<PAGE>
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 October 30, 1999
-----------------------------------------------------
Commission file number 1-683
---------------------------------------------------------
Multigraphics, Inc.
- -------------------------------------------------------------------------------
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.
2,848,346 shares of Registrant's
Common Stock, $.025 par value, were outstanding as of December 1, 1999.
<PAGE>
MULTIGRAPHICS, INC.
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
--------
<S> <C> <C> <C>
Item 1 - Condensed Consolidated Statement of Operations
for the Three Months Ended October 30, 1999 and
October 31, 1998
(unaudited) 1
Condensed Consolidated Balance Sheet
as of October 30, 1999 (unaudited) and
July 31, 1999. 2
Condensed Consolidated Statement of
Cash Flows for the Three Months Ended
October 30, 1999 and October 31, 1998
(unaudited) 3
Notes to Condensed Consolidated Financial
Statements (unaudited) 4 - 11
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations. 12 - 17
Item 3 - Quantitative and Qualitative Disclosures about
Market Risk 18
PART II OTHER INFORMATION
Item 6 - Exhibits
</TABLE>
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
MULTIGRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------
OCTOBER 30, 1999 OCTOBER 31, 1998
-------------------- -------------------
<S> <C> <C>
REVENUES
Machines and Supplies $ 15,046 $ 15,626
Services 9,194 10,043
-------------------- ---------------------
TOTAL REVENUES 24,240 25,669
-------------------- ---------------------
COST OF SALES
Machines and Supplies 12,250 12,398
Services 6,676 6,404
-------------------- ---------------------
TOTAL COST OF SALES 18,926 18,802
-------------------- ---------------------
GROSS MARGIN 5,314 6,867
OPERATING EXPENSES
Selling, general and administrative 4,868 6,085
Miscellaneous (income) expense (3) 24
-------------------- ---------------------
TOTAL OPERATING EXPENSES 4,865 6,109
OPERATING INCOME 449 758
Non-operating income (expense):
Interest income 2 20
Interest (expense) (478) (495)
Transaction (expense) (650) -
Goodwill Amortization (32) (21)
-------------------- ---------------------
Income (loss) (709) 262
Income tax expense - 100
-------------------- ---------------------
NET INCOME (LOSS) $ (709) $ 162
==================== =====================
PER SHARE OF COMMON STOCK:
BASIC:
Net income (loss) $ (0.25) $ 0.06
==================== =====================
DILUTED:
Net income (loss) $ (0.25) $ 0.06
==================== =====================
Weighted average shares of common stock and
common stock equivalents outstanding (in
thousands)
Basic 2,848 2,830
==================== =====================
Diluted 2,848 2,928
==================== =====================
</TABLE>
THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE
FINANCIAL STATEMENTS.
<PAGE>
MULTIGRAPHICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
(UNUAUDITED)
OCTOBER 30, JULY 31,
1999 1999
---------------- ----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,259 $ 1,538
Accounts receivable, net 11,545 15,890
Inventories, net 10,523 10,947
Prepaid expenses and other assets 535 582
---------------- ----------------
TOTAL CURRENT ASSETS 23,862 28,957
Property, plant and equipment, net 7,877 8,353
Goodwill 3,907 3,939
Other assets, net 883 961
---------------- ----------------
TOTAL ASSETS $ 36,529 $ 42,210
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current maturities of long-term debt $ 9,007 $ 11,294
Accounts payable 8,338 10,947
Service contract deferred income 10,355 10,725
Payroll related expenses 4,560 4,077
Other current liabilities 3,044 2,792
---------------- ----------------
TOTAL CURRENT LIABILITIES 35,304 39,835
Post-retirement benefit obligations 7,701 7,886
Long-term debt 517 591
Other long-term liabilities 3,959 4,141
---------------- ----------------
TOTAL LIABILITIES 47,481 52,453
SHAREHOLDERS' EQUITY:
Preferred stock, 0.5 million shares authorized; no shares issued - -
Common stock, $.025 par value; 9.5 million shares authorized; 2,848,346
issued as of October 30, 1999 and 2,833,322 issued
as of July 31, 1999 70 70
Capital in excess of par value 22,886 22,886
Accumulated earnings (deficit) (33,908) (33,199)
---------------- ----------------
TOTAL SHAREHOLDERS' EQUITY (10,952) (10,243)
---------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 36,529 $ 42,210
================ ================
</TABLE>
THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE
FINANCIAL STATEMENTS.
