EXHIBIT 2.3
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
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In re: : Chapter 11
MASTER GRAPHICS, INC, et al., : Case No. 00-2929(PJW)
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:
Debtors. : Jointly Administered
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DISCLOSURE STATEMENT WITH RESPECT TO
THE FIRST AMENDED JOINT PLAN OF REORGANIZATION OF
MASTER GRAPHICS, INC. AND PREMIER GRAPHICS, INC.
------------------------------------------------
John Wm. Butler, Jr.
George N. Panagakis
Mark A. McDermott
SKADDEN, ARPS, SLATE, MEAGHER
& FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, Illinois 60606-1285
(312) 407-0700
- and -
Mark S. Chehi (I.D. No. 2885)
SKADDEN, ARPS, SLATE, MEAGHER
& FLOM LLP
One Rodney Square
P.O. Box 636
Wilmington, Delaware 19899-0636
(302) 651-3000
ATTORNEYS FOR DEBTORS
Dated: December 19, 2000
DISCLAIMER
THE INFORMATION CONTAINED IN THIS DISCLOSURE STATEMENT IS INCLUDED HEREIN
FOR PURPOSES OF SOLICITING ACCEPTANCES OF THE FIRST AMENDED JOINT PLAN OF
REORGANIZATION OF MASTER GRAPHICS, INC. AND PREMIER GRAPHICS, INC. (THE "PLAN")
AND MAY NOT BE RELIED UPON FOR ANY PURPOSE OTHER THAN TO DETERMINE HOW TO VOTE
ON THE PLAN. NO PERSON MAY GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS,
OTHER THAN THE INFORMATION AND REPRESENTATIONS CONTAINED IN THIS DISCLOSURE
STATEMENT, REGARDING THE PLAN OR THE SOLICITATION OF ACCEPTANCES OF THE PLAN.
ALL CREDITORS ARE ADVISED AND ENCOURAGED TO READ THIS DISCLOSURE STATEMENT
AND THE PLAN IN THEIR ENTIRETY BEFORE VOTING TO ACCEPT OR REJECT THE PLAN. PLAN
SUMMARIES AND STATEMENTS MADE IN THIS DISCLOSURE STATEMENT ARE QUALIFIED IN
THEIR ENTIRETY BY REFERENCE TO THE PLAN AND THE EXHIBITS AND SCHEDULES ANNEXED
TO THE PLAN AND THIS DISCLOSURE STATEMENT. THE STATEMENTS CONTAINED IN THIS
DISCLOSURE STATEMENT ARE MADE ONLY AS OF THE DATE HEREOF, AND THERE CAN BE NO
ASSURANCE THAT THE STATEMENTS CONTAINED HEREIN WILL BE CORRECT AT ANY TIME AFTER
THE DATE HEREOF.
THIS DISCLOSURE STATEMENT HAS BEEN PREPARED IN ACCORDANCE WITH SECTION 1125
OF THE UNITED STATES BANKRUPTCY CODE AND RULE 3016(b) OF THE FEDERAL RULES OF
BANKRUPTCY PROCEDURE AND NOT NECESSARILY IN ACCORDANCE WITH FEDERAL OR STATE
SECURITIES LAWS OR OTHER NON-BANKRUPTCY LAW. THIS DISCLOSURE STATEMENT HAS BEEN
NEITHER APPROVED NOR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (THE
"SEC"), NOR HAS THE SEC PASSED UPON THE ACCURACY OR ADEQUACY OF THE STATEMENTS
CONTAINED HEREIN. PERSONS OR ENTITIES TRADING IN OR OTHERWISE PURCHASING,
SELLING OR TRANSFERRING SECURITIES OR CLAIMS OF MASTER GRAPHICS, INC. OR PREMIER
GRAPHICS, INC. IN THESE CASES SHOULD EVALUATE THIS DISCLOSURE STATEMENT AND THE
PLAN IN LIGHT OF THE PURPOSE FOR WHICH THEY WERE PREPARED.
AS TO CONTESTED MATTERS, ADVERSARY PROCEEDINGS AND OTHER ACTIONS OR
THREATENED ACTIONS, THIS DISCLOSURE STATEMENT SHALL NOT CONSTITUTE OR BE
CONSTRUED AS AN ADMISSION OF ANY FACT OR LIABILITY, STIPULATION OR WAIVER, BUT
RATHER AS A STATEMENT MADE IN SETTLEMENT NEGOTIATIONS. THIS DISCLOSURE STATEMENT
SHALL NOT BE ADMISSIBLE IN ANY NON-BANKRUPTCY PROCEEDING NOR SHALL IT BE
CONSTRUED TO BE CONCLUSIVE ADVICE ON THE TAX, SECURITIES, OR OTHER LEGAL EFFECTS
OF THE PLAN AS TO HOLDERS OF CLAIMS AGAINST, OR EQUITY INTERESTS IN, MASTER
GRAPHICS, INC. OR PREMIER GRAPHICS, INC.
i
SUMMARY OF PLAN
The following introduction and summary is a general overview only, which is
qualified in its entirety by, and should be read in conjunction with, the more
detailed discussions, information, and financial statements and notes thereto
appearing elsewhere in this Disclosure Statement and the First Amended Joint
Plan of Reorganization of Master Graphics, Inc. and Premier Graphics, Inc. (the
"Plan"). All capitalized terms not defined in this Disclosure Statement have the
meanings ascribed to such terms in the Plan. A copy of the Plan is annexed
hereto as Appendix A.
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This Disclosure Statement contains, among other things, descriptions and
summaries of provisions of the Plan being proposed by Master Graphics, Inc. and
Premier Graphics, Inc. (collectively, the "Debtors") as filed on November 20,
2000, and amended on December 19, 2000, with the United States Bankruptcy Court
for the District of Delaware (the "Bankruptcy Court"). Certain provisions of the
Plan, and thus the descriptions and summaries contained herein, are the subject
of continuing negotiations among the Debtors and various parties, have not been
finally agreed upon, and may be modified. Such modifications, however, will not
have a material effect on the distributions contemplated by the Plan.
A. Business Overview
Master Graphics, Inc. and its wholly-owned operating subsidiary, Premier
Graphics, Inc., conduct a sophisticated, general commercial printing business
through several operating divisions (the "Divisions") currently located in
thirteen states predominantly in the southeastern and midwestern United States.
The Debtors provide a full range of printing services to a diverse group of
customers, many of which are very large, publicly-traded corporations. The
Debtors' products include full-color travel catalogues, corporate annual
reports, sales brochures, educational literature, posters, maps, and other high-
end print materials.
The Debtors were formed in June 1997 in order to acquire general commercial
printing companies throughout the United States with the aim of becoming a sole-
source provider of printing services to a diverse group of companies. The
Debtors thereafter acquired nineteen printing companies, each of which was
incorporated into the Debtors' operating structure as one of the Divisions
referred to above. The Debtors planned to integrate the operations of the
Divisions in order to capitalize on cost savings realized by economies of scale
and other operational efficiencies.
However, the Debtors encountered numerous difficulties in achieving these
economies and other efficiencies. For instance, despite the Debtors' attempts to
achieve cost savings through the negotiation of trade terms with large paper
suppliers, many Divisions continued to purchase paper and other printing
supplies from regional vendors. Each Division also continued to maintain its own
significant corporate staff, including accounting, purchasing, sales, human
resources, and related personnel. Sales personnel failed to capitalize on cross-
selling opportunities among Divisions, focusing instead on the capacities,
capabilities, and limitations of their own Divisions. Additionally, the
Divisions outsourced a significant amount of work, such as specialty binding and
coating work, that could have been referred to other Divisions.
These operational problems were exacerbated by the Debtors' burdensome
capital structure. The Debtors incurred a significant amount of debt in order to
acquire each printing company. This debt took the form of senior secured
financing, public indebtedness, and purchase money notes issued to certain
sellers of the individual printing companies as a portion of the purchase price
for such companies. The great majority of the sellers were also retained by the
Debtors as management of each Division pursuant to the terms of employment
agreements, many of which were long-term and lucrative to the employees.
As a result of these operational and financial difficulties, the Debtors
were unable to pay a significant interest payment to holders of its public
indebtedness that came due on June 1, 2000. The Debtors therefore exercised a
30-day grace period under the terms of the indenture governing this indebtedness
in an effort to explore their strategic alternatives. After commencing
negotiations with holders of this indebtedness and other creditor
constituencies, the Debtors determined that commencement of these Chapter 11
reorganization proceedings was in the best interests of all stakeholders because
it would have been difficult outside of such proceedings to implement the
Debtors' strategic business plan and to restructure their debt obligations.
The Plan is premised upon implementation of a business plan developed by
the Debtors with the assistance of their financial advisors and management
consultants (the "Business Plan"). The Business Plan contemplates the
restructuring of the Debtors' operations around a core group of their operating
Divisions (the "Core Divisions"). The remaining Divisions (the "Non-
ii
Core Divisions") will be disposed of, either by sale, combination, or
liquidation, and the proceeds used to reduce the Debtors' secured indebtedness.
The Business Plan also contemplates the sale or other disposition of certain
items of leased and owned equipment, including the relocation of certain
equipment from some Divisions to others. The Business Plan, including
anticipated cost savings and other efficiencies, is discussed in detail in
Article VII.F. of this Disclosure Statement.
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The Plan is also premised on the substantial restructuring of the Debtors'
unsecured indebtedness, including in particular the indebtedness owed to holders
of the Debtors' public indebtedness. Specifically, the Plan contemplates
cancellation of the Debtors' existing equity and the unsecured indebtedness of
Master Graphics, Inc. and conversion of substantially all of the unsecured
indebtedness of Premier Graphics, Inc. into substantially all of the equity in
the reorganized enterprise which will be organized as a holding company and
operating subsidiary.
While the Debtors believe that the Business Plan and proposed financial
restructuring are reasonable and appropriate, they include a number of
assumptions that may differ from actual results and are subject to a number of
risk factors. These risk factors are discussed in Article IX of this Disclosure
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Statement.
B. Basis of the Plan
After careful review of the Debtors' current business operations, estimated
recoveries in a liquidation scenario, the prospects of ongoing business
relationships, and the Business Plan, the Debtors have concluded that the
recovery to the Debtors' creditors will be maximized by the continued operation
of the Debtors' printing business through the Core Divisions. In particular,
according to the liquidation analysis and other analyses prepared by the Debtors
with the assistance of their financial advisors, the Debtors believe that the
value of their estates is greater as a going concern than in a liquidation.
C. Summary of Treatment of Claims and Interests Under the Plan
The Plan constitutes a separate plan of reorganization for each of the
Debtors. Accordingly, the Plan contains separate classes for the Claims and
Interests of each Debtor. As contemplated by the Bankruptcy Code, Administrative
Claims and Priority Tax Claims are not classified. See Article VIII.B.1. for a
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summary of the treatment proposed under the Plan for Administrative Claims and
Priority Tax Claims.
The table below summarizes the classification and treatment of the
prepetition Claims and Interests under the Plan. The classification and
treatment for all Classes are described in more detail under Article VIII.B.2.
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The table below also sets forth the Debtors' estimates of the amount of
Claims that will ultimately become allowed in each Class based upon review by
the Debtors of all Claims scheduled by and filed against the Debtors and
consideration of the provisions of the Plan that affect the allowance of certain
Claims. The table below includes an estimated percentage recovery for holders of
Claims in each Class. For purposes of estimating the percentage recoveries for
holders of Claims in certain classes as set forth below, the reorganization
value of the Debtors is between $80.65 million and $94.65 million and the New
Holding Company Common Stock was assumed to be valued at between $21.74 million
and $35.74 million in the aggregate, with a mid-point value of $28.74 million.
The estimated percentage recoveries that are based upon distributions of New
Holding Company Common Stock were calculated using the mid-point of this
valuation range.
The Debtors' financial advisors, Lazard Freres & Company, LLC ("Lazard"),
valued the New Holding Company Common Stock based, in part, on information and
financial projections provided by the Debtors. The foregoing valuation
assumptions include, among other things, an assumption that the operating
results projected for the Reorganized Debtors will be achieved in all material
respects, including revenue growth and improvements in operating margins,
earnings and cash flow. Certain of the projected results are materially better
than certain historical results of operations and no assurance can be given that
the projected results will be achieved. To the extent that the valuation
assumptions are dependent upon the achievement of the operating results
projected by the Debtors, the valuation assumptions must be considered
speculative. The valuation assumptions also consider, among other matters, (i)
market valuation information concerning certain publicly traded equity
securities of certain other companies that are considered relevant, (ii) certain
general economic and industry information considered relevant to the business of
the Reorganized Debtors, and (iii) such other investigations and analyses as
were deemed necessary or appropriate. The Debtors and Lazard believe these
valuation assumptions are reasonable.
iii
The foregoing valuation assumptions are not a prediction or reflection of
post-Confirmation trading prices of the New Holding Company Common Stock or any
other securities. Such securities may trade at substantially higher or lower
prices or not at all because of a number of factors, including those discussed
in Article IX. The trading prices of securities issued under a plan of
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reorganization are subject to many unforeseeable circumstances and therefore
cannot be predicted.
Also, for certain Classes of Claims, the actual amounts of Allowed Claims
could materially exceed or could be materially less than the estimated amounts
shown in the table that follows. Accordingly, for these reasons, no
representation can be or is being made with respect to whether the estimated
percentage recoveries shown in the table below will actually be realized by the
holders of Allowed Claims in any particular Class. In addition, the Plan
provides for certain distribution reserves to be established with respect to
Disputed Claims. As a result, the process of distributing all of the property to
be distributed to holders of Claims under the Plan will be completed over time.
Premier Graphics, Inc.
Class Description Treatment Under Plan
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Class P1 Holders of Allowed Secured Lender Claims shall be
Secured Lender Claims paid in full in Cash from (i) the Proceeds from
the Exit Facility not required by the Reorganized
Debtors for working capital or other purposes, and
(ii) to the extent such proceeds are insufficient
to pay Allowed Secured Lender Claims in full, the
Net Proceeds from sales of Non-Core Divisions
and/or their assets that comprise Collateral of
the Allowed Secured Lender Claims. To the extent
that the Secured Lender Claims are paid in full on
the later of the Effective Date or the date such
claims are allowed, such claims are unimpaired
under the Plan.
Estimated Amount of Claims: $56.8 million
Estimated Percentage Recovery: 100%
Class P2 Class P2 consists of Premier Graphics' obligations
Warrant Put Note Claim to GE Capital under the terms of the Warrant Put
Note Guaranty Agreement. The Warrant Put Note
Guaranty Agreement guarantees Master Graphics'
obligations to GE Capital under the Warrant Put
Note. On, or as soon as reasonably practicable
after, the Effective Date, the Warrant Put Note
Guaranty Agreement shall be replaced by Premier
Graphics' issuance of the New Warrant Put Note
Guaranty Agreement.
Estimated Amount of Claim: up to $2.2 million
Estimated Percentage Recovery: TBD
Class P3 The legal, equitable, and contractual rights of
Other Secured Claims the Holders of Allowed Other Secured Claims,
including primarily capital lease obligations, are
unaltered by the Plan. Holders of such Claims
shall receive either (i) Cash, (ii) such other
treatment as to which the Debtors and the Holders
agree, or (iii) such other treatment that will not
impair the Holders of such Claims.
Estimated Amount of Claims: $5.43 million
Estimated Percentage Recovery: 100%
Class P4 The legal, equitable, and contractual rights of
Other Priority Claims the Holders of Allowed Other Priority Claims,
including claims for wages, salaries, and employee
benefits, are unaltered by the Plan. Holders of
such Claims shall receive either (i) Cash, (ii)
such other treatment as to which the Debtors and
the Holders agree, or (iii) such other treatment
that will not impair the Holders of such Claims.
Estimated Amount of Claims: $0
Estimated Percentage Recovery: 100%
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Premier Graphics, Inc.
Class Description Treatment Under Plan
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Class P5 Holders of Allowed Class P5 General Unsecured
General Unsecured Claims Claims shall receive their pro rata share of (i)
100% of the New Holding Company Common Stock, plus
(ii) distributions from recoveries on Avoidance
Claims and Causes of Action, if any.
Estimated Amount of Claims $160 million
Estimated Percentage Recovery: 13.5% - 22.3%
Class P6 Class P6 consists of unsecured claims against
Administrative Convenience Premier Graphics in an amount equal to or less
Claims than $10,000. At the election of Premier Graphics,
holders of Administrative Convenience Claims shall
receive either (i) Cash in an amount equal to 25%
of the allowed amount of such Claims or (ii) the
treatment afforded holders of Class P-5 General
Unsecured Claims.
Estimated Amount of Claims: $1.6 million
Estimated Percentage Recovery: 13.5% - 25%
Class P7 Class P7 consists of the Old Premier Graphics
Interests Common Stock. Under the Plan, all such Interests
shall be cancelled and the Holders thereof shall
be entitled to no distribution. On the Effective
Date, New Holding Company shall be created, the
New Operating Company Common Stock shall be issued
to New Holding Company, and the New Holding
Company Common Stock shall be issued to Holders of
Class P5 General Unsecured Claims, with the
balance reserved to new management.
Estimated Percentage Recovery: 0%
Master Graphics, Inc.
Class Description Treatment Under Plan
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Class M1 Class M1 arises out of Master Graphics' guaranty
Secured Lender Claims of Premier Graphics' obligations to the
Prepetition Lenders under the Prepetition Credit
Agreement. Holders of such Claims shall receive
the treatment afforded to Class P1 Secured Lender
Claims.
Estimated Amount of Claims: $56.8 million
Estimated Percentage Recovery: 100%
Class M2 Class M2 consists of Master Graphics' obligations
Warrant Put Note Claim to GE Capital under the Warrant Put Note. On, or
as soon as reasonably practicable after, the
Effective Date, the Warrant Put Note shall be
replaced by Master Graphics' issuance of the New
Warrant Put Note to GE Capital.
Estimated Amount of Claim: up to $2.2 million
Estimated Percentage Recovery: TBD
Class M3 The legal, equitable, and contractual rights of
Other Secured Claims the Holders of Allowed Other Secured Claims,
including capital lease obligations, are unaltered
by the Plan. Holders of such Claims shall receive
either (i) Cash, (ii) such other treatment as to
which the Debtors and the Holders agree, or (iii)
such other treatment that will not impair the
Holders of such Claims.
Estimated Amount of Claims: $5.43 million
Estimated Percentage Recovery: 100%
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Master Graphics, Inc.
Class Description Treatment Under Plan
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Class M4 The legal, equitable, and contractual rights of
Other Priority Claims the Holders of Allowed Other Priority Claims,
including claims for wages, salaries, and employee
benefits, are unaltered by the Plan. Holders of
such Claims shall receive either (i) Cash, (ii)
such other treatment as to which the Debtors and
the Holders agree, or (iii) such other treatment
that will not impair the Holders of such Claims.
Estimated Amount of Claims: $0
Estimated Percentage Recovery: 100%
Class M5 Class M5 consist of all General Unsecured Claims
General Unsecured Claims against Master Graphics. Holders of Class M5
Allowed General Unsecured Claims shall receive no
distributions on account of their Claims.
Estimated Amount Claims $19.8 million
Estimated Percentage Recovery: 0%
Class M6 Class M6 consists of the Old Master Graphics
Interests Common Stock and the Old Master Graphics Preferred
Stock. Under the Plan, all such Interests shall be
cancelled and the Holders thereof shall be
entitled to no distribution.
Estimated Percentage Recovery: 0%
THE DEBTORS AND THE UNSECURED CREDITORS' COMMITTEE BELIEVE THAT THE PLAN
PROVIDES THE BEST RECOVERIES POSSIBLE FOR THE HOLDERS OF CLAIMS AGAINST EACH OF
THE DEBTORS AND THUS STRONGLY RECOMMEND THAT YOU VOTE TO ACCEPT THE PLAN.
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vi
TABLE OF CONTENTS
PAGE
I. INTRODUCTION......................................................... 1
II. PLAN VOTING INSTRUCTIONS AND PROCEDURES.............................. 1
A. Definitions................................................. 1
B. Notice to Holders of Claims................................. 1
C. Solicitation Package........................................ 2
D. Voting Procedures, Ballots and Voting Deadline.............. 2
E. Confirmation Hearing and Deadline for Objections to
Confirmation.............................................. 3
III. HISTORY OF THE DEBTORS............................................... 4
A. Description of Business..................................... 4
1. The General Commercial Printing Market................... 4
2. The Debtors' Operations.................................. 4
3. Customers................................................ 5
4. Sales and Marketing...................................... 5
5. Employees................................................ 5
6. Purchasing and Raw Materials............................. 6
7. Competition.............................................. 6
8. Plants and Properties.................................... 6
9. Governmental and Environmental Regulation................ 6
10. Financial Results....................................... 7
B. Formation of the Debtors.................................... 7
1. Overview................................................. 7
2. History of the Acquisitions.............................. 7
3. Consideration for the Acquisitions....................... 8
IV. PREPETITION CAPITAL STRUCTURE OF THE DEBTORS......................... 9
A. The Senior Credit Facility.................................. 9
B. The Senior Notes............................................ 10
C. Seller Notes................................................ 10
D. Earn-Out Agreements......................................... 12
E. Warrant Put Note............................................ 12
F. Personal Property Leases.................................... 12
G. Equity...................................................... 13
1. Redeemable Preferred Stock............................... 13
2. Common Stock............................................. 13
3. Sellers' Warrants........................................ 13
4. Stock Options............................................ 13
V. CORPORATE STRUCTURE OF THE DEBTORS................................... 14
A. Current Corporate Structure................................. 14
B. Boards of Directors......................................... 14
VI. EVENTS LEADING TO COMMENCEMENT
OF THE CHAPTER 11 CASES......................................... 14
VII. THE CHAPTER 11 CASES................................................. 16
A. Continuation of Business; Stay of Litigation................ 16
B. Summary of Certain Relief Obtained at the Outset of the
Chapter 11 Cases.......................................... 16
1. First Day Orders......................................... 16
2. Appointment of Creditors' Committee...................... 17
C. Cash Collateral and Financing............................... 17
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1. Authorization to Use Cash Collateral..................... 17
2. Postpetition Financing................................... 18
D. Other Material Relief Obtained During the Chapter 11 Cases.. 18
1. Employee Retention Program............................... 18
2. Critical Vendors......................................... 19
3. Sales of Certain Divisions............................... 19
4. Closure of Technigrafiks................................. 20
E. Summary of Claims Process, Bar Date, and Claims Filed....... 21
1. Schedules and Statements of Financial Affairs............ 21
2. Claims Bar Date.......................................... 21
3. Proofs of Claim and Other Claims......................... 21
F. Development and Summary of the Business Plan................ 21
VIII. SUMMARY OF THE REORGANIZATION PLAN.................................. 23
A. Overall Structure of the Plan............................... 23
B. Classification and Treatment of Claims and Interests........ 24
1. Treatment of Unclassified Claims Under the Plan.......... 24
2. Treatment of Classified Claims Against Premier Graphics.. 25
C. Other Significant Plan Provisions........................... 28
1. Corporate Existence...................................... 28
2. Corporate Action......................................... 29
3. Vesting, Retention, and Disposition of Assets............ 29
D. Description of Securities to Be Issued in Connection with
the Plan; Possible Privatization of New
Holding Company........................................... 29
E. Registration Rights with Respect to New Holding Company
Common Stock.............................................. 30
F. Post-Consummation Operations of the Debtors................. 31
1. Reorganized Debtors...................................... 31
2. Officers and Directors................................... 31
3. Management Incentive Plan................................ 31
4. Exit Financing Facility.................................. 31
5. Pension Plan............................................. 32
F. Distributions Under the Plan................................ 33
1. Time of Distributions.................................... 33
2. Interest on Claims....................................... 33
3. Disbursing Agent......................................... 33
4. Delivery of Distributions................................ 33
5. Undeliverable Distributions.............................. 33
6. Procedures for Resolving Disputed, Contingent,
and Unliquidated Claims................................ 34
7. Fractional Shares........................................ 34
8. Allowance of Certain Claims.............................. 35
G. Miscellaneous Matters....................................... 36
1. Postpetition Interest.................................... 36
2. Treatment of Executory Contracts and Unexpired Leases.... 36
3. Exculpation and Limitation of Liability.................. 37
4. Indemnity Claims......................................... 38
5. Releases by Debtors and Debtors-in-Possession............ 38
6. Release by Holders of Claims and Interests............... 39
7. Injunction............................................... 39
H. Preservation of Rights of Action............................ 39
IX. CERTAIN FACTORS TO BE CONSIDERED..................................... 39
A. General Considerations...................................... 39
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B. Certain Bankruptcy Considerations........................... 40
C. Inherent Uncertainty of Financial Projections............... 40
D. Dividends................................................... 40
E. Access to Financing......................................... 40
F. Claims Estimations.......................................... 40
G. Market for New Common Stock................................. 41
X. RESALE OF SECURITIES RECEIVED UNDER THE PLAN.......................... 41
A. Issuance of New Common Stock................................ 41
B. Subsequent Transfers of Securities.......................... 41
XI. CERTAIN INCOME TAX CONSEQUENCES OF THE PLAN.......................... 42
A. Restructuring Transaction Steps............................. 42
B. Income Tax Consequences to the Debtors...................... 43
1. Regular United States Federal Income Tax................. 43
2. Alternative Minimum Tax.................................. 45
C. United States Federal Income Tax Consequences to
Claim Holders............................................. 45
1. Holders of Secured Lender Claims (Classes P-1 and M-1)... 45
2. Holders of Warrant Put Note Claims (Classes P-2 and M-2). 45
3. Holders of General Unsecured Claims of Premier Graphics
(Class P-5) other than Senior Note Claims.............. 45
4. Holders of Senior Note Claims (Class P-5)................ 46
5. Information Reporting and Backup Withholding............. 47
D. United States Federal Income Tax Consequences of the
Disbursing Agent.......................................... 47
E. Importance of Obtaining Professional Tax Assistance......... 47
XII. CONFIRMATION......................................................... 47
A. Feasibility of the Plan..................................... 48
B. Acceptance of the Plan...................................... 48
C. Best Interests of Claim Holders............................. 48
D. Liquidation Analysis........................................ 49
E. Valuation of the Reorganized Debtors........................ 49
1. Reorganization Value..................................... 49
2. Valuation Methodology.................................... 50
F. Application of the "Best Interests" of Creditors Test to
the Liquidation Analysis and the Valuation................ 52
1. Premier Graphics......................................... 52
2. Master Graphics.......................................... 52
G. Confirmation Without Acceptance of All Impaired Classes:
The "Cramdown" Alternative................................ 53
H. Conditions to Confirmation and/or Consummation.............. 54
1. Conditions to Confirmation............................... 54
2. Conditions to the Effective Date......................... 54
I. Waiver of Conditions to Confirmation and/or Consummation.... 54
J. Retention of Jurisdiction................................... 54
XIII. ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PLAN........... 56
A. Continuation of the Chapter 11 Cases........................ 56
B. Alternative Plans of Reorganization......................... 56
C. Liquidation under Chapter 7 or Chapter 11................... 56
XIV. VOTING REQUIREMENTS.................................................. 57
A. Parties in Interest Entitled to Vote........................ 58
B. Classes Impaired Under the Plan............................. 59
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1. Voting Impaired Classes of Claims and Interests.......... 59
2. Non-Voting Impaired Classes of Claims and Interests...... 59
3. Unimpaired Classes of Claims and Interests............... 59
XV. CONCLUSION........................................................... 59
A. Hearing on and Objections to Confirmation................... 60
1. Confirmation Hearing..................................... 60
2. Date Set for Filing Objections to Confirmation........... 60
B. Recommendation.............................................. 60
x
APPENDICES
Appendix A - First Amended Joint Plan of Reorganization of Master
Graphics, Inc. and Premier Graphics, Inc.
Appendix B - Liquidation Analysis
Appendix C - Pro Forma Financial Projections
Appendix D - Reorganization Valuation
xi
DISCLOSURE STATEMENT WITH RESPECT TO
THE FIRST AMENDED JOINT PLAN OF REORGANIZATION OF
MASTER GRAPHICS, INC. AND PREMIER GRAPHICS, INC.
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I. INTRODUCTION
Master Graphics, Inc. and Premier Graphics, Inc. (collectively, the
"Debtors") submit this disclosure statement (the "Disclosure Statement")
pursuant to Section 1125 of Title 11 of the United States Code, 11 U.S.C. (S)(S)
101, et seq. (the "Bankruptcy Code") for use in the solicitation of votes on the
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First Amended Joint Plan of Reorganization (the "Plan") proposed by the Debtors
and filed with the United States Bankruptcy Court for the District of Delaware
(the "Bankruptcy Court") on November 20, 2000, and amended on December 19, 2000.
A copy of the Plan is annexed as Appendix A to this Disclosure Statement.
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This Disclosure Statement sets forth certain information regarding the
Debtors' prepetition operating and financial history, the need to seek Chapter
11 protection, significant events that have occurred during the Chapter 11
Cases, and the anticipated organization, operations, and financing of the
Reorganized Debtors. This Disclosure Statement also describes terms and
provisions of the Plan, including certain alternatives to the Plan, certain
effects of confirmation of the Plan, certain risk factors associated with
securities to be issued under the Plan, and the manner in which distributions
will be made under the Plan. In addition, this Disclosure Statement discusses
the confirmation process and the voting procedures that Claim holders in
Impaired Classes must follow for their votes to be counted.
