SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended May 2, 1998
Commission file number 1-683
Multigraphics, Inc.
(Exact name of registrant as specified in its charter)
Delaware 34-0054940
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
431 Lakeview Court Mt. Prospect, IL 60056
(Address of principal executive offices) (Zip Code)
(847) 375-1700
(Registrant's telephone number, including area code)
AM International, Inc.
(Former Name)
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 has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court.
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.
2,826,957 shares of Registrant's
Common Stock, $.025 par value, were outstanding as of May 29, 1998.
<PAGE>
MULTIGRAPHICS, INC.
INDEX
Page
PART I - Financial Information
Item 1 - Condensed Consolidated Statement of
Operations for the Nine Months Ended May 2, 1998
and May 3, 1997 (unaudited). 1
Condensed Consolidated Balance Sheet
as of May 2, 1998 (unaudited) and
July 31, 1997. 2
Condensed Consolidated Statement of
Cash Flows for the Nine Months Ended
May 2, 1998 and May 3, 1997
(unaudited). 3
Notes to Condensed Consolidated Financial
Statements (unaudited). 4 - 9
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations. 10 - 14
Part II Other Information
Item 6 - Exhibits 15
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
MULTIGRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
May 2, May 3, May 2, May 3,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenues
Machines and Supplies $16,806 $10,006 $39,932 $35,714
Services 10,625 10,863 30,398 33,621
Total Revenues 27,431 20,869 70,330 69,335
Cost of sales
Machines and Supplies 12,916 8,193 31,065 29,475
Services 7,350 6,399 21,191 20,779
Total Cost of Sales 20,266 14,592 52,256 50,254
Gross Margin 7,165 6,277 18,074 19,081
Selling, general and administrative 5,830 5,744 15,652 20,274
Unusual items, net - - - (2,095)
Operating income (loss) 1,335 533 2,422 902
Non-operating income (expense):
Interest income 32 367 193 1,094
Interest expense (453) (632) (1,175) (2,186)
Other, net (18) - (24) 120
Income (loss) before income taxes 896 268 1,416 (70)
Income tax (expense) benefit (341) - (538) -
Net income (loss) $ 555 $ 268 $ 878 $ (70)
Net income (loss) per common share
Basic: $ 0.20 $ 0.10 $ 0.31 $ (0.02)
Diluted: $ 0.19 $ 0.10 $ 0.31 $ (0.02)
(a)Weighted average shares of common
stock and common stock equivalents
outstanding (in thousands)
Basic: 2,818 2,805 2,816 2,804
Diluted: 2,919 2,805 2,879 2,804
<FN>
(a)The weighted average number of common shares outstanding and net income per
common share have been restated to reflect the effect of the 1 for 2 1/2
share reverse stock split which was effected by the Company's shareholders
on May 28, 1997.
The Notes to Consolidated Financial Statements are an integral part of these
financial statements.
</TABLE>
<PAGE>
<TABLE>
MULTIGRAPHICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in thousands, except per share amounts)
(Unaudited)
May 2,1998 July 31,1997
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,666 $10,376
Accounts receivable, net 12,287 10,746
Inventories, net 12,522 11,893
Prepaid expenses and other assets 687 744
Total current assets 28,162 33,759
Property, plant and equipment, net 9,580 10,222
Goodwill 2,756 -
Other assets, net 1,040 919
Total assets $41,538 $44,900
Liabilities and Shareholders' Equity
Current liabilities:
Short-term borrowings and current
maturities of long-term debt $ 8,526 $ 5,773
Accounts payable 6,029 5,217
Service contract deferred income 9,834 11,738
Payroll related expenses 5,240 6,803
Other 8,412 10,152
Total current liabilities 38,041 39,683
Long-term debt 1,278 3,352
Post-retirement benefit obligations 10,893 11,966
Other long-term liabilities 1,810 1,799
Total liabilities 52,022 56,800
Shareholders' Equity
Common stock, $.025 par value; 9.5 million
shares authorized;
2,826,957 issued as of May 2, 1998 and
2,815,337 issued as of July 31, 1997 70 70
Capital in excess of par value 22,700 22,162
Accumulated earnings (deficit) (33,254) (34,132)
Total shareholders' equity (10,484) (11,900)
Total liabilities and shareholders' equity $41,538 $44,900
<FN>
The Notes to Consolidated Financial Statements are an integral part of
these financial statements.