<PAGE>
MULTIGRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------
OCTOBER 30, 1999 OCTOBER 31, 1998
------------------- --------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ (709) $ 162
ADJUSTMENTS TO RECONCILE NET INCOME TO CASH FLOW
FROM OPERATING ACTIVITIES:
Depreciation of property, plant and equipment 476 457
Amortization of goodwill 32 21
Benefit from operating loss carryforwards - 100
Change in assets and liabilities:
Accounts receivable, net 4,345 1,740
Inventory, net 424 (1,167)
Prepaid expenses and other assets 47 148
Accounts payable (2,609) 1,070
Deferred service revenue (370) (834)
Other current liabilities 735 (54)
Other, net (269) (1,022)
---------- ----------
CASH FLOW FROM OPERATING ACTIVITIES 2,102 621
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition Activities - (167)
Capital expenditures - (188)
---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES - (355)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under revolving
credit facilities (4,197) 960
Subordinated debt borrowings 2,000 -
Payment of Bankruptcy Claims (27) (1,094)
Payments under capital lease
arrangements (157) (100)
---------- ----------
CASH FLOW FROM FINANCING ACTIVITIES (2,381) (234)
---------- ----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (279) 32
Cash and cash equivalents at beginning of period 1,538 2,869
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,259 $ 2,901
========== ==========
</TABLE>
THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE
FINANCIAL STATEMENTS.
<PAGE>
MULTIGRAPHICS, INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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. 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, 1999.
NOTE 2 - PLAN OF MERGER AND BUSINESS RISKS
PLAN OF MERGER
On October 1, 1999, the Company announced that it entered into an Agreement and
Plan of Merger with Paragon Corporate Holdings, Inc. ("Paragon") providing for
Paragon to acquire the Company for $1.25 in cash per share of common stock.
Paragon will also assume the outstanding debt of the Company. Concurrently with
executing the merger agreement, the Company entered into a credit facility with
Paragon pursuant to which Paragon advanced the Company $2 million on a secured
basis and subordinated to the Company's primary lender as discussed in Note 4.
The board of directors of each company have approved the transaction. Paragon is
the parent company of AB Dick Company, a manufacturer and worldwide supplier to
the graphic arts industry.
The merger transaction will be accounted for as a purchase and is anticipated to
close in January 2000. The merger is subject to approval of the holders of at
least a majority of our outstanding shares of common stock, expiration of the
Hart-Scott-Rodino antitrust review period and other customary conditions. Under
the merger agreement, Paragon may receive a termination fee under certain
circumstances. There can be no assurance that the merger agreement will result
in a transaction.
Lion Advisors, L.P. and AIF II, L.P., which beneficially own approximately 35
percent of the outstanding shares of Multigraphics, have agreed with Paragon to
support the transaction and to vote for approval of the merger agreement and
have granted an option to Paragon to purchase their shares under certain
circumstances.
BUSINESS RISKS
During the Company's fourth fiscal quarter ended July 31, 1999 and the first two
months of the current year first quarter, the Company continued to experience
difficulty meeting its liquidity requirements due primarily to lower than
expected sales, demands to settle non-operating obligations and decreases in its
borrowing base. This liquidity difficulty forced the Company to reduce inventory
and
<PAGE>
NOTE 2 - PLAN OF MERGER AND BUSINESS RISKS (CONTINUED)
delay payments to vendors and suppliers, which led some vendors to delay or
cancel shipment of product, resulting in lower sales levels and profitability.