FOR A DESCRIPTION OF THE PLAN AND VARIOUS RISK AND OTHER FACTORS
PERTAINING TO THE PLAN AS IT RELATES TO CLAIMS AGAINST AND INTERESTS IN THE
DEBTORS, PLEASE SEE ARTICLES VIII AND IX.
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THIS DISCLOSURE STATEMENT CONTAINS SUMMARIES OF CERTAIN PROVISIONS OF THE
PLAN, CERTAIN DOCUMENTS RELATED TO THE PLAN, CERTAIN EVENTS IN THE CHAPTER 11
CASES, AND CERTAIN FINANCIAL INFORMATION. ALTHOUGH THE DEBTORS BELIEVE THAT SUCH
SUMMARIES ARE FAIR AND ACCURATE, SUCH SUMMARIES ARE QUALIFIED TO THE EXTENT THAT
THEY DO NOT SET FORTH THE ENTIRE TEXT OF SUCH DOCUMENTS. FACTUAL INFORMATION
CONTAINED IN THIS DISCLOSURE STATEMENT HAS BEEN PROVIDED BY THE DEBTORS'
MANAGEMENT, EXCEPT WHERE OTHERWISE SPECIFICALLY NOTED. THE DEBTORS DO NOT
WARRANT OR REPRESENT THAT THE INFORMATION CONTAINED HEREIN, INCLUDING THE
FINANCIAL INFORMATION, IS WITHOUT ANY MATERIAL INACCURACY OR OMISSION.
II. PLAN VOTING INSTRUCTIONS AND PROCEDURES
A. Definitions
Except as otherwise defined herein, capitalized terms not otherwise defined
in this Disclosure Statement have the meanings ascribed to them in the Plan. In
addition, all references in this Disclosure Statement to monetary figures refer
to United States currency.
B. Notice to Holders of Claims
This Disclosure Statement is being transmitted to holders of Claims that
are entitled under the Bankruptcy Code and, pursuant to certain Orders entered
by the Bankruptcy Court, to vote on the Plan. See Article VIII for a discussion
------------
and listing of those holders of Claims that are entitled to vote on the Plan and
those holders of Claims and Interests that are not entitled to vote on the Plan.
The purpose of this Disclosure Statement is to provide adequate information to
enable such holders to make a reasonably informed decision with respect to the
Plan prior to exercising their right to vote to accept or reject the Plan.
On December 19, 2000, the Bankruptcy Court approved this Disclosure
Statement as containing information of a kind and in sufficient and adequate
detail to enable such holders to make an informed judgment with respect to
acceptance or rejection of the Plan. THE BANKRUPTCY COURT'S APPROVAL OF THIS
DISCLOSURE STATEMENT DOES NOT
1
CONSTITUTE EITHER A GUARANTY OF THE ACCURACY OR COMPLETENESS OF THE INFORMATION
CONTAINED HEREIN OR AN ENDORSEMENT OF THE PLAN BY THE BANKRUPTCY COURT.
ALL HOLDERS OF CLAIMS AGAINST THE DEBTORS ARE ENCOURAGED TO READ THIS
DISCLOSURE STATEMENT AND ITS APPENDICES CAREFULLY AND IN THEIR ENTIRETY BEFORE
DECIDING TO VOTE EITHER TO ACCEPT OR TO REJECT THE PLAN. This Disclosure
Statement contains important information about the Plan, considerations
pertinent to acceptance or rejection of the Plan, and developments concerning
the Chapter 11 Cases.
THIS DISCLOSURE STATEMENT IS THE ONLY DOCUMENT AUTHORIZED BY THE BANKRUPTCY
COURT TO BE USED IN CONNECTION WITH THE SOLICITATION OF VOTES ON THE PLAN. No
solicitation of votes may be made except after distribution of this Disclosure
Statement, and no person has been authorized to distribute any information
concerning the Debtors other than the information contained herein.
CERTAIN OF THE INFORMATION CONTAINED IN THIS DISCLOSURE STATEMENT IS BY ITS
NATURE FORWARD LOOKING AND CONTAINS ESTIMATES, ASSUMPTIONS AND PROJECTIONS THAT
MAY BE MATERIALLY DIFFERENT FROM ACTUAL FUTURE RESULTS. Except with respect to
the projections set forth in Appendix C annexed hereto (the "Projections") and
----------
except as otherwise specifically and expressly stated herein, this Disclosure
Statement does not reflect any events that may occur subsequent to the date
hereof and that may have a material impact on the information contained in this
Disclosure Statement. Neither the Debtors nor the Reorganized Debtors intend to
update the Projections; thus, the Projections will not reflect the impact of any
subsequent events not already accounted for in the assumptions underlying the
Projections. Further, the Debtors do not anticipate that any amendments or
supplements to this Disclosure Statement will be distributed to reflect such
occurrences. Accordingly, the delivery of this Disclosure Statement shall not
under any circumstance imply that the information herein is correct or complete
as of any time subsequent to the date hereof.
EXCEPT WHERE SPECIFICALLY NOTED, THE FINANCIAL INFORMATION CONTAINED HEREIN
HAS NOT BEEN AUDITED BY A CERTIFIED PUBLIC ACCOUNTING FIRM AND HAS NOT BEEN
PREPARED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.
C. Solicitation Package
Accompanying this Disclosure Statement are copies of (1) the Plan; (2) the
notice of, among other things, the time for submitting Ballots to accept or
reject the Plan, the date, time and place of the hearing to consider
confirmation of the Plan and related matters, and the time for filing objections
to confirmation of the Plan (the "Confirmation Hearing Notice"); and (3) if you
are the holder of Claim(s) entitled to vote on the Plan, one or more Ballots
(and return envelopes) to be used by you in voting to accept or to reject the
Plan.
D. Voting Procedures, Ballots and Voting Deadline
After carefully reviewing the Plan, this Disclosure Statement and the
detailed instructions accompanying your Ballot, please indicate your acceptance
or rejection of the Plan by voting in favor of or against the Plan on the
enclosed Ballot. Please complete and sign your original Ballot (copies will not
be accepted) and return it in the envelope provided.
Each Ballot has been coded to reflect the Class of Claims it represents.
Accordingly, in voting to accept or reject the Plan, you must use only the coded
Ballot or Ballots sent to you with this Disclosure Statement.
IN ORDER FOR YOUR VOTE TO BE COUNTED, YOUR BALLOT MUST BE PROPERLY
COMPLETED AS SET FORTH ABOVE AND IN ACCORDANCE WITH THE VOTING INSTRUCTIONS
ON THE BALLOT AND RECEIVED NO LATER THAN JANUARY 17, 2001, AT 4:00 P.M.
--------
(EASTERN TIME) (THE "VOTING DEADLINE") BY MASTER GRAPHICS, INC., ET AL.,
c/o ROBERT L. BERGER AND ASSOCIATES, INC., 16161 VENTURA BOULEVARD, PMB
732, ENCINO, CALIFORNIA 91436 (THE "VOTING AGENT"). DO NOT RETURN ANY STOCK
CERTIFICATES OR DEBT INSTRUMENTS WITH YOUR BALLOT. Additionally, if you
have any questions about (1) the procedure for voting your Claim with
respect to the packet of materials that you have received or (2) the amount
of your Claim, you should contact the Voting Agent at the address set forth
above or by calling (818) 906-8300.
2
If you wish to obtain, at your own expense, unless otherwise specifically
required by Federal Rule of Bankruptcy Procedure 3017(d), an additional copy of
the Plan, this Disclosure Statement, or any appendices or exhibits to such
documents, please contact the Voting Agent at the address set forth above.
FOR FURTHER INFORMATION AND INSTRUCTION ON VOTING TO ACCEPT OR REJECT THE
PLAN, SEE ARTICLE XII.
-----------
E. Confirmation Hearing and Deadline for Objections to Confirmation
Pursuant to section 1128 of the Bankruptcy Code and Federal Rule of
Bankruptcy Procedure 3017(c), the Bankruptcy Court has scheduled the
Confirmation Hearing for January 25, 2001, at 11:00 a.m. (Eastern Time) before
the Honorable Peter J. Walsh, United States Bankruptcy Judge, at 824 Market
Street, Wilmington, Delaware 19801. The Confirmation Hearing may be adjourned
from time to time by the Bankruptcy Court without further notice except for the
announcement of the adjournment date made at the Confirmation Hearing or at any
subsequent adjourned Confirmation Hearing. The Bankruptcy Court has directed
that objections, if any, to confirmation of the Plan be filed with the Clerk of
the Bankruptcy Court and served so that they are RECEIVED on or before January
--------
17, 2001, at 4:00 p.m. (Eastern Time) by:
Counsel for the Debtors
Skadden, Arps, Slate, Meagher & Flom (Illinois)
333 West Wacker Drive
Chicago, Illinois 60606-1285
Attn: John Wm. Butler, Jr., Esq.
George N. Panagakis, Esq.
- and -
Skadden, Arps, Slate, Meagher & Flom LLP
One Rodney Square
P.O. Box 636
Wilmington, Delaware 19899-0636
Attn: Mark S. Chehi, Esq.
United States Trustee
The Office of the United States Trustee
601 Walnut Street
Suite 950 West
Philadelphia, Pennsylvania 19106
Attn: Frank Perch, Esq.
Counsel for the Creditors' Committee
Wachtell, Lipton, Rosen & Katz, LLP
51 West 52nd Street
New York, New York 10019
Attn: Chaim J. Fortgang, Esq.
Dov Kleiner, Esq.
- and -
Morris Nichols Arsht & Tunnell
1201 Market Street
Wilmington, Delaware 19899
Attn: Derek Abbott, Esq.
3
III. HISTORY OF THE DEBTORS
A. Description of Business
1. The General Commercial Printing Market
The printing industry is one of the largest and most fragmented industries
in the United States. The industry's total estimated sales in 1999 were $155.7
billion. These sales were generated by an estimated 49,000 printing companies.
The printing industry includes general commercial printing, financial printing,
printing and publishing of books, newspapers and periodicals, quick printing,
and production of business forms and greeting cards.
The Debtors focus on providing general commercial printing and related
services. This segment of the printing industry, which is comprised of
approximately 23,000 general commercial printing companies, generated total
revenue of roughly $49.3 billion in 1999.
The general commercial printing business requires a printer to develop a
customer's concept into printable material through the use of design and
electronic prepress services. The printer then imprints the printable material
onto paper; cuts, folds, and binds the finished product; and finally, stores and
distributes the finished product at the customer's direction. Historically,
design and prepress services have been performed by advertising agencies,
specialty printing services, or the customer. However, because of the decreased
cost of, and the technological advancements in, computer-aided design software
and hardware, general commercial printing companies are able to offer electronic
prepress services to their customers on a more efficient and cost-effective
basis.
The primary printing process used by the general commercial printing
industry is offset lithography. In this process, paper is fed into the printing
presses utilized in the offset lithography process either sheet by sheet, on
sheet-fed presses, or on continuous rolls on web presses. Sheet-fed presses
generally are more cost-effective than web presses for jobs of fewer than 50,000
impressions. Sheet-fed presses vary in size and are capable of printing up to 16
pages of letter-sized finished product on a press sheet of 25 by 38 inches with
eight pages on each side at speeds of up to 15,000 impressions per hour.
Web presses generally are used for large printing jobs such as catalogs and
magazines. Web presses print on both sides of a continuous roll of paper at the
same time. Web presses can print 16-page impressions on a press sheet of 23 by
35 inches at speeds of over 40,000 impressions per hour. They can also fold,
glue and perforate a finished product.
Larger printing companies make extensive use of web presses. These
companies specialize in large production runs of over 50,000 copies, generally
pursuant to long-term contracts. However, general commercial printing companies
such as the Debtors tend to be locally-owned and operated and rely heavily on
sheet-fed presses in servicing customers predominately on a job-by-job basis.
These companies compete by offering a high level of customer service and rapid
turnaround of projects.
2. The Debtors' Operations
The Debtors provide service in all areas of general commercial printing,
including (i) the development of a customer's concept into printable material
through the use of electronic prepress services; (ii) the use of printing
presses to imprint the printable material onto paper; (iii) the cutting,
folding, and binding of the finished product; and (iv) the storage and
distribution of the final product.
a. Design and Prepress Services
Prepress services include the development of designs for customers and the
conversion of designs into digitized images. The Debtors offer commercial
prepress services at all of their facilities, enabling each Division to service
customers from inception of the concept through delivery of the finished
product.
Historically such design and prepress services were provided by advertising
agencies, specialty printing services or by the Debtors' customers from their
own in-house processes. However, one of the most significant technological
advancements in the general commercial printing industry in recent years has
been the computerization of the prepress area. Because of such
4
technological advances and a decrease in the cost of such technology, the
Debtors are able to offer design and prepress services to their customers on an
efficient and cost-effective basis.
b. Printing
Once a project moves through prepress production, it is transferred to the
press area where the image is reproduced on paper. As of the Petition Date, the
Debtors operated 77 sheet-fed presses. The Debtors' presses range in size from
11 by 17 inches to 28 by 41 inches, have a color range capable of simultaneously
printing up to ten colors, and print up to 15,000 impressions per hour. The
Debtors also operated web presses capable of printing up to 40,000 impressions
per hour. The web presses are located in six of the Debtors' Divisions.
c. Finishing
The Debtors' finishing operations include cutting, folding, binding and
other operations to finish the printed product. Historically general commercial
printing companies have outsourced these finishing operations due to the
substantial amount of capital investment required for the equipment necessary to
perform these tasks. Because some of the companies that the Debtors acquired
owned such equipment at the time of acquisition, the Debtors are able to offer
finishing operations and provide a completely integrated service from design
through fulfillment.
d. Fulfillment
Fulfillment services include a wide range of labor-intensive services that
combine, package, store and ship the Debtors' finished products. The fulfillment
area also provides electronic tracing services for customer inventory. Large
corporations utilize a variety of the Debtors' fulfillment services.
3. Customers
Most of the Debtors' top customers historically have been large companies.
Consistent with the general commercial printing industry as a whole, the Debtors
have a small percentage of significant long-term contracts with their customers.
Due to the project-oriented nature of the Debtors' customers' printing
requirements, sales to particular customers may vary significantly from year to
year. The Debtors' top ten customers in 1999 accounted for less than 14% of
sales, and no single customer accounted for more than 2.5%.
4. Sales and Marketing
The general commercial printing industry is characterized by strong
relationships between the purchasers of printing services and the salespeople
who service their accounts. The business requires a substantial amount of
interaction with customers, including personal sales calls, art work, reviews of
color and other proofs, and customer approval of the printed piece while it is
being printed. Responsiveness is essential because of the typically short lead
time on most general commercial printing jobs. A well-trained, experienced sales
force therefore is a vital component of any printing company's operating
strategy.
For these reasons, the Debtors market their services based primarily on
quality and responsiveness and, to a lesser degree, on price. As of the Petition
Date, the Debtors employed over 150 salespeople across all of their Divisions, a
majority of whom were paid on a commission basis.
5. Employees
As of the Petition Date, the Debtors employed approximately 1,900
employees. The majority of the Debtors' employees are hourly wage earners. A
small group of employees located at one of the Debtors' Divisions is subject to
a collective bargaining agreement. In connection with the Debtors' acquisition
of various printing companies the Debtors entered into employment agreements
with the former owners of many of the companies. As discussed in more detail
below, the Debtors rejected all of those employment agreements during these
proceedings.
5
6. Purchasing and Raw Materials
The Debtors utilize various raw materials in their printing businesses,
including paper, prepress supplies, printing plates, ink, film, chemicals,
solvents, glue and wire. These materials are purchased from a number of national
and local suppliers. Paper is the largest cost item, comprising approximately
26% of revenue for the year ended December 31, 1999. The Debtors do not maintain
significant inventories of paper and are generally able to pass the cost of the
paper through to their customers. The Debtors have pricing arrangements in place
with several paper suppliers that provide for volume-based discounts and
rebates.
7. Competition
The Debtors compete with a substantial number of other general commercial
printing companies. The major competitive factors are the quality of customer
service, the quality of finished products, and price. The Debtors' ability to
compete effectively in providing customer service and quality finished products
is primarily dependent on production and distribution capabilities, the
availability of equipment, and the ability to perform the services with speed
and accuracy. Despite certain of the Debtors' difficulties in integrating
operations among their Divisions, the Debtors believe they compete effectively
in many of these areas. Although the general commercial printing industry in the
United States remains highly fragmented, recent technological developments and
over capacity in the industry have increased industry consolidation and
competitive pressures.
8. Plants and Properties
The Debtors currently lease land and buildings that house their printing
operations at several locations throughout the United States. The typical leased
facility comprises between 50,000 and 70,000 square feet. Most of these leases
are with insiders--individuals or entities controlled by individuals who
formerly owned individual printing companies prior to their acquisition by the
Debtors and who currently serve as senior management of the Divisions that
operate from the leased facilities. The names of these landlords, the city and
state where the facilities are located, and the monthly rent charged to the
Debtors are listed in Annex 1 attached hereto.
-------
Additionally, the Debtors own the following real properties: (i) a 15,000
square foot facility in Ozark, Missouri; (ii) a 33,000-square-foot facility in
Montezuma, Iowa; (iii) a 73,800-square-foot facility in Springdale, Arkansas;
(iv) an 83,400-square-foot facility in Nashville, Tennessee; (v) a 64,000-
square-foot facility in Indianapolis, Indiana; and (vi) an 18,000-square-foot
facility in Ridgeland, Mississippi.
9. Governmental and Environmental Regulation
The Debtors' manufacturing operations are subject to numerous federal,
state and local laws and regulations relating to human health and safety and the
environment. These laws and regulations address and regulate, among other
matters, wastewater discharge, air quality, the generation, handling, storage,
treatment, disposal and transportation of solid and hazardous wastes, and
releases of hazardous substances into the environment. In addition, third
parties and governmental agencies in some cases have the power under such laws
and regulations to require remediation of environmental conditions and, in the
case of governmental agencies, to impose fines and penalties. The Debtors make
capital expenditures from time to time to stay in compliance with applicable
laws and regulations.
The Debtors have obtained all permits and approvals and filed all
registrations required for the conduct of their businesses, except where the
failure to obtain any permit or approval or file any registration would not have
a material adverse effect on the Debtors' business, financial condition, or
results of operations. The Debtors believe that they are in compliance in all
material respects with the numerous federal, state and local laws, regulations,
permits, and approvals relating to human health and safety and the environment
except where noncompliance would not have a material adverse effect on the
Debtors' business, financial condition or results of operations.
6
10. Financial Results
Set forth below is selected financial data for the Debtors.
9 Months Ended 12 Months Ended
September 30, December 31,
(In thousands, except per share amounts) 2000 1999 1998
---- ---- -----
Revenue $198,537 $ 261,541 $163,277
Gross profit 35,211 $ 54,403 41,937
Impairment loss (1) 34,544 77,746 0
Operating income (loss) (40,420) (81,098) 14,054
Net earnings (loss) (66,449) (105,208) 1,875
Balance Sheet Data (at end of period):
Total assets 134,614 $ 187,439 $207,876
Working capital (8,140) (145,812) 47,925
Long-term obligations (2) 194,757 207,563 145,147
Redeemable common stock warrants 2,200 2,200 0
Redeemable preferred stock 1,677 1,580 1,437
(1) Related primarily to the write-off of goodwill related to acquisitions.
(2) Classified as liabilities subject to compromise as of September 30, 2000.
B. Formation of the Debtors
1. Overview
The Debtors were formed in June 1997. Their initial strategy was to be a
consolidator in the general commercial printing industry. From June 1997 through
July 1999, the Debtors acquired nineteen general commercial printing companies.
In the third quarter of 1999, the Debtors closed one division located in
Ridgeland, Mississippi and consolidated the operations of two Divisions in
Indianapolis, Indiana.
2. History of the Acquisitions
In June 1997, the Debtors acquired all of the outstanding common stock of
(i) Blackwell Lithographers, Inc. located in Ridgeland, Mississippi, and (ii)
Lithograph Printing Company of Memphis located in Memphis, Tennessee. In that
same month, the Debtors also acquired substantially all of the assets of
Sutherland Printing Company with locations in Ozark, Missouri, and Montezuma,
Iowa.
During the next six months through December 1997, the Debtors acquired all
of the outstanding common stock of the following three additional general
commercial printing companies: (i) The Argus Press, Inc. located in Niles,
Illinois; (ii) Phoenix Communications, Inc. located in Atlanta, Georgia; and
(iii) Jones Printing Company, Inc. located in Chattanooga, Tennessee.
During 1998, the Company acquired another eight general commercial printing
businesses, bringing the total number of acquisitions to thirteen. The acquired
businesses were: (i) Harperprints, Inc. located in Henderson, North Carolina;
(ii) Hederman Brothers, Inc. located in Ridgeland, Mississippi; (iii) Phillips
Litho Company, Inc. located in Springdale, Arkansas; (iv) McQuiddy Printing
Company, Inc. located in Nashville, Tennessee; (v) Golden Rule Printing located
in Huntsville, Alabama; (vi) The Printing Company located in Indianapolis,
Indiana; (vii) Stephenson Incorporated located in Alexandria, Virginia; and
(viii) Technigrafiks, Inc. located in Houston, Texas.
Finally, during 1999, the Debtors acquired another five printing
businesses, primarily by stock purchases. The businesses acquired were (i)
Columbia Graphics located in Chicago, Illinois; (ii) Woods Lithographics located
in Phoenix,
7
Arizona; (iii) White Arts, Inc. located in Indianapolis, Indiana; (iv) Eagle
Direct, Inc. located in Denver, Colorado; and (v) Thomasson Printing located in
Carrolton, Georgia.
3. Consideration for the Acquisitions
The consideration the Debtors paid for these companies was comprised of one
or more of the following: (i) cash; (ii) notes to the sellers (the "Seller
Notes"); (iii) assumption of indebtedness; (iv) promises of future payments
contingent upon earnings (the "Earn-Out Agreements"); (v) warrants and stock
options; (vi) employment agreements; and (vii) rent under leases of seller-owned
buildings. The Seller Notes, cash, and debt refinanced are summarized in the
following table.
Debt
Division (1) Seller Notes Cash Refinanced Consideration
-------- ----------- ---- ---------- -------------
Argus Press $ 3,750,000 $ 8,500,000 $ 2,423,749 $ 14,673,749
Columbia 0 11,869,603 6,630,397 18,500,000
Eagle Direct 0 9,131,827 1,868,397 11,000,224
Golden Rule 0 4,132,810 3,867,190 8,000,000
Harperprints 1,125,000 4,568,875 5,431,125 11,125,000
Hederman 2,088,985(4) 1,500,000 4,426,282 7,882,834
Jones Printing 1,250,000 2,672,594 2,478,509 6,401,103
Lithograph 3,750,000 7,433,727 (123,727) 11,060,000
McQuiddy 1,502,948 5,012,697 3,894,303 10,409,948
Phillips Litho 854,210 8,113,078 6,886,922 15,854,219
Phoenix 4,621,308(5) 6,633,030 7,482,970 18,737,318
Stephenson 0 8,109,348 13,890,652 22,000,000
Sutherland 1,090,000 0 3,978,414 5,068,414
Technigrafiks 0 8,570,133 0 8,570,133
Thomasson 0 3,889,000 1,111,000 5,000,000
White Arts (2) 0 0 4,300,000 4,300,000
TPC (2) 0 5,544,426 0 5,544,426
Woods (3) 0 2,820,002 6,724,209 9,544,211
- --------- ----------- ----------- ----------- ------------
Totals $20,032,451 $98,501,150 $75,270,168 $193,803,769
____________________
(1) The B&M Division is not included in this table, nor is Blackwell
Lithographers. B&M Printing was the initial entity at the time of the
Debtors' formation in June 1997. Blackwell Lithographers was closed in
1999.
(2) White Arts and TPC are now a combined Division.
(3) Original cash outlay has been reduced by $1.8 million currently held in
escrow as a year 2000 EBITDA earnout.
8
(4) At the time the Debtors acquired Hederman, Hederman owed approximately $1.8
million to H. Henry (Hap) Hederman, Jr. and his affiliates pursuant to existing
promissory notes. The Seller Notes for Hederman include approximately $1.8
million of notes issued in replacement of such notes.
(5) At the time the Debtors acquired Phoenix Communications, Phoenix
Communications owed approximately $3.47 million pursuant to existing promissory
notes to the former owners of King Mailing Services, a company it had acquired
in 1996. The Seller Note for Phoenix includes approximately $3.47 million of
notes issued in replacement of such notes.
In addition to the foregoing consideration, the Earn-Out Agreements
obligate the Debtors to pay certain former owners additional consideration, but
only if the Divisions surpass certain cash flow-based targets. The measurement
periods under the Earn-Out Agreements range from one to five years. The maximum,
quantifiable earn-out potential under the Earn-Out Agreements is $53.45 million.
To date, however, very few of the Divisions have achieved the cash flow-based
targets. As a consequence, only two former owners have been paid any
consideration under the Earn-Out Agreements: (i) the former owners of
Harperprints, Inc. ($6.9 million) and (ii) the former owner of Phillips Litho
($923,000).
Finally, certain owners of the acquired companies also entered into
employment agreements with the Debtors, and those former owners who owned the
buildings from which they operated their businesses leased those buildings to
the Debtors. Although payments under the employment agreements and the leases
were not formally characterized by the Debtors or the sellers as purchase price
consideration for the acquired companies, the amounts of the payments under the
agreements and the leases were negotiated in conjunction with the other forms of
purchase price consideration summarized above and, in some instances, the
amounts were modified to reflect modifications in the amounts of other forms of
consideration.
IV. PREPETITION CAPITAL STRUCTURE OF THE DEBTORS
A. The Senior Credit Facility
The Debtors are parties to that certain Third Amended and Restated Loan and
Security Agreement dated March 15, 1999 (as amended, the "Prepetition Credit
Agreement") among General Electric Capital Corporation, as agent ("GE Capital"),
Deutsche Financial Services Corporation, as revolving credit agent ("Deutsche"),
and TransAmerica Equipment Financial Services Corporation (collectively with GE
Capital and Deutsche, the "Prepetition Lenders").
The facility provided by the Prepetition Credit Agreement originally
consisted of (i) Term Loan A in the amount of $30 million; (ii) Term Loan B in
the amount of $30 million; and (iii) a revolving credit facility (the
"Revolver") in an amount up to $20 million. Term Loan A bears interest, payable
monthly, at a floating rate equal to LIBOR plus 3.5% and matures in March 2004.
Term Loan B bears interest, payable monthly, at a floating rate equal to LIBOR
plus 4.0% and matures in March 2005. The Revolver, which contains certain
borrowing base limitations, bears interest at the prime rate for corporate loans
published from time to time plus 0.5% and is repayable in full in March 2005.
In December 1999, the Debtors and the Prepetition Lenders amended the
Revolver to provide for an overline amount of $12.5 million (the "Overline
Loan"). The Overline Loan bears interest, payable monthly, at a floating rate
equal to the prime rate plus 3.5%.
As of the Petition Date, the Debtors were indebted to the Prepetition
Lenders under the Prepetition Credit Agreement in the total amount of
approximately $56.8 million, plus accrued interest and applicable costs,
expenses, and fees. This amount was comprised of the following components: (i)
$15.3 million under the Revolver; (ii) $29 million under Term Loan A and Term
Loan B; and (iii) $12.5 million under the Overline Loan.
9
The obligations arising under the Prepetition Credit Agreement are secured
by liens on, and security interests in, substantially all of the real and
personal property assets of Premier Graphics plus a pledge by Master Graphics of
all of the issued and outstanding stock of Premier Graphics.
B. The Senior Notes
Pursuant to the terms of an Indenture dated December 11, 1998, as amended
and supplemented (the "Indenture"), between Premier Graphics and United States
Trust Company of New York, as trustee (the "Indenture Trustee"), Premier
Graphics issued those certain 11 1/2% Senior Notes due 2005 (the "Senior Notes")
in the principal amount of $130 million. The proceeds obtained by Premier
Graphics from issuance of the Senior Notes totaled approximately $125.6 million
and were used to repay indebtedness incurred in the acquisition of various
printing companies, to acquire other printing companies, and in the normal
operations of the Debtors' business.
The Senior Notes are guaranteed by Master Graphics. They bear interest at
11 1/2%, payable semi-annually. They are redeemable, in whole or in part,
beginning in December 2002, at a premium of 5.75%, declining to 2.875% in
December 2003, and to the face amount in December 2004. Premier Graphics did not
pay the semi-annual installment of interest due June 1, 2000, in the amount of
$7.475 million. As of the Petition Date, the unpaid principal and interest owed
on the Senior Notes totaled $137.475 million.
C. Seller Notes
As described above, the Debtors financed the acquisition of certain
printing companies by issuing Seller Notes to certain of the sellers. The Seller
Notes are unsecured and constitute obligations solely of Master Graphics. As
such, the Seller Notes are structurally subordinate in right of payment to all
other obligations of Premier Graphics.
The original face amount of the Seller Notes was approximately $22.1
million. The following table lists the Seller Notes, the seller, the original
principal amount of the Seller Notes, and the current principal amount of the
Seller Note with respect to each Division. The table also identifies which
Seller Notes were amended in connection with issuance of the Senior Notes in
December 1998.