</TABLE>
<PAGE>
<TABLE>
MULTIGRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands, except per share amounts)
(Unaudited)
Nine Months Ended
May 2, May 3,
1998 1997
<S> <C> <C>
Cash Flows from Operating Activities:
Net income/ (loss) $ 878 $ (70)
Adjustments to reconcile net income to
cash flow from operating activities:
Depreciation of property, plant and
equipment 1,377 1,401
Amortization of Goodwill 30 -
Benefit from operating loss carryforwards 538 -
Change in assets and liabilities:
Accounts receivable, net 1,868 11,296
Inventory,net 2,136 (1,156)
Prepaid expenses and other assets 48 908
Accounts payable (2,492) (10,700)
Other current liabilities (5,866) (15,103)
Other, net (973) (827)
Cash flow from operating activities (2,456) (14,251)
Cash Flows from Investing Activities:
Acquisition activities (5,612) -
Capital expenditures (321) (1,579)
Net proceeds from divested operations - 50,638
Proceeds from disposition of PP&E - 140
Cash flow from Investing Activities (5,933) 49,199
Cash Flows from Financing Activities:
Net borrowings (payments) under
revolving credit facilities 4,367 (5,430)
Payments of Bankruptcy Claims (3,161) (3,149)
Payments under capital lease arrangements (527) (1,041)
Cash flow from financing activities 679 (9,620)
Increase (decrease)in cash and cash equivalents (7,710) 25,328
Cash and cash equivalents at beginning of period 10,376 2,560
Cash and cash equivalents at end of period $ 2,666 $27,888
<FN>
The Notes to Consolidated Financial Statements are an integral
part of these financial statements.
</TABLE>
<PAGE>
MULTIGRAPHICS, INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
Note 1 - Basis of Presentation
The Condensed Consolidated Financial Statements included herein have
been prepared by the Company, without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. In the
opinion of management, the Condensed Consolidated Financial
Statements reflect all adjustments, which are of a recurring nature,
necessary for fair presentation. Certain prior year amounts have
been reclassified to conform with the current year presentation. The
accompanying Condensed Consolidated Financial Statements and the
related notes should be read in conjunction with the Consolidated
Financial Statements and the related notes thereto included in the
Company's Annual Report on Form 10-K for the year ended July 31,
1997.
Note 2 - Acquisitions
In December, the Company purchased all of the outstanding shares of
Publishing Solutions Inc., and acquired the operating assets of
Hanley Graphic Products Company. Publishing Solutions provides its
customers in northeast and central Ohio with equipment and systems
integration solutions utilizing digital technologies for design, pre-
press, imaging, and interactive media applications. Hanley Graphic
Products Company is a leading regional dealer of graphic arts
equipment and supplies serving customers in Northern Illinois. The
aggregate purchase price was approximately $6.0 including expenses of
the transactions, and could increase by a maximum of $2.1 million,
contingent upon the companies' attainment of certain operating
targets over the next two years. The purchases included intangibles
such as trademarks and goodwill that have been assigned preliminary
value of approximately $2.8 million, which will be written off over a
period not to exceed forty years. The allocation of purchase price
was based on preliminary estimates, and may be revised at a later
date.
Both acquisitions will be accounted for as purchases and,
accordingly, the financial statements include results of operations
from the date of acquisition. The following pro forma summary
presents the results of operations for the current and prior period
as though the acquisitions had taken place at the beginning of the
prior period. The pro forma amounts give effect to certain
adjustments including increased interest expense, goodwill
amortization, estimated income tax expense as well as other factors,
and do not necessarily reflect the results which would have occurred
had the businesses operated as a single entity during such periods,
nor are they necessarily indicative of results which may be obtained
in the future.
