<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities
------------------------------------------------------------------------
Exchange Act of 1934
For the quarterly period ended September 30, 2000 or
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
-------------------------------------------------------------------------
Exchange Act of 1934
For the transition period from to
---------------------------------------------
Commission file number 0-24411
-------------------------------
MASTER GRAPHICS, INC.
---------------------
(Debtors-in-possession as of July 7, 2000)
(Exact name of registrant as specified in its charter)
Tennessee 62-1694322
-------------------------------------------------------------
(State or Other Jurisdiction (I. R. S. Employer
of Incorporation or Organization) Identification No.)
70 Timber Creek Drive, Suite 5, Cordova, TN 38018
-----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(901) 685-2020
--------------
(Registrant's telephone number, including area code)
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 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $0.001 Par Value, 7,923,026 shares as of November 14, 2000.
--------------------------------------------------------------------------
<PAGE>
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets, September 30, 2000 and
December 31, 1999.................................................. 3
Condensed Consolidated Statements of Operations for the Three
Months Ended September 30, 2000 and 1999........................... 4
Condensed Consolidated Statements of Operations for the Nine
Months Ended September 30, 2000 and 1999........................... 5
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 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.............................................. 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 18
Item 3. Defaults Upon Senior Securities.................................... 18
Item 6. Exhibits and Reports on Form 8-K................................... 18
Signatures................................................................. 19
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
MASTER GRAPHICS, INC. AND SUBSIDIARY
(DEBTORS-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,663 $ 1,341
Trade accounts receivable, net 43,065 52,334
Inventories:
Raw materials and supplies 3,793 5,097
Work-in-process 8,927 12,047
-------- --------
Total inventories 12,720 17,144
Deferred loan costs, net 5,398 6,317
Other current assets 3,262 1,505
-------- --------
Total current assets 66,108 78,641
Property, plant and equipment, net 65,387 80,130
Goodwill, net 0 25,318
Other 3,119 3,350
-------- --------
Total assets $134,614 $187,439
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
LIABILITIES NOT SUBJECT TO COMPROMISE:
CURRENT LIABILITIES:
Current installments of long-term debt $ 54,627 $ 184,905
Accounts payable 9,025 21,609
Accrued expenses 10,596 15,739
Put warrants 0 2,200
--------- ---------
Total current liabilities 74,248 224,453
Long-term debt, net of current installments 0 22,658
Deferred income taxes 6,816 6,816
Other liabilities 0 973
Redeemable preferred stock 0 1,580
LIABILITIES SUBJECT TO COMPROMISE 189,221 0
Commitments and contingencies
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock ($0.001 par value; 100,000,000
shares authorized; 7,923,026 shares issued and
outstanding at September 30, 2000 and December 31, 1999) 8 8
Additional paid-in capital 39,836 39,933
Accumulated deficit (175,515) (108,982)
--------- ---------
Total shareholders' equity (deficit) (135,671) (69,041)
--------- ---------
Total liabilities and shareholders' equity (deficit) $ 134,614 $ 187,439
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
MASTER GRAPHICS, INC. AND SUBSIDIARY
(DEBTORS-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended September 30,
2000 1999
--------- --------
<S> <C> <C>
Net revenue $ 61,133 $ 68,567
Cost of revenue 50,705 53,416
--------- --------
Gross profit 10,428 15,151
Selling, general and administrative expenses 12,246 14,047
Impairment loss 3,042 0
--------- --------
Operating income (loss) (4,860) 1,104
Other income (expense):
Interest expense (contractual interest of $6,833 for 2000
and $5,750 for 1999) (2,647) (5,750)
Other, net 458 (608)
--------- --------
Loss before reorganization costs and income taxes (7,049) (5,254)
Reorganization costs:
Professional fees 2,346 0
Retention and incentive bonus plan 1,083 0
Adjustment to debt discount 4,227 0
Loss on disposal of operation 66 0
Interest income (73) 0
--------- --------
7,649 0
--------- --------
Loss before income taxes (14,698) (5,254)
Income tax expense 0 1,349
--------- --------
Net loss $ (14,698) $ (6,603)
========= ========
Net loss per share - basic $ (1.86) $ (0.84)
========= ========
Net loss per share - diluted $ (1.86) $ (0.84)
========= ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
MASTER GRAPHICS, INC. AND SUBSIDIARY
(DEBTORS-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
2000 1999
--------- --------
<S> <C> <C>
Net revenue $ 198,537 $190,222
Cost of revenue 163,326 145,575
--------- --------
Gross profit 35,211 44,647
Selling, general and administrative expenses 41,087 37,546
Impairment loss 34,544 0
--------- --------
Operating income (loss) (40,420) 7,101
Other income (expense):
Interest expense (contractual interest of $20,959 for 2000
and $15,777 for 1999) (16,773) (15,777)
Other, net 1,143 (493)
--------- --------
Loss before reorganization costs and income taxes (56,050) (9,169)
Reorganization costs:
Professional fees 5,096 0
Retention and incentive bonus plan 1,083 0
Adjustment to debt discount 4,227 0
Loss on disposal of operation 66 0
Interest income (73) 0
--------- --------
10,399 0
--------- --------
Loss before income taxes (66,449) (9,169)
Income tax benefit 0 0
--------- --------
Net loss $ (66,449) $ (9,169)
========= ========
Net loss per share - basic $ (8.41) $ (1.18)
========= ========
Net loss per share - diluted $ (8.41) $ (1.18)
========= ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
MASTER GRAPHICS, INC. AND SUBSIDIARY
(DEBTORS-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
