respectively |
49,407 | 49,402 | |||||||||
Income tax receivable |
38 | 233 | |||||||||
Other |
3,485 | 2,227 | |||||||||
Total receivables |
52,930 | 51,862 | |||||||||
Inventories |
9,030 | 10,203 | |||||||||
Deferred income taxes |
2,442 | 6,246 | |||||||||
Prepaid expenses and other current assets |
4,358 | 4,296 | |||||||||
Current assets of discontinued operations |
— | 866 | |||||||||
Total current assets |
68,760 | 73,473 | |||||||||
Property, plant and equipment |
311,108 | 310,180 | |||||||||
Less accumulated depreciation |
(187,114 | ) | (183,167 | ) | |||||||
Net property, plant and equipment |
123,994 | 127,013 | |||||||||
Excess of cost over net assets acquired |
66,548 | 66,548 | |||||||||
Deferred financing costs |
12,527 | 3,335 | |||||||||
Other assets |
7,597 | 7,790 | |||||||||
Long-term assets of discontinued operations |
— | 282 | |||||||||
Total assets |
$ | 279,426 | 278,441 | ||||||||
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)
| December 31, 2003 | March 31, 2003 | |||||||||
| (Unaudited) | ||||||||||
Liabilities and Stockholders’ Deficit |
||||||||||
Current liabilities: |
||||||||||
Current installments of long-term debt and
capitalized leases |
$ | 5,348 | 31,698 | |||||||
Trade accounts payable |
36,626 | 39,044 | ||||||||
Accrued expenses |
29,449 | 32,302 | ||||||||
Current liabilities of discontinued operations |
— | 249 | ||||||||
Total current liabilities |
71,423 | 103,293 | ||||||||
Long-term debt and capitalized leases,
excluding current installments |
302,371 | 200,059 | ||||||||
Deferred income taxes |
8,873 | 2,023 | ||||||||
Other liabilities |
76,421 | 80,765 | ||||||||
Total liabilities |
459,088 | 386,140 | ||||||||
| |
||||||||||
Commitments and contingencies (Note 7) |
||||||||||
| |
||||||||||
Stockholders’ deficit: |
||||||||||
Common stock, voting, $.01 par value, 5,852,223
shares authorized, 165,054 and 163,929 shares issued and
outstanding at December 31, 2003 and March 31, 2003, respectively |
2 | 2 | ||||||||
Preferred stock, $.01 par value, 15,823 shares
authorized, none issued and outstanding as of
December 31, 2003, as of March 31, 2003, 3,617
shares Series AA convertible preferred stock
issued and outstanding, $39,442,500 liquidation
preference, and 1,606 shares Series BB
convertible preferred stock issued and
outstanding, $17,500,000 liquidation preference |
— | — | ||||||||
Additional paid-in capital |
2,045 | 58,816 | ||||||||
Accumulated deficit |
(157,227 | ) | (140,655 | ) | ||||||
Other accumulated comprehensive loss, net of tax |
(24,482 | ) | (25,862 | ) | ||||||
Total stockholders’ deficit |
(179,662 | ) | (107,699 | ) | ||||||
Total liabilities and stockholders’ deficit |
$ | 279,426 | 278,441 | |||||||
See accompanying notes to condensed consolidated financial statements.
4
ACG HOLDINGS, INC.
Condensed Consolidated Statements of Operations
(In thousands)
(Unaudited)
| Three Months Ended | |||||||||||
| December 31, | |||||||||||
| 2003 | 2002 | ||||||||||
Sales |
$ | 128,569 | 141,913 | ||||||||
Cost of sales |
111,339 | 122,390 | |||||||||
Gross profit |
17,230 | 19,523 | |||||||||
Selling, general and administrative expenses |
7,519 | 9,460 | |||||||||
Operating income |
9,711 | 10,063 | |||||||||
Other expense (income): |
|||||||||||
Interest expense |
8,412 | 7,149 | |||||||||
Interest income |
(1 | ) | (6 | ) | |||||||
Other, net |
83 | 38 | |||||||||
Total other expense |
8,494 | 7,181 | |||||||||
Income from continuing operations before
income taxes |
1,217 | 2,882 | |||||||||
Income tax expense (benefit): |
|||||||||||
Current |
406 | 532 | |||||||||
Deferred |
(2,196 | ) | (114 | ) | |||||||
Total income tax expense (benefit) |
(1,790 | ) | 418 | ||||||||
Income from continuing operations |
3,007 | 2,464 | |||||||||
Discontinued operations: |
|||||||||||
Loss from operations, net of $0 tax |
— | 243 | |||||||||
Net income |
$ | 3,007 | 2,221 | ||||||||
See accompanying notes to condensed consolidated financial statements.