<PAGE>
<TABLE>
Note 2 Acquisitions (continued)
Quarter Ended Nine Months Ended
May 2, May 3, May 2, May 3,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenues $ 27,431 $ 27,684 $ 79,165 $ 90,376
Net Income $ 555 $ 395 $ 927 $ 174
Earnings per share:
Basic: $ 0.20 $ 0.14 $ 0.33 $ 0.06
Diluted: $ 0.19 $ 0.14 $ 0.32 $ 0.06
</TABLE>
Note 3 - Borrowing Arrangements
The Company's short and long-term borrowings are comprised of the
following:
<TABLE> May 2, 1998 July 31, 1997
<S> <C> <C>
Revolving Credit Facility $ 4,367 $ -
General Unsecured Claims &
Priority Tax Claims 3,488 6,649
Capital Leases 1,949 2,476
Total $ 9,804 $ 9,125
Classified in the Consolidated Balance Sheet
as follows:
Short-term $ 8,526 $ 5,773
Long-term 1,278 3,352
Total $ 9,804 $ 9,125
</TABLE>
In May, 1997 the Company entered into a $10,000 three year secured
Revolving Credit Facility (subject to borrowing base limitations)
with Foothill Capital Corporation ("Foothill"). The Revolving Credit
Facility includes a $5,000 sub-facility for the issuance of letters
of credit. As security for utilization of the Revolving Credit
Facility, the Company granted a security interest and general lien
upon all of its assets. At May 2, 1998 the Company had borrowings of
$4,367 under the Revolving Credit Facility and was utilizing
approximately $2,263 of the facility to secure outstanding letters of
credit. Interest generally will be charged
<PAGE>
Note 3 - Borrowing Arrangements (continued)
at a spread of 1% above the reference (i.e. prime) rate of Foothill
and can be reduced in 1/2% increments in each of the next two fiscal
years if certain performance measures are achieved. At May 2, 1998
the reference rate was 8.5%. Letter of credit fees are 1.5% per
annum plus issuance costs and processing fees. The agreement
contains restrictive covenants limiting capital expenditures,
restricting the payment of dividends and other payments, and provides
for quarterly measures of working capital and net worth, among other
things. In addition, the agreement limits the Company's ability to
borrow or to request letters of credit following a material adverse
change as determined by Foothill. At May 2, 1998 the Company was in
compliance with the covenants of the Revolving Credit Facility. On
February 19, 1998 the Revolving Credit Facility was amended and
restated (the "Amendment") to add the Company's wholly owned
subsidiary, Publishing Solutions Inc., as a co-borrower under the
Facility. The Amendment was made, among other things, to allow the
eligible assets of Publishing Solutions Inc. to be included in the
Company's borrowing base and to reset the Company's covenant
requirements in light of the acquisitions made by the Company during
the quarter ended January 31, 1998. As of May 2, 1998 the calculated
borrowing base was in excess of $10,000. The Company is operating
its business with existing cash reserves and liquidity provided by
the Foothill Revolving Credit Facility which, based on current
projections, are adequate to finance current operations.
On October 13, 1993 the Company concluded a reorganization when the
United States Bankruptcy Court for the District of Delaware confirmed
the Company's Plan of Reorganization (Plan). The Plan provides that
holders of allowed general unsecured claims receive cash payments
toward satisfaction of the full amount of their claims in equal
quarterly payments payable on the last business day of each calendar
quarter ending after October 13, 1993 over a five-year period,
together with interest at 5% per annum. Holders of priority tax
claims are paid 10% of the allowed claim together with accrued and
unpaid interest at 8% per annum on the then outstanding amount on
each anniversary of October 13, 1993 which occurs prior to the sixth
anniversary of the date of assessment, and the balances of such
claims along with accrued and unpaid interest on the sixth
anniversary. For financial reporting purposes interest on general
unsecured claims has been imputed at 9% per annum. The timing of
payments of disputed claims commence with the allowance of the claim
by the Bankruptcy Court and may occur at a rate different from the
equal quarterly payments made to holders of the allowed general
unsecured claims discussed above. At May 2, 1998 the Company had
$1,936 of restricted cash which pertains to the settlement of
disputed claims in accordance with the Plan.
Note 4 - Capital Structure
On May 1, 1997 the Board of Directors declared a dividend of $2.00
per common share, payable to holders of record as of May 13, 1997.
The dividend of approximately $14,080 was disbursed on May 27, 1997.
On May 28, 1997 the Company's shareholders approved amendments to the
Company's Second Restated Certificate of Incorporation (1) decreasing
the authorized number of shares of
capital stock from 50,000,000 shares to 10,000,000 shares with
9,500,000 shares being reserved for issuance as Common Stock and
500,000 shares being reserved for issuance as Preferred Stock, (2)
changing the name of the Company to Multigraphics, Inc. and (3)
effecting a 1 for 2 / share reverse stock split, thereby decreasing
the number of issued and outstanding shares of the Company's Common
Stock to 2,815,337, without giving effect to elimination of
fractional shares, and increasing the par value of each Common share
from $.01 to $.025 per share. All references in the accompanying
financial statements to the number of common shares and per-share
amounts have been restated to reflect the reverse stock split and
change in par value.