2000 1999
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(66,449) $(9,169)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Impairment loss 34,544 0
Depreciation and amortization 8,605 9,113
Adjustment to debt discount 4,227 0
Deferred compensation 36 0
Deferred taxes 0 705
Loss on disposal of equipment 0 992
Changes in operating assets and liabilities, net of effect of business acquisitions:
Trade accounts receivable 9,269 (4,203)
Inventories 4,424 (2,764)
Other assets (1,586) (2,116)
Accounts payable (2,191) 122
Accrued reorganization costs 3,137 0
Other accrued expenses 11,877 4,573
--------- --------
Net cash provided by (used in) operating activities 5,893 (2,747)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions, net of cash acquired (225) (59,804)
Purchases of equipment (1,607) (7,627)
Disposals of equipment 117 5,990
--------- --------
Net cash provided by (used in) investing activities (1,715) (61,441)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on lines of credit 487 15,669
Proceeds from issuance of long-term debt 0 43,109
Issuance of common stock to finance acquisitions 0 233
Principal payments on long-term debt (4,243) (4,246)
Loan costs incurred (100) (255)
--------- --------
Net cash provided by (used in) financing activities (3,856) 54,510
--------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 322 (9,678)
CASH AND CASH EQUIVALENTS, beginning of period 1,341 13,525
--------- --------
CASH AND CASH EQUIVALENTS, end of period $ 1,663 $ 3,847
========= ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
<PAGE>
MASTER GRAPHICS, INC. AND SUBSIDIARY
(DEBTORS-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(Unaudited)
(1) Basis of Presentation
The accompanying condensed consolidated financial statements of Master Graphics,
Inc. and its subsidiary, Premier Graphics, Inc., (collectively "Company") are
unaudited and have been prepared in accordance with generally accepted
accounting principles for interim financial information and Article 10 of
Regulation S-X and Statement of Position 90-7, "Financial Reporting by Entities
in Reorganization Under the Bankruptcy Code". Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. These condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements as of and for the year ended December 31, 1999.
In the opinion of the Company, the accompanying condensed consolidated financial
statements contain all adjustments (consisting of normal, recurring adjustments,
except for the write off of goodwill and property, plant and equipment explained
in note 4) necessary to present fairly the financial position, results of
operations, and cash flows of the Company as of the dates and for the periods
presented.
Because of the seasonal nature of the Company's business, the results of
operations for the periods presented are not necessarily indicative of the
results of operations for a full fiscal year.
The accompanying unaudited condensed consolidated financial statements of the
Company include the results of operations of Master Graphics, Inc. and its
subsidiary, on a consolidated basis. All intercompany balances and transactions
have been eliminated in the consolidation.
(2) Liquidity, Proceedings Under Chapter 11 and Going Concern
On July 7, 2000, Master Graphics and its wholly-owned subsidiary, Premier
Graphics, filed voluntary petitions with the United States Bankruptcy Court for
the District of Delaware for reorganization under Chapter 11 of Title 11 of the
United States Bankruptcy Code, and orders for relief have been entered by the
Bankruptcy Court. The Chapter 11 cases were consolidated for the purpose of
joint administration. Master Graphics and Premier Graphics (the "Debtors") are
currently operating their businesses as debtors-in-possession pursuant to the
Bankruptcy Code.
Under the Bankruptcy Code, actions to collect pre-petition indebtedness are
stayed and other contractual obligations against the Debtors may not be
enforced. In addition, under the Bankruptcy Code the Debtors may assume or
reject executory contracts, including lease obligations. Parties affected by
these rejections may file claims with the Bankruptcy Court in accordance with
the reorganization process. Substantially all pre-petition liabilities are
subject to settlement under a plan of reorganization to be voted upon by
creditors and equity holders and approved by the Bankruptcy Court. Although the
Debtors expect to file a reorganization plan or plans that provide for emergence
from bankruptcy in 2001, there can be no assurance that a reorganization plan or
plans will be proposed by the Debtors or confirmed by the Bankruptcy Court, or
that any such plan will be consummated. As provided by the Bankruptcy Code, the
Debtors initially have the exclusive right for 120 days to submit a plan of
reorganization. That statutory exclusivity period expired on November 4, 2000,
but the Debtors have received a bridge order from the Bankruptcy Court extending
exclusivity until November 21, 2000, on which date the Bankruptcy Court will
hear a motion requesting an extension of the exclusivity period through December
21, 2000. If the Debtors fail to file a plan of reorganization during the
exclusivity period or if such plan is not accepted by the required number of
creditors and equity holders, any party in interest may subsequently file its
own plan of reorganization for the Debtors. A plan of reorganization must be
confirmed by the Bankruptcy Court, upon certain findings being made by the
Bankruptcy Court, which are required by the Bankruptcy Code. The Bankruptcy
Court may confirm a plan notwithstanding the non-acceptance of the plan by an
impaired class of creditors or equity security holders if certain requirements
of the Bankruptcy Code are met. A plan of reorganization in all likelihood will
result in holders of Master Graphics' common stock receiving no value for their
shares. Because of this likelihood, the value of Master Graphics' common stock,
if any, is highly speculative. A plan of reorganization could materially change
the amounts currently recorded in the consolidated financial statements.