As of July 31, 1999 and throughout the first two months of the current year
first quarter, over 50 percent of the Company's trade accounts payable were
past their due date. In light of these events, the Company's primary lender
in August 1999 advised the Company that it needed to protect its collateral
base and, absent an immediate plan or transaction which would infuse
significant additional liquidity into the Company, it would invoke a material
adverse change clause and thereby would commence reducing the lending advance
rates as well as increasing the interest rate on borrowings. This action by
the lender would have worsened the Company's already tenuous liquidity
situation and possibly force the Company into bankruptcy.
The $2 million loan from Paragon was used by the Company to pay down a large
portion of the past due trade accounts payable and to pay merger transaction
costs. As of October 30, 1999, approximately 20 percent of the Company's
trade accounts payable were past their due date, most of which were less than
30 days past due. The Company's ability to meet its liquidity requirements
through the completion date of the merger transaction is largely dependent on
sustained levels of billings to customers which generate borrowing base
liquidity. Variations in market demand, competitive pressures or purchase
mix, cash required for non-operating obligations, the willingness of vendors
to extend trade credit and the timing of revenues and costs could have a
negative impact on the Company's liquidity and credit facilities. In light of
this the Company is continuing to implement cost reduction programs to
minimize the uses of cash. The Company believes that its current projections
of future billings, the continued positive results of identified cost
reduction programs, and the continued extension of credit by the Company's
trade vendors and primary lender will provide the Company with capital
resources and liquidity sufficient to finance its current operations and fund
non-operating obligations as they come due through the date of the proposed
merger anticipated to close in January 2000, however, there can be no
assurance that such will be the case.
The Company's current financial condition and uncertainties as described above
raise doubt about the Company's ability to continue as a going concern absent
the merger transaction. The accompanying financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
NOTE 3 - ACQUISITIONS
In December 1997 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 regional dealer of graphic arts equipment
and supplies serving customers in Northern Illinois. In June 1998 the Company
acquired the business and certain assets of Progressive Lithoplate and Supply
Company, a regional graphic arts dealer serving customers in Northern Illinois.
In September 1998, the
<PAGE>
NOTE 3 - ACQUISITIONS (CONTINUED)
Company acquired the business and certain assets of Austin, Texas based Texas
Prepress Systems, Inc., a regional prepress systems integrator.
The aggregate purchase price for the four acquired companies was $7,213
including expenses of the transactions, and could increase by a maximum of $875,
contingent upon the attainment of certain operating targets by the acquired
companies over the two years following their acquisition. The excess purchase
price over the fair market value of net assets acquired amounts to a preliminary
value of $4,135, which will be amortized over periods from 10 to 40 years.
The acquisitions have been accounted for as purchases and, accordingly, the
consolidated 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 periods 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.
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------
October 30, October 31, November 1,
1999 1998 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Revenues $ 24,240 $ 25,879 $ 28,464
Net Income (loss) $ (709) $ 165 $ 233
Earnings (loss) per share:
Basic $ (0.25) $ 0.06 $ 0.08
Diluted $ (0.25) $ 0.06 $ 0.08
</TABLE>
<PAGE>
NOTE 4 - BORROWING ARRANGEMENTS
The Company's short and long-term borrowings are comprised of the following:
<TABLE>
<CAPTION>
OCTOBER 30, 1999 JULY 31, 1999
---------------- ---------------
<S> <C> <C>
Revolving Credit Facility $ 5,626 $ 9,823
Subordinated Debt 2,000 0
General Unsecured Claims & Priority Tax Claims 874 881
Capital Leases 1,024 1,181
---------------- ---------------
Total $ 9,524 $ 11,885
================ ===============
Classified in the Consolidated Balance Sheet as follows:
Short-term $ 9,007 $ 11,294
Long-term 517 591
---------------- ---------------
Total $ 9,524 $ 11,885
================ ===============
</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. 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. On
July 30, 1998 the Revolving Credit Facility was amended further to, among other
things, (1) grant the Company the ability to increase the Revolving Credit
Facility limit in increments of $1,000 up to a maximum limit of $15,000 and, (2)
extend the expiration date an additional two years to May 30, 2002 plus an
automatic one year extension unless terminated pursuant to the terms of the
Revolving Credit Facility. The Revolving Credit Facility limit was increased to
$11,000 on July 31, 1998, $12,000 on November 6, 1998 and $13,000 on February
12, 1999. On October 30, 1999, the calculated borrowing base was approximately
$9,100. As of October 30, 1999, the Company had borrowings of $5,626 under the
Revolving Credit Facility and was utilizing approximately $1,340 of the facility
to secure outstanding letters of credit. Interest generally will be charged at a
spread of 1% above the reference (i.e. prime) rate of Foothill. As of October
30, 1999 the reference rate was 8.25%. Letter of credit fees are 0.75% 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 providing 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
<PAGE>
NOTE 4 - BORROWING ARRANGEMENTS (CONTINUED)
determined by Foothill. As of October 30, 1999, the Company was in compliance
with the covenants (as amended and discussed below) of the Revolving Credit
Facility.