<PAGE>
Restated for the reverse stock split and the payment of the $2.00 per
share dividend, as of
May 2, 1998, the Company's 1994 Long Term Incentive Plan provides for
the issuance of 560,000 shares of Common Stock. Options to purchase
the Common Stock are awarded at a price not less than 100% of the
market price on the date of the grant, become exercisable at various
dates generally from one to four years after the date of grant, and
expire ten years after the date of grant. At May 2, 1998 options to
purchase 351,049 shares were outstanding at option prices ranging
from $2.1875 to $8.2139. The Company has not issued any Preferred
Stock. The Common Stock is not subject to conversion or redemption
and when issued is fully paid and non-assessable and has no
preemptive rights. The Company's warrants issued in accordance with
the Plan expired unexercised.
Note 5 - Commitments and Contingencies
The Company received creditor claims during its bankruptcy
proceedings which the Company believes are duplicative, erroneous or
exaggerated and to which the Company believes it has valid defenses.
The Company has filed objections to these disputed claims in the
United States Bankruptcy Court in Delaware. As of May 2, 1998
disputed claims amounted to approximately $8,205. The disputed
claims are primarily comprised of environmental and product liability
claims. The Company has been notified of various environmental
matters in connection with certain current or former Company
locations in Illinois, Ohio, Indiana, Pennsylvania, and Rhode Island.
The Company is also involved in various other administrative and
legal proceedings incidental to its business, including product
liability and general liability lawsuits against which the Company is
partially insured. The disputed claims are in many cases in excess
of recorded reserves. At the present time, it is management's
opinion, based on information available to the Company and
management's experience in such matters, that the resolution of these
legal proceedings is not expected to have a material adverse effect
on the Company's financial condition, results of operations or
liquidity.
Note 6 - Components of Certain Balance Sheet Accounts
<TABLE>
May 2, 1998 July 31, 1997
<S> <C> <C>
Accounts receivable:
Accounts receivable $12,744 $11,080
Allowance for doubtful accounts (457) (334)
Total accounts receivable, net $12,287 $10,746
Inventories:
Raw materials and Work-in-process $ 180 $ 225
Finished goods 12,342 11,668
Total inventories, net $12,522 $11,893
</TABLE>
<PAGE>
Inventories and cost of goods sold reported in the interim financial
statements are based, in part, on accounting estimates relating to
inventory obsolescence and differences resulting from periodic
physical inventories which are conducted on dates on or about the
Company's fiscal year end. Accumulated depreciation deducted from
property, plant and equipment was $5,028 at May 2, 1998 and $7,077 at
July 31, 1997. The policy of the Company with respect to fully
depreciated assets is to adjust the gross cost and accumulated
depreciation at the date of disposition, and to recognize gains or
losses as incurred. During the quarter ended January 31, 1998 the
Company recorded adjustments to write off the gross cost and
accumulated depreciation values of fully depreciated assets disposed
as a result of its exit from machine manufacturing activities. There
was no gain or loss recognized, and no impact on depreciation expense
as a result of that process.
Note 7 - Unusual Items, Net
On September 20, 1996 the Company completed the sale of its 2,148,000
shares of AM Japan Co., Ltd. ("AM Japan") and the Company received
proceeds of approximately $10,600, net of certain costs. A gain of
approximately $2,600 was recorded by the Company in the quarter ended
November 2, 1996 after providing for expenses related to the sale.
On December 2, 1996, the Company and Xeikon, N. V. entered into an
agreement under which the parties agreed not to renew the
distribution agreement pursuant to which the Company sold and
serviced Xeikon digital color presses in North America. As part of
this agreement, Xeikon America, Inc. has acquired certain assets from
the Company and assumed certain liabilities of the Company. The
divestiture of the assets resulted in a net loss of approximately
$500 which the Company recorded in the quarter ending November 2,
1996.
Note 8 - Earnings Per Share
In February 1997, Statement of Financial Accounting Standards No.128
"Earnings per Share" ("SFAS 128") was issued by the Financial
Accounting Standards Board ("FASB"). SFAS 128 specifies
modifications to the calculation of earnings per share from that
currently used by the Company. Under SFAS 128, "basic earnings per
share" is calculated based upon the weighted average number of common
shares actually outstanding, and "diluted earnings per share" is
calculated based upon the weighted average number of common shares
outstanding and other potential common shares if they are dilutive.