In November 2000, the Company expects to enter into a $12 million, fully
committed asset-based debtor-in-possession credit facility (the "DIP Facility")
with its prepetition senior secured lenders. The Bankruptcy Court granted
interim approval of the DIP Facility on August 3, 2000 and it is scheduled to
grant final approval on November 21, 2000. The DIP Facility matures upon the
earlier of (1) January 6, 2001, or, if all elements of an Asset Disposition
Program are approved and implemented, January 31, 2001; or (2) the date upon
which a plan of reorganization for the Debtors becomes effective. The DIP
facility will be a non-amortizing revolving credit facility in a principal
amount of up to $12 million, of which (A) up to $4.5 million will be available
to the Company upon closing to
7
<PAGE>
fund weekly cash requirements and (B) the entire $12 million will be available
to the Company immediately following the date on which the Company (i)
acknowledges the secured claim of one of the pre-petition senior secured lenders
in the principal amount of $2.2 million under a warrant put note and (ii) agrees
to the terms on which that warrant put note will be refinanced as part of a plan
of reorganization. Borrowings under the DIP Facility will be limited based on a
borrowing base formula, which considers eligible inventories and eligible
receivables. The DIP Facility will bear interest at a base rate plus 1.5% per
annum (11.0% at November 14, 2000). The Company will be required to pay an
unused commitment fee of 0.5% per annum of the daily average unused portion of
the DIP Facility. The DIP Facility lenders will receive a commitment fee equal
to 1% of the maximum available borrowings. The DIP facility will be secured by
all assets of the Company.
In conjunction with the Company's bankruptcy filing on July 7, 2000, the Company
ceased accruing interest on Senior Notes and seller notes as of that date.
During the third quarter, the Company wrote-off the remaining debt discount
related to the Senior Notes and a seller note.
The condensed consolidated financial statements have been prepared on a going
concern basis of accounting and do not reflect any adjustments that might result
if the Company is unable to continue as a going concern. The Company's recent
losses and the Chapter 11 cases raise substantial doubt about the Company's
ability to continue as a going concern. Company management intends to submit a
plan for reorganization to the Bankruptcy Court. The ability of the Company to
continue as a going concern and the appropriateness of using the going concern
basis is dependent upon, among other things, (i) the Company's ability to obtain
and comply with debtor-in-possession financing agreements, (ii) confirmation of
a plan of reorganization under the Bankruptcy Code, (iii) the Company's ability
to achieve profitable operations after such confirmation, and (iv) the Company's
ability to generate sufficient cash from operations to meet its obligations. The
condensed consolidated financial statements do not include any adjustments
relating to recoverability and classification of recorded asset amounts or the
amount and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
(3) Earnings Per Share
Basic earnings per share are calculated by dividing net loss plus preferred
stock dividend and discount accretion by the weighted average number of common
shares outstanding. For the three months and nine months ended September 30,
2000 and 1999, conversion of the preferred stock and the exercise of employee
stock options, the deferred compensation plan, seller warrants and lender
warrants are not assumed because their effect would be anti-dilutive using the
treasury stock method. A plan of reorganization may result in the issuance of
additional shares of common stock that would significantly dilute currently
outstanding shares.
8
<PAGE>
MASTER GRAPHICS, INC. AND SUBSIDIARY
(DEBTORS-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
Loss
(Numerator) Shares Per-Share
THREE MONTHS ENDED SEPTEMBER 30, 2000 (in thousands) (Denominator) Amount
------------------------------------- -------------- ------------- ----------
<S> <C> <C> <C>
Net loss $(14,698)
Plus: Redeemable preferred stock dividends (29)
Plus: Redeemable preferred stock discount amortization (33)
--------
BASIC LOSS PER SHARE
Loss available to common shareholders $(14,760) 7,923,026 $(1.86)
======== ========= ======
DILUTED LOSS PER SHARE
Loss available to common shareholders $(14,760) 7,923,026 $(1.86)
======== ========= ======
THREE MONTHS ENDED SEPTEMBER 30, 1999
-------------------------------------
Net loss $ (6,603)
Plus: Redeemable preferred stock dividends (29)
Plus: Redeemable preferred stock discount amortization (30)
--------
BASIC LOSS PER SHARE
Loss available to common shareholders $ (6,662) 7,923,026 $(0.84)
======== ========= ======
DILUTED LOSS PER SHARE
Loss available to common shareholders $ (6,662) 7,923,026 $(0.84)
======== ========= ======
NINE MONTHS ENDED SEPTEMBER 30, 2000
------------------------------------
Net loss $(66,449)
Plus: Redeemable preferred stock dividends (85)
Plus: Redeemable preferred stock discount amortization (98)
--------
BASIC LOSS PER SHARE
Loss available to common shareholders $(66,632) 7,923,026 $(8.41)
======== ========= ======
DILUTED EARNINGS PER SHARE
Loss available to common shareholders $(66,632) 7,923,026 $(8.41)
======== ========= ======
NINE MONTHS ENDED SEPTEMBER 30, 1999
------------------------------------
Net loss $ (9,169)
Plus: Redeemable preferred stock dividends (87)
Plus: Redeemable preferred stock discount amortization (90)
--------
BASIC LOSS PER SHARE
Loss available to common shareholders $ (9,346) 7,913,727 $(1.18)
======== ========= ======
DILUTED LOSS PER SHARE
Loss available to common shareholders $ (9,346) 7,913,727 $(1.18)
======== ========= ======
</TABLE>
9
<PAGE>
MASTER GRAPHICS, INC. AND SUBSIDIARY
(DEBTORS-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2000
(Unaudited)
(4) Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", long-lived assets, including goodwill related to those long-
lived assets, are reviewed for impairment whenever events and circumstances
indicate that their carrying value may not be recoverable. Such reviews are
performed using estimated undiscounted cash flows over the remaining lives of
the assets. If these reviews indicate impairment of the asset has occurred, the
amount of the impairment is calculated using industry-accepted market valuation
methods.