Original Current
Division Seller Principal Principal(1) Amended(2)
- --------------------------- ---------------------- -------------- -------------- ----------
Argus Press Allan Bartel $ 1,875,000 $ 1,450,000 Yes
Joseph Jensen $ 1,875,000 $ 1,450,000 Yes
Blackwell (closed) Bill Blackwell $ 1,000,000 $ 0(3) No
B&M Printing Carl Nelson $ 500,000 $ 0 No
Jack Gammon $ 600,000 $ 0 No
Harperprints Michael Harper $ 1,125,000 $ 1,125,000 No
Hederman Brothers Hap Hederman, Jr. $ 703,500(4) $ 703,500 Yes
H. Henry Hederman, Sr. $ 9,604 $ 0 No
Hederman Senior Trust $ 1,200,000 $ 900,000 Yes
Grandchild Trust No. 1 $ 43,448 $ 0 No
Grandchild Trust No. 2 $ 43,448 $ 0 No
Gerald Barrick $ 88,984 $ 0(5) No
10
Original Current
Division Seller Principal Principal(1) Amended(2)
-------- ------ ---------- ------------ ----------
Jones Printing Robert Rymer $ 32,895 $ 0 No
Wendell Burns $ 1,217,105 $ 1,000,000 No
Lithograph Walter McMullen $ 3,750,000 $ 3,750,000 Yes
McQuiddy David L. McQuiddy, Jr. $ 1,502,948 $ 1,502,948 No
Phillips Litho Phil Phillips $ 854,210 $ 854,210 Yes
Phoenix Comm. Cary Rosenthal $ 557,750 $ 557,750 Yes
Joseph Segal $ 957,750 (6) $ 557,750 Yes
Scott Diamond $ 493,589 (7) $ 482,089 No
Ross Lenhart $ 11,500 $ 0 No
Richard Roberts $ 11,500 $ 0 No
The Cunningham Group $ 1,599,812 $ 0 No
Jon Cunningham $ 95,000 $ 0 No
Segal Services $ 124,000 $ 124,000 Yes
Mynette Segal $ 70,000 $ 70,000 Yes
Bernice Alter $ 50,000 $ 0 No
Mendel Segal $ 259,500 $ 259,500 Yes
Clyde Powell $ 157,363 $ 157,363 Yes
Bart Knight $ 233,544 $ 233,544 Yes
Sutherland Dave Sutherland $ 1,090,000 $ 1,090,000 Yes
- ---------- --------------- ----------- -----------
Totals $22,132,459 $16,267,654
=========== ===========
(1) The Debtors used approximately $4.7 million from the proceeds of the Senior
Notes to repay amounts due under the Seller Notes.
(2) In connection with the issuance of the Senior Notes, the Debtors
restructured approximately $12.5 million of Seller Notes and related
obligations to have the following features: (i) balloon maturity date of
June 30, 2006; (ii) monthly interest payments at 12% per annum if paid when
due or, if not paid when due, accrued interest at 16% per annum until all
accrued interest has been paid; (iii) no restrictive covenants; and (iv) no
rights or remedies against Master Graphics until maturity. After September
1999, the Debtors ceased paying interest under the Seller Notes. Since that
time, interest therefor has accrued under the Seller Notes at 16% per
annum.
(3) The Blackwell Seller Note was repaid in connection with the Blackwell's
resignation from the Debtors.
(4) Includes (i) a promissory note in the original principal amount of $607,000
that replaced an existing note owed to Mr. Hederman and (ii) a promissory
note in the original principal amount of $96,500.
11
(5) Mr. Barrick's Seller Note was paid in full in connection with his
resignation from the Debtors as part of a confidential settlement
negotiated between the Debtors and Mr. Barrick.
(6) Includes (i) a promissory note in the original principal amount of $557,750
and (ii) a promissory note in the original principal amount of $400,000.
(7) Includes (i) a promissory note in the original principal amount of $11,500
and (ii) a promissory note in the original principal amount of $482,089.
D. Earn-Out Agreements
As discussed above, in connection with the acquisition of certain printing
companies, the Debtors agreed, pursuant to the Earn-Out Agreements, to pay the
former owners of such companies cash purchase price consideration contingent
upon the companies surpassing certain cash flow-based targets. Although the
maximum, quantifiable earn-out potential under the Agreements is $53.45 million,
very few of the Divisions have achieved the cash flow-based targets.
E. Warrant Put Note
In connection with the financing of the Debtors' acquisition of the
Harperprints Division, on March 31, 1998, Master Graphics issued to GE Capital a
Common Stock Purchase Warrant and entered into documentation related to the
Warrant (collectively, the "Warrant Purchase Agreement"). The Warrant gave GE
Capital the right to acquire 220,000 shares of Master Graphics' common stock for
an aggregate exercise price of $100.00. Upon the occurrence of certain listed
events, the Warrant granted GE Capital the right to require Master Graphics to
repurchase the common stock underlying the Warrant for a redemption price equal
to the highest of (i) a pro rata share of Master Graphics' book value, (ii) a
pro rata share of the appraised value of Master Graphics, or (iii) the current
market price of the underlying common stock.
The Warrant was amended on December 1, 1999 to allow GE Capital to put the
common stock underlying the warrant to Master Graphics at any time after the
earlier to occur of (i) December 1, 2001, or (ii) upon the occurrence of certain
listed events (including a change of control of Master Graphics and a default
under the Prepetition Credit Agreement). The amendment to the Warrant also
quantified the put price at a minimum of $2.2 million rather than the
calculation listed above (the "Put Option").
On March 17, 2000, GE Capital notified Master Graphics that it was
exercising the Put Option to sell to Master Graphics all 220,000 shares of
Master Graphics common stock for the stated consideration of $2.2 million. In
connection with GE Capital's exercise of the Put Option, on April 3, 2000,
Master Graphics issued that certain Demand Promissory Note to GE Capital in the
amount of $2.2 million (the "Warrant Put Note"). GE Capital has asserted that
Premier Graphics is obligated to satisfy the Warrant Put Note pursuant to the
terms of that certain Company Guaranty Agreement executed by Premier Graphics in
favor of GE Capital on September 26, 1997 (the "Warrant Put Note Guaranty
Agreement"). The Debtors have reserved their rights throughout these Chapter 11
Cases as to the amount, validity, and alleged secured nature of these Claims.
F. Personal Property Leases
The Debtors are obligated under various capital leases for certain
machinery and equipment that expire at various dates during the next 5 years.
As of December 31, 1999, the gross amount of machinery and equipment and related
accumulated amortization recorded under capital leases was approximately
$6,892,000 and $712,000, respectively.
Additionally, on May 10, 1999, Premier Graphics entered into that certain
Master Equipment Lease Agreement ("Master Lease") with Heidelberg Print Finance
Americas, Inc. ("Heidelberg") under which Premier Graphics agreed to lease from
Heidelberg fourteen Heidelberg Speedmaster presses and related equipment. The
term of the Master Lease is ten years and expires in June 2010. During these
Chapter 11 cases, the Debtors have returned to Heidelberg certain of these
presses.
12
G. Equity
1. Redeemable Preferred Stock
In March 1998, Master Graphics issued 177,776 shares of Series A Cumulative
Convertible Preferred Stock (the "Preferred Stock") to GE Capital. The
Preferred Stock carries an annual dividend rate of 5% of its liquidation value,
or $12.8125 per share. However, no dividends have been paid to date. Accrued
and unpaid dividends were $199,000 as of December 31, 1999.
The Preferred Stock is convertible into common stock at the holder's option
at a ratio of 1 share of common stock for each share of Preferred Stock. The
holder may require Master Graphics to redeem the Preferred Stock at the end of
seven years at a price effectively equal to the greater of its liquidation
preference or the fair value of the underlying common stock on an as-if
converted basis. The Preferred Stock was initially recorded at its fair value at
the date of issuance--approximately $1.35 million--and has been accreted to its
mandatory redemption value. As of May 2000, the redemption value was $2.77
million.
2. Common Stock
In the second quarter of 1998, Master Graphics completed an initial public
offering of common stock at $10 per share. From June 10, 1998 until January 21,
2000, Master Graphics' common stock was traded on the NASDAQ National Market. On
January 21, 2000, Master Graphics' common stock was delisted from the NASDAQ
National Market and is now traded on the OTC Bulletin Board. As such, an
established public trading market currently does not exist for the common stock,
but a few brokers may make a market from time to time over-the-counter.
As of the Petition Date, there were 7,923,026 shares of Master Graphics
common stock issued and outstanding. As of March 27, 2000, there were 110
shareholders of record. This number does not reflect the number of beneficial
owners of the common stock as determined by securities position listings.
3. Sellers' Warrants
Master Graphics issued common stock warrants as part of the consideration
given to certain sellers of acquired printing companies. The terms of the
warrants were generally the same, stating that the seller would have the ability
to exercise his warrant at any time during the ten years subsequent to the
initial public offering of Master Graphics' common stock in June 1998. The
exercise price was the initial public offering price--$10 per share. The
collective number of shares obtainable under the warrants is 1,440,710 shares.
In connection with the acquisition of the B&M Printing, Master Graphics
granted rights to acquire 43,000 shares of common stock to the former owners.
As with the other warrants, the exercise price was $10 per share.
4. Stock Options
During 1998, the Debtors adopted the 1998 Equity Compensation Plan, which
provides for grants of stock options, stock appreciation rights, and restricted
stock to selected employees, officers, directors, consultants, and advisers. The
plan, as amended, authorizes the issuance of up to 1.5 million shares of Master
Graphics' common stock. As of December 31, 1998, options to purchase 562,699
outstanding shares had been granted to employees of the Debtors. The exercise
price for all shares under option was the fair market value on the grant date--
$10 per share. The options vest over three years, and will expire, if
unexercised, from five to ten years from the grant date.
During 1998, the Debtors also adopted the 1998 Non-Employee Director Stock
Option Plan, which authorizes the issuance of up to 50,000 shares of common
stock. This Plan was amended on June 16, 2000, to authorize the issuance of up
to 350,000 shares of common stock. Under this plan, non-employee directors have
been granted options covering 162,000 shares of Master Graphics common stock;
the options vest over 3 years and may be exercised over the five-year period
following the grant.
13
V. CORPORATE STRUCTURE OF THE DEBTORS
A. Current Corporate Structure
The only two entities that comprise the Debtors are Master Graphics and
Premier Graphics. Master Graphics owns all of the common stock of Premier
Graphics.
B. Boards of Directors
The following persons comprise the Boards of Directors of both Master
Graphics and Premier Graphics:
Name POSITION
---- --------
Michael B. Bemis Chairman of the Board and Chief Executive Officer
Frederick F. Avery Director
Edmund L. Brunini, Jr. Director
Robert J. Diehl Director
Donald L. Hutson Director
From the Debtors' inception in June 1997, John P. Miller, the Debtors'
founder, served as President, Chief Executive Officer, and Chairman of the Board
of Directors. Immediately prior to Master Graphics' initial public offering of
its common stock in June 1998, Mr. Miller owned 100% of the Master Graphics
Common Stock.
Effective December 31, 1999, however, Mr. Miller resigned from all
positions that he held with the Debtors. All of Mr. Miller's shares of stock in
Master Graphics were sold in November and December 1999 to cover margin calls.
The Debtors do not believe that Mr. Miller currently owns any shares of Master
Graphics' common stock. In addition to Mr. Miller's resignation, Lance T. Fair,
formerly the Debtors' Senior Vice President of Acquisitions and Chief Financial
Officer, resigned effective December 31, 1999.
Michael B. Bemis joined the Debtors' Boards as an independent director on
January 20, 2000 and thereafter became Chairman on February 3, 2000. The
Debtors thereafter promoted Robert J. Diehl, formerly Chief Operating Officer,
to the offices of President and Chief Executive Officer. Additionally, P.
Melvin Henson, Jr., formerly Chief Accounting Officer, was promoted to the
office of Chief Financial Officer. Finally, Donald H. Goldman, formerly Chief
Information Officer, was promoted to the roles of Chief Operating Officer and
Chief Information Officer.
Effective June 16, 2000, Mr. Bemis assumed the position of Chief Executive
Officer. Mr. Diehl thereafter assumed the position of Executive Vice President
of Operations, and Mr. Henson resumed his position as Chief Accounting Officer.
Mr. Goldman has terminated his employment with the Debtors. Effective November
16, 2000, Mr. Diehl's employment was terminated by the Debtors.
Management has continued to operate as a debtor in possession pursuant to
sections 1107 and 1108 of the Bankruptcy Code during the Chapter 11 Cases. In
addition, the Debtors' management has reviewed all major decisions and actions
with the Creditors' Committee (defined below) and has sought approval of
material, non-ordinary course and other matters related to the Debtors from the
Bankruptcy Court.
VI. EVENTS LEADING TO COMMENCEMENT
OF THE CHAPTER 11 CASES
As stated above, the Debtors' initial acquisition strategy was to be a
consolidator in the general commercial printing industry by integrating the
operations of acquired companies in order to capitalize on cost savings realized
by economies of scale and other operational efficiencies.
14
However, the Debtors encountered numerous difficulties in achieving these
economies and other efficiencies. For instance, the Debtors leased the fourteen
Heidelberg Speedmaster presses in an effort to become one of the most
technologically-advanced printing suppliers in the country. These presses were
installed at nine of the Debtors' Divisions, replacing twenty-seven older
presses. However, the simultaneous installation of these presses at 50% of the
Divisions significantly disrupted the Debtors' operations. The presses took
significantly longer to install than anticipated, and, once they were installed,
costs associated with the training cycle were likewise greater than expected.
The delays and disruption caused by this aggressive capital program had an
immediate negative impact on the Debtors' performance. The Divisions' ability
to produce printed products was severely impaired. In addition, the delays had
a negative impact on the Debtors' order backlog because the ability of the
Debtors' sales force to solicit business was limited by the uncertain timing of
the press installation and completion of training.
Similar problems occurred with respect to the Debtors' development of a
plan called "Master Central." The objective of the Master Central strategy was
to generate incremental capacity utilization of the Debtors' equipment and other
fixed assets, both by generating new sales and by coordinating the transfer of
production of jobs among the Debtors' various Divisions and thereby driving
margin improvement.
Although the strategy was and remains sound in concept, the Debtors did not
successfully implement it. During 1999, for instance, almost 65% of Master
Central generated revenue was produced at only three of the Debtors' web press
plants. Moreover, certain Master Central jobs replaced jobs that were
historically produced at higher margins.
Similar problems arose with respect to the ISO 9001 certification program.
This program approach is based upon the assumption that more and more American
companies are consolidating their supplier base--an assumption being born out in
the marketplace--and that those suppliers that can guarantee consistent quality
of products across the supplier's manufacturing system will be in a better
position to participate in the consolidated environment.
Consistent with this strategy, the Debtors embarked in late 1998 upon a
process to gain ISO 9001 certification across their facilities, with the
majority of this effort occurring during the 2nd and 3rd quarters of 1999. This
process requires the formal documentation of internal work flows and procedures
and involves all functional areas. Eight divisions gained certification in
1999. However, the certification process took significant time away from day-
to-day operations. Functional teams were required to develop and document the
steps involved to complete their jobs. Operators were taken away from their
machines or worked overtime; sales representatives were confined to the office
and were not in the field; and senior division management was needed to oversee
this effort. The Debtors therefore postponed further ISO certification
activities until their operations could be stabilized.
Another problem the Debtors encountered in integrating their operations
arose as a result of the fact that each independent acquired company had its own
management information and financial reporting system. These systems generally
were incompatible with one another and the Debtors were not able to
electronically convert data from field systems to the Debtors' corporate system.
Moreover, some systems were not year 2000 compliant.
To remedy the incompatibility issue and year 2000 problems, the Debtors had
to select a management information system that could satisfy the needs of a
multiple division general commercial printing company and install and implement
that system on a division-by-division basis. The Debtors identified a system
that would best satisfy the Debtors' needs for a company-wide system because of
its programming focus towards the printing industry, the integrated nature of
the software, and the installation support being offered by its manufacturer.
The installation process of the new system began in November 1998.
Installation responsibility fell to each Division, with the Debtors' corporate
office providing guidance and insight. However, certain Divisions incurred a
loss of operating focus after installation as the time required to solve start-
up problems took longer than anticipated. The installation and training for the
new system was not completed until September 1999, almost a year after
commencement of the process.
The pace of the foregoing initiatives--all of which were implemented
simultaneously--caused major disruptions throughout the Debtors' plants.
Moreover, despite the Debtors' attempts to achieve cost savings through its
corporate management, each Division continued to maintain its own significant
corporate staff, including accounting, purchasing, sales,
15
human resources, and related personnel. Sales personnel in turn failed to
capitalize on cross-selling opportunities among Divisions, focusing instead on
the capacities and limitations of their own Divisions. The Divisions outsourced
a significant amount of work, such as specialty binding and coating work, that
could have been referred to other Divisions.
In July 1999, the Debtors' boards of directors determined that it would be
in the best interest of Master Graphics' shareholders to engage Donaldson,
Lufkin & Jenrette Securities Corporation and Prudential Securities Incorporated
to seek strategic alternatives to maximize shareholder value. Senior management
spent several weeks assisting in the preparation of an offering memorandum and
engaging in discussions and interviews with potential suitors. However, this
additional distraction negatively affected 1999 operating results. No strategic
transaction resulted from these discussions. The Debtors then determined not to
continue to seek strategic alternatives but instead focused all management
efforts on operations. As part of this process, the Debtors implemented the
senior management changes discussed above.
As a result of the these operational difficulties, the Debtors were unable
to pay a $7.475 million interest payment to holders of the Senior Notes due on
June 1, 2000. The Debtors therefore exercised a 30-day grace period under the
terms of the Indenture in an effort to explore their strategic alternatives.
After commencing negotiations with holders of the Senior Notes and the
Prepetition Lenders, the Debtors determined that commencement of these Chapter
11 reorganization proceedings was in the best interests of all stakeholders.
The Debtors therefore filed their petitions shortly after termination of the 30-
day grace period on July 7, 2000.
VII. THE CHAPTER 11 CASES
A. Continuation of Business; Stay of Litigation
On July 7, 2000 (the "Petition Date"), each of Master Graphics and Premier
Graphics filed a voluntary petition for relief under Chapter 11 of the
Bankruptcy Code. Since the Petition Date, the Debtors have continued to operate
as debtors-in-possession subject to the supervision of the Bankruptcy Court and
in accordance with the Bankruptcy Code. The Debtors are authorized to operate
their business in the ordinary course of business, with transactions out of the
ordinary course of business requiring Bankruptcy Court approval.
An immediate effect of the filing of the Debtors' bankruptcy petitions was
the imposition of the automatic stay under the Bankruptcy Code which, with
limited exceptions, enjoined the commencement or continuation of all collection
efforts by creditors, the enforcement of liens against property of the Debtors,
and the continuation of litigation against the Debtors. This relief provided
the Debtors with the "breathing room" necessary to assess and reorganize their
business. The automatic stay remains in effect, unless modified by the
Bankruptcy Court, until consummation of a plan of reorganization.
B. Summary of Certain Relief Obtained at the Outset of the Chapter 11 Cases
1. First Day Orders
On July 10, 2000, the Debtors filed several motions seeking the relief
provided by certain so-called "first day orders." First day orders are intended
to facilitate the transition between a debtor's prepetition and postpetition
business operations by approving certain regular business conduct that may not
be authorized specifically under the Bankruptcy Code or as to which the
Bankruptcy Code requires prior approval by the Bankruptcy Court.
The first day orders in the Chapter 11 Cases authorized, among other
things:
. the retention of the following professionals to serve on behalf of the
Debtors: Skadden, Arps, Slate, Meagher & Flom (Illinois) and its
affiliated law practice entities as restructuring counsel to the
Debtors; Bass, Berry & Sims, PLC, as special corporate counsel to the
Debtors; Lazard Freres & Company, LLC, as restructuring advisors and
investment bankers; Carl Marks Consulting Group, LLC, as turnaround
management consultants; and Robert L. Berger & Associates, Inc. as
noticing and claims agent;
16
. the continued retention of professionals regularly employed by the
Debtors in the ordinary course of their business;
. the maintenance of the Debtors' bank accounts and operation of their
cash management systems substantially as such systems existed prior to
the Petition Date;
. the payment of employees' accrued prepetition wages and employee
benefit claims;
. the payment of contractors in satisfaction of liens;
. the payment of prepetition shipping charges and related possessory
liens;
. the payment of certain prepetition obligations to customers and the
continuation of customer programs and practices;
. the continuation of utility services during the pendency of the
Chapter 11 Cases;
. the payment of certain prepetition tax claims; and
. the joint administration of each of the Debtors' bankruptcy cases.
2. Appointment of Creditors' Committee
On July 21, 2000, the Office of the United States Trustee for the District
of Delaware appointed an Official Committee of Unsecured Creditors (the
"Committee") pursuant to section 1102 of the Bankruptcy Code to represent the
interests of all unsecured creditors in this case. The members of the Committee
include (i) the Indenture Trustee for the Senior Notes; (ii) Lehman Brothers,
holder of a substantial amount of the Senior Notes; (iii) Dobbs Management
Services, holder of a substantial amount of the Senior Notes; (iv) WWF Paper
Corporation, a large supplier of printing paper; and (v) Case Paper Company,
another large supplier of printing paper.
The Committee has retained as counsel the law firm of Wachtell, Lipton,
Rosen & Katz, LLP located in New York City. Co-counsel to the Committee is the
law firm of Morris Nichols Arsht & Tunnell located in Wilmington, Delaware.
C. Cash Collateral and Financing
1. Authorization to Use Cash Collateral
Cash collateral is defined in the Bankruptcy Code and includes "cash,
negotiable instruments, documents of title, securities, deposit accounts, ...
other cash equivalents ... and ... proceeds, products, offspring, rents or
profits of property subject to a security interest ...." Under the
Bankruptcy Code, the Debtors are prohibited from using, selling, or leasing cash
collateral unless either the appropriate creditor(s) consent or the Bankruptcy
Court, after notice and a hearing, authorizes such action.
The Prepetition Lenders hold liens on, and security interests in,
substantially all of the Debtors' real and personal property, including cash
held in deposit accounts and proceeds from collections on accounts receivable.
As such, certain cash generated from the Debtors' operations constitute the
Prepetition Lenders' cash collateral, which the Debtors may not use without
their consent or an appropriate order from the Bankruptcy Court.
On July 7, 2000, the United States District Court for the District of
Delaware entered an Emergency Cash Collateral Stipulation and Order pursuant to
which the Prepetition Lenders authorized the Debtors to utilize their cash
collateral to pay wages and vendors for delivery of goods pending a hearing on a
more formal request for use of their cash collateral. On July 10, 2000, the
Bankruptcy Court entered an Interim Cash Collateral Stipulation and Order
authorizing the Debtors' continued
17
use of the Prepetition Lenders' cash collateral until August 7, 2000. The
Debtors' interim authority to use cash collateral was extended to September 12,
2000, at which time the Debtors were authorized to use cash collateral on a
final basis.
2. Postpetition Financing
The Debtors rely not only on collections from the operation of their
business to pay expenses and related costs but also on borrowings pursuant to
lines of credit provided by the Prepetition Lenders. On August 3, 2000, the
Debtors therefore obtained authority from the Bankruptcy Court to enter into the
DIP Facility with GE Capital, as agent, and the Prepetition Lenders under which
the Prepetition Lenders agreed to provide financing to the Debtors in an amount
up to $12 million, subject to borrowing base and other limitations. The DIP
Facility Order was supplemented on October 3, 2000 and a Final Order with
respect thereto was entered on November 9, 2000.
D. Other Material Relief Obtained During the Chapter 11 Cases
1. Employee Retention Program
One of the factors that led to the Debtors' deteriorating operating
performance prior to the Petition Date was an incentive compensation structure
that was not based on meaningful performance-based criteria that were designed
to motivate employees to produce profitable business.
As an initial step in remedying this problem, the Debtors sought authority
from the Bankruptcy Court to reject all of their employment agreements with
every member of management, including all members of corporate senior management
and members of management at each of the Divisions.
With the assistance of human capital advisors from Arthur Andersen, LLP
("Arthur Andersen"), the Debtors also developed a comprehensive employee
retention, incentive, and severance plan (the "Employee Incentive Plan")
designed to attract and retain key employees during the reorganization process,
provide new, performance-based incentives to motivate them during the Chapter 11
cases, and to compensate employees who lost their jobs, other than for cause, as
a result of the restructuring of the Debtors' operations.
Under the terms of the Incentive Plan, the Debtors made payments totaling
$685,000 on or about September 30, 2000, as part of the retention bonus
component of the program. In order to qualify for the remaining payment under
this component of the program, employees will have to remain in the Debtors'
employ until the earlier of March 31, 2000, or confirmation of a plan of
reorganization.
Certain key Division managers and sales people and other personnel also
will be entitled to incentive compensation under the Employee Incentive Plan
assuming that their Division earnings before interest, taxes, depreciation,
amortization, and restructuring costs ("EBITDAR") exceed certain targets
established by the Debtors in consultation with the Committee. All incentive
compensation payments will be awarded thirty days after the conclusion of each
six-month performance period beginning with the performance period commencing on
July 1, 2000. Thus, the first payment under the program is payable on January
31, 2001. Although it is difficult to estimate the total amount of payments
that could be made as incentive compensation, all such compensation is self-
funded in that the payments are a function of percentages of EBITDAR performance
over EBITDAR targets. Thus, the better the Divisions perform, the more that key
employees can earn. If the Divisions do not meet their targets, then payments
will be limited accordingly.
In connection with the Debtors' identification of the Non-Core Divisions
(as defined and discussed below), the scope of the Employee Incentive Plan has
been modified with respect to employees of the Non-Core Divisions.
18
2. Critical Vendors
The Debtors' ability to continue to be awarded printing jobs by, and sell
printing jobs to, their customers depends upon the uninterrupted flow of a
handful of obvious, yet very important supplies: paper, ink, binding materials,
glue, and related products. Given the nature of the Debtors' general commercial
printing business, these goods and services are integrally intertwined with the
products and services that the Debtors in turn provide to their customers. The
Debtors therefore believe that absent timely payment to the vendors of these
supplies, the Debtors' operations would be severely damaged, perhaps beyond
repair.
In recognition of these facts, the Debtors obtained from the Bankruptcy
Court authority to pay the prepetition claims of certain critical vendors,
provided that such vendors extend normalized trade credit to the Debtors
postpetition. In particular, the Debtors obtained authority to pay three
categories of key vendors. The first category includes those large vendors that
supply several of the Divisions with critical supplies (the "Company-Wide
Critical Vendors"). These Company-Wide Critical Vendors include Unisource,
Westvaco Corporation, Pitman Company, Athens Paper Co., WWF Paper, Mac Papers,
Inc., and Flint Ink Corporation. The prepetition claims of the Company-Wide
Critical Vendors were approximately $5.6 million.
The second category of critical vendors includes twenty-two vendors
required by certain of the Debtors' large customers to provide particular types
of paper or other supplies in the production of their printing jobs (the
"Customer-Specific Critical Vendors"). The Customer-Specific Critical Vendors'
claims collectively totaled between $432,000 and $456,000 per month prior to the
Petition Date. However, the customers requiring use of these Vendors generated
sales of almost $12 million for the first five months of 2000.
The final category of critical vendors includes roughly two hundred
regional suppliers of paper, ink, specialty services, and specialty labor shops
utilized by various divisions in satisfying their needs (the "Division-Specific
Critical Vendors"). The typical monthly purchases from the Division-Specific
Critical Vendors aggregate $1.8 million per month, or roughly $9,500 per vendor.
In all, the authority obtained by the Debtors, with the support of the
Committee, allowed the Debtors to pay up to $7.88 million in prepetition
critical vendor claims. This authority proved invaluable in the Debtors'
ability to obtain normalized trade terms from their vendors and to stabilize
relations with their suppliers.