On October 1, 1999, the Revolving Credit Facility was further amended to,
among other things, (1) permit the Company to obtain a $2,000 secured
subordinated loan from Paragon, and (2) reset the Company's covenant
requirements in light of the Company's impending merger transaction with
Paragon Corporate Holdings, Inc. as described in Note 2 "Plan of Merger". On
October 1, 1999, the Company borrowed $2,000 on a secured subordinated basis
from Paragon. These borrowings are subordinate to the borrowings under the
Revolving Credit Facility, incur interest at 10% per annum, and are to be
repaid no later than September 30, 2000.
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. The final scheduled quarterly payment
was made during September 1998. 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 had been
imputed at 9% per annum. At October 30, 1999 the Company had $749 of restricted
cash, which pertains to the settlement of disputed claims in accordance with the
Plan.
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
October 30, 1999 disputed claims amounted to approximately $0.5 million. The
disputed claims are primarily comprised of environmental and product liability
claims. Although the vast majority of the claims filed in the bankruptcy
proceedings have been expunged or resolved within the Company's reserves, a few
significant disputed claims remain pending in the bankruptcy proceeding.
In October 1995, a wholly owned subsidiary in the United Kingdom (currently in
liquidation) repaid an intercompany loan of approximately $1,000. The liquidator
of this subsidiary has asserted that the loan repayment was a preference and
should be repaid, together with interest for the benefit of other creditors. The
Company has vigorously resisted the liquidator's claim on the
<PAGE>
NOTE 5 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
basis that the subsidiary was solvent at the time of the loan repayment, it
was anticipated that it would remain solvent in the future, and there was no
intent to make a preferential payment.
The Company has been notified of various environmental matters in connection
with certain current or former Company locations in Illinois and Ohio. 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 in the bankruptcy proceedings and the other legal
proceedings 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.
The Company has sold certain receivables related to machine sales, subject to
recourse provisions and repurchase provisions. Management believes unreserved
exposures pertaining to these contingencies will not materially impact the
Company's financial condition, results of operations or liquidity.
<PAGE>
NOTE 6 - BALANCE SHEET ACCOUNTS
The components of certain balance sheet accounts are as follows:
<TABLE>
<CAPTION>
October 30, July 31,
1999 1999
---------------- ----------------
<S> <C> <C>
ACCOUNTS RECEIVABLE:
Accounts receivable $ 11,942 $ 16,230
Allowance for doubtful accounts (397) (340)
---------------- ----------------
Accounts receivable, net $ 11,545 $ 15,890
================ ================
PROPERTY, PLANT AND EQUIPMENT:
Machinery and equipment $ 12,535 $ 12,550
Leasehold improvements 3,338 3,338
---------------- ----------------
15,873 15,888
Less accumulated depreciation and amortization (7,996) (7,535)
---------------- ----------------
Property, plant and equipment, net $ 7,877 $ 8,353
================ ================
GOODWILL:
Goodwill $ 4,135 $ 4,135
Amortization (228) (196)
---------------- ----------------
Goodwill, net $ 3,907 $ 3,939
================ ================
</TABLE>
NOTE 7 - OPERATING SEGMENTS
The Company adopted Statement of Financial Accounting Standards No. 131
"Disclosure about Segments of an Enterprise and Related Information," effective
July 31, 1999. Adoption of this Statement required the Company to change the
disclosure of operating segment information, but did not require significant
changes in the way geographic information was disclosed.