5
ACG HOLDINGS, INC.
Condensed Consolidated Statements of Operations
(In thousands)
(Unaudited)
| Nine Months Ended | |||||||||||
| December 31, | |||||||||||
| 2003 | 2002 | ||||||||||
Sales |
$ | 365,536 | 399,444 | ||||||||
Cost of sales |
314,931 | 341,193 | |||||||||
Gross profit |
50,605 | 58,251 | |||||||||
Selling, general and administrative expenses |
23,842 | 26,480 | |||||||||
Restructuring costs |
2,000 | — | |||||||||
Operating income |
24,763 | 31,771 | |||||||||
Other expense (income): |
|||||||||||
Interest expense |
25,713 | 21,454 | |||||||||
Interest income |
(8 | ) | (83 | ) | |||||||
Loss on early extinguishment of debt |
3,196 | — | |||||||||
Other, net |
294 | 520 | |||||||||
Total other expense |
29,195 | 21,891 | |||||||||
Income (loss) from continuing operations
before income taxes |
(4,432 | ) | 9,880 | ||||||||
Income tax expense: |
|||||||||||
Current |
1,030 | 1,258 | |||||||||
Deferred |
10,654 | 75 | |||||||||
Total income tax expense |
11,684 | 1,333 | |||||||||
Income (loss) from continuing operations |
(16,116 | ) | 8,547 | ||||||||
Discontinued operations: |
|||||||||||
Loss from operations, net of $0 tax |
12 | 745 | |||||||||
Loss on sale, net of $0 tax |
444 | — | |||||||||
Net income (loss) |
$ | (16,572 | ) | 7,802 | |||||||
See accompanying notes to condensed consolidated financial statements.
6
ACG HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
| Nine Months Ended | ||||||||||||
| December 31, | ||||||||||||
| 2003 | 2002 | |||||||||||
Cash flows provided (used) by operating activities: |
||||||||||||
Net income (loss) |
$ | (16,572 | ) | 7,802 | ||||||||
Adjustments to reconcile net income (loss) to net cash provided by
operating activities: |
||||||||||||
Depreciation |
17,708 | 17,354 | ||||||||||
Depreciation related to discontinued operations |
26 | 308 | ||||||||||
Amortization of other assets |
497 | 411 | ||||||||||
Amortization of deferred financing costs |
1,591 | 1,175 | ||||||||||
Write-off of deferred financing costs |
3,196 | — | ||||||||||
Deferred income tax expense |
10,654 | 75 | ||||||||||
Discontinued operations, net of tax |
430 | 437 | ||||||||||
Decrease (increase) in working capital and other |
(9,360 | ) | 351 | |||||||||
Net cash provided by operating activities |
8,170 | 27,913 | ||||||||||
Cash flows provided (used) by investing activities: |
||||||||||||
Purchases of property, plant and equipment |
(10,501 | ) | (24,944 | ) | ||||||||
Proceeds from sales of property, plant and equipment |
24 | 259 | ||||||||||
Other |
260 | (18 | ) | |||||||||
Net cash used by investing activities |
(10,217 | ) | (24,703 | ) | ||||||||
Cash flows provided (used) by financing activities: |
||||||||||||
Repayment of long-term debt, net |
(39,185 | ) | (9,428 | ) | ||||||||
Net increase in revolver borrowings |
7,164 | 10,731 | ||||||||||
Repayment
of 12 ¾% senior subordinated notes |
(170,055 | ) | (1,700 | ) | ||||||||
Proceeds from issuance of 10% senior second secured notes |
280,000 | — | ||||||||||
Repayment of capital lease obligations |
(4,832 | ) | (6,799 | ) | ||||||||
Repayment of capital lease obligations – discontinued operations |
— | (100 | ) | |||||||||
Payment of deferred financing costs |
(13,979 | ) | (458 | ) | ||||||||
Repurchase and retire preferred stock and cancel preferred stock options |
(56,942 | ) | — | |||||||||
Other, net |
— | (3 | ) | |||||||||
Net cash provided (used) by financing activities |
2,171 | (7,757 | ) | |||||||||
Effect of exchange rates on cash |
(124 | ) | — | |||||||||
Net change in cash |
— | (4,547 | ) | |||||||||
Cash: |
||||||||||||
Beginning of period |
— | 4,547 | ||||||||||
End of period |
$ | — | — | |||||||||
Non-cash investing activity: |
||||||||||||
Equipment purchases under capital leases |
$ | 2,870 | 725 | |||||||||
See accompanying notes to condensed consolidated financial statements.