3. Sales of Certain Divisions
As discussed below in Article VII.F, the Debtors have developed a business
-------------
plan that contemplates the sale of certain of their operating Divisions and
application of the proceeds of such sales to the secured indebtedness owed to
the Prepetition Lenders and to the claims held by other holders of liens on such
property. As of December 19, 2000, the Debtors had received offers for each of
the Non-Core Divisions and have accepted firm offers to purchase three of their
Non-Core Divisions; these transactions have been approved by the Bankruptcy
Court. The offers were tendered by former owners of those Divisions and/or
persons affiliated with those persons. The Debtors anticipate closing on these
transactions by January 15, 2001. The terms of each sale are discussed below.
a. Hederman Brothers
On November 2, 2000, the Debtors filed a motion with the Bankruptcy Court
requesting authority to approve a sale of the Hederman Brothers Division
("Hederman"), located in Ridgeland, Mississippi, to H. Henry (Hap) Henderman,
Jr., the current president of the Division, former owner of Hederman prior to
its acquisition by the Debtors, and former board member of the Debtors. The
purchase price is equal to the sum of (a) $2.66 million; plus (b) the book
----
value, as of the closing date, of the inventory; plus (c) any prepaid rent on a
----
prorated basis for the month in which closing occurs; less (d) the dollar value
----
of postpetition trade payables of Premier Graphics assumed by the purchaser;
less (e) cure and reinstatement costs of Premier Graphics with respect to
- ----
executory contracts and unexpired leases assumed by the purchaser. The Debtors
will retain the right to the accounts receivable, estimated to be approximately
$1.5 million as of September 30, 2000. Additionally, for a period of
19
ninety (90) days following the closing, the purchaser shall use commercially
reasonable efforts to collect accounts receivable that were created by Hederman
before the closing and that have been outstanding less than ninety (90) days and
remit the amount collected, less a 5% collection fee, to the Debtors. As part of
the sale, the Debtors and the purchaser shall execute mutual releases of any and
all claims they may have against each other. On December 19, 2000, the
Bankruptcy Court entered an order approving the sale and the releases.
b. Columbia Graphics
On December 5, 2000, the Debtors filed a notice of their intent to sell
substantially all the assets, other than accounts receivable, of their Columbia
Graphics Division located in Chicago, Illinois, to Columbia Graphics, LLC, for
an amount equal to the sum of (a) $4,238,300 for the fixed assets; plus (b) the
----
book value of Columbia Graphics' raw materials, inventory, work-in-process and
finished goods as of the closing ($1,524,366 as of September 30, 2000); less (c)
----
Columbia Graphics' postpetition trade payables (approximately $364,000 as of
September 30, 2000) to the extent such amounts are assumed liabilities; less (d)
----
Columbia Graphics' accrued but unpaid postpetition liabilities with respect to
contracts elected to be assumed by the purchaser; less (e) Columbia Graphics'
----
accrued but unpaid postpetition liabilities for the cumulative amount of
vacation pay, pension benefits, and other employee benefits. Additionally, for
a period of ninety (90) days following the closing, the purchaser shall use
commercially reasonable efforts to collect accounts receivable created by
Columbia Graphics before the closing that have been outstanding less than ninety
(90) days and remit the amount collected, less a 5% collection fee, to the
Debtors. As part of the sale, the Debtors and the purchaser shall execute
mutual releases of any and all claims they may have against each other. On
December 19, 2000, the Bankruptcy Court entered an order approving the sale and
the releases.
c. EagleDirect.com
On December 5, 2000, the Debtors filed a notice of their intent to sell
substantially all the assets of their EagleDirect.com Division located in
Denver, Colorado, to Forum4Print, Inc. The sale based on the Debtors' September
30, 2000, balance sheet, would provide consideration of (a) cash at closing in
the amount of $3,108,053; plus (b) the assumption of prepetition and
----
postpetition customer prepaid postage and shipping deposits in the amount of
$1,068,271, for a total consideration of $4,176,324. The purchase price is
based upon estimates of the amounts and values of receivables, deposits, and
fixed assets which will be adjusted as of the closing date. The purchase price
therefore may be adjusted if and to the extent such estimates change as of the
closing. On December 19, 2000, the Bankruptcy Court entered an order approving
the sale and the releases.
d. Stephenson Printing
The Debtors have received offers to purchase substantially all the assets
of their Stephenson Printing Division located in Alexandria, Virginia. Certain
of these offers have been made by George W. Stephenson, the current president of
the Division and former owner of Stephenson Printing prior to its acquisition by
the Debtors. As of December 19, 2000, the Debtors were continuing discussions
and negotiations with Mr. Stephenson and other bidders. If the Debtors and any
bidder succeeded in negotiating terms for an acceptable transaction, the Debtors
anticipate closing the sale as soon as practicable. There is no assurance,
however, that an offer will be submitted that is acceptable to the Debtors, in
which case the Stephenson Printing Division will be liquidated.
4. Closure of Technigrafiks
On September 12, 2000, the Debtors obtained authority from the Bankruptcy
Court to cease all business operations at its Technigrafiks facility located in
Houston, Texas, and to windup Technigrafiks' affairs. This relief was necessary
because Technigrafiks' operations had deteriorated to a point where it was no
longer a viable enterprise, despite the Debtors' extensive efforts to
rehabilitate the business and sell it as a going concern. The Debtors rejected
a lease of a Heidelberg Speedmaster press utilized at the Technigrafiks
facility, rejected the lease of nonresidential real property utilized to operate
the plant, transferred owned equipment from the facility to one of the Debtors'
other Divisions, and currently are in the process of collecting Technigrafiks'
outstanding accounts receivable.
20
E. Summary of Claims Process, Bar Date, and Claims Filed
1. Schedules and Statements of Financial Affairs
On August 21, 2000, each of the Debtors filed its Schedules of Assets and
Liabilities and Statements of Financial Affairs (collectively, the "Schedules
and Statements") with the Bankruptcy Court. The Schedules and Statements were
amended on September 29, 2000, and October 13, 2000. Among other things, the
Schedules and Statements set forth the Claims of known creditors against the
Debtors as of the Petition Date based upon the Debtors' books and records.
These Claims are summarized below and do not include amounts represented by
guaranties.
- ----------------------------------------------------------------------------------------------
CLAIMS
----------------------------------------------------------
DEBTOR SECURED PRIORITY UNSECURED
- ----------------------------------------------------------------------------------------------
Master Graphics Inc. $ 0 $ 0 $ 19,800,000
- ----------------------------------------------------------------------------------------------
Premier Graphics Inc. $ 59,731,000 $ 0 $ 156,839,203
- ----------------------------------------------------------------------------------------------
TOTAL: $ 59,731,000 $ 0 $ 176,639,203
- ----------------------------------------------------------------------------------------------
2. Claims Bar Date
On September 12, 2000, the Bankruptcy Court entered an Order (the "Bar Date
Order") establishing the general deadline for filing proofs of claim against the
Debtors (the "Bar Date"). The deadline established by the Bankruptcy Court was
November 17, 2000, for Claims except Claims of governmental units for which the
deadline is, in accordance with section 502(b)(9) of the Bankruptcy Code,
January 6, 2001 and for Claims based on the rejection of executory contracts and
unexpired leases as to which the bar date is the later of (i) November 17, 2000,
(ii) 30 days after rejection, or (iii) such other date as may be set forth in
the order approving a rejection. The Debtors' claims and notice agent provided
notice of the Bar Date by mailing: (i) a notice of the Bar Date; (ii) a proof of
claim form to each person listed in the Schedules; and (iii) statements which
indicated whether the Claim of each recipient was listed in the Schedules and
Statements as either unliquidated, contingent and/or disputed.
3. Proofs of Claim and Other Claims
Approximately 1,200 proofs of claim have been filed against the Debtors.
Secured Claims filed against Premier Graphics aggregate approximately $61
million and Unsecured Claims against Premier Graphics aggregate approximately
$165 million. Secured Claims and Unsecured Claims against Master Graphics, not
including Claims based on guaranties, aggregate $2.6 million and $31 million,
respectively. In addition, numerous Claims were asserted by various alleged
creditors in unliquidated amounts. The Debtors believe that numerous other
claims that have been asserted or threatened to be asserted are without merit
and intend to object to all such claims. There can be no assurance that the
Debtors will be successful in contesting any of such Claims.
F. Development and Summary of the Business Plan
Because of the Debtors' inability to integrate effectively their operating
Divisions, the Debtors retained the management consulting firm of Carl Marks
Consulting Group, LLC ("Carl Marks") to assist the Debtors in developing a more
unified and profitable business structure. Carl Marks is one of the oldest
crisis and turnaround management consulting firms in the country with extensive
experience in assisting distressed companies such as the Debtors in
restructuring their operations.
21
Carl Marks conducted an extensive investigation of all aspects of the
Debtors' operations before developing recommendations for the Debtors to
consider in restructuring their business. Carl Marks personnel visited all of
the Debtors' operating plants, interviewed key employees, including officers, of
the Debtors at every Division, and conducted several meetings of Division and
corporate leadership where Carl Marks personnel solicited input about the
problems that have plagued the Debtors' operations and how they could be
resolved.
Carl Marks identified numerous operational weaknesses in the Debtors'
business. For instance, each Division maintained separate, duplicative
departments for normal business operations, including accounting, purchasing,
and human resources departments. The decision-making process was exceptionally
decentralized, with each Division acting autonomously with respect to inventory,
payroll, and other expenditures. There was a lack of significant cooperation
and communication among Division presidents. Sales personnel focused on their
particular Divisions without regard to cross-selling opportunities among
Divisions. Capital projects, including the leases of the Heidelberg equipment,
had been poorly implemented resulting in an adverse impact upon operations and
customer relations.
Based upon these and numerous other observations, Carl Marks suggested to
the Debtors that a restructuring of the Debtors' operations should include the
consolidation of certain normal business functions; more centralized decision-
making with respect to purchasing of printing supplies; education of Division
management and sales personnel regarding each Division's printing capacities in
order to maximize cross-selling opportunities; the improved utilization of
equipment by transferring jobs from Divisions operating at full capacity to
those whose equipment is underutilized; the sale or return of certain owned and
leased equipment; the aggressive marketing of the Debtors' large stable of
established customers to obtain a larger share of their printing business, much
of which is dispersed among numerous printing companies; and the reduction in
the amount of work out-sourced, thereby increasing the amount of work retained
among the Divisions.
Based upon these and other recommendations, the Debtors have determined to
restructure their operations around a core group of 11 of their current 17
Divisions. These Divisions (the "Core Divisions") are Argus Press, B&M Printing,
Golden Rule Printing, Harperprints, Jones Printing, Lithograph Printing,
McQuiddy Printing, Sutherland Printing, Thomasson Printing, White Arts/TPC, and
Woods Lithographs. The Core Divisions will comprise the business of the
Reorganized Debtors because of their historically positive operating performance
and because the Debtors believe, based on their business judgment, that they
will continue to generate positive results in the future. As indicated in the
Projections attached hereto as Appendix C, the annual revenues of the Core
----------
Divisions are expected to be in the range of $168 million for 2001, with
projected 2001 EBITDA of roughly $12 million.
The remaining Divisions (the "Non-Core Divisions") include Columbia
Graphics, EagleDirect, Hederman Brothers, Phillips Litho, Phoenix
Communications, and Stephenson Printing. These Divisions historically have
underperformed relative to the Core Divisions. Based upon this and other
factors, the Debtors believe it is unlikely that the operations of the Non-Core
Divisions can be rehabilitated or their performance improved. The Debtors
therefore obtained approval from the Bankruptcy Court to sell the Non-Core
Divisions as going concerns, combine one or more of the Non-Core Divisions with
a Core Division, or cease operations and promptly liquidate the Non-Core
Divisions. As described above in Article VII.D.3., the Debtors anticipate
----------------
closing on sales of Columbia Graphics, EagleDirect, and Hederman Brothers on or
about January 15, 2001. The Debtors continue to pursue other potential
purchasers of Phillips Litho, Phoenix Communications, and Stephenson Printing
either as going concerns or through liquidation.
The estimated proceeds from the sales of Columbia Graphics, EagleDirect,
and Hederman Brothers, plus the estimated proceeds from the anticipated
dispositions of Phillips Litho, Phoenix Communications, and Stephenson Printing
is approximately $31 million, net of liquidation costs, all of which will be
applied to reduce the secured indebtedness owed to the Prepetition Lenders. As
of the Petition Date, the secured indebtedness was approximately $56.8 million.
After application to this indebtedness of the estimated sales proceeds from the
Non-Core Divisions, the remaining secured indebtedness will be roughly $25.8.
The Debtors anticipate that the process of disposing of the Non-Core Divisions
will be substantially complete by June 2001. The Debtors have reserved their
right to re-designate Core and Non-Core Divisions and to sell Core Divisions in
the event appropriate offers acceptable to the Debtors are received.
22
The reduction in secured indebtedness is necessary to meet the Reorganized
Debtors' projected debt-carrying capacity. As indicated in the Projections
attached as Appendix C, the Debtors believe that their projected EBITDA will be
----------
able to support the reduced indebtedness contemplated by the Business Plan.
Indeed, the Business Plan and this Plan of Reorganization contemplate
elimination of approximately $160 million in secured and unsecured indebtedness
through sales of the Non-Core Divisions and conversion of substantially all of
the $130 million in Senior Notes into equity of New Holding Company.
Moreover, one of the potential upsides to this Plan is the prospect of
retaining a portion of the revenues historically generated by the Non-Core
Divisions. The Debtors are attempting to capture a portion of these revenues by
entering into new contracts with key sales personnel from the Non-Core
Divisions. These personnel will either be relocated to Core Divisions or moved
into satellite offices in their current geographic locales. The Business Plan
contemplates the Reorganized Debtors capturing roughly $11.5 million in revenue
from the Non-Core Divisions, generating additional EBITDA of $1.15 million for
2001.
On November 1, 2000, the Debtors filed a motion (the "Core/Non-Core
Motion") with the Bankruptcy Court requesting authority to designate certain of
the Divisions as Core Divisions to be restructured pursuant to the Plan, and to
designate the remaining Divisions as Non-Core to be either sold as going
concerns, combined with other divisions, or liquidated. The Bankruptcy Court
entered an order on November 21, 2000, granting the Core/Non-Core Motion. As
part of that order, the Debtors were granted authority to implement a transition
incentive compensation plan (the "Transition Compensation Plan") for employees
of the Non-Core Divisions. The Plan contemplates incentive-based pay to certain
key employees including Division presidents and certain key salespeople,
designed to motivate such employees to stay with the Debtors during the sales
and wind-up process. In particular, the Plan contemplates paying salespeople
additional commissions in order to entice such personnel to continue working
with the Core Divisions after conclusion of these reorganization proceedings.
VIII. SUMMARY OF THE REORGANIZATION PLAN
THIS SECTION PROVIDES A SUMMARY OF THE STRUCTURE, CLASSIFICATION, TREATMENT
AND IMPLEMENTATION OF THE PLAN AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
THE PLAN, WHICH ACCOMPANIES THIS DISCLOSURE STATEMENT, AND TO THE EXHIBITS AND
SCHEDULES ATTACHED THERETO.
ALTHOUGH THE STATEMENTS CONTAINED IN THIS DISCLOSURE STATEMENT INCLUDE
SUMMARIES OF THE PROVISIONS CONTAINED IN THE PLAN AND IN DOCUMENTS REFERRED TO
THEREIN, THIS DISCLOSURE STATEMENT DOES NOT PURPORT TO BE A PRECISE OR COMPLETE
STATEMENT OF ALL THE TERMS AND PROVISIONS OF THE PLAN OR DOCUMENTS REFERRED TO
THEREIN, AND REFERENCE IS MADE TO THE PLAN AND TO SUCH DOCUMENTS FOR THE FULL
AND COMPLETE STATEMENTS OF SUCH TERMS AND PROVISIONS.
THE PLAN ITSELF AND THE DOCUMENTS REFERRED TO THEREIN WILL CONTROL THE
TREATMENT OF CREDITORS AND EQUITY SECURITY HOLDERS UNDER THE PLAN AND WILL, UPON
THE EFFECTIVE DATE, BE BINDING UPON HOLDERS OF CLAIMS AGAINST, AND INTERESTS IN,
THE DEBTORS, THE REORGANIZED DEBTORS, AND OTHER PARTIES IN INTEREST.
A. Overall Structure of the Plan
Shortly after filing for relief under Chapter 11 of the Bankruptcy Code,
the Debtors focused on the formulation of a plan of reorganization that would
enable them to reorganize and emerge quickly from Chapter 11 in order to
preserve their value as a going concern. The Debtors recognize that, in the
competitive industry in which they operate, a lengthy and uncertain Chapter 11
case would detrimentally affect the confidence in the Debtors by their vendors
and employees, further impair their financial condition, and dim the prospects
for a successful reorganization.
23
The Plan constitutes a separate plan of reorganization for each of the
Debtors. Accordingly, the voting and other confirmation requirements of the
Bankruptcy Code must be satisfied for each of the Debtors. Under the Plan,
Claims against, and Interests in, each of the Debtors are divided into Classes
according to their relative seniority and other criteria.
If the Plan is confirmed by the Bankruptcy Court and consummated, (1) the
Claims in certain Classes will be reinstated or modified and will receive
distributions equal to the full amount of such Claims, (2) the Claims in other
Classes will be modified and will receive distributions constituting a partial
recovery on such Claims, and (3) in the case of Interests, will receive no
distribution. On the Effective Date and at certain times thereafter, the
Reorganized Debtors will distribute Cash, securities and other property in
respect of certain Classes of Claims as provided in the Plan. The Classes of
Claims against the Debtors created under the Plan, the treatment of those
Classes under the Plan, and the securities and other property to be distributed
under the Plan are described below.
The terms of the Plan are based upon, among other things, the Debtors'
assessment of their ability to achieve the goals of the Business Plan, make the
distributions contemplated under the Plan, and pay their continuing obligations
in the ordinary course of the Reorganized Debtors' businesses. Following
consummation of the Plan, the Reorganized Debtors will operate their businesses
with a reduced level of indebtedness and operating expenses.
B. Classification and Treatment of Claims and Interests
Section 1122 of the Bankruptcy Code requires that a plan of reorganization
classify the claims of a debtor's creditors and the interests of its equity
holders. The Bankruptcy Code also provides that, except for certain claims
classified for administrative convenience, a plan of reorganization may place a
claim of a creditor or an interest of an equity holder in a particular class
only if such claim or interest is substantially similar to the other claims of
such class.
The Bankruptcy Code also requires that a plan of reorganization provide the
same treatment for each claim or interest of a particular class unless the
holder of a particular claim or interest agrees to a less favorable treatment of
its claim or interest. The Debtors believe that the Plan complies with such
standard. If the Bankruptcy Court finds otherwise, it could deny confirmation
of the Plan if the holders of Claims and Interests affected do not consent to
the treatment afforded them under the Plan.
The Debtors believe that they have classified all Claims and Interests in
compliance with the requirements of section 1122 of the Bankruptcy Code. If a
Creditor or Interest holder challenges such classification of Claims or
Interests and the Bankruptcy Court finds that a different classification is
required for the Plan to be confirmed, the Debtors, to the extent permitted by
the Bankruptcy Court, intend to make such reasonable modifications to the
classifications of Claims or Interests under the Plan to provide for whatever
classification might be required by the Bankruptcy Court for confirmation.
EXCEPT TO THE EXTENT THAT SUCH MODIFICATION OF CLASSIFICATION ADVERSELY AFFECTS
THE TREATMENT OF A HOLDER OF A CLAIM OR INTEREST AND REQUIRES RESOLICITATION,
ACCEPTANCE OF THE PLAN BY ANY HOLDER OF A CLAIM PURSUANT TO THIS SOLICITATION
WILL BE DEEMED TO BE A CONSENT TO THE PLAN'S TREATMENT OF SUCH HOLDER OF A CLAIM
REGARDLESS OF THE CLASS AS TO WHICH SUCH HOLDER ULTIMATELY IS DEEMED TO BE A
MEMBER.
As stated above, the Plan is comprised of individual Plans proposed
separately by each of the Debtors. The discussion below summarizes the
classification scheme with respect to each Debtor.
1. Treatment of Unclassified Claims Under the Plan
a. Administrative Claims Generally
Administrative Claims consist of the costs and expenses of the
administration of the Chapter 11 Cases incurred by the Debtors. Such costs and
expenses may include with respect to a particular Debtor, but are not limited
to, Claims arising under the DIP Facility, the cost of operating the business
since the Petition Date, the outstanding unpaid fees and expenses of the
24
professionals retained by the Debtors and the Creditors' Committee as approved
by the Bankruptcy Court, and the payments necessary to cure prepetition defaults
on unexpired leases and executory contracts that are being assumed under the
Plan. All payments to professionals in connection with the Chapter 11 Cases for
compensation and reimbursement of expenses and all payments to reimburse
expenses of members of the Creditors' Committee will be made in accordance with
the procedures established by the Bankruptcy Code and the Bankruptcy Rules and
are subject to approval of the Bankruptcy Court as being reasonable.
On, or as soon as reasonably practicable after, the later of (i) the
Effective Date, or (ii) the date on which an Administrative Claim becomes an
Allowed Administrative claim, each holder of an Allowed Administrative Claim
shall receive, in full satisfaction, settlement, release and discharge of and in
exchange for such Allowed Administrative Claim, (i) Cash equal to the unpaid
portion of such Allowed Administrative Claim, (ii) such other treatment as to
which the relevant Debtor and such Claim holder shall have agreed upon in
writing or (iii) as otherwise may be provided under applicable law; provided,
however, that Allowed Administrative Claims against a Debtor with respect to
liabilities incurred in the ordinary course of business during the Chapter 11
Cases shall be paid in the ordinary course of business in accordance with the
terms and conditions of any agreements relating thereto.
b. Priority Tax Claims Generally
Priority Tax Claims against a Debtor are those tax Claims against such
Debtor entitled to priority pursuant to section 507(a)(8) of the Bankruptcy
Code. On, or as soon as reasonably practicable after, the later of (i) the
Effective Date, or (ii) the date on which a Priority Tax Claim becomes an
Allowed Priority Tax Claim, each holder of an Allowed Priority Tax Claim against
a Debtor shall receive in full satisfaction, settlement, release and discharge
of, and in exchange for, such Allowed Priority Tax Claim, at the sole option of
the relevant Debtor, (i) equal Cash payments made on the last Business Day of
every three-month period following the Effective Date, over a period not
exceeding six years after the assessment of the tax on which such Claim is
based, totaling the principal amount of such Claim plus simple interest on any
outstanding balance from the Effective Date calculated at the interest rate
available on ninety (90) day United States Treasuries on the Effective Date,
(ii) such other treatment agreed to by the Allowed Priority Tax Claim holder and
the applicable Debtor or Reorganized Debtor, provided, however, that such
treatment is on more favorable terms to the applicable Debtor than the treatment
set forth in clause (i) hereof, or (iii) payment in full; provided, further,
however, that any Priority Tax Claim that is not an Allowed Claim, including any
Allowed Priority Tax Claim not due and owing on the Effective Date will be paid
in accordance with this section when such Claim becomes due and owing.
2. Treatment of Classified Claims Against Premier Graphics
a. Unimpaired Classes of Claims Against Premier Graphics
(i) Class P-3 (Other Secured Claims)
Class P-3 consists of all Other Secured Claims against Premier Graphics.
An Other Secured Claim is a Claim, other than a Claim owed to the Prepetition
Lenders, that is secured by a lien on property in which a Debtor's Estate has an
interest or that is subject to setoff under section 553 of the Bankruptcy Code,
but only to the extent of the value of the Claim holder's interest in the
applicable Estate's interest in such property or to the extent of the amount
subject to setoff, as applicable. Other Secured Claims also include obligations
under capital leases. The Debtors have a number of capital leases with various
entities that lease the Debtors equipment used in their printing business. The
Debtors anticipate assuming certain of these leases under the Plan. Other
leases will be rejected.
The legal, equitable and contractual rights of the holders of Allowed Other
Secured Claims, including lessors under capital leases against Premier Graphics
that may be rejected, are unaltered by the Plan. Thus, on, or as soon as
reasonably practicable after, the later of (i) the Effective Date, or (ii) the
date on which such Other Secured Claim becomes an Allowed Other Secured Claim,
each holder of an Allowed Other Secured Claim against Premier Graphics shall
receive, in full satisfaction, settlement and release of, and in exchange for,
such Allowed Other Secured Claim, at the election of Premier
25
Graphics or New Operating Company, (i) Cash equal to the amount of such Allowed
Other Secured Claim; (ii) such other less favorable treatment as to which
Premier Graphics or New Operating Company and the holder of such Allowed Other
Secured Claim shall agree upon in writing; or (iii) such other treatment that
will not impair the holder of such Allowed Other Secured Claim pursuant to
Section 1124 of the Bankruptcy Code; provided, however, that any Allowed Other
Secured Claim that is not an Allowed Claim on the Effective Date, including any
Allowed Other Secured Claim not due and owing on the Effective Date will be paid
in accordance with this section if and when such Claim becomes Allowed or is due
and owing. Any default that existed with respect to any Other Secured Claim
immediately prior to the Petition Date shall be deemed cured upon the Effective
Date.
(ii) Class P-4 (Other Priority Claims)
Class P-4 consists of Claims against Premier Graphics that are entitled to
priority under section 507(a) of the Bankruptcy Code, other than Administrative
Claims and Priority Tax Claims. These Claims include primarily Claims of
employees for prepetition wages, salaries, and benefits. The Debtors received
authority from the Bankruptcy Court at the commencement of the Chapter 11 Cases
to pay such Claims in the ordinary course of the Debtors' business. The Debtors
therefore do not anticipate a significant amount of Other Priority Claims. The
Debtors believe that the amount of Other Priority Claims will not exceed the
Reorganized Debtors' ability to pay such Claims as described below.
The legal and equitable rights of the holders of Other Priority Claims
against Premier Graphics are unaltered by the Plan. Thus, on, or as soon as
reasonably practicable after, the later of (i) the Effective Date, or (ii) the
date on which such Other Priority Claim becomes an Allowed Other Priority Claim,
each holder of an Allowed Other Priority Claim shall receive, in full
satisfaction, settlement and release of, and in exchange for, such Allowed Other
Priority Claim, at the election of Premier Graphics or New Operating Company,
(i) Cash equal to the amount of such Allowed Other Priority Claim; (ii) such
other less favorable treatment as to which the Premier Graphics or New Operating
Company and the holder of such Allowed Other Priority Claim have agreed upon in
writing; or (iii) such Claim will be otherwise treated in any other manner such
that it will not be impaired pursuant to section 1124 of the Bankruptcy Code;
provided, however, that any Allowed Other Priority Claim that is not an Allowed
Claim on the Effective Date, including any Allowed Other Priority Claim not due
and owing on the Effective Date will be paid in accordance with this section
when such Claim becomes due and owing. Any default with respect to any Other
Priority Claim that existed immediately prior to the Petition Date will be
deemed cured on the Effective Date.
b. Impaired Classes of Claims and Interests Against Premier Graphics
(i) P-1 (Secured Lender Claims)
The Secured Lender Claims include the Claims of the Prepetition Lenders
under the Prepetition Credit Agreement, including Claims for principal, accrued
but unpaid interest through the Effective Date, and fees and expenses incurred
by the Prepetition Lenders. While currently classified as impaired, to the
extent that the holders of Class P-1 Secured Lender Claims receive Cash in full
satisfaction of the Allowed amount of their Claims on the later of the Effective
Date or the date that such Claims are Allowed, the Class P-1 Secured Lender
Claims are unimpaired.
On, or as soon as reasonably practicable after, the later of (i) the
Effective Date, or (ii) the date on which the Secured Lender Claims against
Premier Graphics become Allowed Secured Lender Claims, the Prepetition Lenders
shall receive, in full satisfaction, settlement, release and discharge of, and
in exchange for, the Secured Lender Claims against Premier Graphics, (i) Cash,
up to the full amount of the Allowed Secured Lender Claims against Premier
Graphics, from the proceeds of the Exit Facility, other than proceeds required
by the Reorganized Debtors for working capital and other purposes, and (ii) to
the extent such proceeds from the Exit Facility are not sufficient to pay the
Allowed Secured Lender Claims in full, Cash to be realized from the Net Proceeds
of the Non-Core Assets that comprise Collateral of the Secured Lenders up to the
remaining unpaid amount of the Allowed Secured Lender Claims. The Exit Facility
is described below.
26
(ii) P-2 (Warrant Put Note Guaranty Agreement Claim)
As described above, Master Graphics issued to GE Capital the Warrant Put
Note in the face amount of $2.2 million. Premier Graphics guaranteed the
obligations of Master Graphics under the Warrant Put Note pursuant to the terms
of that certain Warrant Put Note Guaranty Agreement. Class P-2 consists of
Premier Graphics' guarantee obligations under the terms of the Guaranty
Agreement. Under the Plan, Premier Graphics will issue to GE Capital, in full
satisfaction, settlement, release, and discharge of, and in exchange for, the
Warrant Put Note Guaranty Agreement Claims, the New Warrant Put Note Guaranty
Agreement that will guarantee the obligations of New Holding Company to GE
Capital under the New Warrant Put Note. The terms of the New Warrant Put Note
are described below.
(iii) P-5 (General Unsecured Claims)
Class P-5 consists of all General Unsecured Claims against Premier
Graphics. These include the unpaid principal and interest on the Senior Notes
in the total amount of $137.45 million, Trade Claims arising in connection with
the provision of goods and services to the Debtors in the ordinary course of
business (but not including any Critical Vendors to the extent they have already
been paid), claims arising out of the rejection of unexpired leases of real
property and equipment, claims arising out of the rejection of employment
agreements, claims of Sellers of the Divisions to the Debtors under the Earn-Out
Agreement described above, and any other unsecured claims against the Debtors.
General Unsecured Claims against Premier Graphics shall be satisfied as
follows. On the Effective Date, or as soon thereafter as is reasonably
practicable, each holder of an Allowed General Unsecured Claim against Premier
Graphics shall receive, in full satisfaction, settlement, release and discharge
of, and in exchange for, such Allowed General Unsecured Claim against Premier
Graphics, its Pro Rata share of the New Holding Company Common Stock plus the
proceeds, if any, from Causes of Action, to be distributed by the Disbursing
Agent to holders of Allowed General Unsecured Claims against Premier Graphics,
at such times and in the manner as determined by the Disbursing Agent.