The Company evaluates the carrying value of goodwill that is not identified with
impaired assets ("enterprise level goodwill") according to Accounting Principles
Board Opinion No. 17 "Intangible Assets". The Company regularly evaluates
whether events and circumstances warrant revised estimates of useful lives or
recognition of charge-off of carrying amounts of such goodwill. Impairment of
such goodwill is determined using a discounted cash flow method. The discount
rate used in the evaluation is management's expected rate of return or hurdle
rate for investments of similar risk.
During the third quarter, the Company recorded a charge of $3.0 million related
to the impairment of property, plant and equipment. Master Graphics experienced
continuing deterioration in results of operations following the filing of
voluntary petitions with the United States Bankruptcy Court for the District of
Delaware for reorganization under Chapter 11 of Title 11 of the United States
Bankruptcy Code. Management determined it was necessary to perform an analysis
of the recoverability of all long-lived assets of Master Graphics as described
in Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
and Accounting Principles Board Opinion No. 17 "Intangible Assets". Management
concluded from these evaluations that impairment of property, plant and
equipment occurred. An impairment charge was required because discounted
projected cash flows were less than the carrying value of the assets. This is in
addition to a charge of $24.7 million related to the impairment of goodwill and
$6.6 million related to the impairment of property, plant and equipment in the
second quarter.
(5) Liabilities Subject to Compromise
"Liabilities Subject to Compromise" refers to liabilities incurred prior to the
commencement of the Chapter 11 cases that may be settled for an amount less than
face value. These amounts represent the Company's estimate of known or potential
claims to be resolved in connection with the Chapter 11 cases. Those claims
remain subject to future adjustments based on negotiations, actions of the
Bankruptcy Court, further developments with respect to disputed claims, future
rejection of additional executory contracts or unexpired leases, and
determination as to the value of any collateral securing claims or other events.
Payment terms for these amounts will be established in connection with the
Chapter 11 cases. The principal categories of liabilities subject to compromise
under reorganization proceedings are identified below:
September 30,
2000
-------------
Long-term debt $155,956
Accounts payable 10,392
Accrued expenses 17,648
Other liabilities 3,548
Redeemable preferred stock 1,677
--------
$189,221
========
(6) Acquisitions
The following unaudited pro forma financial information presents the combined
results of operations of the Company and the acquired businesses, as if the
acquisitions had occurred at the beginning of the period presented. Effect has
been given to certain adjustments, including amortization of goodwill, adjusted
depreciation expense and increased interest expense on debt related to the
acquisitions. The pro forma financial information does not necessarily reflect
the results of operations that would have occurred had the Company and the
acquired businesses constituted a single entity during such period (in
thousands).
Nine months ended September 30,
1999
----
Net revenue $204,189
Net loss $ (9,671)
========
Basic loss per share $ (1.24)
========
Diluted loss per share $ (1.24)
========
10
<PAGE>
MASTER GRAPHICS, INC. AND SUBSIDIARY
(DEBTORS-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2000
(Unaudited)
(7) Wholly-owned Operating Subsidiary
Master Graphics is a holding company with no operating assets or operations.
Premier Graphics, its operating subsidiary, is the primary obligor for the
Senior Notes and the pre-petition senior secured credit facility with General
Electric Capital Corporation as agent. The Senior Notes are fully and
unconditionally guaranteed by Master Graphics. Following is summarized combined
financial information of Premier Graphics as of December 31, 1999 and September
30, 2000 and for the three months and nine months ended September 30, 2000 and
1999, respectively (in thousands).
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Balance sheet data:
Current assets $ 64,173 $ 78,134
Property, plant and equipment 65,188 79,918
Goodwill, net 0 25,318
Due from Shareholder 89,520 80,245
Other non-current assets 2,499 2,835
--------- --------
Total assets $ 221,380 $266,450
========= ========
Liabilities not subject to compromise:
Current liabilities, including current installments of long-term debt
of $52,427 in 2000 and $183,392 in 1999 $ 67,552 $218,711
Long-term debt, net 0 8,529
Other liabilities 2,024 2,024
--------- --------
Total liabilities not subject to compromise 69,576 229,264
Liabilities subject to compromise 169,255 0
--------- --------
Total liabilities 238,831 229,264
Stockholders' equity (deficit) (17,451) 37,186
--------- --------
Total liabilities and stockholders' equity (deficit) $ 221,380 $266,450
========= ========
Three months ended September 30,
2000 1999
--------- --------
Statement of operations data:
Net revenues $ 61,133 $ 68,567
Gross profit 10,388 15,284
Operating income (loss) (3,940) 2,564
Interest expense 2,758 5,280
Net loss $ (9,901) $ (5,166)
Nine months ended September 30,
2000 1999
--------- --------
Statement of operations data:
Net revenues $ 198,537 $190,222
Gross profit 35,193 44,474
Operating income (loss) (36,469) 8,585
Interest expense 15,650 14,370
Net loss $ (54,639) $ (6,274)
</TABLE>
The following unaudited pro forma financial information presents the combined
results of operations of Premier Graphics and the businesses acquired in 1999 as
if the acquisitions and related financings had occurred as of January 1, 1999,
after giving effects to certain adjustments, including amortization of goodwill,
adjusted depreciation expense and increased interest expense on debt related to
the acquisitions. The unaudited pro forma financial information does not
necessarily reflect the results of operations that would have occurred had
Premier Graphics and the acquired businesses constituted a single entity during
such periods (in thousands).
