SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] - QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[ ] - TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period from January 1, 1997 to March 31, 1997
Commission File Number: 0-22696
DISC GRAPHICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3678012
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 Gilpin Avenue, Hauppauge, New York 11788
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 234 -1400
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days
Yes [X] No [ ]
As of May 13, 1997, 5,368,358 shares of the Registrant's Common Stock, par
value $.01, were outstanding.
<PAGE>
INDEX TO FORM 10-Q
Page
----
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets as of March 31, 1997
and December 31, 1996......................................... 1
Consolidated Statements of Income for the Three Months ended
March 31, 1997 and 1996....................................... 2
Consolidated Statements of Cash Flows for the Three Months
ended March 31, 1997 and 1996 ................................ 3
Notes to Consolidated Financial Statements ................... 4
Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 8
PART II - OTHER INFORMATION
Signatures ................................................. 12
<PAGE>
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
As of March 31, 1997 and December 31, 1996
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 30,638 $ 30,859
Accounts receivable, net of allowance for doubtful
accounts of $819,000 and $844,000, respectively 8,962,907 9,055,995
Inventories 1,875,590 2,013,333
Prepaid expenses and other current assets 779,242 599,927
Current maturities of notes receivable 57,005 85,014
Deferred income taxes 700,000 700,000
------- -------
Total current assets 12,405,382 12,485,128
Plant and equipment, net 8,851,244 8,254,920
Goodwill, net of amortization of $58,891 and $46,493,
respectively 1,055,115 1,069,363
Security deposits and other assets 305,531 236,271
------- -------
Total assets $22,617,272 $22,045,682
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of equipment notes payable $ 538,126 $ 456,651
Current portion, long-term debt 98,720 97,167
Current maturities of capitalized lease obligations
payable 555,840 692,852
Accounts payable and accrued expenses 5,366,381 5,282,571
Income taxes payable 164,891 954,088
------- -------
Total current liabilities 6,723,958 7,483,329
Long term debt 1,628,373 515,234
Equipment notes payable, less current maturities 1,738,319 1,902,838
Capitalized lease obligations payable, less current
maturities 2,074,953 2,192,235
Deferred income taxes 988,000 988,000
------- -------
Total liabilities 13,153,603 13,081,636
Stockholders' equity:
Preferred stock:
$.01 par value; authorized 5,000 shares;
no shares issued and outstanding - -
Common stock:
$.01 par value; authorized 20,000,000 shares;
issued 5,378,518 53,786 53,786
Additional paid in capital 5,051,555 5,051,555
Retained earnings 4,387,671 3,883,366
--------- ---------
9,493,012 8,988,707
Less: Treasury stock at cost, 10,160 and 8,710 shares at
March 31, 1997 and December 31, 1996 respectively (29,342) (24,661)
------- -------
Total stockholders' equity 9,463,670 8,964,046
Total liabilities and stockholders' equity $22,617,272 $22,045,682
=========== ===========
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
<PAGE>
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Consolidated Statements of Income
For the Three Months Ended March 31, 1997 and March 31, 1996
(unaudited)
<TABLE>
<CAPTION>
March 31, March 31,
1997 1996
---------- ---------
<S> <C> <C>
Sales $11,197,838 $ 8,304,328
Cost of sales 8,214,806 6,572,176
--------- ---------
Gross profit 2,983,032 1,732,152
Operating expenses:
Selling and shipping 950,073 656,168
General and administrative 1,043,086 867,304
--------- -------
Operating income 989,873 208,680
Interest expense, net 149,367 178,679
------- -------
Income before provision for income taxes 840,506 30,001
------- ------
Provision for income taxes 336,203 12,897
------- ------
Net income $504,303 $ 17,104
======== ========
Net Income per share $0.09 $0.00
===== =====
Weighted average number of shares
outstanding 5,380,369 4,962,188
========= =========
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
<PAGE>
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Nine Months Ended March 31, 1997 and March 31, 1996
(unaudited)
<TABLE>
<CAPTION>
March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $504,303 $ 17,104
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 474,777 331,182
Decrease (Increase) in accounts receivable 93,088 (463,672)
Decrease in inventory 137,743 152,097
Decrease (Increase) in prepaid expenses and
other current assets (179,315) 114,645
Increase (Decrease) in prepaid taxes - (129,370)
Increase in accounts payable and accrued
expenses 83,810 394,848
Decrease in income taxes payable
(789,197) (105,083)
Decrease (Increase) in security deposits
and other assets (69,260) 49,974
------- ------
Total adjustments (248,354) 344,621
-------- -------
Net cash provided by (used in)
operating activities 255,949 361,725
------- -------
Cash flows from investing activities:
Capital expenditures (1,056,852) (84,704)
---------- -------
Net cash used in investing activities (1,056,852) (84,704)
---------- -------