(iv) P-6 (Administrative Convenience Claims Against Premier
Graphics)
Administrative Convenience Claims are those unsecured Claims against
Premier Graphics, in an amount equal to or less than $10,000, that are not
Secured Lender Claims, Other Secured Claims, Administrative Claims, Priority Tax
Claims, or Other Priority Claims. On, or as soon as reasonably practicable
after, the later of (i) the Effective Date, or (ii) the date on which an
Administrative Convenience Claim becomes an Allowed Administrative Convenience
Claim, each holder of an Allowed Administrative Convenience Claim shall receive,
in full satisfaction, settlement, and release of, and in exchange for, such
Allowed Administrative Convenience Claim, at the election of Premier Graphics or
New Operating Company, (i) Cash in an amount equal to 25% of the amount of such
Allowed Administrative Claim if the Debtors have sufficient Cash and Cash
reserves to make such payments, or (ii) the same treatment as is afforded to
holders of Allowed Class P-5 General Unsecured Claims against Premier Graphics
if the Debtors determine that there are insufficient Cash and Cash reserves to
make Cash payments. If the latter election is made, holders of Administrative
Convenience Claims shall be deemed holders of Class P-5 General Unsecured Claims
for all purposes (including voting and distributions) under the Plan. Such
election shall be made by the Debtors on or before the Effective Date.
(v) P-7 (Interests in Premier Graphics)
Interests in Premier Graphics consist of the Old Common Stock of Premier
Graphics owned by Master Graphics. Under the Plan, the Old Common Stock of
Premier Graphics and all other Interests in Premier Graphics will be cancelled
and the holders thereof shall not receive or retain any distribution on account
of such Interests.
27
c. Unimpaired Classes of Claims Against Master Graphics
(i) Class M-3 (Other Secured Claims)
Other Secured Claims against Master Graphics shall be treated in a manner
identical to the treatment of Other Secured Claims against Premier Graphics.
(ii) Class M-4 (Other Priority Claims)
Other Priority Claims against Master Graphics shall be treated in a manner
identical to the treatment of Other Priority Claims against Premier Graphics.
d. Impaired Classes of Claims Against and Interests in Master
Graphics
(i) M-1 (Secured Lender Claims)
Class M-1 consists of Master Graphics' guarantee of Premier Graphics'
obligations to the Prepetition Lenders under the Prepetition Credit Agreement.
Under the Plan, the Prepetition Lenders will receive the treatment specified
above with respect to their Claims against Premier Graphics in full
satisfaction, settlement, release and discharge of, and in exchange for, their
Claims against Master Graphics. While currently classified as impaired, to the
extent that the holders of Class M-1 Secured Lender Claims receive Cash in full
satisfaction of the Allowed amount of their Claims on the later of the Effective
Date or the date that such Claims are Allowed, the Class M-1 Secured Lender
Claims are unimpaired.
(ii) M-2 (Warrant Put Note)
As stated above, GE Capital shall receive the New Warrant Put Note in
exchange for the Warrant Put Note in full satisfaction, settlement, release and
discharge of, and in exchange for, its Warrant Put Note Claims against Master
Graphics.
(iii) M-5 (General Unsecured Claims)
Class M-5 General Unsecured Claims against Master Graphics consist of
Claims arising under the Seller Notes issued by the Debtors to the various
former owners of the Divisions, Master Graphics' guaranty of Premier Graphics'
obligations to holders of the Senior Notes, and other general unsecured claims
against Master Graphics. The holders of General Unsecured Claims against Master
Graphics, a holding company with no material assets, shall not receive or retain
any distribution of property under the Plan on account of their Claims.
(iv) M-6 (Interests in Master Graphics)
On the Effective Date, the Old Master Graphics Common Stock, Old Master
Graphics Preferred Stock, and all other Interests in Master Graphics will be
cancelled and the holders thereof shall not receive or retain any distribution
on account of such Interests.
C. Other Significant Plan Provisions
1. Corporate Existence
On, or as soon as reasonably practicable after, the Effective Date, all
appropriate actions shall be taken, in accordance with the terms of Section 7.7
-----------
of the Plan, to (i) wind up and terminate the corporate existence of Master
Graphics under the laws of Tennessee; (ii) form New Holding Company and New
Operating Company pursuant to the Certificates of Incorporation and By-laws;
(iii) transfer all of the assets of Premier Graphics, other than the Non-Core
Assets and Causes of Action, to a creditor representative designated by the
Debtors, who shall in turn transfer such assets to New Holding Company, which
shall in turn
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transfer such assets to New Operating Company, other than the Non-Core Assets
and Causes of Action; and (iv) issue all of the New Operating Company Common
Stock to New Holding Company. Notwithstanding anything to the contrary in this
Plan, the Unimpaired Claims of a particular Debtor shall remain the obligations
solely of such Debtor and shall not become obligations of any other Debtor by
virtue of the Plan, the Chapter 11 Cases, or otherwise.
2. Corporate Action
On the Effective Date, all other actions contemplated by the Plan shall be
authorized and approved in all respects (subject to the provisions of the Plan).
All matters provided for in the Plan involving the corporate structure of the
Debtors or the Reorganized Debtors, and any corporate action required by the
Debtors or the Reorganized Debtors, in connection with the Plan, shall, as of
the Effective Date, be deemed to have occurred and shall be effective as
provided herein, and shall be authorized and approved in all respects without
any requirement of further action by the security holders or directors of the
Debtors or the Reorganized Debtors.
3. Vesting, Retention, and Disposition of Assets
The Non-Core Assets and Causes of Action shall remain property of the
Estate of Premier Graphics, provided, however, that the Non-Core Assets and
Causes of Action may be transferred to a disposition trust, limited liability
company or other entity to be controlled by New Operating Company if agreed to
by the Debtors, the Committee, and, if there is insufficient Cash to pay in full
the Secured Lender Claims, the Prepetition Lenders. The Estate or such other
entity shall have full authority, by and through the Reorganized Debtors to take
any steps necessary to investigate and prosecute the Causes of Action and to
dispose of the Non-Core Assets consistent with procedures approved by the
Bankruptcy Court and sections 363 and 365 of the Bankruptcy Code, including,
without limitation, the duty and obligation to make distributions to the holders
of Allowed Claims in Classes P-1 and M-1. All liens and security interests in
the Non-Core Assets shall remain intact as to the Non-Core Assets and the Net
Proceeds therefrom to the same extent, validity and relative priority as existed
on the Effective Date. Any proceeds remaining after satisfaction of all Allowed
Secured Lender Claims shall be transferred to New Operating Company.
Upon the making of such Cash payments or the provision of such other
treatment as may be mutually agreed upon by the Debtors and the Prepetition
Lenders, the Prepetition Credit Agreement shall be terminated and any notes
issued thereunder shall be cancelled. To the extent that any termination
statements, instruments of satisfaction, or other similar releases of interests
necessary to terminate or otherwise remove from title or record any filed
financing statements, mortgages, or other documents or agreements evidencing a
security interest in the Debtors' assets shall not have been delivered to the
Reorganized Debtors in proper form for filing and executed by the appropriate
parties prior to, or in connection with, such satisfaction of the Secured Lender
Claims, then the Reorganized Debtors are hereby authorized to (a) execute and
file such statements, instruments, releases or other documents on behalf of the
Prepetition Agent or Secured Lenders with respect to the encumbered assets and
(b) to file, register, or otherwise record a certified copy of the Confirmation
Order, which, once filed, registered or otherwise recorded, shall constitute
conclusive evidence of the release of all security interests in the Debtors'
assets of any kind or nature whatsoever.
On and after the Effective Date, the Reorganized Debtors may operate their
businesses and may use, acquire and dispose of property and compromise or settle
any claims or interests arising or becoming due on or after the Effective Date
without supervision of or approval by the Bankruptcy Court and free and clear of
any restrictions of the Bankruptcy Code or the Bankruptcy Rules, other than
restrictions expressly imposed by the Plan or the Confirmation Order. Without
limiting the foregoing, the Reorganized Debtors may pay the reasonable charges
that they incur on or after the Effective Date for Professionals' fees,
disbursements, expenses or related support services without application to the
Bankruptcy Court.
D. Description of Securities to Be Issued in Connection with the Plan;
Possible Privatization of New Holding Company
The Certificates of Incorporation and By-Laws of each of New Operating
Company and New Holding Company shall be structured as necessary to satisfy the
provisions of the Plan and the Bankruptcy Code, in form and substance reasonably
satisfactory to the Creditors' Committee, and shall include, among other things,
(i) pursuant to section 1123(a)(6) of the Bankruptcy Code, a provision
prohibiting the issuance of non-voting equity securities, but only to the extent
required by section
29
1123(a)(6) of the Bankruptcy Code; and (ii) provisions authorizing the issuance
of New Operating Company Common Stock and New Holding Company Common Stock in
amounts not less than the amounts necessary to permit the distributions thereof
required or contemplated by the Plan. After the Effective Date, the New Holding
Company and New Operating Company may amend and restate their respective
Certificates of Incorporation and Bylaws as permitted by applicable law.
On the Effective Date, except as otherwise provided for in the Plan, (i)
the Existing Securities, which include the Old Premier Graphics Common Stock,
the Old Master Graphics Common Stock, the Old Master Graphics Preferred Stock,
and any other notes, bonds (with the exception of surety bonds outstanding),
indentures or other instruments or documents evidencing or creating any
indebtedness or obligations of a Debtor, except such notes or other instruments
evidencing a Debtor's indebtedness or obligations of a Debtor that are
reinstated or amended and restated under the Plan, shall be cancelled without
any further action; provided however, that such notes or other instruments shall
remain valid solely to the extent necessary to establish ownership for purposes
of the distributions under the Plan, and (ii) the obligations of, and/or Claims
against, the Debtors under or relating to any agreements, indentures or
certificates of designation governing the Existing Securities and any other
notes, bonds, indentures or other instruments or documents evidencing or
creating any indebtedness or obligations of a Debtor, except such notes or other
instruments evidencing indebtedness or obligations of a Debtor that are
reinstated or amended and restated under the Plan, as the case may be, shall be
discharged; provided, however, that each indenture or other agreement that
governs the rights of the Claim holder and that is administered by an indenture
trustee, an agent or a servicer shall continue in effect solely for the purposes
of allowing such indenture trustee, agent or servicer to make the distributions
to be made on account of such Claims under the Plan as provided in the Plan and
with respect to rights solely between the Claim holders and the respective
indenture trustees, agents or servicers (such as an indenture trustee charging
liens); provided, further, that this proviso shall not affect the discharge of
the Debtors' liabilities under the Bankruptcy Code and the Confirmation Order or
result in any expense or liability to the Reorganized Debtors.
At the election of Premier Graphics or New Operating Company, holders of
Allowed P-6 Administrative Convenience Claims shall either receive a Cash
distribution equal to 25% of the allowed amount of such Claims or such Claims
will be provided the same treatment as, and be included as part of, Class P-5
General Unsecured Claims. The Debtors will make such election on or before the
Effective Date depending upon, among other things, whether the Debtors and the
Reorganized Debtors have sufficient Cash and Cash reserves to make a Cash
payment to holders of Allowed Administrative Convenience Claims. If the Debtors
elect to make Cash payments to the holders of Allowed Administrative Convenience
Claims, there will likely be fewer than 300 holders of New Holding Company
Common Stock as the Debtors anticipate that there are likely to be fewer than
300 holders of Class P-5 Claims who would be receiving such New Holding Company
Common Stock. In such event, the New Holding Company may become a private
company that is not subject to the public reporting requirements of the Exchange
Act as long as certain other requirements under the Act are also complied with.
There may be certain advantages to New Holding Company becoming a private
company, including possible cost savings that otherwise may be incurred in
fulfilling the reporting requirements of the Exchange Act if New Holding Company
were to be a public company.
E. Registration Rights with Respect to New Holding Company Common Stock
The issuance of the New Holding Company Common Stock and the distribution
thereof to holders of Allowed Class P-5 Claims shall be exempt from registration
under applicable securities laws pursuant to section 1145(a) of the Bankruptcy
Code. Without limiting the effect of section 1145 of the Bankruptcy Code, not
earlier than the first anniversary of the Effective Date, New Holding Company
will enter into a Registration Rights Agreement with each holder of an Allowed
Class P-5 Claim (i) who by virtue of holding New Holding Company Common Stock to
be distributed under the Plan and/or its relationship with New Holding Company
could reasonably be deemed to be an "affiliate" (as such term is used within the
meaning of applicable securities laws) of New Holding Company, and (ii) who
requests in writing that New Holding Company execute such agreement. Drafts of
such Registration Rights Agreements will be filed by the Debtors with the
Bankruptcy Court no later than the Exhibit Filing Date. The Registration Rights
Agreements shall contain certain shelf, demand and piggyback registration rights
for the benefit of the signatories thereto.
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F. Post-Consummation Operations of the Debtors
1. Reorganized Debtors
On and after the Effective Date, the Reorganized Debtors may operate their
businesses and may use, acquire and dispose of property and compromise or settle
any claims or interests arising or becoming due on or after the Effective Date
without supervision of or approval by the Bankruptcy Court and free and clear of
any restrictions of the Bankruptcy Code or the Bankruptcy Rules, other than
restrictions expressly imposed by the Plan or the Confirmation Order.
2. Officers and Directors
Subject to any requirement of Bankruptcy Court approval pursuant to section
1129(a)(5) of the Bankruptcy Code, as of the Effective Date, the initial boards
of directors of the Reorganized Debtors each shall have five (5) directors. The
Chief Executive Officer shall serve as chairman of the boards of directors and
shall be entitled to appoint one additional director. The Chief Executive
Officer, chief financial officer, and those directors not chosen initially by
the Chief Executive Officer shall be appointed by the Creditors' Committee in
consultation with the Debtors and shall be reasonably acceptable to the Chief
Executive Officer. The Debtors shall file with the Bankruptcy Court written
notice of the identities of the Chief Executive Officer, the other initial
officers and the members of the boards of directors on a date that is not less
than five (5) days prior to the Confirmation Hearing. Notwithstanding the
foregoing, if and to the extent that the Creditors' Committee does not designate
one or more of the foregoing officers or directors within five (5) days prior to
the Confirmation Hearing, then the Debtors shall designate and appoint such
Persons by announcing their identities at the Confirmation Hearing. The current
boards of directors of the Debtors will be deemed to have resigned on the
Effective Date without further action on the part of such boards or the Debtors.
3. Management Incentive Plan
After the Effective Date, the Reorganized Debtors will each have the
authority to terminate, amend or enter into employment, retirement,
indemnification and other agreements with their respective active directors,
officers and employees and to terminate, amend or implement retirement income
plans, welfare benefit plans and other plans for active employees. Such
agreements and plans may include equity, bonus and other incentive plans in
which officers and other employees of the Reorganized Debtors may be eligible to
participate.
4. Exit Financing Facility
As stated above, the Debtors shall pay the Secured Lender Claims, in whole
or in part, from proceeds of the Exit Facility. The Debtors anticipate that
they will obtain an Exit Facility from a lending source, in an amount sufficient
to pay the Secured Lender Claims in full, plus an amount necessary for working
capital and other purposes. Such an Exit Facility will likely be secured by (i)
all or substantially all of the assets of the Reorganized Debtors, including the
Core Divisions, plus (ii) the interests of the Debtors in the Non-Core
Divisions.
The Debtors estimate a need for a working capital facility of approximately
$15 million. The Debtors expect that the terms of such a facility will include
a three to five year revolving line of credit, based on customary lending
formulas, sublimits, and other terms, with a letter of credit subfacility. The
rates for such financing are expected to be based upon a prime rate and LIBOR
rate plus an additional margin that is consistent with other credits of similar
sizes and types. The Debtors also expect to pay other standard fees and
expenses typical of a transaction of this type. The Exit Facility will be
subject to several conditions precedent, and borrowings under the Facility will
be subject to the Debtors satisfying customary financial covenants and ratios.
The Debtors, through their retained investment bank, Lazard, have solicited
proposals for exit financing from more than twenty financial institutions.
Through such solicitation, the Debtors requested proposals for (i) a Tranche A
term loan
31
facility of up to $20 million; (ii) a Tranche B revolving credit facility of up
to $30 million; and (iii) a Tranche C bridge loan facility pending the
completion of the sales or liquidations of the Non-Core Divisions. The Tranche C
bridge loan facility would only be necessary if the proceeds from the Tranche A
facility, the Tranche B facility and the sale or liquidation of the Non-Core
Division Assets were insufficient to make the requisite Cash payments under the
Plan on the Effective Date and to provide adequate working capital for the
operations of the Reorganized Debtors.
As of the date of this Disclosure Statement, the Debtors had received
proposals from three different institutions outlining the terms under which they
would provide the Tranche A and Tranche B components of the Exit Facility and
one proposal regarding the Tranche C component. The terms of the proposals
vary in terms of pricing, availability, closing conditions and other terms and
remain subject to contingencies stated therein. In addition, the Debtors
anticipate receiving at least two additional Exit Facility proposals. While
there can be no assurance that an Exit Facility will be obtained, the Debtors
intend to continue their negotiations with the institutions that submit Exit
Facility proposals and to enter into a final agreement with the party offering
financing on terms most suitable for the Reorganized Debtors in accordance with
the Plan.
If an Exit Facility is obtained, the Debtors will file with the Bankruptcy
Court the final documentation with respect thereto on or before the Effective
Date. The terms and conditions of the Exit Facility will include in all
respects the terms and conditions of the documents filed with respect thereto,
except to the extent that the Debtors and exit lender(s) agree otherwise. In
the Confirmation Order, the Bankruptcy Court will approve the Exit Facility in
substantially the form filed with the Bankruptcy Court and all documents to be
executed in connection therewith (and with such changes as to which the
applicable Debtors and lenders may agree) and authorize the Debtors to execute
the same, together with such other documents as the exit lenders may reasonably
require in order to effectuate the treatment afforded to such parties under the
Exit Facility.
5. Pension Plan
Premier Graphics maintains the Hederman Brothers Pension Plan (the
"Hederman Pension Plan"), a defined benefit pension plan subject to Title IV of
the Employee Retirement Income Security Act of 1974 ("ERISA"). The Hederman
Pension Plan was established by Hederman Brothers, Inc. ("Hederman") effective
January 1, 1966. Hederman became a division of Premier Graphics in 1998. Premier
Graphics froze service and benefit accruals under the Hederman Pension Plan
effective June 10, 1999. As stated above, the Hederman Division is being sold.
The Hederman Pension Plan participants are being transferred to the purchaser.
However, the purchaser of the Hederman assets did not assume the Hederman
Pension Plan.
Premier Graphics and the members of its controlled group, as defined in
Section 4001(a)(14) of ERISA, therefore are obligated to contribute to the
Hederman Pension Plan the amounts necessary to satisfy the minimum funding
standards of Section 412 of the Internal Revenue Code (the "Code") and Section
302 of ERISA. The Hederman Pension Plan may be terminated only if the
provisions of Section 4041 or 4042 of ERISA are satisfied. If the Hederman
Pension Plan is terminated, Premier Graphics and the members of its controlled
group may be jointly and severally liable for the unfunded benefit liabilities
of the Plan under Section 4062 of ERISA. The Pensions Benefit Guaranty
Corporation (the "PBGC") has filed contingent claims against Premier Graphics
and Master Graphics with respect to the Hederman Pension Plan.
As of December 11, 2000, the market value of Hederman Pension Plan assets
was approximately $2,527,627 and the present value of accrued benefits, valued
on a termination basis, was estimated to be approximately $2,574,281. Although
assets and liabilities were approximately the same as of such date, due to the
volatility of the market, the Hederman Pension Plan's funding status on a
termination basis has recently fluctuated widely, ranging from an estimated
$701,780 surplus as of August 31, 2000 to an estimated $332, 479 deficit as of
December 4, 2000. The Hederman Pension Plan is in compliance with Section 412
of the Code and Section 302 of ERISA and is able to pay benefits when due. In
light of the fact that the Hederman Division has been sold but the Hederman
Pension Plan was not assumed by the purchaser, the Debtors anticipate that they
will terminate the Hederman Pension Plan in compliance with applicable laws.
32
F. Distributions Under the Plan
1. Time of Distributions.
Except as otherwise provided for herein or ordered by the Bankruptcy Court,
distributions under the Plan on account of an Allowed Claim shall be made on the
later to occur of (a) the Effective Date (or as soon thereafter as is
practicable) or (b) as soon as reasonably practicable after such Claim becomes
an Allowed Claim, or as otherwise provided by this Plan.
2. Interest on Claims.
Unless otherwise specifically provided for in the Plan, the Confirmation
Order, or required by applicable bankruptcy law, postpetition interest shall not
accrue or be paid on Claims, and no Claim holder shall be entitled to interest
accruing on or after the Petition Date on any Claim. To the extent provided for
in the Plan, the Confirmation Order, or required by applicable bankruptcy law,
postpetition interest shall accrue on Claims at the applicable non-default rate.
Interest shall not accrue or be paid upon any Disputed Claim in respect of the
period from the Petition Date to the date a final distribution is made thereon
if and after such Disputed Claim becomes an Allowed Claim.
3. Disbursing Agent.
The Disbursing Agent, which may include the Reorganized Debtors, the
trustee (the "Trustee") under a creditors' trust that may be created under the
Plan (the "Creditors' Trust"), or such other party as may be designated by the
Reorganized Debtors to serve as disbursing agent with respect to distributions
under the Plan, shall make all distributions required under this Plan, except
that (a) the Indenture Trustee, as agent or servicer, shall make distributions
of New Holding Company Common Stock and proceeds, if any, from Causes of Action
to holders of Allowed Senior Note Claims in accordance with the Indenture, and
(b) the Prepetition Administrative Agent shall make distributions to holders of
Allowed Secured Lender Claims from the proceeds of sale of the Non-Core Assets.
The Disbursing Agent shall reasonably cooperate with the Indenture Trustee, as
agent or servicer, and the Prepetition Administrative Agent in making
distributions in accordance with this Plan.
4. Delivery of Distributions.
Distributions to Allowed Claim holders shall be made by the Disbursing
Agent (including the Trustee under the Creditors' Trust, if applicable), the
Indenture Trustee (as agent or servicer), or the Prepetition Administrative
Agent (for purposes of this paragraph, the "applicable disbursing agent") (a) at
the addresses set forth on the proofs of claim filed by such Claim holders (or
at the last known addresses of such Claim holders if no proof of claim is filed
or if the Debtors have been notified of a change of address), (b) at the
addresses set forth in any written notices of address changes delivered to the
applicable disbursing agent after the date of any related proof of claim, (c) at
the addresses reflected in the Schedules if no proof of claim has been filed and
the applicable disbursing agent has not received a written notice of a change of
address, or (d) in the case of a Claim holder whose Claim is governed by the
Indenture or other agreement and is administered by the Indenture Trustee, at
the addresses contained in the official records of the Indenture Trustee,
including as set forth in any ballots cast with respect to such Claims.
Distributions made to holders of Claims by the Indenture Trustee or the
Prepetition Administrative Agent shall be subject to the rights of the Indenture
Trustee and the Prepetition Administrative Agent under the Indenture,
Prepetition Credit Agreement, or similar contract or agreement to enforce any
charging liens thereunder. If any Claim holder's distribution is returned as
undeliverable, no further distributions to such Claim holder shall be made
unless and until the applicable disbursing agent is notified of such Claim
holder's then current address, at which time all missed distributions shall be
made to such Claim holder without interest.
5. Undeliverable Distributions
Amounts in respect of undeliverable distributions shall be returned to (x)
the Indenture Trustee, with respect to Senior Note Claims or (y) New Operating
Company with respect to distributions made by any other applicable disbursing
agent, until such distributions are claimed. All claims for undeliverable
distributions shall be made on or before the first (1st) anniversary
33
of the Effective Date. After such date, all unclaimed property relating to
distributions shall revert to New Operating Company and any New Holding Company
Common Stock held for distribution on account of such Claim shall be cancelled
and of no further force or effect and all the other unclaimed property shall
revert to New Operating Company, free of any restrictions thereon and
notwithstanding any federal or state escheat laws to the contrary. Nothing
contained in the Plan shall require any of the applicable disbursing agents to
attempt to locate any holder of an Allowed Claim or Interest.
6. Procedures for Resolving Disputed, Contingent, and Unliquidated Claims
a. No Distributions Pending Allowance.
No payments or distributions will be made with respect to all or any
portion of a Disputed Claim unless and until all objections to such Disputed
Claim have been settled or withdrawn or have been determined by a Final Order,
and the Disputed Claim has become an Allowed Claim. All objections to Claims
must be filed on or before the Claims Objection Deadline.
b. Disputed Claims Reserve
The Disbursing Agent shall withhold the Distribution Reserve from the
property to be distributed under the Plan based upon the Face Amount of Disputed
Claims as directed by the Reorganized Debtors. The Disbursing Agent shall
withhold such amounts or property as may be necessary from property to be
distributed to other Classes of Claims under the Plan based upon the Face Amount
of such Claims. The Disbursing Agent may request estimation for any Disputed
Claim that is contingent or unliquidated, and the Disbursing Agent will withhold
the applicable distribution reserve based upon the estimated amount of each such
Claim as estimated by the Bankruptcy Court. If the Disbursing Agent elects not
to request such an estimation from the Bankruptcy Court with respect to a
Disputed Claim that is contingent or unliquidated, the Disbursing Agent shall
withhold the applicable distribution reserve based upon the good faith estimate
of the Disbursing Agent of such Claim. The Disbursing Agent shall also place in
the applicable distribution reserve any dividends, payments or other
distributions made on account of, as well as any obligations arising from, the
property withheld as the applicable distribution reserve, to the extent that
such property continues to be withheld as the applicable distribution reserve at
the time such distributions are made or such obligations arise. If practicable,
the Disbursing Agent will invest any Cash that is withheld as the applicable
distribution reserve in a manner that will yield a reasonable net return, taking
into account the safety of the investment. Nothing in this Plan or the
Disclosure Statement shall be deemed to entitle the holder of a Disputed Claim
to postpetition interest on such Claim.
c. Distributions After Allowance.
Payments and distributions from the Distribution Reserve shall be made as
appropriate to the holder of any Disputed Claim that has become an Allowed
Claim, as soon as practicable after the date such Disputed Claim becomes an
Allowed Claim. Such distributions shall be based upon the cumulative
distributions that would have been made to the holder of such Claim under the
Plan if the Disputed Claim had been Allowed on the Effective Date and shall not
be limited by the Disputed Claim Amounts previously reserved with respect to
such Disputed Claim to the extent that additional amounts are available therefor
from the applicable reserve, but only to the extent that such additional amounts
have not yet been distributed to holders of Allowed Claims. Upon such
distribution, the reserve shall be reduced by an amount equal to the amount
reserved with respect to such Disputed Claim. After a Final Order has been
entered, or other final resolution has been reached, with respect to all Class
P-5 Disputed Claims, any remaining New Holding Company Common Stock shall be
distributed, pro rata, to Allowed Class P-5 Claims.
7. Fractional Shares.
Any other provision of the Plan notwithstanding, payments of fractions of
shares of New Holding Company Common Stock shall not be made. Whenever any
payment of a fraction of a share of New Holding Company Common Stock under the
Plan would otherwise be called for, the actual payment made shall reflect a
rounding of such fraction to the nearest whole share (up or down), with half
shares being rounded down.
34
8. Allowance of Certain Claims
a. DIP Facility Claim
On or as soon as reasonably practicable after the Effective Date, the
Allowed DIP Facility Claims shall be paid in full in Cash. Any disputes as to
the Allowed amount of such DIP Facility Claims shall be resolved by the
Bankruptcy Court as soon as reasonably practicable upon motion by the Debtors
after notice to the DIP Lenders; provided, however, that any amount of such
Claims that is not disputed shall be paid by the Debtors in full in Cash on the
Effective Date and only the balance of such Claims, if any, shall be treated as
a Disputed Claim. Upon compliance with the foregoing, all liens and security
interests granted to secure the DIP Facility Claims shall be deemed cancelled
and shall be of no further force or effect. To the extent that any termination
statements, instruments of satisfaction, or other similar releases of interests
necessary to terminate or otherwise remove from title or record any filed
financing statements, mortgages, or other documents or agreements evidencing a
security interest in the Debtors' assets shall not have been delivered to the
Debtors or the Reorganized Debtors in proper form for filing and executed by the
appropriate parties prior to, or in connection with, such satisfaction of the
DIP Facility Claims, then the Debtors and the Reorganized Debtors are hereby
authorized to (a) execute and file such statements, instruments, releases or
other documents on behalf of the Postpetition Agent or the DIP Lenders with
respect to the encumbered assets and (b) file, register, or otherwise record a
certified copy of the Confirmation Order, which, once filed, registered or
otherwise recorded, shall constitute conclusive evidence of the release of all
security interests in the Debtors' and the Reorganized Debtors' assets of any
kind or nature whatsoever.
b. Professional Claims
On the Effective Date, the Debtors shall pay all amounts owing to
Professionals for all outstanding amounts relating to prior periods through the
Effective Date approved by the Bankruptcy Court in accordance with the
Professional Fee Order; provided, however, that Professionals shall continue to
prepare monthly fee applications in accordance with the Professionals Fee Order
up to the Effective Date. Professionals shall estimate fees and expenses due
for periods that have not been billed as of the Effective Date. On the
Effective Date, the Reorganized Debtors shall fund an escrow account in an
amount equal to the aggregate amount of outstanding fee applications not ruled
upon by the Bankruptcy Court as of the Effective Date plus the aggregate amount
of all estimated fees and expenses due for periods that have not been billed as
of the Effective Date. Such escrow account shall be used by the Reorganized
Debtors to pay the remaining Professional Claims owing to the Professionals as
and when Allowed by the Bankruptcy Court. When all Professional Claims have
been paid in full, amounts remaining in such escrow account, if any, shall be
returned to the Reorganized Debtors.