Common share equivalents consisting of common shares issuable on
exercise of outstanding options are computed using the treasury
method.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion of the results of operations and financial condition
presented below should be read in conjunction with Management's
Discussion and Analysis included in the Company's Annual Report to
Shareholders for the year ended July 31, 1997.
<PAGE>
The interim results of operations for the nine months ended May 3,
1997 include the results of two foreign subsidiaries which have been
divested. The Company sold its interest in AM Japan Co., Ltd. in
September, 1996, and on October 17, 1996, the Company's Canadian
subsidiary filed a voluntary assignment in bankruptcy.
As previously reported, the Company acquired the operating assets of
Hanley Graphic Products Company, and purchased all of the outstanding
shares of Publishing Solutions Inc. in separate transactions
consummated in the second quarter of fiscal 1998. Both acquisitions
have been accounted for as purchases and, accordingly, the
consolidated financial statements include the post-acquisition
results of these operations since their respective acquisition dates.
All per share data is presented on a diluted basis.
<TABLE>
Consolidated Results of Operations
<S> Quarter Ended Nine Months Ended
($ in millions) May 2, May 3, May 2, May 3,
1998 1997 1998 1997
<C> <C> <C> <C>
Revenues $ 27.4 $ 20.9 $ 70.3 $ 69.3
Gross margin 7.1 6.3 18.1 19.1
Gross margin % 26.1% 30.1% 25.7% 27.5%
Operating expenses 5.8 5.8 15.7 20.3
Unusual items, net (income) - - - (2.1)
Operating income / (Loss) 1.3 0.5 2.4 0.9
Non-operating expense, net 0.4 0.2 1.0 1.0
Net income/(Loss) before tax $ 0.9 $ 0.3 $ 1.4 $ (0.1)
Net income/(Loss) $ 0.6 $ 0.3 $ 0.9 $ (0.1)
</TABLE>
Third Quarter
The net income for the quarter ended May 2, 1998 was $0.6 million
($0.19 per common share), an improvement of $0.3 million ($0.09 per
common share) over the prior year comparable period. The improvement
in net income reflects the benefit of various operating improvements
which have resulted in lower operating expenses, and the positive
contributions from the acquisitions made in the second quarter of the
current fiscal year.
Third quarter revenues of $27.4 million increased by $6.6 million
over the corresponding prior year period. The 32% increase in
revenues was attributable to the acquisition of two regional graphic
arts equipment and supply dealers earlier in the year. The
operations acquired serve the same customer base as Multigraphics,
and further enhance the Company's broad product offering and service
capabilities in its Midwestern market. In addition to its growth
through acquisition strategy, the Company continued to increase its
focus on the distribution of new products and product lines, and the
addition of third party service agreements. Market demand,
particularly in the in-plant market segment, for the Company's
manufactured duplicator press products has experienced long term
decline due in part to inroads from competing printing technologies.
As a result, the installed base of the Company's duplicator press
equipment has declined which has led to decreased sales of duplicator
supplies and services. Revenues from acquisitions, new products and
service offerings collectively have been more than sufficient to
offset the decline in revenues from the discontinuance of
unprofitable product lines and other traditional supplies and
services, which decreased $1.0 million from the prior year quarter.
The Company's primary objective is to achieve continued growth within
the graphic arts market by expanding the product offering, enhancing
digital support capabilities and increasing market penetration and
geographic coverage through selected acquisitions, and believes
additional increases in revenues could improve profitability, since
the Company has infrastructure and systems capable of absorbing
greater volumes of transactions.
<PAGE>
Gross margin of $7.1 million increased by $0.8 million over the
comparable prior year period. Increased margins derived from the
acquired operations and from new products and product lines more than
offset the $1.0 million decline in margin from traditional service
revenues, and discontinued product lines. As noted above, the
Company has sought to replace the revenues previously derived from
its historically higher margin manufactured products, with product
lines added through distribution agreements, joint ventures,
affiliations with third parties, and acquisitions of graphic arts
dealers. To offset the lower margin rates, the Company has invested
in information systems and has undertaken other reorganization
measures to increase efficiency and lower expenses.
Operating expenses in the third quarter of $5.8 million were equal to
the prior year period, but improved significantly as a percent of
sales. The improved expense levels were the result of various
actions taken by the Company which have lowered headcount, facility
and other selling, general and administrative costs, while improving
service levels and operational efficiency.