Cash flows from financing activities:
Proceeds of secured bank loan payable,
net of repayments 1,015,972 -
Origination of long term note receivable (9,460)
Payments of notes receivable 28,009
Payments of long-term debt (238,618) (316,234)
Expenses in connection with merger - (35,000)
Purchase of treasury stock (4,681) -
------ -------
Net cash provided by (used in)
financing activities 800,682 (360,694)
------- --------
Net increase (decrease) in cash (221) (83,673)
---- -------
Cash, December 31 $ 30,859 $ 1,309,677
========= ===========
Cash, March 31 $ 30,638 $ 1,226,004
========= ===========
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
<PAGE>
DISC GRAPHICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization, Operation and Summary of Significant Accounting Policies:
General
-------
The financial statements included herein have been prepared by Disc
Graphics, Inc. (the "Company") without audit. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to
the rules and regulations of the Securities and Exchange Commission. While the
Company believes that the disclosures made are adequate to make the
information presented not misleading, it is recommended that these financial
statements should be read in conjunction with the audited financial statements
and the notes thereto for the year ended December 31, 1996 and the Company's
Annual Report on Form 10-K for the period ended December 31, 1996. The
December 31, 1996 figures included herein were derived from the audited
consolidated financial statements. In the opinion of management, the
information furnished herein reflects all adjustments that are necessary to
fairly present such information. These adjustments consist only of normal
recurring adjustments and adjustments made for the acquisition of Pointille,
Inc.
The Merger
----------
On October 30, 1995, the Company, then known as RCL Capital Corp.
("RCL"), consummated the merger (the "Merger") pursuant to the Agreement and
Plan of Merger dated as of May 8, 1995 (the "Merger Agreement") between RCL
and Disc Graphics, Inc., a New York corporation ("Old Disc"). Pursuant to the
Merger Agreement, (i) Old Disc merged with and into RCL, (ii) RCL's name was
changed to Disc Graphics, Inc., and (iii) all of the outstanding shares of
Class A Common Stock, no par value, and Class B Common Stock, no par value, of
Old Disc were converted into (a) an aggregate of 3,100,000 shares of Common
Stock of the Company and (b) and an aggregate of 1,000,000 warrants to
purchase an aggregate of 1,000,000 shares of Common Stock of the Company,
one-quarter of which shall be exercised at a price of each of $7.00, $8.00,
$9.00 and $10.00.
Potential Future Issuance of Shares of Common Stock by the Company
-------------------------------------------------------------------
Pursuant to the Merger Agreement as modified by a certain Agreement dated
as of October 30, 1995 by and among certain stockholders of RCL (the "RCL
Stockholders") and the former shareholders of Old Disc (the "Old Disc
Shareholders") and RCL, if the Old Disc Shareholders subsequently determine
from time to time until up to five years after October 30, 1995 (the
"Effective Time") that, as of the Effective Time, either (i) RCL did not have
cash or marketable securities with a fair market value as of the Effective
Time of not less than $6,000,000 (the actual amount of cash and marketable
securities held by RCL as of the Effective Time, the "First Amount") or (ii)
the cash and marketable securities of RCL did not exceed all liabilities of
RCL of any kind or nature (whether fixed or contingent, matured or unmatured)
(including, without limitation, all liabilities based upon, relating to or
arising from any actions taken by or on behalf of RCL or the failure of RCL to
take any actions prior to the Effective Time or any facts or
<PAGE>
DISC GRAPHICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Organization, Operation and Summary of Significant Accounting Policies
(continued):
circumstances existing prior to the Effective Time, which in any such case
results in any liabilities, obligations or claims against the Company after
the Effective Time (all such liabilities collectively, the "RCL
Liabilities")), by not less than $6,000,000 (the actual amount of cash and
marketable securities held by RCL as of the Effective Time less such
liabilities, the "Second Amount"), then promptly upon notice of such
determination by the Old Disc Shareholders to the Company, the Company shall
issue to such Old Disc Shareholders, on a pro rata basis based on the number
of shares of Old Disc Common Stock held by such shareholders immediately prior
to the Effective Time, the number of shares of the Company's Common Stock (the
"RCL Designated Shares") sufficient (without duplication) to increase the
percentage ownership of the Company by all of such shareholders that such
shareholders have had immediately after the Effective Time (excluding, any RCL
Indemnity Shares (as defined below) issued after the Effective Time) from
60.23% to a percentage determined by a formula defined in the Merger
Agreement. Although the formula in the Merger Agreement allows the Old Disc
Shareholders to receive as much as three times the number of RCL Designated
Shares, the Old Disc Shareholders agreed to limit the calculation to two times
the number of RCL Designated Shares.