All Professionals or other entities requesting compensation or
reimbursement of expenses pursuant to sections 327, 328, 330, 331, 503(b) and
1103 of the Bankruptcy Code for services rendered before the Effective Date
(including compensation for making a substantial contribution in any of the
Chapter 11 Cases) shall file with the Bankruptcy Court and serve such
applications on counsel for the Debtors, the Creditors' Committee, the United
States Trustee and as otherwise required by the Bankruptcy Court and the
Bankruptcy Code an application for final allowance of compensation and
reimbursement of expenses no later than forty-five (45) days after the Effective
Date. Objections to applications of Professionals and other entities for
compensation and reimbursement of expenses must be filed with the Bankruptcy
Court no later than sixty-five (65) days after the Effective Date. All
compensation and reimbursement of expenses allowed by the Bankruptcy Court shall
be paid ten (10) days after the entry of an Order allowing such fees and
expenses, or as soon thereafter as practicable.
c. Other Administrative Claims
All other requests for payment of an Administrative Claim (other than as
set forth in Article XI of the Plan) must be filed with the Bankruptcy Court and
----------
served on counsel for the Debtors and/or the Reorganized Debtors no later than
forty-five (45) days after the Effective Date. Unless the Debtors object to an
Administrative Claim within forty-five (45) days after receipt, such
Administrative Claim shall be deemed allowed in the amount requested. In the
event that the Debtors object to an Administrative Claim, the Bankruptcy Court
shall determine the Allowed amount of such Administrative Claim.
35
Notwithstanding the foregoing, no request for payment of an Administrative Claim
need be filed with respect to an Administrative Claim which is paid or payable
by a Debtor in the ordinary course of business.
G. Miscellaneous Matters
1. Postpetition Interest
Unless otherwise specifically provided for in the Plan, the Confirmation
Order, or required by applicable bankruptcy law, postpetition interest will not
accrue or be paid on Claims, and no Claim holder will be entitled to interest
accruing on or after the Petition Date on any Claim. Interest will not accrue
or be paid upon any Disputed Claim in respect of the period from the Petition
Date to the Effective Date, but shall accrue from the Effective Date until such
time that the Disputed Claim becomes an Allowed Claim.
2. Treatment of Executory Contracts and Unexpired Leases
The Debtors are parties to numerous leases and executory contracts with
various parties.
a. Assumption of Executory Contracts and Unexpired Leases
Each executory contract or unexpired lease as to which any of the Debtors
is a party shall be deemed automatically assumed in accordance with the
provisions and requirements of sections 365 and 1123 of the Bankruptcy Code as
of the Effective Date, unless such executory contract or unexpired lease (i)
shall have been previously rejected by the Debtors by order of the Bankruptcy
Court, (ii) is the subject of a motion to reject pending on or before the
Effective Date, (iii) is listed on Plan Schedule 8.2, or (iv) is otherwise
-----------------
rejected pursuant to the terms of the Plan. Entry of the Confirmation Order by
the Bankruptcy Court shall constitute approval of such assumptions and
rejections pursuant to sections 365 and 1123 of the Bankruptcy Code. Each
executory contract and unexpired lease assumed pursuant to the Plan shall vest
in and be fully enforceable by the respective Reorganized Debtor in accordance
with its terms, except as modified by the provisions of the Plan, or any order
of the Bankruptcy Court authorizing and providing for its assumption or
applicable federal law.
Each executory contract and unexpired lease that is assumed and relates to
the use, ability to acquire or occupancy of real property shall include (a) all
modifications, amendments, supplements, restatements or other agreements made
directly or indirectly by any agreement, instrument or other document that in
any manner affect such executory contract or unexpired lease and (b) all
executory contracts or unexpired leases appurtenant to the premises, including
all easements, licenses, permits, rights, privileges, immunities, options,
rights of first refusal, powers, uses, reciprocal easement agreements and any
other interests in real estate or rights in rem related to such premises, unless
any of the foregoing agreements has been rejected pursuant to a Final Order of
the Bankruptcy Court or is otherwise rejected as a part of this Plan.
b. Rejection of Executory Contracts and Unexpired Leases
The executory contracts and unexpired leases specifically listed on Plan
----
Schedule 8.2 of the Plan as rejected as of the Effective Date shall be deemed
- ------------
automatically rejected as of the Effective Date and the remaining executory
contracts and leases identified on Plan Schedule 8.2 shall be deemed rejected
-----------------
ten (10) days after the Debtors or the Reorganized Debtors serve written notice
on the parties to such executory contracts and unexpired leases of the effective
date of the rejection of such executory contracts and unexpired leases. As to
those rejected executory contracts and unexpired leases rejected effective after
the Effective Date, the Reorganized Debtors shall continue to perform their
obligations thereunder until the effective date of such rejections. The Debtors
reserve the right to (i) file a motion on or before the Confirmation Date to
reject an executory contract or unexpired lease that (a) is not listed on Plan
----
Schedule 8.2, or (b) has not been previously rejected by Final Order of the
- ------------
Bankruptcy Court, and (ii) modify or supplement Plan Schedule 8.2 at any time
-----------------
prior to the Effective Date, including, without limitation, the right to add any
executory contract or unexpired lease to, or delete any executory contract or
unexpired lease from, Plan Schedule 8.2.
-----------------
36
c. Cure of Defaults of Assumed Executory Contracts and Unexpired
Leases
Any monetary amounts by which each executory contract and unexpired lease
to be assumed under the Plan may be in default shall be satisfied, under section
365(b)(1) of the Bankruptcy Code by Cure. "Cure" means the distribution within
a reasonable period of time following the Effective Date of Cash, or such other
property as may be agreed upon by the parties or ordered by the Bankruptcy
Court, with respect to the assumption or assumption and assignment of an
executory contract or unexpired lease, pursuant to section 365(b) of the
Bankruptcy Code, in an amount equal to all unpaid monetary obligations, without
interest, or such other amount as may be agreed upon by the parties under such
executory contract or unexpired lease, to the extent such obligations are
enforceable under the Bankruptcy Code and applicable bankruptcy law.
In the event of a dispute regarding (a) the nature or the amount of any
Cure, (b) the ability of the applicable Reorganized Debtor or any assignee to
provide "adequate assurance of future performance" (within the meaning of
section 365 of the Bankruptcy Code) under the contract or lease to be assumed,
or (c) any other matter pertaining to assumption, Cure shall occur following the
entry of a Final Order resolving the dispute and approving the assumption
d. Claims Based on Rejection of Executory Contracts or Unexpired
Leases
If the rejection by a Debtor, pursuant to the Plan or otherwise, of an
executory contract or unexpired lease results in a Claim, then such Claim shall
be forever barred and shall not be enforceable against the Debtors, the
Reorganized Debtors or the properties of any of them unless a proof of claim is
filed with the clerk of the Bankruptcy Court and served upon counsel to the
Debtors, counsel to the Creditors' Committee, and, if served after the Effective
Date, counsel to the Reorganized Debtors, (a) entry of the Confirmation Order
with respect to executory contracts and unexpired leases listed on Plan Schedule
-------------
8.2 as rejected as of the Effective Date or (b) within thirty (30) days after
- ---
service of notice of the effective date of the rejection of any other executory
contract or unexpired lease listed on Plan Schedule 8.2. To the extent a proof
-----------------
of claim is timely filed in connection with the rejection of any other executory
contract or unexpired lease, such Claim will be, and will be treated as, a
General Unsecured Claim as to the respective Debtor, subject to any limitation
on allowance of such Claims under section 502(b) of the Bankruptcy Code or
otherwise.
e. Miscellaneous
Notwithstanding any other provision of the Plan, each of the Debtors will
retain the right to, at any time prior to the Effective Date, modify or
supplement Plan Schedule 8.1 or Plan Schedule 8.2, including, without
----------------- -----------------
limitation, the right to add any executory contract or unexpired lease to, or
delete any executory contract or unexpired lease from such Plan Schedules.
Listing an executory contract or unexpired lease on Plan Schedule 8.1 or
-----------------
Plan Schedule 8.2 will not constitute an admission by any of the Debtors or the
- -----------------
Reorganized Debtors that such contract or lease (including any related
agreements that may exist) is an executory contract or unexpired lease or that
the applicable Debtor or Reorganized Debtor has any liability thereunder.
3. Exculpation and Limitation of Liability
Except as otherwise specifically provided in the Plan, the Debtors, the
Reorganized Debtors, the DIP Lenders, the DIP Agent, the Creditors' Committee,
the members of the Creditors' Committee in their representative capacity, any of
such parties' respective present or former members, officers, directors,
employees, advisors, attorneys, representatives, financial advisors, investment
bankers or agents and any of such parties' successors and assigns, shall not
have or incur, and shall be released under the Plan from any claim, obligation,
Cause of Action or liability to one another or to any holder of any Claim or
Interest, or any other party in interest, or any of their respective agents,
employees, representatives, financial advisors, attorneys or affiliates, or any
of their successors or assigns, for any act or omission in connection with, or
arising out of the Debtors' Chapter 11 Cases, the pursuit of confirmation of the
Plan, the consummation of the Plan, the administration of the Plan or the
property to be distributed under the Plan, except for their gross negligence or
willful misconduct, and in all respects shall be entitled to reasonably rely
upon the advice of counsel with respect to their duties and responsibilities
under the Plan.
37
Notwithstanding any other provision of the Plan, no Claim holder or
Interest holder, or other party in interest, none of their respective agents,
employees, representatives, financial advisors, attorneys or affiliates, and no
successors or assigns of the foregoing, shall have any right of action against
the Debtors, the Reorganized Debtors, the DIP Lenders, the DIP Agent, the
Creditors' Committee, the members of the Creditors' Committee in their
representative capacity, or any of such parties' respective present or former
members, officers, directors, employees, advisors, attorneys, representatives,
financial advisors, investment bankers or agents or such parties' successors and
assigns, for any act or omission in connection with, relating to or arising out
of the Chapter 11 Cases, the pursuit of confirmation of the Plan, the
consummation of the Plan, the administration of the Plan or the property to be
distributed under the Plan, except for their gross negligence or willful
misconduct.
4. Indemnity Claims
In satisfaction and compromise of any obligations or rights of any of the
Indemnitees' Indemnification Rights, (a) all Indemnification Rights except (i)
all Indemnification Rights of an Indemnitee who is also a Released Party, and
(ii) those based solely upon any act or omission arising out of or relating to
any Indemnitee's service with, for or on behalf of a Debtor on or after the
Petition Date (collectively, the "Continuing Indemnification Rights"), shall be
released and discharged on and as of the Effective Date; provided that the
Continuing Indemnification Rights shall remain in full force and effect on and
after the Effective Date and shall not be modified, reduced, discharged or
otherwise affected in any way by the Chapter 11 Cases, (b) the Debtors or the
Reorganized Debtors, as the case may be, covenant to purchase and maintain
director and officer insurance providing coverage for those Indemnitees with
Continuing Indemnification Rights for a period of two years after the Effective
Date insuring such parties in respect of any claims, demands, suits, causes of
action or proceedings against such Indemnitees based upon any act or omission
related to such Indemnitee's service with, for or on behalf of the Debtors in at
least the scope and amount as currently maintained by the Debtors (the
"Insurance Coverage"), and (c) the Debtors or the Reorganized Debtors, as the
case may be, shall indemnify Indemnitees with Continuing Indemnification Rights
and agree to pay for any deductible or retention amount that may be payable in
connection with any claim covered by either under the foregoing Insurance
Coverage or any prior similar policy.
5. Releases by Debtors and Debtors-in-Possession
a. Releases
Pursuant to section 1123(b)(3) of the Bankruptcy Code, effective as of the
Effective Date, each Debtor, in its individual capacity and as a Debtor in
Possession, for and on behalf of its Estate, shall release and discharge: (i)
all current officers of each of the Debtors (which, unless covered by clauses
(ii) or (iii) below, specifically excludes any Division president), all current
directors of each of the Debtors, and all current employees providing services
at the corporate level, (ii) any former officer or director of the Debtors or
any current or former employee of the Debtors (including any Division president)
who has, or through an entity controlled by such Person has, consummated the
purchase of a Non-Core Division which has been approved by Final Order entered
by the Bankruptcy Court but only to the extent of any release or discharge
approved by such Final Order of the Bankruptcy Court in connection with such
purchase, (iii) all current employees of Core Divisions, but only to the extent
provided in, and subject to any additional terms or conditions set forth in, a
written employment agreement between the Reorganized Debtors and any such
current employees, (iv) agents, attorneys, accountants, management consultants,
financial advisors, investment bankers or other Professionals of the Debtors
retained by order of the Bankruptcy Court in the Chapter 11 Cases, (v) the
Creditors' Committee and all members of the Creditors' Committee in their
representative capacity, including all Professionals retained by the Creditors'
Committee, (vi) the DIP Lenders, the DIP Agent and all professionals retained by
the DIP Lenders and the DIP Agent, and (vii) the Prepetition Lenders, the
Prepetition Administrative Agent, the Prepetition Revolving Credit Agent, and
all of their respective professionals (except to the extent any rights have been
reserved by the Debtors or the Committee pursuant to prior Court order until
such rights are waived or otherwise lapse) (each of such Persons referred to in
the foregoing clauses (i) through (vii), a "Released Person") for and from (but
subject to the limitations of clauses (ii) and (iii)) any and all (x) claims or
Causes of Action existing as of the Effective Date in any manner arising from,
based on or relating to, in whole or in part, the Debtors, the subject matter
of, or the transactions or events giving rise to, any Claim or Interest that is
treated in the Plan, the business or contractual arrangements between any Debtor
or any Released Person, the
38
restructuring of Claims and Interests prior to or in the Chapter 11 Cases, or
any act, omission, occurrence or event in any manner related to any such Claims,
Interest, restructuring or the Chapter 11 Cases and (y) Avoidance Actions.
b. Binding Effect of Release and Discharge on Successors to the
Debtors' Interests
No provision of the Plan or of the Confirmation Order, including, without
limitation, any release or exculpation provision, shall modify, release or
otherwise limit the liability of any Person not specifically released hereunder,
including, without limitation, any Person that is a co-obligor or joint
tortfeasor of a Released Person or that otherwise is liable under theories of
vicarious or other derivative liability. The Reorganized Debtors and any
newly-formed entities that will be continuing the Debtors' businesses after the
Effective Date shall be bound, to the same extent the Debtors are bound, by all
of the releases set forth above.
6. Release by Holders of Claims and Interests
Each Person that votes to accept the Plan (each, a "Release Obligor"),
shall have conclusively, absolutely, unconditionally, irrevocably and forever,
released and discharged each Released Person from any claim or Cause of Action
existing as of the Effective Date arising from, based on or relating to, in
whole or in part, the subject matter of, or the transaction or event giving rise
to, the Claim or Interest of such Release Obligor, and any act, omission,
occurrence or event in any manner related to such subject matter, transaction or
obligation; provided, however, that this Section 13.8 shall not release any
------------
Released Person from any Claim or Cause of Action existing as of the Effective
Date, based on (i) the Internal Revenue Code or other domestic state, city or
municipal tax code, (ii) the environmental laws of the United States or any
domestic state, city or municipality, (iii) any criminal laws of the United
States or any domestic state, city or municipality, (iv) the Employee Retirement
Income Security Act of 1974, as amended, and (v) violation of federal securities
laws. Nothing in the Plan will restrict any federal or state government
regulatory agency from pursuing regulatory or police enforcement action against
the Release Parties other than any action or proceeding of any type to recover
monetary claims, damages, or penalties against such parties for an act,
omission, or event occurring prior to the Effective Date.
7. Injunction
The satisfaction, release and discharge pursuant to the Plan shall also act
as an injunction against any Person commencing or continuing any action,
employment of process, or act to collect, offset or recover any Claim or Cause
of Action satisfied, released or discharged under the Plan to the fullest
extent authorized or provided by the Bankruptcy Code, including, without
limitation, to the extent provided for or authorized by sections 524 and 1141
thereof.
H. Preservation of Rights of Action
In accordance with section 1123(b)(3) of the Bankruptcy Code and except as
provided in the Plan, the Debtors (or an entity designated by them) will retain
and, at the direction of the Reorganized Debtors, may enforce Causes of Action
in the exercise of their reasonable business judgment.
IX. CERTAIN FACTORS TO BE CONSIDERED
The holder of a Claim against a Debtor should read and carefully consider
the following factors, as well as the other information set forth in this
Disclosure Statement (and the documents delivered together herewith and/or
incorporated by reference herein), before deciding whether to vote to accept or
to reject the Plan.
A. General Considerations
The formulation of a reorganization plan is the principal purpose of a
Chapter 11 case. The Plan sets forth the means for satisfying the Claims
against and Interests in each of the Debtors. Equity Interests will receive no
distributions pursuant to the Plan and certain Classes of Claims will not be
paid in full pursuant to the Plan. Reorganization of certain of the Debtors'
39
businesses and operations under the proposed Plan also avoids the potentially
adverse impact of a liquidation on those Debtors' employees and other
stakeholders.
B. Certain Bankruptcy Considerations
If the Plan is not confirmed and consummated, there can be no assurance
that the Chapter 11 Cases will continue rather than be converted to a
liquidation or that any alternative plan of reorganization would be on terms as
favorable to the holders of Claims as the terms of the Plan. If a liquidation
or protracted reorganization were to occur, there is a substantial risk that the
value of the Debtors' enterprise would be substantially eroded to the detriment
of all stakeholders. In addition, if a liquidation or protracted reorganization
were to occur, there is a substantial risk that holders of Secured Claims would
receive less than they will receive under the Plan. Finally, if the Debtors are
not able to emerge from Chapter 11 consistent with the timetable that provides
for the Confirmation Hearing to be conducted on January 25, 2001, the Debtors'
cash flow and availability under the DIP Financing may not be sufficient to fund
operations and the costs of the Chapter 11 Cases for a significant additional
period of time. See Appendix B annexed hereto for a liquidation analysis of
----------
each individual Debtor.
C. Inherent Uncertainty of Financial Projections
The Projections set forth in Appendix C annexed hereto cover the operations
----------
of the Reorganized Debtors on a consolidated basis through fiscal year 2003.
These Projections are based on numerous assumptions including the timing,
confirmation, and consummation of the Plan in accordance with its terms, the
anticipated future performance of the Reorganized Debtors, industry performance,
general business and economic conditions, and other matters, many of which are
beyond the control of the Reorganized Debtors and some or all of which may not
materialize. In addition, unanticipated events and circumstances occurring
subsequent to the date that this Disclosure Statement is approved by the
Bankruptcy Court may affect the actual financial results of the Debtors'
operations. These variations may be material. Because the actual results
achieved throughout the periods covered by the Projections may vary from the
projected results, the Projections should not be relied upon as a guaranty,
representation, or other assurance that the actual results that will occur.
Except with respect to the Projections and except as otherwise specifically
and expressly stated herein, this Disclosure Statement does not reflect any
events that may occur subsequent to the date hereof and that may have a material
impact on the information contained in this Disclosure Statement. Neither the
Debtors nor the Reorganized Debtors intend to update the Projections for the
purposes hereof; thus, the Projections will not reflect the impact of any
subsequent events not already accounted for in the assumptions underlying the
Projections.
D. Dividends
The Debtors do not anticipate that cash dividends will be paid with respect
to the New Holding Company Common Stock in the foreseeable future.
E. Access to Financing
The Debtors' operations are dependent on the availability and cost of
working capital financing and may be affected adversely by any shortage or
increased cost of such financing. The Debtors' postpetition operations are
financed almost entirely from operating cash flow and the DIP Facility. The
Debtors believe that substantially all of their needs for funds necessary to
consummate the Plan and for post-Effective Date working capital financing will
be met by the Exit Facility, projected operating cash flow, select asset sales
and local financing arrangements. There can be no assurance, however, that the
Debtors will procure an Exit Facility as contemplated by the Plan.
F. Claims Estimations
There can be no assurance that the estimated Claim amounts set forth herein
are correct. The actual Allowed amount of Claims likely will differ in some
respect from the estimates. The estimated amounts are subject to certain risks,
uncertainties,
40
and assumptions. Should one or more of these risks or uncertainties materialize,
or should underlying assumptions prove incorrect, the actual Allowed amount of
Claims may vary from those estimated herein.
G. Market for New Common Stock
There will likely not be an active market for the New Holding Company
Common Stock distributed pursuant to the Plan, nor do the Debtors expect that an
active market will develop in the foreseeable future. No assurances can be given
as to the prices at which the New Holding Company Common Stock will trade in the
future, if it is traded at all. If the Debtors elect to pay the Allowed
Administrative Convenience Claims in Cash, there will likely not be any market
for the securities distributed under the Plan.
X. RESALE OF SECURITIES RECEIVED UNDER THE PLAN
A. Issuance of New Common Stock
Section 1145(a)(1) of the Bankruptcy Code exempts the offer and sale of
securities under a plan of reorganization from registration under section 5 of
the Securities Act and state laws if three principal requirements are satisfied:
(1) the securities must be offered and sold under a plan of reorganization and
must be securities of the debtor, of an affiliate participating in joint plan
with the debtor, or of a successor to the debtor under the plan; (2) the
recipients of the securities must hold a prepetition or administrative expense
claim against the debtor or an interest in the debtor; and (3) the securities
must be issued entirely in exchange for the recipient's claim against or
interest in the debtor, or principally in such exchange and partly for cash or
property. The Debtors believe that the offer and sale of the New Holding Company
Common Stock under the Plan satisfies the requirements of section 1145(a)(1) of
the Bankruptcy Code and is, therefore, exempt from registration under the
Securities Act and state securities laws.
B. Subsequent Transfers of Securities
The New Holding Company Common Stock to be issued pursuant to the Plan may
be freely transferred by most recipients following initial issuance under the
Plan, and all resales and subsequent transactions in the New Holding Company
Common Stock so issued are exempt from registration under federal and state
securities laws, unless the holder is an "underwriter" with respect to such
securities. Section 1145(b) of the Bankruptcy Code defines four types of
"underwriters":
(1) persons who purchase a claim against, an interest in, or a claim for
an administrative expense against the debtor with a view to
distributing any security received in exchange for such a claim or
interest;
(2) persons who offer to sell securities offered under a plan for the
holders of such securities;
(3) persons who offer to buy such securities for the holders of such
securities, if the offer to buy is: (A) with a view to distributing
such securities; or (B) made under a distribution agreement; and
(4) a person who is an "Issuer" with respect to the securities, as the
term "Issuer" is defined in Section 2(11) of the Securities Act.
Under Section 2(11) of the Securities Act, an "Issuer" includes any person
directly or indirectly controlling or controlled by the issuer, or any person
under direct or indirect common control of the issuer.
To the extent that Persons who receive New Holding Company Common Stock
pursuant to the Plan are deemed to be "underwriters," resales by such persons
would not be exempted by section 1145 of the Bankruptcy Code from registration
under the Securities Act or other applicable law. Persons deemed to be
underwriters would, however, be permitted to sell such Securities without
registration pursuant to the provisions of Rule 144 under the Securities Act.
These rules permit the public
41
sale of securities received by "underwriters" if current information regarding
the issuer is publicly available and if volume limitations and certain other
conditions are met.
Whether or not any particular person would be deemed to be an "underwriter"
with respect to the New Holding Company Common Stock to be issued pursuant to
the Plan would depend upon various facts and circumstances applicable to that
person. Accordingly, the Debtors express no view as to whether any particular
Person receiving New Holding Company Common Stock under the Plan would be an
"underwriter" with respect to such securities.
Given the complex and subjective nature of the question of whether a
particular holder may be an underwriter, the Debtors make no representation
concerning the right of any person to trade in the New Holding Company Common
Stock or other securities. The Debtors recommend that potential recipients of
the New Holding Company Common Stock consult their own counsel concerning
whether they may freely trade the New Holding Company Common Stock and other
securities without compliance with the Securities Act or the Exchange Act.
XI. CERTAIN INCOME TAX CONSEQUENCES OF THE PLAN
A summary description of certain income tax consequences of the Plan
is provided below. The description of tax consequences below is for
informational purposes only and, due to a lack of definitive judicial or
administrative authority or interpretation, substantial uncertainties exist with
respect to various tax consequences of the Plan as discussed herein. Only the
principal consequences of the Plan for the Debtors and for holders of Claims who
are entitled to vote to accept or reject the Plan are described below. No
opinion of counsel has been sought or obtained with respect to any tax
consequences of the Plan. No rulings or determinations of the Internal Revenue
Service (the "IRS") or any other tax authorities have been sought or obtained
with respect to the tax consequences of the Plan, and the discussion below is
not binding upon the IRS or such other authorities. The Debtors are not making
any representations regarding the particular tax consequences of the
confirmation and consummation of the Plan as to any Claim holder, and are not
rendering any form of legal opinion as to such tax consequences.
The discussion of United States federal income tax consequences below is
based on the Internal Revenue Code of 1986, as amended (the "IRC"), the Treasury
regulations promulgated thereunder, judicial decisions, and published
administrative rulings and pronouncements of the IRS as in effect on the date
hereof. Legislative, judicial or administrative changes or interpretations
enacted or promulgated after the date hereof could alter or modify the analyses
set forth below with respect to the United States federal income tax
consequences of the Plan. Any such changes or interpretations may be
retroactive and could significantly affect the United States federal income tax
consequences discussed below.
The following discussion does not address foreign, state or local tax
consequences of the Plan, nor does it purport to address the United States
federal tax consequences of the Plan to special classes of taxpayers (such as
foreign entities, S corporations, regulated investment companies, insurance
companies, financial institutions, small business investment companies, broker-
dealers and tax-exempt organizations). Furthermore, United States federal
estate and gift tax issues are not addressed herein. The following discussion
assumes that Claim holders hold their Claims as capital assets for United States
federal income tax purposes.
Each holder of a Claim is strongly urged to consult its tax advisor
regarding the United States federal, state, and local and any foreign tax
consequences of the transactions described herein and in the Plan.
A. Restructuring Transaction Steps
Under the Plan, the following transactions will occur on the Effective Date
in the following order:
1. Premier Graphics will sell and transfer without recourse and subject to
liabilities, its Core Assets to a creditor representative (the "Creditor
Representative") on behalf of Claim holders, in partial satisfaction of General
Unsecured Claims in an amount equal to the fair market value of the Core Assets;
42
2. The Creditor Representative, on behalf of Claim holders, will
contribute, without recourse and subject to liabilities, all of the Core Assets
to New Holding Company in exchange for all of the shares of New Holding Company
Common Stock;
3. New Holding Company will contribute, without recourse and subject to
liabilities, all of the Core Assets to New Operating Company in exchange for all
of the shares of New Operating Company Common Stock;
4. The Creditor Representative will transfer to the Disbursing Agent for
distribution to Claim holders all of the shares of New Holding Company Common
Stock; and
5. Old Master Graphics Common Stock will be transferred to the Disbursing
Agent, followed by the distribution of Non-Core Assets to Old Master Graphics in
complete liquidation of Old Premier Graphics.
B. Income Tax Consequences to the Debtors
1. Regular United States Federal Income Tax
a. Restructuring Transactions
i. Sale and Transfer of Core Assets by Premier Graphics.
The sale and transfer of the Core Assets to the Creditor Representative
followed by the transfer of Core Assets to New Holding Company have been
structured as a taxable transaction (a "Taxable Transfer"), with the result that
New Holding Company would obtain a fair market value tax basis in the Core
Assets. Upon a subsequent contribution of the Core Assets by New Holding
Company to New Operating Company, New Operating Company will obtain the Core
Assets with New Holding Company's carryover basis.
Assuming a Taxable Transfer, Premier Graphics would recognize gain or loss
upon the transfer to the Creditor Representative in an amount equal to the
difference between the fair market value of the Core Assets and its tax basis in
such Core Assets. Based upon the estimated reorganization value of New Holding
Company, and due to the Debtors' substantial tax basis in their assets and
available net operating losses ("NOL") carryforwards, the Debtors believe that
no significant federal, state or local tax liability, if any, should be incurred
upon the transfer. However, the Debtors' determination of gain or loss and
resulting tax liability may be subject to adjustment on audit by the IRS. In
addition, the fair market value of the Core Assets may vary from current
estimates and may be subject to challenge by the IRS.
Although structured as a Taxable Transfer, there is no assurance that the
transactions would be so treated by the IRS. For example, if the transfer of
the assets to New Holding Company were deemed to constitute a tax-free
reorganization under Section 368(a)(1)(G) of the IRC, (a "G reorganization"), no
gain or loss generally would be recognized by Premier Graphics. Rather, New
Holding Company would succeed to certain tax attributes of Premier Graphics,
including its tax basis in the Core Assets, but only after taking into account
the reduction in such tax attributes and tax basis on account of the substantial
discharge of debt pursuant to the Plan, as discussed more fully below. Thus,
New Holding Company would have no NOL carryforwards and would have significantly
diminished tax basis in the Core Assets, with the result that future tax
depreciation and amortization with respect to the Debtors' real and personal
property would be eliminated.