The Company is a distributor of an extensive range of equipment and supplies and
a service provider to the U.S graphic arts industry. The Company manages two
operating segments: Distribution and Service.
The Company's distribution segment serves in-plant printers and small to medium
sized commercial printers. Its supplies and equipment offerings consist of
consumable products used in the production of printed materials such as films,
inks, plates, rubber rollers, cleaning solutions and cotton pads, as well as
equipment products such as digital imagesetters,
<PAGE>
NOTE 7 - OPERATING SEGMENTS (CONTINUED)
platesetters, presses, folders and cutters. The Company tracks various
categories of these products, none of which account for more than 10% of its
revenues.
The Company's Service segment provides service and parts offerings on over 250
models of printing equipment installed in in-plant and small to medium sized
commercial print shops, governmental and educational institutions, as well as
national retail outlets. The Company has approximately 325 service
representatives, and offers service capabilities in all 50 states.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies discussed in the Company's
Annual Report on Form 10-K for the year ended July 31, 1999. The Company
evaluates performance based on revenues and direct operating income of the
segments and does not include general and administrative costs. The Company
accounts for intersegement sales as transfers of inventory.
The business segments have been separated based on specifically identifiable
revenues and the direct costs that are attributable to each of the segments.
Information as to the operations of the Company's two operating segments is as
follows:
<TABLE>
<CAPTION> CORPORATE/
DISTRIBUTION SERVICE OTHER TOTAL
------------ ------- ----- -----
<S> <C> <C> <C> <C>
THREE MONTHS ENDED OCTOBER 30, 1999:
Revenue 15,046 9,194 - 24,240
Earnings/(loss) from operations 1,200 1,470 (2,221) 449
Earnings/(loss) before taxes 1,200 1,470 (3,379) (709)
THREE MONTHS ENDED OCTOBER 30, 1998:
Revenue 15,626 10,043 - 25,669
Earnings/(loss) from operations 672 2,792 (2,727) 737
Earnings/(loss) before taxes 672 2,792 (3,202) 262
</TABLE>
Corporate/Other represents general and administrative costs that are not
directly attributable to one of the operating segments. The Company does not
allocate assets, capital expenditures, depreciation and interest expense between
operating segments.
The Company has some sales outside of the United States through foreign dealers
that do not have a material effect on the total revenues from each segment.
<PAGE>
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 on Form 10-K for the year ended July 31,
1999.
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. In June 1998 the Company acquired the business and
certain assets of Progressive Lithoplate and Supply Company. In September 1998
the Company acquired the business and certain assets of Austin, Texas based
Texas Prepress Systems, Inc., a regional prepress systems integrator. The
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.
CONSOLIDATED RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
($ in millions) THREE MONTHS ENDED
---------------------------------
OCTOBER 30, OCTOBER 31,
1999 1998
-------------- -------------
<S> <C> <C>
Revenues $ 24.2 $ 25.7
Gross Margin 5.3 6.9
Gross Margin % 21.9% 26.8%
Operating Expenses 4.9 6.1
Operating Income 0.4 0.8
Non-operating expenses, net 1.2 0.5
Net income (loss) before tax (0.7) 0.3
Net Income (loss) $ (0.7) $ 0.2
</TABLE>
The net loss for the first quarter ended October 30, 1999 was $0.7 million
($0.25 per common share). In the comparable prior year period, the Company had a
profit of $0.2 million ($0.06 per common share). The current year net loss
includes $0.7 million of merger transaction costs relating to the Company's
impending merger as previously announced and discussed below.
First quarter revenues of $24.2 million were $1.4 million below the
corresponding prior year period. The decrease in revenues was largely
attributable to lower supplies sales and service revenues. The sales declines
were due to, among other factors, a decrease in the Company's traditional
installed equipment base and the associated supplies and service revenues
created therefrom, discontinued product lines, and impediments created by the
Company's liquidity difficulties of the prior year fourth quarter and first two
months of the current year first quarter.