11
<PAGE>
MASTER GRAPHICS, INC. AND SUBSIDIARY
(DEBTORS-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2000
(Unaudited)
Nine months ended September 30,
1999
-------------------------------
Net revenue $204,189
Operating income 8,850
Depreciation and amortization 9,165
Net loss $ (6,776)
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Quarterly Report on Form 10-Q includes certain forward-looking statements
based upon management's beliefs as well as assumptions made by, and data
currently available to, management. This information has been, or in the future
may be, included in reliance on the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. These statements are subject to a
number of risks and uncertainties including, but not limited to, the following:
the ability of the Company to continue as a going concern; the ability of the
Company to obtain debtor-in-possession financing arrangements; the ability of
the Company to obtain Bankruptcy Court approval of any debtor-in-possession
credit facility; the ability of the Company to operate pursuant to the terms of
any debtor-in-possession credit facility; the ability of the Company to operate
successfully under a Chapter 11 proceeding; approval of plans and activities by
the Bankruptcy Court; risks associated with operating a business in Chapter 11;
the ability of the Company to create and have approved a reorganization plan in
the Chapter 11 cases; adverse developments with respect to the Company's
liquidity or results of operations; the ability of the Company to obtain
shipments and negotiate terms with vendors and service providers for current
orders; the ability to develop, fund and execute an operating plan for the
Company; the ability of the Company to attract and retain key executives and
other employees; the seasonal nature of the Company's business; competitive
pressures from other commercial printers which may affect the nature and
viability of the Company's business strategy; trends in the economy as a whole
which may affect demand for the types of goods sold and services provided by the
Company; the ability of the Company to attract and retain customers; and
potential adverse publicity.
Actual results may differ materially from those anticipated in any such forward-
looking statements. The Company undertakes no obligation to update or revise any
forward-looking statements to reflect subsequent events or circumstances.
Overview
On July 7, 2000, Master Graphics and its wholly-owned subsidiary, Premier
Graphics, filed voluntary petitions with the United States Bankruptcy Court for
the District of Delaware for reorganization under Chapter 11 of Title 11 of the
United States Bankruptcy Code, and orders for relief have been entered by the
Bankruptcy Court. The Chapter 11 cases were consolidated for the purpose of
joint administration. Master Graphics and Premier Graphics (the "Debtors") are
currently operating their businesses as debtors-in-possession pursuant to the
Bankruptcy Code.
Under the Bankruptcy Code, actions to collect pre-petition indebtedness are
stayed and other contractual obligations against the Debtors may not be
enforced. In addition, under the Bankruptcy Code the Debtors may assume or
reject executory contracts, including lease obligations. Parties affected by
these rejections may file claims with the Bankruptcy Court in accordance with
the reorganization process. Substantially all pre-petition liabilities are
subject to settlement under a plan of reorganization to be voted upon by
creditors and equity holders and approved by the Bankruptcy Court.
Although the Debtors expect to file a reorganization plan or plans that provide
for emergence from bankruptcy in 2001, there can be no assurance that a
reorganization plan or plans will be proposed by the Debtors or confirmed by the
Bankruptcy Court, or that any such plan will be consummated. As provided by the
Bankruptcy Code, the Debtors initially have the exclusive right for 120 days to
submit a plan of reorganization. That statutory exclusivity period expired on
November 4, 2000, but the Debtors have received a bridge order from the
Bankruptcy Court extending exclusivity until November 21, 2000, on which date
the Bankruptcy Court will hear a motion requesting an extension of the
exclusivity period through December 21, 2000. If the Debtors fail to file a plan
of reorganization during such period or if such plan is not accepted by the
required number of creditors and equity holders, any party in interest may
subsequently file its own plan of reorganization for the Debtors. A plan of
reorganization must be confirmed by the Bankruptcy Court, upon certain findings
being made by the Bankruptcy Court which are required by the Bankruptcy Code.
The Bankruptcy Court may confirm a plan notwithstanding the non-acceptance of
the plan by an impaired class of creditors or equity security holders if certain
requirements of the Bankruptcy Code are met. A plan of reorganization in all
likelihood will result in holders of Master Graphics' common stock receiving no
value for their shares. Because of this possibility, the value of Master
Graphics' common stock is highly speculative. A plan of reorganization could
materially change the amounts currently recorded in the consolidated financial
statements.