To qualify as a G reorganization, it would be necessary for Premier
Graphics to be treated as having transferred substantially all of its assets
directly to New Holding Company and for Premier Graphics to have distributed all
of its remaining assets to its creditors. Alternatively, it would be necessary
to have distributed more than eighty percent of the New Holding Company Common
Stock to holders of debt instruments treated as "securities" for federal income
tax purposes and for New Holding Company to continue to carry on a historic
active five-year trade or business. The Debtors believe that the transfer of
assets to the Creditor Representative followed by the transfer of such assets to
New Holding Company should not qualify as a G reorganization.
43
ii. New Holding Company Tax Attributes
As discussed above, assuming a Taxable Transfer, New Holding Company would
obtain an aggregate tax basis in the Core Assets equal to their fair market
value as of the Effective Date and would not succeed to any tax attributes of
Old Premier Graphics.
b. Cancellation of Indebtedness
Under general United States federal income tax principles, the Debtors will
realize cancellation of debt ("COD") income to the extent that its obligation to
a Claim holder is discharged pursuant to the Plan for an amount less than the
adjusted issue price (in most cases, the amount the Debtors received upon
incurring the obligation, with certain adjustments) of such holder's Claim. For
this purpose, the amount paid to a Claim holder in discharge of its Claim
generally will equal the amount of Cash and the fair market value on the
Effective Date of any other property paid to such Claim holder.
Because the Debtors each will be debtors in a bankruptcy case at the time
they realize COD income, they will not be required to include such COD income in
their gross income, but rather will be required to reduce certain of their
respective tax attributes by the amounts of COD income so excluded. Under the
general rules of IRC section 108, the required attribute reduction will be
applied to reduce the NOLs and NOL carryforwards, to the extent of such NOLs and
carryforwards, and certain other tax attributes. IRC section 108(b)(5) permits
a corporation in bankruptcy proceedings to elect to apply the required attribute
reduction to reduce first the basis of its depreciable property to the extent of
such basis, with any excess applied next to reduce its NOLs and NOL
carryforwards, and then certain other tax attributes. The Debtors have not yet
determined whether they will make the election under IRC section 108(b)(5).
c. Limitation on Net Operating Losses
The Debtors believe that Master Graphics experienced an "ownership change"
(within the meaning of IRC section 382) prior to the Petition Date. The
ownership change occurred when certain lenders to John P. Miller, owner of the
Old Master Graphics Common Stock, foreclosed upon their security interests in
the Old Master Graphics Common Stock in order to cover certain margin calls. As
a result of the ownership change, the ability of the Debtors to use their NOLs
and NOL carryforwards to offset taxable income, if any, currently is limited
under IRC section 382 to an amount equal to the sum of (A) a regular annual
limitation (pro-rated for the portion of the taxable year of the ownership
change following the date on which the change occurred), (B) the amount of the
"recognized built-in gain" for the year which does not exceed the excess of
Master Graphics' "net unrealized built-in gain" over previously recognized
built-in gains (as the quoted terms are defined in IRC section 382(h)) and (C)
any carryforward of unused amounts described in clauses (A) and (B) from prior
years. The ability of Master Graphics to use "net unrealized built-in losses,"
if any, to offset future taxable income may also be limited under IRC section
382. The regular annual limitation generally will be equal to the product of
(x) the lesser of the value of Master Graphics stock immediately after the
ownership change or the gross value of the assets of the Debtors immediately
before the ownership change (with certain adjustments) and (y) the "long-term
tax-exempt rate" in effect at the time of the ownership change. The long-term
tax-exempt rate at the time of the ownership change was 5.72%.
The Debtors will continue to operate in reorganized form pursuant to the
Plan, and will experience another ownership change on the Effective Date as a
result of its issuance of New Holding Company Common Stock to holders of various
classes of Claims against the Reorganized Debtors. As discussed above, Master
Graphics will be required to reduce its NOLs and NOL carryforwards by the amount
of its COD income excluded from gross income under IRC section 108. The Debtors
do not anticipate that any of Master Graphics' pre-Effective Date NOLs and
capital loss carryovers will remain after application of such amounts to reduce
COD income.
44
2. Alternative Minimum Tax
A corporation may incur alternative minimum tax liability even where NOL
carryovers and other tax attributes are sufficient to eliminate its taxable
income as computed under the regular corporate income tax. It is possible that
the Debtors will be liable for the alternative minimum tax.
C. United States Federal Income Tax Consequences to Claim Holders
The tax treatment of holders of Claims and the character and amount of
income, gain or loss recognized as a consequence of the Plan and the
distributions provided for by the Plan will depend upon, among other things, (1)
whether the Taxable Transfer will be recharacterized as a G reorganization by
the IRS; (2) whether the Claim constitutes a "security" for federal income tax
purposes; (3) the manner in which a holder acquired a Claim; (4) the length of
time the Claim has been held; (5) whether the Claim was acquired at a discount;
(6) whether the holder has taken a bad debt deduction with respect to the Claim
(or any portion thereof) in the current or prior years; (7) whether the holder
has previously included accrued but unpaid interest with respect to the Claim;
(8) the method of tax accounting of the holder; and (9) whether the Claim is an
installment obligation for United States federal income tax purposes.
Therefore, holders of Claims should consult their tax advisors for information
that may be relevant to their particular situation and circumstances and the
particular tax consequences to them of the transactions contemplated by the
Plan.
1. Holders of Secured Lender Claims (Classes P-1 and M-1)
The exchange of Allowed Secured Lender Claims for cash and a debt
obligation will be a taxable exchange for federal income tax purposes. A Holder
will therefore be required to recognize gain or loss for federal income tax
purposes equal to the difference between its adjusted tax basis in its Allowed
Secured Lender Claims and the sum of the cash received
The market discount provisions of the IRC may apply to holders of certain
Claims. In general, a debt obligation other than a debt obligation with a fixed
maturity of one year or less that is acquired by a holder in the secondary
market (or, in certain circumstances, upon original issuance) is a "market
discount bond" as to that holder if its stated redemption price at maturity (or,
in the case of a debt obligation having original issue discount, its revised
issue price) exceeds the tax basis of the debt obligation in the holder's hands
immediately after its acquisition. However, a debt obligation will not be a
"market discount bond" if such excess is less than a statutory de minimis
amount. Gain recognized by a Claim holder with respect to a "market discount
bond" will generally be treated as ordinary interest income to the extent of the
market discount accrued on such bond during the Claim holder's period of
ownership, unless the Claim holder elected to include accrued market discount in
taxable income currently. A holder of a market discount bond that is required
under the market discount rules of the IRC to defer deduction of all or a
portion of the interest on indebtedness incurred or maintained to acquire or
carry the bond may be allowed to deduct such interest, in whole or in part, on
disposition of such bond.
2. Holders of Warrant Put Note Claims (Classes P-2 and M-2)
The exchange of the Warrant Put Note Claim for the New Warrant Put Note
will be a taxable exchange for federal income tax purposes. A Holder will
therefore be required to recognize gain or loss for federal income tax purposes
equal to the difference between its adjusted tax basis in the Warrant Put Note
and the fair market value of the New Warrant Put Note. The Holder will take a
basis in the New Warrant Put Note equal to its fair market value. Holders will
have a holding period for the New Warrant Put Note determined by reference to
the date of the above-described exchange.
3. Holders of General Unsecured Claims of Premier Graphics (Class P-5)
other than Senior Note Claims
The Debtors believe and intend to take the position that none of the
General Unsecured Claims other than Senior Note Claims will be classified as
securities for federal income tax purposes. A Holder will therefore be required
to recognize gain or loss for federal income tax purposes equal to the
difference between its adjusted tax basis in its General Unsecured Claims, if
any, and the fair market value of its pro rata share of (i) the New Holding
Company Common Stock, and (ii) recoveries on
45
Causes of Action. The Holder will take a basis in its New Holding Company Common
Stock and its undivided interest in the Causes of Action equal to their
respective fair market values. Holders will have a holding period for each of
the above-described assets determined by reference to the date of the above-
described exchange.
If the IRS were to recharacterize the Taxable Transfer as a G
reorganization, as described above, and if the General Unsecured Claims were to
be classified as securities for federal income tax purposes, holders of the
General Unsecured Claims would not recognize any gain or loss.
4. Holders of Senior Note Claims (Class P-5)
a. General
The Debtors believe and intend to take the position that the Senior Note
Claims will not be classified as securities for federal income tax purposes. A
Holder will therefore be required to recognize gain or loss for federal income
tax purposes equal to the difference between its adjusted tax basis in its
Senior Note Claims and the fair market value of its pro rata share of (i) the
New Holding Company Common Stock, and (ii) the Causes of Action. The Holder
will take a basis in its New Holding Company Common Stock and its undivided
interest in each of the other assets to their respective fair market values.
Holders will have a holding period for each of the above-described assets
determined by reference to the date of the above-described exchange.
b. Market Discount
The market discount provisions of the IRC may apply to holders of certain
Claims. The market discount provisions are discussed above under Article
-------
XI.C.1.
- -------
c. Reorganization Treatment
If the Senior Note Claims were classified as securities for federal income
tax purposes and the transfer of assets to New Holding Company were successfully
characterized by the IRS as a G reorganization, then the above exchange of the
Senior Note Claims would be an exchange pursuant to a plan of reorganization. A
holder of a Claim with respect to the Senior Notes should recognize gain, but
not loss, with respect to its Claim surrendered in an amount equal to the lesser
of (x) the amount of gain realized (i.e., the excess of the fair market value of
any property received by such holder in respect of its Claim over the adjusted
tax basis of such Claim) and (y) the "boot" (as described below) received by
such holder, if any, in respect of its Claim. A holder will be treated as
receiving "boot" to the extent of the fair market value of property other than
shares of New Holding Company Common Stock received by the holder. Subject to
the discussion of market discount below, any such gain recognized will generally
be treated as capital gain. In addition, a holder's aggregate tax basis in the
New Holding Company Common Stock should be equal to the aggregate tax basis in
the Claims exchanged therefor, decreased by the amount of boot received and
increased by any gain recognized, and such holder's holding period for such
property will include the holding period of the Claims exchanged therefor. A
holder's tax basis in any boot received will equal the fair market value of such
property on the Effective Date, and the holder's holding period in such property
will begin on the day after the Effective Date.
In addition, under the market discount rules discussed above, any accrued
but unrecognized market discount with respect to Senior Notes generally will be
treated as ordinary income to the extent of the gain recognized in connection
with the reorganization described above. Any remaining accrued but unrecognized
market discount generally will be treated as ordinary income to the extent of
the gain recognized upon the subsequent disposition of the New Holding Company
Common Stock received in exchange for the relevant Claim. If a holder were
required under the market discount rules of the IRC to defer its deduction of
all or a portion of the interest on indebtedness, if any, incurred or maintained
to acquire or carry the relevant Claim, continued deferral of the deduction for
interest on such indebtedness may be required. Any such deferred interest
expense would be attributed to the property received in exchange for such Claim,
and would be treated as interest paid or accrued in the year in which the holder
disposes of such property.
46
5. Information Reporting and Backup Withholding
Certain payments, including the payments with respect to Claims pursuant to
the Plan, are generally subject to information reporting by the payor (the
relevant Debtor) to the IRS. Moreover, such reportable payments are subject to
backup withholding under certain circumstances. Under the IRC's backup
withholding rules, a holder of a Claim may be subject to backup withholding at a
rate of 31% with respect to distributions or payments made pursuant to the Plan,
unless the holder: (a) comes within certain exempt categories (which generally
include corporations) and, when required, demonstrates this fact or (b) provides
a correct United States taxpayer identification number and certifies under
penalty of perjury that the taxpayer identification number is correct and that
the taxpayer is not subject to backup withholding because of a failure to report
all dividend and interest income.
Holders of Claims that are Non-United States Persons and that receive
payments or distributions under the Plan through a United States office of the
relevant Debtor will not be subject to backup withholding, provided that the
holders furnish certification of their status as Non-United States Persons (and
furnish any other required certifications), or are otherwise exempt from backup
withholding. Generally, such certification is provided on IRS Form W-8BEN.
Backup withholding is not an additional tax. Amounts withheld under the
backup withholding rules may be credited against a holder's United States
federal income tax liability, and a holder may obtain a refund of any excess
amounts withheld under the backup withholding rules by filing an appropriate
claim for refund with the IRS (generally, a United States federal income tax
return).
D. United States Federal Income Tax Consequences of the Disbursing Agent
Under the IRC, amounts earned by an escrow account, settlement fund or
similar fund must be subject to current tax. Although certain Treasury
regulations have been issued, no Treasury regulations have been promulgated to
address the tax treatment of such funds in a bankruptcy context. Accordingly,
the proper tax treatment of such funds is uncertain. Depending on the facts and
the relevant law, such funds possibly could be treated as grantor trusts,
separately taxable trusts, or otherwise. The Debtors presently intend to treat
the assets held by the Disbursing Agent as held for the account of the Debtors.
There can be no assurance that the IRS will respect such treatment.
E. Importance of Obtaining Professional Tax Assistance
THE FOREGOING DISCUSSION IS INTENDED ONLY AS A SUMMARY OF CERTAIN INCOME
TAX CONSEQUENCES OF THE PLAN AND IS NOT A SUBSTITUTE FOR CAREFUL TAX PLANNING
WITH A TAX PROFESSIONAL. THE ABOVE DISCUSSION IS FOR INFORMATIONAL PURPOSES
ONLY AND IS NOT TAX ADVICE. THE TAX CONSEQUENCES ARE IN MANY CASES UNCERTAIN
AND MAY VARY DEPENDING ON A CLAIM HOLDER'S PARTICULAR CIRCUMSTANCES.
ACCORDINGLY, CLAIM HOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS ABOUT THE
UNITED STATES FEDERAL, STATE, LOCAL, AND APPLICABLE FOREIGN INCOME AND OTHER TAX
CONSEQUENCES OF THE PLAN.
XII. CONFIRMATION
A. Feasibility of the Plan
In connection with confirmation of the Plan, the Bankruptcy Court will have
to determine that the Plan is feasible pursuant to section 1129(a)(11) of the
Bankruptcy Code, which means that the confirmation of the Plan is not likely to
be followed by the liquidation or the need for further financial reorganization
of the Debtors. Because the Plan constitutes a separate Plan for each Debtor,
the requirements of section 1129(a)(11) of the Bankruptcy Code must be satisfied
separately for each Debtor.
47
To support the feasibility of the Plan, the Debtors have prepared the
Projections, which are Pro Forma Financial Projections for Fiscal Years 2000
through 2003, as set forth in Appendix C annexed to this Disclosure Statement.
----------
The Projections indicate that the Debtors should have sufficient cash flow to
pay and service their respective debt obligations, and to fund their operations
as contemplated by the Business Plan. Accordingly, the Debtors believe that the
Plan complies with the financial feasibility standard of section 1129(a)(11) of
the Bankruptcy Code with respect to each Debtor. As noted in the Projections,
however, the Debtors caution that no representations can be made as to the
accuracy of the Projections or as to a Reorganized Debtor's ability to achieve
the projected results. Many of the assumptions upon which the Projections are
based are subject to uncertainties outside of the control of the Debtors. Some
assumptions inevitably will not materialize and events and circumstances
occurring after the date on which the Projections were prepared may be different
from those assumed or may be unanticipated, and may affect adversely the
Reorganized Debtors' financial results. Therefore, the actual results may vary
from the projected results and the variations may be material and adverse. See
Article IX of this Disclosure Statement for a discussion of certain risk factors
- ----------
that may affect financial feasibility of the Plan with respect to the Debtors.
THE PROJECTIONS WERE NOT PREPARED WITH A VIEW TOWARD COMPLIANCE WITH THE
GUIDELINES ESTABLISHED BY THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
OR THE RULES AND REGULATIONS OF THE SEC REGARDING PROJECTIONS. FURTHERMORE, THE
PROJECTIONS HAVE NOT BEEN AUDITED BY THE DEBTORS' INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS. ALTHOUGH PRESENTED WITH NUMERICAL SPECIFICITY, THE PROJECTIONS ARE
BASED UPON A VARIETY OF ASSUMPTIONS, SOME OF WHICH IN THE PAST HAVE NOT BEEN
ACHIEVED AND WHICH MAY NOT BE REALIZED IN THE FUTURE, AND ARE SUBJECT TO
SIGNIFICANT BUSINESS, ECONOMIC AND COMPETITIVE UNCERTAINTIES AND CONTINGENCIES,
MANY OF WHICH ARE BEYOND THE CONTROL OF THE DEBTORS. CONSEQUENTLY, THE
PROJECTIONS SHOULD NOT BE REGARDED AS A REPRESENTATION OR WARRANTY BY THE
DEBTORS, OR ANY OTHER PERSON, THAT THE PROJECTIONS WILL BE REALIZED. ACTUAL
RESULTS MAY VARY MATERIALLY FROM THOSE PRESENTED IN THE PROJECTIONS.
B. Acceptance of the Plan
As a condition to Confirmation, the Bankruptcy Code requires that each
Class of Impaired Claims vote to accept the Plan, except under certain
circumstances.
Section 1126(c) of the Bankruptcy Code defines acceptance of a plan by a
class of impaired claims as acceptance by holders of at least two-thirds (2/3)
in dollar amount and more than one-half ( 1/2) in number of claims in that
class, but for that purpose counts only those who actually vote to accept or to
reject the Plan. Thus, a Class will have voted to accept the Plan only if two-
thirds (2/3) in amount and a majority in number actually voting cast their
Ballots in favor of acceptance. Claim holders who fail to vote are not counted
as either accepting or rejecting a plan.
C. Best Interests of Claim Holders
Even if a plan is accepted by each class of Claim holders and Interest
holders, the Bankruptcy Code requires a bankruptcy court to determine that the
plan is in the best interests of all Claim holders and Interest holders that are
impaired by the plan and that have not accepted the plan. The "best interests"
test, as set forth in section 1129(a)(7) of the Bankruptcy Code, requires a
bankruptcy court to find either that all members of an impaired class of claims
have accepted the plan or that the plan will provide a member who has not
accepted the plan with a recovery of property of a value, as of the effective
date of the plan, that is not less than the amount that such holder would
recover if the debtor were liquidated under Chapter 7 of the Bankruptcy Code.
The best interests test does not apply to holders of Claims that are Unimpaired.
To calculate the probable distribution to members of each impaired class of
Claim holders and Interest holders if the debtor were liquidated under Chapter
7, a bankruptcy court must first determine the aggregate dollar amount that
would be generated from the debtor's assets if its Chapter 11 case was converted
to a case under Chapter 7 of the Bankruptcy Code. This "liquidation value"
would consist primarily of the proceeds from a forced sale of the debtor's
assets by a Chapter 7 trustee.
48
If a Chapter 7 liquidation were pursued for the Debtors, the amount of
liquidation value available to unsecured creditors would be reduced, first, by
the claims of secured creditors to the extent of the value of their collateral,
and, second, by the costs and expenses of liquidation, as well as by other
administrative expenses and costs of both the Chapter 7 case and the Chapter 11
Cases. Costs of liquidation under Chapter 7 of the Bankruptcy Code would
include the compensation of a trustee, as well as of counsel and other
professionals retained by the trustee, asset disposition expenses, all unpaid
expenses incurred by the Chapter 11 case (such as compensation of attorneys,
financial advisors and accountants) that are allowed in the Chapter 7 case,
litigation costs, and claims arising from the operations of the debtor during
the pendency of the Chapter 11 case. The liquidation itself would trigger
certain priority payments that otherwise would be due in the ordinary course of
business. Those priority claims would be paid in full from the liquidation
proceeds before the balance would be made available to pay general claims or to
make any distribution in respect of equity interests. The liquidation would
also prompt the rejection of certain executory contracts and unexpired leases
and thereby create a higher number of unsecured creditors.
Once the bankruptcy court ascertains the recoveries in liquidation of
secured creditors and priority claimants, it must determine the probable
distribution to general unsecured creditors and equity security holders from the
remaining available proceeds in liquidation. If such probable distribution has
a value greater than the distributions to be received by such creditors and
equity security holders under the plan, then the plan is not in the best
interests of creditors and equity security holders. The Debtors believe that
the members of each Class of Impaired Claims will receive more under the Plan
than they would receive if the Debtors were liquidated under Chapter 7.
D. Liquidation Analysis
The Debtors believe that the Plan meets the "best interests of creditors"
test of section 1129(a)(7) of the Bankruptcy Code. The liquidation analysis for
the Debtors is annexed as part of Appendix B to this Disclosure Statement. As
----------
indicated in Appendix B, the estimated net liquidation value of the Debtors is
----------
between $60.6 million and $66 million. Under such valuation, the holders of
General Unsecured Claims would not receive any distribution on account of such
claim.
The Debtors believe that any liquidation analysis with respect to any of
the Debtors is inherently speculative. The liquidation analyses for the Debtors
necessarily contain estimates of the amount of Claims that will ultimately
become Allowed Claims. These estimates are based solely upon the Debtors'
incomplete review of Claims filed and the Debtors' books and records. No Order
or finding has been entered by the Bankruptcy Court estimating or otherwise
fixing the amount of Claims at the projected amounts of Allowed Claims set forth
in the liquidation analyses. In preparing the liquidation analyses, the Debtors
have projected an amount of Allowed Claims that is at the lowest end of a range
of reasonableness such that, for purposes of the liquidation analyses, the
largest possible Chapter 7 liquidation dividend to holders of Allowed Claims can
be assessed. The estimate of the amount of Allowed Claims set forth in the
liquidation analyses should not be relied on for any other purpose, including,
without limitation, any determination of the value of any distribution to be
made on account of Allowed Claims under the Plan.
E. Valuation of the Reorganized Debtors
1. Reorganization Value
In conjunction with the Plan, the Debtors determined that it was necessary
to estimate post-confirmation values for the enterprise of the Reorganized
Debtors and, thus, the New Holding Company Common Stock. Accordingly, the
Debtors directed their financial advisor, Lazard, to prepare a reorganization
valuation analysis for purposes of this Disclosure Statement. A copy of the
reorganization valuation analysis is attached to this Disclosure Statement as
Appendix D.
- ----------
In preparing its analyses, Lazard (1) reviewed certain recent publicly
available financial statements of the Debtors; (2) reviewed certain financial
projections prepared by the Debtors for the operations of the Reorganized
Debtors, including those Projections set forth in Appendix C annexed to this
----------
Disclosure Statement; (3) reviewed the Debtors' assumptions underlying such
projections; (4) considered the market values of publicly traded companies that
Lazard and the Debtors believe are in businesses reasonably comparable to the
operating business of the Debtors; (5) considered certain economic and industry
49
information relevant to the operating business of the Debtors; (6) discussed the
current operations and prospects of the operating business with the Debtors; and
(7) made such other examinations and performed such other analyses as Lazard has
deemed necessary or appropriate for the purpose of its valuation.
As a result of such analyses, reviews, discussions, considerations and
assumptions, Lazard estimates that the enterprise value of the Reorganized
Debtors falls in a range between $80.65 million and $94.65 million (inclusive of
the anticipated Net Proceeds from the sale of the Non-Core Assets), and the
aggregate value of the New Holding Company Common Stock falls in a range between
$21.74 million and $35.74 million. This estimated range of values represents a
hypothetical value which reflects the estimated intrinsic value of the
Reorganized Debtors derived through the application of various valuation
techniques. Such analysis does not purport to represent valuation levels which
would be achieved in, or assigned by, the public markets for debt and equity
securities or private markets for corporations. Lazard's estimate necessarily
is based on economic, market, financial and other conditions as they exist on,
and on the information made available to it as of, the date of this Disclosure
Statement. It should be understood that, although subsequent developments may
affect Lazard's conclusions, Lazard does not have any obligation and does not
intend to update, revise or reaffirm its estimate.
In preparing its analyses, Lazard assumed and relied upon the accuracy and
completeness of all of the financial and other information that was available to
it from public sources and that was provided to Lazard by the Debtors or their
representatives, and has not assumed any responsibility for independent
verification of any such information. With respect to the financial projections
supplied to Lazard, Lazard assumed the accuracy thereof and assumed that such
projections have been prepared reasonably in good faith and on a basis
reflecting the best currently available estimates and judgments of the Debtors
as to the future operating and financial performance of the Debtors. Such
projections assume the Debtors will operate the businesses reflected in the
Business Plan and that such businesses perform as expected in the Business Plan.
To the extent that the Debtors operate more or fewer businesses during the
projection period and to the extent that all or a portion of the businesses
perform at levels inconsistent with those expected in the Business Plan, such
adjustments may have a material impact on the operating projections and
valuations as presented herein. Lazard did not make or obtain any independent
evaluation of the Reorganized Debtors' assets, nor did Lazard verify any of the
information it reviewed.
2. Valuation Methodology
Lazard performed a variety of analyses and considered a variety of factors
in preparing the valuation of the Reorganized Debtors. While several generally
accepted valuation techniques for estimating the Reorganized Debtors' enterprise
value were used, Lazard primarily relied on three methodologies: comparable
public company analysis, discounted cash flow analysis, and precedent
transactions analysis. Lazard placed different weights on each of these
analyses and made judgements as to the relative significance of each analysis in
determining the Reorganized Debtors' indicated enterprise value range. Lazard's
valuation must be considered as a whole and selecting just one methodology or
portions of the analyses, without considering the analyses as a whole, could
create a misleading or incomplete conclusion as to the Reorganized Debtors'
enterprise value. This valuation methodology was used to derive the value of
the Reorganized Debtors' Core Divisions. In addition, Lazard estimated the
proceeds from disposition of the Non-Core Divisions' assets based upon
liquidation appraisals and upon arms-length negotiations with willing buyers of
the Non-Core Divisions' assets during the valuation process. As such,
liquidation appraisals were appropriately discounted to reflect estimated
proceeds from the sale of the Non-Core Divisions' assets.
a. Comparable Public Company Analysis
A comparable public company analysis estimates value based on a comparison
of the target company's financial statistics with the financial statistics of
public companies that are similar to the target company. It establishes a
benchmark for asset valuation by deriving the value of "comparable" assets,
standardized using a common variable such as EBITDA, EBIT, revenues, earnings
and cash flows. The analysis includes a detailed multi-year financial comparison
of each company's income statement, balance sheet and cash flow. In addition,
each company's performance, profitability, margins, leverage and business trends
are also examined. Based on these analyses, a number of financial multiples and
ratios are calculated to gauge each company's relative performance and
valuation. Comparable public company analysis is generally a historic or
"backward looking" technique. It relies on the fact that the price that an
investor is willing to pay in the public markets for securities of
50
similar publicly traded companies represents the Reorganized Debtors' current
and future prospects as well as the rate of return required on the investment.
A key factor to this approach is the selection of companies with relatively
similar business and operational characteristics to the target company.
Criteria for selecting comparable companies include, among other relevant
characteristics, similar lines of businesses, business risks, growth prospects,
maturity of businesses, market presence, size and scale of operations. The
selection of truly comparable companies is often difficult and subject to
interpretation. However, the underlying concept is to develop a premise for
relative value, which when coupled with other approaches, presents a foundation
for determining firm value.
Due to the localized nature of the general commercial printing business,
each of the Debtors' Divisions competes primarily with substantially smaller
private companies. Furthermore, the array of printing services offered by, and
geographic distribution of, the Debtors' facilities do not directly reflect
those of any comparable companies. In conducting its analysis, Lazard selected
the five most comparable companies after examining all public companies in the
general commercial printing industry.
b. Discounted Cash Flow Approach
The discounted cash flow ("DCF") valuation methodology relates the value of
an asset or business to the present value of expected future cash flows to be
generated by that asset or business. The DCF methodology is a "forward looking"
approach that discounts the expected future cash flows by a theoretical or
observed discount rate determined by calculating the average cost of debt and
equity for publicly traded companies that are similar to the Reorganized
Debtors.
This approach relies on the company's ability to project future cash flows
with some degree of accuracy. Since the Debtors' Projections reflect
significant assumptions made by the Debtors' management concerning anticipated
results, the assumptions and judgments used in the Projections may or may not
prove correct and therefore, no assurance can be provided that projected results
are attainable or will be realized. Lazard cannot and does not make any
representations or warranties as to the accuracy or completeness of the Debtors'
Projections.
c. Precedent Transaction Analysis
Precedent transaction analysis estimates value by examining public merger
and acquisition transactions. An analysis of the disclosed purchase price as a
multiple of various operating statistics reveals industry sales multiples for
companies in similar lines of businesses to the Debtors. These transaction
multiples are calculated based on the purchase price (including any debt
assumed) paid to acquire companies that are comparable to the Debtors. These
multiples were then applied to the Debtors' key operating statistics to
determine the total enterprise value or value to a potential strategic buyer.