<PAGE>
Gross margin of $5.3 million in the current quarter decreased by $1.6 million
over the prior year comparable quarter due to the decrease in revenues mentioned
above coupled with a 20% increase in freight costs caused by an increase in
priority shipments to fill backorders during the Company's liquidity crisis. The
lower service revenues, which fall largely to the margin line without
corresponding cost reductions, and the higher freight costs resulted in a 4.9
percentage point decrease in the gross margin rate.
Selling, general and administrative expenses in the first quarter of $4.9
million decreased by $1.2 million over the prior year period due to the
Company's continued efforts to reduce costs through actions to lower headcount,
facility and other general and administrative costs, while improving operational
efficiency. As a result of these efforts the relationship of operating expenses
to revenues improved to 20.1 % from 23.8 % in the prior year quarter.
Non-operating expenses consist primarily of net interest expense of $0.5 million
and merger transaction costs of approximately $0.7 million related to the
impending merger mentioned above.
LIQUIDITY AND CAPITAL RESOURCES
(THREE MONTHS ENDED OCTOBER 30, 1999 AND OCTOBER 31, 1998)
During the Company's fiscal quarter ended July 31, 1999, and the first two
months of the current year first quarter, the Company continued to experience
difficulty in meeting its liquidity requirements due primarily to lower than
expected sales, demands to settle non-operating obligations and decreases in its
borrowing base. This liquidity difficulty forced the Company to reduce inventory
and delay payments to vendors and suppliers, which led some vendors to delay or
cancel shipment of product, resulting in lower sales levels and profitability.
As of July 31, 1999 and throughout the first two months of the current year
first quarter, over 50% of the Company's trade accounts payable were past their
due date. In light of these events, Multigraphics' primary lender in August 1999
advised Multigraphics that it needed to protect its collateral base and, absent
an immediate plan or transaction which would infuse significant additional
liquidity into Multigraphics, it would invoke a material adverse change clause
and thereby would commence reducing the lending advance rates as well as
increasing the interest rate on borrowings. This action by the lender would have
worsened the Company's already tenuous liquidity situation and possibly force
Multigraphics into bankruptcy.
On October 1, 1999, the Company announced that it entered into an Agreement and
Plan of Merger with Paragon Corporate Holdings, Inc. ("Paragon") providing for
Paragon to acquire the Company for $1.25 in cash per share of common stock.
Paragon will also assume the outstanding debt of the Company. Concurrently, with
executing the merger agreement, the Company entered into a credit agreement with
Paragon pursuant to which Paragon advanced the Company $2 million on a secured
basis and subordinated to the Company's primary lender as discussed in Note 4 to
the Notes to the Consolidated Financial Statements included herein. The
<PAGE>
board of directors of each company have approved the transaction. Paragon is
the parent company of AB Dick Company, a manufacturer and worldwide supplier
to the graphic arts industry.
On October 1, 1999 the Company's credit agreement with its primary lender was
amended to, among other things, (1) permit the Company to obtain the $2 million
secured subordinated loan from Paragon and (2) reset the Company's covenant
requirements in light of the impending merger transaction. On October 1, 1999,
the Company borrowed $2 million on a secured subordinated basis from Paragon.
These borrowings are subordinate to the borrowings under the credit agreement
with our primary lender, incur interest at 10% per annum, and are to be repaid
no later than September 30, 2000. As of October 30, 1999, the Company was in
compliance with the covenants of the credit agreement.
The $2 million loan from Paragon was used by the Company to pay down a large
portion of the past due trade accounts payable and to pay merger transaction
costs. As of October 30, 1999, approximately 20 percent of the Company's
trade accounts payable were past their due date, most of which were less than
30 days past due. The Company's ability to meets its liquidity requirements
through the completion date of the merger transaction is largely dependent on
sustained levels of billings to customers which generate borrowing base
liquidity. Variations in market demand, competitive pressures or purchase
mix, cash required for non-operating obligations, the willingness of vendors
to extend credit and the timing of revenues and costs could have a negative
impact on the Company's liquidity and credit facilities. In light of this,
the Company is continuing to implement cost reduction programs to minimize
the uses of cash. The Company believes its current projection of future
billings, the continued positive results of identified cost reduction
programs, and the continued extension of credit by the Company's trade
vendors and primary lender will provide it with capital resources and
liquidity sufficient to finance its current operations and fund non-operating
obligations as they come due through the date of the proposed merger
anticipated to close in January 2000, however, there can be no assurance that
such will be the case.