At the first day hearing held on July 10, 2000 before Judge Peter J. Walsh, the
Bankruptcy Court entered first day orders granting authority to the Debtors,
among other things, to pay pre-petition and post-petition employee wages,
salaries, benefits and other employee obligations and to pay vendors and other
providers in the ordinary course for goods and services received from July 7,
2000, and approved an agreement with respect to the right to use cash
collateral. In November, the Company expects to enter into a $12 million, fully
committed super-priority debtor-in-possession credit facility (the "DIP
Facility") with its prepetition lenders. The Bankruptcy Court granted interim
approval of the DIP Facility on August 3, 2000 and is scheduled to grant final
approval on November 21, 2000. The DIP Facility matures upon the earlier of (1)
January 6, 2001, or, if all elements of an Asset Disposition
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<PAGE>
Program are approved and implemented, January 31, 2001; or (2) the date upon
which a plan of reorganization for the Debtors becomes effective. The DIP
facility will be a non-amortizing revolving credit facility in a principal
amount of up to $12 million, of which (A) up to $4.5 million will be available
to the Company upon closing to fund weekly cash requirements and (B) the entire
$12 million will be available to the Company immediately following the date on
which the Company (i) acknowledges the secured claim of one of the pre-petition
senior secured lenders in the principal amount of $2.2 million under a warrant
put note and (ii) agrees to the terms on which that warrant put note will be
refinanced as part of a plan of reorganization. Borrowings under the DIP
Facility will be limited based on a borrowing base formula, which considers
eligible inventories and eligible receivables. The DIP Facility will bear
interest at a base rate plus 1.5% per annum (11.0% at November 14, 2000). The
Company will be required to pay an unused commitment fee of 0.5% per annum as a
percentage of the daily average unused portion of the DIP Facility. The DIP
Facility lenders will receive a commitment fee equal to 1% of the maximum
available borrowings. The DIP facility will be secured by all assets of the
Company.
The Company's condensed consolidated financial statements included with this
Form 10-Q have been prepared on a going concern basis, which contemplates
continuity of operations, realization of assets and liquidation of liabilities
and commitments in the normal course of business. The filing of the voluntary
petitions referred to above, the related circumstances and the losses from
operations raise substantial doubt with respect to the Company's ability to
continue as a going concern. The Company's ability to continue as a going
concern is dependent upon, among other things, the Company's ability to obtain
and comply with debtor-in-possession financing agreements, confirmation of a
plan or plans of reorganization, future profitable operations and the ability to
generate cash from operations and financing sources sufficient to meet
obligations. As a result of the filing of the Chapter 11 cases and related
circumstances, realization of assets and liquidation of liabilities is subject
to significant uncertainty. While under the protection of Chapter 11, the
Debtors may sell or otherwise dispose of assets, and liquidate or settle
liabilities, for amounts other than those reflected in the condensed
consolidated financial statements. Further, a plan or plans of reorganization
could materially change the amounts reported in the condensed consolidated
financial statements. The condensed consolidated financial statements do not
include any adjustments relating to recoverability of the value of recorded
asset amounts or the amounts and classification of liabilities that might be
necessary as a consequence of a plan of reorganization.
At this time, it is not possible to predict the outcome of the Chapter 11 cases
or their effect on the Company's business. If it is determined that the
liabilities subject to compromise in the Chapter 11 cases exceed the fair value
of the assets, unsecured claims may be satisfied at less than 100% of their face
value and the equity interests of the Company's shareholders will have no value.
The Company's liquidity, capital resources, results of operations and ability to
continue as a going concern are subject to known and unknown risks and
uncertainties, including those set forth above under "Safe Harbor Statement
Under the Private Securities Litigation Reform Act of 1995."
Consolidated Results of Operations
The following table sets forth certain unaudited consolidated financial data for
the periods indicated (dollars in millions) and such results as a percentage of
revenue.
<TABLE>
<CAPTION>
Three months ended September 30,
2000 1999
----- -----
<S> <C> <C> <C> <C>
Revenue $ 61.1 100.0% $ 68.6 100.0%
Gross profit 10.4 17.0 15.2 22.2
Selling, general and administrative expenses 12.3 20.1 14.1 20.6
Operating income (loss) (1) (4.9) (8.0) 1.1 1.6
Interest and other expense 2.2 3.6 6.4 9.3
Reorganization costs 7.6 12.4 0.0 0.0
Net loss $(14.7) (24.1%) $(6.6) (9.6%)
</TABLE>
(1) In the three month period ended September 30, 2000, the Company incurred an
impairment loss of approximately $3.0 million. See further discussion in note 4
to the condensed consolidated financial statements.
Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999
Revenue. Revenue decreased 10.9% from $68.6 million for the three months ended
September 30, 1999 to $61.1 million for the three months ended September 30,
2000. This decrease is primarily due to an overall weakening of the general
commercial printing market, customer concerns over the uncertainty of the
Company's financial situation and closure of the Company's Technigrafiks
division in Houston, Texas.
Gross Profit. Gross profit decreased from $15.2 million for the three months
ended September 30, 1999 to $10.4 million for the three months ended September
30, 2000. As a percentage of sales, gross profit decreased from 22.2% for the
three months ended September 30, 1999 to 17.0% for the three months ended
September 30, 2000. The Company believes that an overall weakening of the
general commercial printing market and customer concerns over the uncertainty of
the Company's financial situation has resulted in downward pricing pressure on
the Company. A key component of the gross profit calculation is an interim line
item referred to as "value added," which is defined as sales less the direct
cost of sales (i.e., paper, ink and outside services). Other
14
<PAGE>
manufacturing costs such as labor, utilities, supplies, and repairs are deducted
from value added to arrive at gross profit. Value added for the three months
ended September 30, 1999 was approximately 59% of sales compared to
approximately 57% of sales for the three months ended September 30, 2000. Also
impacting gross profit in the third quarter of 2000 are the reduction in sales
discussed above and an inability to reduce fixed costs accordingly and the lease
expense associated with the Company's Heidelberg press program that began in
late 1999.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased from $14.0 million for three months ended
September 30, 1999 to $12.2 million for the three months ended September 30,
2000. This reduction was primarily due to lower salary costs in the third
quarter of 2000 as well as the elimination of goodwill amortization in the third
quarter of 2000 due to the Company's asset impairment charges.