Precedent transaction analysis explains other aspects of value. Unlike the
comparable public company analysis, the valuation in this methodology includes a
"control" premium, representing the purchase of a majority or controlling
position in a company's assets. Thus, this methodology generally produces
higher valuations than the comparable public company analysis. Other aspects of
value that manifest itself in a precedent transaction analyses include the
following: (i) circumstances surrounding a merger transaction may introduce
"noise" into the analysis (e.g. an additional premium may be extracted from a
buyer in the case of a competitive bidding contest); (ii) the market environment
is not identical for transactions occurring at different periods of time; and
(iii) circumstances pertaining to the financial position of a company may have
an impact on the resulting purchase price (e.g. a company in financial distress
may receive a lower price due to perceived weakness in its bargaining leverage)
Since precedent transaction analysis explains other aspects of value
besides the inherent value of a company and may be predicated on a limited
number of transactions occurring under variable market conditions, there are
significant limitations as to its usage in the Debtors' valuation.
F. Application of the "Best Interests" of Creditors Test to the Liquidation
Analysis and the Valuation
51
It is impossible to determine with any specificity the value each Creditor
will receive as a percentage of its Allowed Claim. This difficulty in
estimating the value of recoveries is due to, among other things, the inherent
uncertainty with respect to the lack of any public market for the New Holding
Company Common Stock. Such a valuation is made even more difficult because the
analysis regarding the amount of General Unsecured Claims that ultimately will
be Allowed is preliminary and subject to change.
Notwithstanding the difficulty in quantifying recoveries to holders of
Allowed Claims with precision, the Debtors believe that the financial
disclosures contained herein and the Projections imply a greater recovery to
holders of Claims in each Impaired Class under the Plan than the recovery
available in a Chapter 7 liquidation.
Set forth below are tables and discussions that compare, for each Impaired
Class for which the Plan provides a distribution, the estimated recoveries under
the Plan with estimated recoveries in a Chapter 7 liquidation (utilizing the
mid-point of the ranges set forth in the Liquidation Analysis). Estimated
Liquidation Analysis Recoveries set forth below are calculated at the mid-point
of the ranges set forth in the Liquidation Analysis:
1. Premier Graphics
Estimated Recovery Estimated Liquidation
Impaired Class Under the Plan Analysis Recovery
-------------- -------------- -----------------
P-1* 100% 100%
P-2 (1) (2)
P-5 13.5% - 22.3% 0%
P-6 13.5% - 25% 0%
P-7 0% 0%
2. Master Graphics
Estimated Recovery Estimated Liquidation
Impaired Class Under the Plan Analysis Recovery
-------------- -------------- -----------------
M-1* 100% 100%
M-2 0% 0%
M-5 0% 0%
M-6 0% 0%
(*) While currently classified as impaired, to the extent that the holders of
Class P-1 and Class M-1 Secured Lender Claims receive Cash in full satisfaction
of the Allowed amount of their Claims on the later of the Effective Date or the
date that such Claims are Allowed, such Secured Lender Claims are unimpaired.
(1) Class P-2 consists of Premier Graphics' guaranty of Master Graphics'
obligations to GE Capital under the Warrant Put Note pursuant to the terms of
the Warrant Put Note Guaranty Agreement. Under the Plan, this Guaranty shall be
replaced with the New Warrant Put Note Guaranty Agreement.
52
(2) In a liquidation, it is not clear whether GE Capital would receive a
distribution on account of its Warrant Put Note Guaranty Claim against Premier
Graphics because of an issue with respect to the secured status of the Warrant
Put Note Guaranty Claim. This issue is resolved under the Plan by Master
Graphics' issuance to GE Capital of the New Warrant Put Note and Premier
Graphics' issuance to GE Capital of the New Warrant Put Note Guaranty Agreement.
G. Confirmation Without Acceptance of All Impaired Classes: The "Cramdown"
Alternative
In the event that a Class of Claims does not accept the Plan or is deemed
to have rejected the Plan, the Debtors intend to seek confirmation of the Plan
pursuant to the "cramdown" provisions of the Bankruptcy Code. Specifically,
section 1129(b) of the Bankruptcy Code provides that a plan can be confirmed
even if the plan is not accepted by all impaired classes, as long as at least
one impaired class of Claims has accepted it. The Bankruptcy Court may confirm
the Plan at the request of the Debtors if the Plan "does not discriminate
unfairly" and is "fair and equitable" as to each impaired class that has not
accepted the Plan. A plan does not discriminate unfairly within the meaning of
the Bankruptcy Code if a dissenting class is treated equally with respect to
other classes of equal rank.
A plan is fair and equitable as to a class of secured claims that rejects
such plan if the plan provides (1)(a) that the Claim holders included in the
rejecting class retain the liens securing those claims whether the property
subject to those liens is retained by the debtor or transferred to another
entity, to the extent of the allowed amount of such claims, and (b) that each
holder of a claim of such class receives on account of that claim deferred cash
payments totaling at least the allowed amount of that claim, of a value, as of
the effective date of the plan, of at least the value of the holder's interest
in the estate's interest in such property; (2) for the sale, subject to section
363(k) of the Bankruptcy Code, of any property that is subject to the liens
securing the claims included in the rejecting class, free and clear of the
liens, with the liens to attach to the proceeds of the sale, and the treatment
of the liens on proceeds under clause (1) or (2) of this paragraph; or (3) for
the realization by such holders of the indubitable equivalent of such claims.
A plan is fair and equitable as to a class of unsecured claims which
rejects a plan if the plan provides (1) for each holder of a claim included in
the rejecting class to receive or retain on account of that claim property that
has a value, as of the effective date of the plan, equal to the allowed amount
of such claim; or (2) that the holder of any claim or interest that is junior to
the claims of such class will not receive or retain on account of such junior
claim or interest any property at all.
A plan is fair and equitable as to a class of equity interests that rejects
a plan if the plan provides (1) that each holder of an interest included in the
rejecting class receive or retain on account of that interest property that has
a value, as of the effective date of the plan, equal to the greater of the
allowed amount of any fixed liquidation preference to which such holder is
entitled, any fixed redemption price to which such holder is entitled, or the
value of such interest; or (2) that the holder of any interest that is junior to
the interest of such class will not receive or retain under the plan on account
of such junior interest any property at all.
At the Confirmation Hearing, the Debtors shall request confirmation
pursuant to section 1129(b) of the Bankruptcy Code with respect to each class of
Claims or Interests that does not or is deemed not to have accepted the Plan.
See Article VIII for a summary of those Claims deemed not to have accepted the
-------------
Plan.
H. Conditions to Confirmation and/or Consummation
1. Conditions to Confirmation
The following are conditions precedent to confirmation of the Plan that may
be satisfied or waived in accordance with the Plan:
a. The Bankruptcy Court shall have approved by Final Order a
disclosure statement with respect to the Plan in form and
substance reasonably acceptable to the Debtors and the Creditors'
Committee; and
53
b. The Confirmation Order shall be in form and substance reasonably
acceptable to the Debtors and the Creditors' Committee.
2. Conditions to the Effective Date
The following are conditions precedent to the occurrence of the Effective
Date, each of which may be satisfied or waived in accordance with the Plan:
a. The Reorganized Debtors shall have entered into the Exit Facility
and all conditions precedent to the consummation thereof shall
have been waived or satisfied in accordance with the terms
thereof.
b. The Debtors shall have Cash on hand sufficient to pay all Claims
and to make any other payments required to be paid under the Plan
by the Debtors on the Effective Date.
c. The Confirmation Order shall be in form and substance acceptable
to the Debtors and reasonably acceptable to the Creditors'
Committee and shall have been entered by the Bankruptcy Court and
shall be a Final Order, and no request for revocation of the
Confirmation Order under section 1144 of the Bankruptcy Code
shall have been made, or, if made, shall remain pending.
d. Each Exhibit, Plan Schedule and documents or agreements to be
executed in connection therewith shall be in form and substance
reasonably acceptable to the Creditors' Committee.
I. Waiver of Conditions to Confirmation and/or Consummation
The conditions set forth in the Plan may be waived, in whole or in part, by
the Debtors in their sole discretion without notice to any other parties in
interest or the Bankruptcy Court and without a hearing. The failure to satisfy
or waive any condition to the Confirmation Date or the Effective Date may be
asserted by the Debtors in their sole discretion regardless of the circumstances
giving rise to the failure of such condition to be satisfied (including any
action or inaction by the Debtors in their sole discretion). The failure of the
Debtors in their sole discretion to exercise any of the foregoing rights shall
not be deemed a waiver of any other rights, and each such right shall be deemed
an ongoing right, which may be asserted at any time.
J. Retention of Jurisdiction
Pursuant to sections 105(a) and 1142 of the Bankruptcy Code, the Bankruptcy
Court shall have exclusive jurisdiction of all matters arising out of, and
related to, the Chapter 11 Cases and the Plan, including, among other things,
the following matters:
1. to hear and determine pending motions for the assumption or rejection
of executory contracts or unexpired leases or the assumption and
assignment, as the case may be, of executory contracts or unexpired
leases to which any of the Debtors are a party or with respect to
which any of the Debtors may be liable, and to hear and determine the
allowance of Claims resulting therefrom including the amount of Cure,
if any, required to be paid to such Claim holders;
2. to adjudicate any and all Causes of Action, adversary proceedings,
applications and contested matters that may be commenced or maintained
pursuant to the chapter 11 cases or the Plan, including, without
limitation, any adversary proceeding or contested matter with respect
to a Trust Claim, proceedings to adjudicate the allowance of Disputed
Claims, and all controversies and issues arising from or relating to
any of the foregoing;
3. to ensure that distributions to Allowed Claim holders are accomplished
as provided herein;
54
4. to hear and determine any and all objections to the allowance or
estimation of Claims filed, both before and after the Confirmation
Date, including any objections to the classification of any Claim or
Interest, and to allow or disallow any Claim, in whole or in part;
5. to enter and implement such orders as may be appropriate if the
Confirmation Order is for any reason stayed, revoked, modified and/or
vacated;
6. to issue orders in aid of execution, implementation or consummation of
the Plan;
7. to consider any modifications of the Plan with respect to any Debtor,
to cure any defect or omission, or to reconcile any inconsistency in
any Order of the Bankruptcy Court, including, without limitation, the
Confirmation Order;
8. to hear and determine all matters involving claims or Causes of Action
involving any of the Debtors or their property;
9. to hear and determine all applications for allowance of compensation
and reimbursement of Professional Claims under the Plan or under
sections 330, 331, 503(b), 1103 and 1129(a)(4) of the Bankruptcy Code;
10. to hear and determine all motions or objections regarding compensation
and reimbursement of expenses made by the Trustee, or any
professionals retained by the Trustee, including, without limitation,
the ability of the Bankruptcy Court to enter an Order to show cause
and commence a hearing to examine any issue concerning the fees and
expenses of the applicable trustee, or any professionals retained by
the applicable trustee;
11. to determine requests for the payment of Claims entitled to priority
under section 507(a)(1) of the Bankruptcy Code, including compensation
of and reimbursement of expenses of parties entitled thereto;
12. to hear and determine disputes arising in connection with the
interpretation, implementation or enforcement of the Plan, including
disputes arising under agreements, documents or instruments executed
in connection with the Plan;
13. to hear and determine all suits or adversary proceedings to recover
assets of any of the Debtors and property of their Estates, wherever
located;
14. to hear and determine matters concerning state, local and federal
taxes in accordance with sections 346, 505 and 1146 of the Bankruptcy
Code;
15. to hear any other matter not inconsistent with the Bankruptcy Code;
16. to hear and determine all disputes involving the existence, nature or
scope of the Debtors' discharge, including any dispute relating to any
liability arising out of the termination of employment or the
termination of any employee or retiree benefit program, regardless of
whether such termination occurred prior to or after the Effective
Date;
17. to hear and determine disputes arising in connection with the
interpretation, implementation, or enforcement of the Trust;
18. to enter a final decree closing the Chapter 11 Cases;
19. to enforce all Orders previously entered by the Bankruptcy Court; and
20. to authorize and approve the Sale of the remaining Non-Core Assets.
55
In addition, notwithstanding anything contained in this Disclosure
Statement or the Plan to the contrary, the Bankruptcy Court will retain
exclusive jurisdiction to hear and determine disputes concerning Causes of
Action and Avoidance Claims and any motions to compromise or settle such
disputes. Despite the foregoing, if the Bankruptcy Court is determined not to
have jurisdiction with respect to the foregoing, or if the Reorganized Debtors
or the Trustee chooses to pursue any Causes of Action or Avoidance Claims (as
applicable) in another court of competent jurisdiction, the Reorganized Debtors
will have authority to bring such action in any other court of competent
jurisdiction.
XIII. ALTERNATIVES TO CONFIRMATION AND
CONSUMMATION OF THE PLAN
The Debtors believe that the Plan affords holders of Claims and Interests
the potential for the greatest realization on the Debtors' assets and,
therefore, is in the best interests of such holders.
If the Plan is not confirmed, however, the theoretical alternatives include
(a) continuation of the pending Chapter 11 Cases, (b) an alternative plan or
plans of reorganization, or (c) liquidation of the Debtors under Chapter 7 or
Chapter 11 of the Bankruptcy Code.
A. Continuation of the Chapter 11 Cases
If the Debtors remain in Chapter 11, the Debtors could continue to operate
their businesses and manage their properties as Debtors in Possession, but they
would remain subject to the restrictions imposed by the Bankruptcy Code. It is
not clear whether the Debtors could survive as a going concern in protracted
Chapter 11 cases. The Debtors could have difficulty sustaining the high costs
and the erosion of market confidence, which may be caused if the Debtors remain
Chapter 11 debtors-in-possession. Ultimately, the Debtors (or other parties in
interest) could propose another plan or liquidate under Chapter 7.
B. Alternative Plans of Reorganization
If the Plan is not confirmed, the Debtors, or, if the Bankruptcy Court did
not grant further extensions of the Debtors' exclusive period in which to
solicit a reorganization plan, any other party in interest in the Chapter 11
Cases, could propose a different plan or plans. Such plans might involve either
a reorganization and continuation of the Debtors' businesses, an orderly
liquidation of their assets, or a combination of both.
C. Liquidation under Chapter 7 or Chapter 11
If no plan is confirmed, the Debtors' Chapter 11 Cases may be converted to
cases under Chapter 7 of the Bankruptcy Code. In a Chapter 7 case, a trustee or
trustees would be appointed to liquidate the assets of the Debtors. It is
impossible to predict precisely how the proceeds of the liquidation would be
distributed to the respective holders of Claims and Interests.
The Debtors believe that in liquidation under Chapter 7, before creditors
receive any distribution, additional administrative expenses involved in the
appointment of a trustee or trustees and attorneys, accountants and other
professionals to assist such trustees would cause a substantial diminution in
the value of the estates. The assets available for distribution to creditors
would be reduced by such additional expenses and by Claims, some of which would
be entitled to priority, which would arise by reason of the liquidation and from
the rejection of leases and other executory contracts in connection with the
cessation of the Debtors' operations and the failure to realize the greater
going concern value of the Debtors' assets.
The Debtors also may be liquidated pursuant to the provisions of a Chapter
11 plan. In a liquidation under Chapter 11, the Debtors' assets could be sold
in an orderly fashion over a more extended period of time than in a liquidation
under Chapter 7. Thus, a Chapter 11 liquidation might result in larger
recoveries than in a Chapter 7 liquidation, but the delay in distributions could
result in lower present values received and higher administrative costs.
Because a trustee is not required in a Chapter 11 case, expenses for
professional fees could be lower than in a Chapter 7 case, in which a trustee
must be appointed. Any distribution to the Claim holders of the Debtors under a
Chapter 11 liquidation plan likely would be delayed substantially.
56
The liquidation analysis for each individual Debtor, prepared with the
assistance of the Debtors' financial advisors, is premised upon a liquidation in
a Chapter 7 case and is annexed as Appendix B to this Disclosure Statement. In
----------
the liquidation analyses, the Debtors have taken into account the nature, status
and underlying value of their assets, the ultimate realizable value of their
assets, and the extent to which such assets are subject to liens and security
interests.
The likely form of any liquidation would be the sale of individual assets.
Based on this analysis, it is likely that a liquidation of the Debtors' assets
would produce less value for distribution to creditors than that recoverable in
each instance under the Plan. In the opinion of the Debtors, the recoveries
projected to be available in liquidation of the Debtors are not likely to afford
holders of Claims as great a realization potential as does the Plan.
XIV. VOTING REQUIREMENTS
On December 19, 2000, the Bankruptcy Court entered an Order approving,
among other things, this Disclosure Statement, setting voting procedures and
scheduling the hearing on confirmation of the Plan (the "Procedures Order"). A
copy of the Notice of Confirmation Hearing is enclosed with this Disclosure
Statement. The Notice of the Confirmation Hearing sets forth in detail, among
other things, the voting deadlines and objection deadlines. The Notice of
Confirmation Hearing and the instructions attached to the Ballot should be read
in connection with this section of this Disclosure Statement.
If you have any questions about (a) the procedure for voting your Claim,
(b) the packet of materials that you have received, or (c) the amount of your
Claim, please contact the Balloting Agent at the following address:
Master Graphics, Inc.
c/o Robert L. Berger and Associates, Inc.
16161 Ventura Boulevard, PMB 732
Encino, California 91436
If you wish to obtain, at your own expense, unless otherwise specifically
required by Federal Rule of Bankruptcy Procedure 3017(d), an additional copy of
the Plan, this Disclosure Statement or any appendices or exhibits to such
documents, please contact the Balloting Agent at the above address.
The Bankruptcy Court may confirm the Plan only if it determines that the
Plan complies with the technical requirements of Chapter 11 of the Bankruptcy
Code and that the disclosures by the Debtors concerning the Plan have been
adequate and have included information concerning all payments made or promised
by the Debtors in connection with the Plan and the Chapter 11 Cases. In
addition, the Bankruptcy Court must determine that the Plan has been proposed in
good faith and not by any means forbidden by law, and under Bankruptcy Rule
3020(b)(2), it may do so without receiving evidence if no objection is timely
filed.
In particular, the Bankruptcy Code requires the Bankruptcy Court to find,
among other things, that (a) the Plan has been accepted by the requisite votes
of all Classes of Impaired Claims and Interests unless approval will be sought
under section 1129(b) of the Bankruptcy Code in spite of the dissent of one or
more such Classes, (b) the Plan is "feasible," which means that there is a
reasonable probability that the Debtors will be able to perform their
obligations under the Plan and continue to operate their businesses without
further financial reorganization or liquidation, and (c) the Plan is in the
"best interests" of all Claim holders, which means that such holders will
receive at least as much under the Plan as they would receive in a liquidation
under Chapter 7 of the Bankruptcy Code. The Bankruptcy Court must find that all
conditions mentioned above are met before it can confirm the Plan. Thus, even
if all the Classes of Impaired Claims against the Debtors accept the Plan by the
requisite votes, the Bankruptcy Court must make an independent finding that the
Plan conforms to the requirements of the Bankruptcy Code, that the Plan is
feasible, and that the Plan is in the best interests of the holders of Claims
against the Debtors. These statutory conditions to confirmation are discussed
above.
UNLESS THE BALLOT OR MASTER BALLOT BEING FURNISHED IS TIMELY SUBMITTED TO
THE VOTING AGENT ON OR PRIOR TO THE VOTING DEADLINE TOGETHER WITH ANY OTHER
DOCUMENTS REQUIRED BY SUCH BALLOT, THE PROCEDURES ORDER PROVIDES FOR THE
REJECTION OF SUCH BALLOT
57
AS INVALID AND, THEREFORE, SUCH BALLOT SHALL NOT BE COUNTED AS AN ACCEPTANCE OR
REJECTION OF THE PLAN. IN NO CASE SHOULD A BALLOT BE DELIVERED TO THE DEBTORS OR
ANY OF THEIR ADVISORS.
A. Parties in Interest Entitled to Vote
Under section 1124 of the Bankruptcy Code, a class of claims is deemed to
be "impaired" under a plan unless (1) the plan leaves unaltered the legal,
equitable and contractual rights to which such claim or interest entitles the
holder thereof or (2) notwithstanding any legal right to an accelerated payment
of such claim or interest, the plan cures all existing defaults (other than
defaults resulting from the occurrence of events of bankruptcy) and reinstates
the maturity of such claim or interest as it existed before the default.
In general, a holder of a claim or interest may vote to accept or to reject
a plan if (1) the claim or interest is "allowed," which means generally that no
party in interest has objected to such claim or interest, and (2) the claim or
interest is impaired by the Plan. If the holder of an impaired claim or
interest will not receive any distribution under the plan in respect of such
claim or interest, the Bankruptcy Code deems such holder to have rejected the
plan. If the claim or interest is not impaired, the Bankruptcy Code deems that
the holder of such claim or interest has accepted the plan and the plan
proponent need not solicit such holder's vote.
The holder of a Claim against the Debtors that is "impaired" under the Plan
is entitled to vote to accept or reject the Plan if (1) the Plan provides a
distribution in respect of such Claim, and (2)(a) the Claim has been scheduled
by the Debtors (and such claim is not scheduled as disputed, contingent or
unliquidated), or (b) it has filed a proof of claim on or before the bar date
applicable to such holder, pursuant to sections 502(a) and 1126(a) of the
Bankruptcy Code and Federal Rules of Bankruptcy Procedure 3003 and 3018. Any
Claim as to which an objection has been timely filed and has not been withdrawn
or dismissed is not entitled to vote, unless the Bankruptcy Court, pursuant to
Federal Rule of Bankruptcy Procedure 3018(a), upon application of the holder of
the Claim with respect to which there has been an objection, temporarily allows
the Claim in an amount that the Bankruptcy Court deems proper for the purpose of
accepting or rejecting the Plan.
A vote may be disregarded if the Bankruptcy Court determines, pursuant to
section 1126(e) of the Bankruptcy Code, that it was not solicited or procured in
good faith or in accordance with the provisions of the Bankruptcy Code. The
Procedures Order also sets forth assumptions and procedures for tabulating
Ballots that are not completed fully or correctly.
B. Classes Impaired Under the Plan
1. Voting Impaired Classes of Claims and Interests.
The following Classes are Impaired under, and entitled to vote on, the
Plan, provided, however, that to the extent that the holders of Class P-1 or M-1
Secured Lender Claims receive Cash in full satisfaction of the Allowed amount of
their Claims on the later of the Effective Date or the date that such Claims are
Allowed, such Secured Lender Claims are unimpaired.:
Class P-1 (Secured Lender Claims against Premier Graphics)
Class P-2 (Warrant Put Note Guaranty Agreement Claims)
Class P-5 (General Unsecured Claims against Premier Graphics)
Class P-6 (Administrative Convenience Claims against Premier)
Class M-1 (Secured Lender Claims against Master Graphics)
Class M-2 (Warrant Put Note Claims)
58
2. Non-Voting Impaired Classes of Claims and Interests
The Classes listed below are not entitled to receive or retain any property
under the Plan. Under section 1126(g) of the Bankruptcy Code, Claim holders and
Interest holders in such Classes are deemed to reject the Plan, and the votes of
such Claim holders and Interest holders will not be solicited.
Class P-7 (Interests in Premier Graphics)
Class M-5 (General Unsecured Claims against Master Graphics)
Class M-6 (Interests in Master Graphics)
3. Unimpaired Classes of Claims and Interests
The Classes of Claims listed below are Unimpaired under the Plan and deemed
under section 1126(f) of the Bankruptcy Code to have accepted the Plan. Their
votes to accept or reject the Plan will not be solicited. Acceptances of the
Plan are being solicited only from those who hold Claims in an Impaired Class
whose members will receive a distribution under the Plan.
Class P-3 (Other Secured Claims against Premier Graphics)
Class P-4 (Other Priority Claims against Premier Graphics)
Class M-3 (Other Secured Claims against Master Graphics)
Class M-4 (Other Priority Claims against Master Graphics)
XV. CONCLUSION
This Disclosure Statement was approved by the Bankruptcy Court after notice
and a hearing. The Bankruptcy Court has determined that this Disclosure
Statement contains information adequate to permit Claim holders and Interest
holders to make an informed judgment about the Plan. Such approval, however,
does not mean that the Bankruptcy Court recommends either acceptance or
rejection of the Plan.
A. Hearing on and Objections to Confirmation
1. Confirmation Hearing
The hearing on confirmation of the Plan has been scheduled for January 25,
2001, at 11:00 a..m. (Eastern Time). Such hearing may be adjourned from time to
time by announcing such adjournment in open court, all without further notice to
parties in interest, and the Plan may be modified by the Debtors pursuant to
section 1127 of the Bankruptcy Code prior to, during, or as a result of that
hearing, without further notice to parties in interest.
2. Date Set for Filing Objections to Confirmation
The time by which all objections to confirmation of the Plan must be filed
with the Bankruptcy Court and received by the parties listed in the Confirmation
Hearing Notice has been set for January 17, 2001, at 4:00 p..m. (Eastern Time).
A copy of the Confirmation Hearing Notice has been provided with this Disclosure
Statement.
B. Recommendation
The Plan provides for an equitable and early distribution to the Debtors'
Creditors and preserves the jobs of a majority of the Debtors' employees. The
Debtors believe that any alternative to confirmation of the Plan, such as
liquidation or attempts by another party in interest to file a plan, could
result in significant delays, litigation and costs, as well as the loss of jobs
by most of the Debtors' employees. Moreover, the Debtors believe that creditors
will receive greater and earlier recoveries under the Plan than those that would
be achieved in liquidation.
59
ACCORDINGLY, THE DEBTORS AND THE UNSECURED CREDITORS COMMITTEE BELIEVE THAT
THE CONFIRMATION AND CONSUMMATION OF THE PLAN IS PREFERABLE TO ALL OTHER
ALTERNATIVES. FOR THESE REASONS, THE DEBTORS URGE YOU TO RETURN YOUR BALLOT
ACCEPTING THE PLAN.
Dated: Wilmington, Delaware
December 19, 2000
Respectfully submitted,
MASTER GRAPHICS, INC. and
PREMIER GRAPHICS, INC.
By: /s/ Michael B. Bemis
------------------------------------
Michael B. Bemis
Chairman and Chief Executive Officer
Counsel:
By: /s/ John Wm. Butler, Jr.
------------------------------------------------
John Wm. Butler, Jr.
George N. Panagakis
Mark A. McDermott
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, Illinois 60606-1285
(312) 407-0700
Mark S. Chehi (I.D. No. 2885)
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM LLP
One Rodney Square
P.O. Box 636
Wilmington, Delaware 19899-0636
(302) 651-3000
ATTORNEYS FOR DEBTORS
ANNEX 1
LEASED PROPERTIES
Landlord Location Size of Property Monthly Rent
-------- -------- ---------------- ------------
70 Timber Creek Partnership 70 Timber Creek Drive 3,200 sq. ft. $ 3,706
Cordova, Tennessee
DLM, Inc. Argus Press Division 56,000 sq. ft. $12,000
7440 N. Natchez Avenue
Niles, Illinois
John P. Miller* B&M Printing Division 2500 70,000 sq. ft. $11,667
Lamar Avenue
Memphis, Tennessee
David Bornhoeft*/(1)/ Columbia Graphics 80,000 sq. ft. $22,200
2900 N. Paulina St.
Chicago, Illinois
KIMCO* Eagle Direct 87,000 sq. ft. $17,445
4155 Forest St.
Denver, Colorado
Rainbow Properties* Golden Rule Printing 65,000 sq. ft. $29,166
1505 The Boardwalk
Huntsville, Alabama
Mike Harper* Harperprints Division 55,000 sq. ft. $25,603
One Industry Drive
Henderson, N. Carolina
Arrowhead Real Estate* Hederman Brothers 72,000 sq. ft. $28,750
500 Steed Road
Ridgeland, Mississippi
Wendell Burns* Jones Printing Division 2205 16,500 sq. ft. $11,100
Dodgon Ave.
Chattanooga, Tennessee
RSH Properties*/(1)/ King Mailing Division New 10,000 sq. ft. $ 3,821
Peachtree Road
Chamblee, Georgia
Graphic Development Company*/(1)/ Lithograph Printing 64,000 sq. ft. $22,700
4222 Pilot Drive
Memphis, Tennessee
Phil Phillips*/(2)/ Phillips Litho 30,000 sq. ft. $10,563
1845 Turnbow Avenue
Springdale, Arkansas
Exh. 1-1
Landlord Location Size of Property Monthly Rent
-------- -------- ---------------- ------------
RFTA Associates* Phoenix Communications 65,000 sq. ft. $23,000
New Peachtree Road
Chamblee, Georgia
GWS, LP.* Stephenson Printing 94,000 sq. ft. $15,000
5741 Gen. Washington Dr.
Fairfax, Virginia
INVESCO Realty/(1)/ Technigrafiks Division 6767 30,300 sq. ft. $20,128
Portwest Dr.
Houston, Texas
Thomasson Holdings* Thomasson Printing 63,900 sq. ft. $ 8,333
940 Columbia Dr.
Carrolton, Georgia
SOFI IV-SPM Woods Lithographics 3433 W. 54,400 sq. ft. $17,311
Earl Drive
Phoenix, Arizona
____________________
(*) Indicates that the landlord is an insider of the Debtors.
(1) Includes multiple properties in Chicago.
(2) Includes multiple properties in Little Rock and Springdale.
Exh. 1-2
Appendix A
AMENDED JOINT PLAN OF REORGANIZATION OF
MASTER GRAPHICS, INC. AND PREMIER GRAPHICS, INC.