Nine Months
For the nine months ended May 2, 1998 the Company had net income of
$0.9 million ($0.31 per common share). In the prior year comparable
period, the Company had a gain of $2.6 million on the divestiture of
its interest in AM Japan Co., Ltd. which reduced its net loss to $0.1
million ($0.02 per common share). Excluding the gain on the
divestiture, net operating income improved by $3.5 million in the
first nine months.
Revenues for the nine months ended May 2, 1998 of $70.3 million
increased $1.0 million over the corresponding prior year period. The
increase was primarily attributable to the acquisitions made in the
prior quarter, which have contributed sufficiently to the Company's
operations to partially offset the decline in revenues from the prior
year divestitures of operations in Japan and Canada, the
discontinuance of unprofitable product lines, and the exit from
manufacturing duplicator presses which, collectively, had contributed
revenues of $7.5 million to the comparable prior year period.
The Company has developed strategies to increase revenues through
product line additions, distribution agreements, joint ventures,
third party service agreements and acquisitions, and believes an
increase in revenue levels could improve profitability, since the
Company has infrastructure and systems capable of absorbing greater
volumes of transactions. The Company is now focused on selling
supplies, graphic arts equipment and integration services, and
providing maintenance service and parts to its chosen markets. The
additional revenues generated from acquisitions and investments in
infrastructure targeted to improve efficiency in supply chain
management have begun to offset the declining demand for products and
services historically offered by the Company.
<PAGE>
Gross margin of $18.1 million for the first nine months of 1998 was
$1.0 million lower than the comparable prior year period, as the
overall margin rate declined 1.8 points to 25.7%. The lower margin
rates largely resulted from the shift in revenue mix from the
Company's traditional manufactured products and service offerings
which historically carried higher margins, but demand for which has
been in long term decline, to revenues derived from product lines
added through distribution agreements, affiliations with third
parties, and acquisitions of graphic arts dealers. In anticipation
of the decline in margin rates, the Company has invested in
information systems, and has instituted various reorganization
measures which have increased operational efficiency and lowered
expense levels. It is management's intent to continue execution of
its growth through acquisition strategy, while maintaining a focus on
cost containment and opportunities to enhance operational
efficiencies.
Operating expenses for the nine months ended May 2, 1998 of $15.7
million were $4.6 million lower than the comparable prior year
period. The decrease in expenses was largely due to the divestiture
of foreign operations, discontinued product lines and costs
associated with the Company's exited manufacturing operation which
collectively added $2.4 million to the prior year. The remainder of
the decrease in expenses resulted from reductions in selling,
general and administrative and corporate expenses as the Company
transitioned to a distribution organization.
Unusual item income in the prior year quarter resulted from a $2.6
million gain on the sale of the Company's majority ownership interest
in AM Japan Co., Ltd. in a transaction completed on September 20,
1996, net of a $0.5 million loss recorded on the disposition of net
assets employed following the decision to exit distribution of the
Xeikon digital color press.
Non-operating expenses of $1.0 million were equal to the comparable
prior year period. Compared to the prior year, interest expense
decreased by $1.0 million, primarily due to lower prepetition debt
obligations, which have been reduced by scheduled payments, and lower
interest costs incurred on postretirement benefit obligations.
Interest income was $1.0 million lower in the current year, primarily
due to lower investment balances in 1998 largely resulting from
payment of a $14.1 million dividend in May, 1997.
The Company recorded income tax expense of $0.5 million during the
nine months ending May 2, 1998. Fresh Start Reporting rules require
recognition of tax expense although the Company had no requirement to
pay U.S. Federal taxes due to utilization of net operating loss
carryforwards available to the Company.
Liquidity and Capital Resources
(nine months ended May 2, 1998 and May 3, 1997)
The Company's cash and cash equivalents were $2.7 million as of May
2, 1998, having decreased $7.7 million from the $10.4 million
balance on July 31, 1997. In addition to the decrease in cash
balances, net borrowings and other debt increased by $1.2 million
during the first nine months of the current year. This overall use
of liquidity was primarily attributable to acquisitions of regional
graphics arts dealers which the Company completed in the second
quarter, as discussed below.
<PAGE>
Operating Activities. In the nine months ended May 2, 1998 the
Company had a cash outflow from operating activities of $2.5 million
as compared with a cash outflow of $14.3 million in the comparable
period ended May 3, 1997. Net income was $0.9 million as compared
with a net loss of $0.1 million in the comparable prior year period.