Impairment loss. As a result of its periodic review of operations for impairment
of assets, management has determined that events that occurred during the three
month period ended September 30, 2000 will permanently affect the Company's
future cash flow expectations. Accordingly, the Company has recorded a loss
related to the impairment of certain long-lived assets totaling $3.0 million.
See note 4 to the condensed consolidated financial statements.
Interest and other expense. Interest and other recurring expenses decreased from
$6.4 million for the three months ended September 30, 1999 to $2.2 million for
the three months ended September 30, 2000. In conjunction with the Company's
bankruptcy filing on July 7, 2000, the Company ceased accruing interest on
Senior Notes and seller notes as of that date.
Reorganization costs. Reorganization costs of $7.6 million are primarily fees
paid and/or accrued for various professional services, amounts accrued or paid
under a retention and incentive bonus plan in connection with the filing of the
Company's Chapter 11 cases and an adjustment to debt discount related to the
Senior Notes and a seller note. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -Overview."
<TABLE>
<CAPTION>
Nine months ended September 30,
2000 1999
----- -----
<S> <C> <C> <C> <C>
Revenue $198.5 100.0% $190.2 100.0%
Gross profit 35.2 17.7 44.6 23.4
Selling, general and administrative expenses 41.1 20.7 37.5 19.7
Operating income (loss) (1) (40.4) (20.4) 7.1 3.7
Interest and other expense 15.6 7.9 16.3 8.6
Reorganization costs 10.4 5.2 0.0 0.0
Net loss $(66.4) (33.5%) $(9.2) (4.8%)
</TABLE>
(1) In the nine month period ended September 30, 2000, the Company incurred an
impairment loss of approximately $34.5 million. See further discussion in note 4
to the condensed consolidated financial statements.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999
Revenue. Revenue increased 4.4% from $190.2 million for the nine months ended
September 30, 1999 to $198.5 million for the nine months ended September 30,
2000. This growth was primarily due to the Company's five acquisitions during
the first half of 1999. On a same store basis, revenues decreased 2.8% for the
nine months ended September 30, 2000 compared to the nine months ended September
30, 1999. This decrease is primarily due to an overall weakening of the general
commercial printing market, customer concerns over the uncertainty of the
Company's financial situation and closure of the Company's Technigrafiks
division in Houston, Texas.
Gross profit. Gross profit decreased from $44.6 million for the nine months
ended September 30, 1999 to $35.2 million for the nine months ended September
30, 2000. Gross profit as a percentage of sales decreased to 17.7% for the nine
months ended September 30, 2000 from 23.4% in the corresponding period of the
prior year. A key component of the gross profit calculation is an interim line
item referred to as "value added," which is defined as sales less the direct
cost of sales (i.e., paper, ink and outside services). Other manufacturing costs
such as labor, utilities, supplies, and repairs are deducted from value added to
arrive at gross profit. Value added for the nine months ended September 30, 1999
was approximately 61% of sales compared to approximately 57% of sales for the
nine months ended September 30, 2000. Also impacting gross profit in the year
2000 is the lease expense associated with the Company's Heidelberg press
program that began in late 1999.
15
<PAGE>
Selling, general and administrative expenses. Selling, general and
administrative expenses increased from $37.5 million for the nine months ended
September 30, 1999 to $41.1 million for the nine months ended September 30,
2000. This increase was primarily due to the Company's five acquisitions during
the first half of 1999.
Impairment loss. As a result of its periodic review of operations for impairment
of assets, management has determined that events that occurred during the nine
month period ended September 30, 2000 will permanently affect the Company's
future cash flow expectations. Accordingly, the Company has recorded a loss
related to the impairment of certain long-lived assets totaling $34.5 million.
See note 4 to the condensed consolidated financial statements.
Interest and other expense. Interest and other expense decreased from $16.3
million for the nine months ended September 30, 1999 to $15.6 million for the
nine months ended September 30, 2000. The Company's senior secured debt facility
has a variable rate component which has risen along with interest rates in
general. On April 3, 2000, the Company's senior secured lenders instituted the
default rate provisions of the credit facility, which increased interest rates
an additional 200 basis points (2%). On April 19, 2000, the senior lending group
notified the Company of their intent to retroactively apply the default interest
rate provisions of the credit facility from May 15, 1999. This retroactive
application was accrued into the Company's first quarter 2000 financial results.
In conjunction with the Company's bankruptcy filing on July 7, 2000, the Company
ceased accruing interest on Senior Notes and seller notes as of that date.
Reorganization costs. Reorganization costs of $10.4 million are primarily fees
paid and/or accrued for professional services, amounts accrued or paid under a
retention and incentive bonus plan in connection with the filing of the
Company's Chapter 11 cases and an adjustment to debt discount related to the
Senior Notes and a seller note. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Overview."
Liquidity and Capital Resources
The Company's primary cash requirements have been for debt service, capital
expenditures, acquisitions and working capital. Historically, the Company has
financed its operations and equipment purchases with cash flow from operations,
capital leases and secured loans through commercial banks or other institutional
lenders, credit lines from commercial banks and the Senior Notes. The Company
has financed its acquisitions primarily with funds under credit facilities as
well as subordinated notes payable to a number of former owners of the acquired
companies.
The Company's largest source of capital for acquisitions has been debt financing
including the $130 million of 11.5% Senior Notes due 2005 as well as the senior
credit facility which originally closed in September 1997 and which has been
revised from time to time, most recently being revised in March 1999.
On July 7, 2000, Master Graphics and Premier Graphics filed the Chapter 11
cases, which will affect the Company's liquidity and capital resources. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Overview."