7
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.
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and are in accordance with the 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 and nine-month periods ended December 31, 2003 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2004. 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, 2003, as reclassified in the Company’s current report on Form 8-K dated November 6, 2003, as filed with the Securities and Exchange Commission.
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. Certain prior period information has been reclassified to conform to current period presentation.
2. Discontinued Operations
In June 2003, the Company sold its digital visual effects business, (“Digiscope”), for a de minimis amount, which resulted in a net loss of approximately $0.4 million, which is net of zero income tax benefits. The sale of Digiscope has been accounted for as a discontinued operation, and accordingly, Digiscope’s operations are segregated and reported within discontinued operations in the accompanying condensed consolidated financial statements. Sales, cost of sales, selling, general and administrative expenses and other expenses attributable to Digiscope for the three and nine months ended December 31, 2002 have been reclassified and presented within discontinued operations.
3. Inventories
The components of inventories are as follows (in thousands):
| December 31, | March 31, | ||||||||
| 2003 | 2003 | ||||||||
Paper |
$ | 6,919 | 7,973 | ||||||
Ink |
187 | 164 | |||||||
Supplies and other |
1,924 | 2,066 | |||||||
Total inventories |
$ | 9,030 | 10,203 | ||||||
8
ACG HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
4. July 3, 2003 Refinancing Transactions
On July 3, 2003, the Company sold $280 million aggregate principal amount of its 10% Senior Second Secured Notes Due 2010 (the “10% Notes”) as part of a recapitalization involving Graphics, Holdings and certain affiliates of the Company and also entered into a $70 million senior secured revolving credit facility maturing on July 3, 2008, with a syndicate of lenders (the “Revolving Credit Facility”), (collectively the “2003 Refinancing”). Graphics repaid substantially all existing indebtedness (excluding capital leases) through:
| • | the repayment of all amounts outstanding under the old bank credit agreement, and the concurrent termination of all related commitments thereunder; | ||
| • | the issuance of letters of credit under the Revolving Credit Facility to replace outstanding letters of credit; and | ||
| • | effective August 3, 2003, the redemption of all of the 12 ¾% Senior Subordinated Notes Due 2005 (the “12 ¾% Notes”), at a redemption price equal to 100% of their aggregate principal amount, plus accrued and unpaid interest thereon. |
In addition, the Company repurchased, and concurrently retired, all 5,223 outstanding shares of preferred stock of Holdings, and canceled all outstanding options to purchase shares of preferred stock of Holdings held by certain key officers, for an aggregate purchase price of $56.9 million. The canceled options would have been exercisable for 582 shares of preferred stock of Holdings.
In connection with the 2003 Refinancing, the Company incurred $13.6 million of deferred financing fees through December 31, 2003. Of the total deferred financing fees, $4.9 million was paid to affiliates of Morgan Stanley for the services they performed in conjunction with the Revolving Credit Facility and the original private placement of the 10% Notes. The Company also incurred a charge of approximately $3.2 million in the nine months ended December 31, 2003 related to the write-off of deferred financing costs associated with the old bank credit agreement and the 12 ¾% Notes. In addition, the Company recorded incremental interest expense of approximately $1.7 million in the nine months ended December 31, 2003 as a result of the 30 day call provision related to the 12 ¾% Notes.
The Revolving Credit Facility provides for maximum borrowings of $70 million, including a letter of credit sub-facility of up to $40 million. Borrowings under this facility, as amended, are subject to a borrowing base limitation based on certain percentages of eligible accounts receivable, eligible inventory and the appraised value of eligible machinery and equipment and real estate, subject to certain limitations. The borrowing base arrangement includes a provision whereby proceeds from collection of substantially all of the Company’s accounts receivable are deposited into bank accounts which are applied daily toward repayment of borrowings outstanding, if any, under the Revolving Credit Facility. At December 31, 2003, the Company had additional borrowing availability under the Revolving Credit Facility of $31.7 million.
The Revolving Credit Facility is secured by substantially all of the assets of Graphics. Holdings has guaranteed Graphics’ indebtedness under the Revolving Credit Facility, which guarantee is secured by a pledge of all of Graphics’ and Graphics’ subsidiaries’ stock.
Amounts outstanding under the Revolving Credit