Accounts receivable decreased by $1.9 million during the first nine
months of 1998 and $11.3 million in the first nine months of 1997 as
a result of the collection of relatively higher outstanding balances
which exist at the inception of each fiscal year and, for the first
nine months of 1997, the decrease also resulted from the elimination
of revenues related to the phase-out of the Company's manufactured
machines and generally improved collection rates. Inventories
decreased $2.1 million in 1998 due primarily to lower stocking levels
of machines resulting from an increase in drop shipment sales and
improving supplies and service parts turnover rates reflective of the
transition from a manufacturing to a distribution operation. During
the prior year period, inventories increased by $1.2 million
primarily as a result of increases in supplies and service parts
stock levels to improve product availability. In the first nine
months of 1998 accounts payable decreased $2.5 million due to lower
inventory purchases and reductions resulting from taking prompt pay
discounts offered by vendors. In the prior year period, accounts
payable decreased $10.7 million due to a paydown of past due
creditors funded with the proceeds received from the divestitures of
Sheridan Systems and AM Japan. Other current liabilities were
reduced by $5.9 million during the first nine months of 1998
primarily due to payment of $1.6 million of payroll related
liabilities, payment of $0.6 million to settle a recourse obligation
of a divested operation, and restructuring payments of approximately
$1.1 million relating to the Company's phase-out of its manufactured
machine product line and other exit costs of a previously divested
foreign subsidiary. In the prior year period, other current
liabilities declined $15.1 million (exclusive of a $14.1 million
liability to record the declaration of the Company's $2.00 per share
dividend which was disbursed on May 27, 1997) due primarily to
restructuring payments for severance, accrued vacation and a
settlement of a lease obligation related to a divested foreign
subsidiary.
Investing Activities. During the second quarter of 1998 the Company
acquired Itasca, Illinois based Hanley Graphic Products Company and
Akron, Ohio based Publishing Solutions Inc. for a total cost of $5.6
million. These acquisitions were financed from existing cash
reserves. During the first nine months of 1997 the Company had
capital expenditures of $1.6 million primarily to upgrade systems and
equipment, and the Company also received $50.6 million of net
proceeds from the divestitures of its Sheridan Systems division and
AM Japan subsidiary.
Financing Activities. During the second and third quarters of 1998
the Company had net borrowings under its Revolving Credit Facility of
$4.4 million which occurred as a result of the operating and
investing activities discussed above. Payments of general unsecured
claims and priority tax claims were $3.2 million in the first nine
months of 1998 and $3.1 million in the first six months of 1997 in
accord with scheduled Plan payments. In the first quarter of 1997
the Company repaid outstanding borrowings under its Revolving Credit
Facility of $5.4 million with proceeds from the divestitures.
<PAGE>
The Company's primary source of financing is its $10 million three
year secured revolving credit facility which it entered into in May,
1997. The Company believes that its existing cash reserves and the
liquidity provided by the credit facility are sufficient to finance
current operations and to support future growth strategies which may
include the acquisition of other regional dealers or distributors in
the graphic arts industry.
FORWARD LOOKING STATEMENTS
This document contains certain forward-looking statements and other
statements that are not historical facts concerning, among other
things, market conditions and the Company's strategies for growth and
expansion. These statements are highly dependent upon a variety of
important factors that could cause such results or events to differ
materially. These factors include, but are not limited to, changing
market conditions, the availability and cost of products, the impact
of competitive products and pricing, the Company's ability to execute
its strategic plans, the continued availability of sources of
financing to assist in the execution of the Company's strategic
plans, and other risks detailed herein and from time-to-time in the
Company's Securities and Exchange Commission filings. There can be
no assurance that the Company has accurately identified and properly
weighed all of the factors that affect market conditions and demand
for the Company's products and services, that the public information
on which the Company has relied is accurate or complete or that the
Company's analysis of the market and demand for its products and
services is correct and, as a result, that the strategies based on
such analysis will be successful.
PART II - OTHER INFORMATION
Item 6. Exhibits
27 Financial Data Schedule
(b) Reports on form 8-K
None
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant had duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
MULTIGRAPHICS, INC.
Date: June 10, 1998 /s/ Gregory T. Knipp
Gregory T. Knipp
Vice President and Chief Financial
Officer
(authorized officer and principal
accounting officer)
<PAGE>
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