The Company expects to enter into a $12 million, fully committed super-priority
debtor-in-possession credit facility (the "DIP Facility") with its prepetition
senior secured lenders. The Bankruptcy Court granted interim approval of the DIP
Facility on August 3, 2000 and the Company expects final approval to be granted
on November 21, 2000. The DIP Facility matures upon the earlier of (1) January
6, 2001, or, if all elements of an Asset Disposition Program are approved and
implemented, January 31, 2001; or (2) the date upon which a plan of
reorganization for the Debtors becomes effective. The DIP facility will be a
non-amortizing revolving credit facility in a principal amount of up to $12
million, of which (A) up to $4.5 million will be available to the Company upon
closing to fund weekly cash requirements and (B) the entire $12 million will be
available to the Company immediately following the date on which the Company (i)
acknowledges the secured claim of one of the pre-petition senior secured lenders
in the principal amount of $2.2 million under a warrant put note and (ii) agrees
to the terms on which that warrant put note will be refinanced as part of a plan
of reorganization. Borrowings under the DIP Facility will be limited based on a
borrowing base formula, which considers eligible inventories and eligible
receivables. The DIP Facility will bear interest at a base rate plus 1.5% per
annum (11.0% at November 14, 2000). The Company will be required to pay an
unused commitment fee of 0.5% per annum of the daily average unused portion of
the DIP Facility. The DIP Facility lenders will receive a commitment fee equal
to 1% of the maximum available borrowings. The DIP facility will be secured by
all assets of the Company.
Year-2000 Readiness Program
The Company has had no disruption to its operations to date as a result of any
year 2000 (Y2K) issue. The Y2K issues are the result of computer programs being
written using two digits rather than four to define the applicable year. As a
result, computer programs that have time-sensitive software are at risk to
recognize a date using "00" as the year 1900 rather than the year 2000. A
company-wide program was completed to ensure its systems were Y2K compliant
during 1999.
Despite assurances from outside parties of their timely readiness, we cannot
ensure that our suppliers, vendors and customers have resolved all Y2K issues.
Given the responses from suppliers and our experience thus far in 2000,
management believes it is highly unlikely that a large number of outside parties
will experience any significant problems due to unresolved Y2K issues. In the
event
16
<PAGE>
that a large number of customers suffer Y2K compliance issues over a
prolonged period, the impact on the Company would be material.
Impact of Recently Issued Accounting Standards
Recently issued accounting standards, which have not yet been adopted, are not
expected to have a material impact on the Company's consolidated financial
statements. Statement of Financial Accounting Standards (SFAS) 133, "Accounting
for Derivative Financial Instruments," as amended by SFAS 137, which will be
effective January 1, 2001, is not expected to have a material impact on our
financial statements because SFAS 133 deals with derivative financial
instruments, which presently are not instruments that the Company is involved
with. The Company is evaluating its revenue recognition policies in light of the
Securities and Exchange Commission's Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements."
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk at September 30, 2000 was generally limited to interest rate risk
related to indebtedness under our senior secured credit facility, which bears
interest based on the Base Rate plus 0.5% for the Revolver and LIBOR plus margin
bases ranging from 3.5% for the Term Loan A traunche to 4.0% for the Term Loan B
traunche. The Company does not currently deal in any derivative instruments nor
is the Company exposed to any currency translation fluctuations. The Company
does not have any commodity derivative instruments because paper price
fluctuations are passed through to our customers using product pricing.
17
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On July 7, 2000, Master Graphics, Inc. and its wholly-owned subsidiary, Premier
Graphics, Inc., filed voluntary petitions with the United States Bankruptcy
Court for the District of Delaware for reorganization under Chapter 11 of Title
11 of the United States Bankruptcy Code. Those Chapter 11 cases were
consolidated for the purpose of joint administration. At this time, it is not
possible to predict the outcome of the Chapter 11 cases or their effect on the
Company's business. If it is determined that the liabilities subject to
compromise in the Chapter 11 cases exceed the fair value of the assets,
unsecured claims may be satisfied at less than 100% of their face value and the
equity interests of the Company's shareholders will have no value.
Item 3. Defaults Upon Senior Securities
Master Graphics, Inc. and its wholly-owned subsidiary, Premier Graphics, Inc.,
commenced the Chapter 11 cases on July 7, 2000. As a result of filing the
Chapter 11 cases, no principal or interest payments will be made on certain
indebtedness incurred prior to July 7, 2000, including the 11.5% Senior Notes
due 2005, until a plan of reorganization defining the payment terms has been
approved by the Bankruptcy Court.
Item 6. Exhibits and Reports on Form 8-K
(A) EXHIBITS
3.1* Charter of Master Graphics, Inc. (Exhibit 3.1)
3.3* Bylaws of Master Graphics, Inc. (Exhibit 3.3)
27.1 Financial Data Schedule (for SEC use only)
* Incorporated by reference to Master Graphics' Registration Statement on Form
S-1 (Registration No. 333- 49861). The parenthetical exhibit number indicates
where the exhibit is found in that filing.
(B) REPORTS ON FORM 8-K
None
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Master
Graphics, Inc. has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MASTER GRAPHICS, INC.
By: /s/ Michael B. Bemis
-----------------------------
Michael B. Bemis
Chief Executive Officer
Date: November 14, 2000
By: /s/ P. Melvin Henson, Jr.
-----------------------------
P. Melvin Henson, Jr.
Sr. Vice President - Finance and Administration
Chief Accounting Officer
Date: November 14, 2000
19