The merger transaction will be accounted for as a purchase and is anticipated to
close in January 2000. The merger is subject to approval of the holders of at
least a majority of the outstanding shares of common stock, expiration of the
Hart-Scott-Rodino antitrust review period and other customary conditions. Under
the merger agreement, Paragon may receive a termination fee under certain
circumstances. There can be no assurance that the merger agreement will result
in a transaction. Lion Advisors, L.P. and AIF II, L.P. which beneficially own
approximately 35% of the outstanding shares of Multigraphics, have agreed with
Paragon to support the transaction and to vote for approval of the merger
agreement and have granted an option to Paragon to purchase their shares under
certain circumstances.
The Company's current financial condition and uncertainties as described above
raise substantial doubt about its ability to continue as a going concern absent
the merger transaction. Our consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
<PAGE>
The Company's cash balances at October 30, 1999 were $1.3 million, a decrease of
$0.3 million from July 31, 1999. Although cash decreased during the quarter,
debt decreased by $2.4 million as a $4.2 million decrease in revolving credit
facility borrowings were partially offset by the $2.0 million subordinated loan
from Paragon discussed above.
OPERATING ACTIVITIES. The Company had a $2.1 million cash inflow from operating
activities during the quarter as compared to a cash inflow of $0.6 million in
the prior year comparable period. In the current year, the Company had a net
loss of $0.7 million, which included $0.7 million of merger transaction costs,
compared to net income of $0.2 million in the prior year quarter.
Accounts receivable decreased by $4.3 million in the first quarter ended October
30, 1999 and $1.7 million in the comparable period ended October 31, 1998
resulting from collection of the relatively high outstanding balances which
exist at the inception of each fiscal year. The current year decrease was larger
than the prior year decrease due to improved collection rates in the current
year quarter. Depreciation expense was approximately $0.5 million in both the
current and prior year periods. Inventory decreased in the current quarter by
$0.4 million compared to an increase of $1.2 million in the comparable prior
year period which was due primarily to higher stocking levels of machines and
supplies to support the Company's digital product offering. In the quarter ended
October 30, 1999, the $2.0 million subordinated loan from Paragon largely funded
a $2.6 million decrease in accounts payable which were greater than 50% past due
at the end of the prior fiscal year due to the Company's liquidity difficulties.
During the prior year quarter, accounts payable increased by $1.1 million due
primarily to the higher inventory levels discussed above.
INVESTING ACTIVITIES. No cash was expended for investing activities during the
current quarter. During the comparable prior year period, $0.2 million was spent
on both acquisition activities and capital expenditures.
FINANCING ACTIVITIES. During the first quarter ended October 30, 1999, the
Company borrowed $2.0 million under its subordinated debt agreement with
Paragon. During this period net borrowings under the Company's revolving credit
facility decreased by $4.2 million largely as a result of the operating and
financing activities discussed above. In the comparable prior year first
quarter, the Company issued $1.1 million in payments of general unsecured
bankruptcy claims, which included the final scheduled quarterly payment.
YEAR 2000 DISCLOSURE
The Company's information systems have required certain modifications to enable
them to be able to process information without regard to whether the date occurs
prior to or after the year 2000. Currently, all systems will properly identify a
year that begins with "20" instead of the familiar "19". The Company's
information systems are relatively new, and its recent systems implementation in
the Fall of 1997 achieved near compliance in the Company's operating systems and
full compliance in its host hardware. As of March 1999, the Company attained
full compliance in both the ERP systems and host hardware. The Company expended
approximately
<PAGE>
$0.3 million in the prior fiscal year to attain compliance and does not
anticipate any further expenditures on any "Year 2000" issues.
The Company also completed a comprehensive review of its other equipment and
operating systems, and contacted its significant vendors and service
providers to assess the possible impact on the Company of such third parties'
failure to address Year 2000 issues. Although the Company cannot verify the
results of its inquiries of third parties, it has not received any
information to date (other than as discussed below) that would lead it to
believe that there will be material problems in obtaining products, supplies
and services from its third party service providers and vendors. The
Company's largest vendor has recently converted to a new computer system and
as a result of conversion issues, the Company has experienced delays in
receiving product from this vendor. To date, it has not had a material
effect on the business. The vendor is working to resolve its issues and,
where possible, the Company is substituting similar products from other
vendors. We are unable to determine at this time the resulting impact, if
any, on the operations of the Company. Nevertheless, any significant or
prolonged interruption in the supply of essential services or products could
adversely affect the Company's revenues and financial results. Similarly,
problems with any significant portion of the Company's 20,000 customers in
processing and paying invoices from the Company could result in cash flow
shortages and liquidity problems.
The Company has undertaken a number of steps to address potential Year 2000
problems. The systems issues and supplier surveys described above are a part of
those efforts. If at any time the Company identifies potential problems with a
service provider or other vendor, it will attempt to obtain services and
products from other sources. The Company has available to it a broad range of
products, however, and does not believe serious shortages will materialize.
Although the Company has completed and tested its systems capabilities in
advance of the year 2000, the Company is prepared to operate without significant
portions of its information systems, just as it currently operates when portions
of the systems are out of service for repairs or upgrades. Customer service
representatives are trained to take orders without access to the information
systems, purchasing representatives are trained to purchase parts without access
to the information systems, and the Company's finance department is preparing to
invoice and bill customers without access to the information systems, if
necessary. The Company is unable to anticipate whether significant customers or
significant numbers of its customers will have difficulty processing and paying
its invoices. Moreover, the Company cannot predict or address all possible
problems which may be associated with Year 2000 issues.
<PAGE>
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 merger agreement with Paragon. These statements are highly
dependent upon a variety of important factors that could cause such results or
events to differ materially from those expressed or implied in these statements.
These factors include, but are not limited to, changing market conditions, the
Company's ability to complete the proposed merger with Paragon, the availability
and cost of products, maintenance of principal vendor relations, the impact of
competitive products and pricing, the continued availability of sources of
financing 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.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The Company is exposed to market risk related to change in interest rates. At
October 30, 1999, the Company had approximately $5.6 million of debt outstanding
on a revolving credit facility with floating interest rates tied to the prime
rate. If this rate was to increase 10 percent, the increase in interest payments
would not have a material impact on the Company's net income or cash flows. In
addition, the Company has fixed rate financing arrangements under subordinated
debt and capital lease obligations in the amount of $3.0 million. A 10 percent
change in interest rates would not have a material impact on the fair market
value of this debt.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS
27 Financial Data Schedule
(b) Reports on Form 8-K
None
<PAGE>
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: December 3, 1999 /s/ Gregory T. Knipp
---------------- -----------------------------------
Gregory T. Knipp
Vice President and Chief Financial Officer
(authorized officer and principal
accounting officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-2000
<PERIOD-START> AUG-01-1999
<PERIOD-END> OCT-30-1999
<CASH> 1,259
<SECURITIES> 0
<RECEIVABLES> 11,942
<ALLOWANCES> 397
<INVENTORY> 10,523
<CURRENT-ASSETS> 23,862
<PP&E> 15,873
<DEPRECIATION> 7,996
<TOTAL-ASSETS> 36,529
<CURRENT-LIABILITIES> 35,304
<BONDS> 0
0
0
<COMMON> 70
<OTHER-SE> (11,022)
<TOTAL-LIABILITY-AND-EQUITY> 36,529
<SALES> 24,240
<TOTAL-REVENUES> 24,240
<CGS> 18,926
<TOTAL-COSTS> 24,949
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 75
<INTEREST-EXPENSE> 476
<INCOME-PRETAX> (709)
<INCOME-TAX> 0
<INCOME-CONTINUING> (709)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (709)
<EPS-BASIC> (0.25)
<EPS-DILUTED> (0.25)
</TABLE>