Notwithstanding the provision of the Merger Agreement described in the
immediately preceding paragraph, the RCL Stockholders and the Old Disc
Shareholders have entered into an agreement (the "Letter Agreement") pursuant
to which the RCL Stockholders will transfer to the Old Disc Shareholders
shares of DGI Common Stock owned by the RCL Stockholders instead of the
Company issuing certain shares of DGI Common Stock to the Old Disc
Shareholders, but only if and to the extent that the net assets are between
$4,900,000 and $5,304,750. "Net Assets" means RCL's cash and marketable
securities at the Effective Time less the RCL liabilities.
Pursuant to the Merger Agreement, the Old Disc Shareholders were issued
342,256 shares of its Common Stock on December 3, 1996. The RCL Stockholders
also transfered 60,000 shares of Common Stock of the Company to Old Disc
Shareholders (the "RCL Indemnity Shares").
Net Income Per Share
--------------------
Net income per share is computed under the treasury stock method which
assumes the exercise of all outstanding options and warrents which are
dilutive. The computation of weighted average shares outstanding does not
include incremental shares relating to outstanding warrants since the exercise
price of the warrants exceed the market price.
<PAGE>
DISC GRAPHICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Organization, Operation and Summary of Significant Accounting Policies
(continued):
Amortization of Costs in Excess of Fair Market Value of Net Assets Acquired
- ---------------------------------------------------------------------------
Costs in excess of fair market value of net assets acquired are being
amortized over a period of 15 years by the straight-line method.
Inventories
------------
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
----------- -------------
<S> <C> <C>
Raw materials $ 1,284,384 $ 1,425,230
Work-in-process 304,190 248,210
Finished goods 287,016 339,893
------- -------
$ 1,875,590 $ 2,013,333
=========== ===========
</TABLE>
Note 2 - Acquisition
On May 17, 1996, the Company acquired substantially all of the assets and
certain liabilities of Pointille, Inc., a California based printing company
("Pointille") , for $662,545 in cash, the issuance of 74,074 shares of the
Company's Common Stock, and the issuance of a promissory note in the amount
of $330,000 (principal and interest), payable in 36 equal monthly
installments of principal and interest beginning on June 17, 1996 (the
"California Acquisition"). The Company recorded the value of the 74,074
shares of the Company's Common Stock issued at the estimated fair value at
the date of the California Acquisition. The California Acquisition was
accounted for using the purchase method of accounting and in accordance with
generally accepted accounting principles. The net worth of Pointille as of
May 17, 1996 is expected to be finalized by May 1997; therefore, an estimate
of the allocation of the purchase price was made on the basis of currently
available information.
The allocation of the purchase price of Pointille was as follows:
<TABLE>
<S> <C>
Purchase price
Cash $662,545
Promissory note (present value) 299,708
Receivable from former owner (175,633)
Common Stock 175,000
Transaction Costs 154,236
-------
$1,115,856
Pointille's net asset value $ 0
----------
Excess of cost over fair value of
business acquired $1,115,856
----------
</TABLE>
<PAGE>
DISC GRAPHICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Acquisitions (continued):
These unaudited pro forma results have been prepared for comparative
purposes only and include certain adjustments such as (i) additional
amortization expense due to goodwill resulting from the California Acquisition
and (ii) an increased interest expense due to cash borrowed under the Company's
financing agreement with Fleet Bank for the payment of the purchase price and
the repayment of Pointille's bank line of credit and notes payable (which was
partially offset by the payment of Pointille's bank line of credit and notes
payable). These unaudited proforma results do not purport to be indicative of
the results of operations which actually would have resulted had the purchase
been effected on January 1, 1996, nor of future results of operations of the
consolidated entities. For purposes of proforma and interim reporting, the
financial information of Pointille, which was on a February 28 fiscal year, was
adjusted to conform with the Company's reporting periods.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and Pointille as if the
California Acquisition had occurred January 1, 1996.
<TABLE>
<CAPTION>
1997 1996
(thousands except per share amounts)
<S> <C> <C>
Net sales $11,198 $9,983
Net income (loss) $504 ($25)
Earnings per Common share $.09 $.00
</TABLE>
Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
-------
The following is a discussion of the consolidated financial condition and
results of operation of the Company for the three month period ended March 31,
1997. The discussion should be read in conjunction with the Company's
consolidated financial statements and the notes thereto included in the Annual
Report.
Introduction
------------
Disc Graphics, Inc. was incorporated in August 1992 under the name RCL
Capital Corp. ("RCL") to serve as a vehicle to effect a business combination
with an operating business. On November 18, 1993, RCL completed the public
offering of Units, each Unit consisting of one share of RCL's Common Stock and
two redeemable warrants. Net proceeds of the public offering after the payment
of certain additional expenses yielded approximately $6,400,000, which was put
into escrow pending the acquisition of an operating business.
<PAGE>
Merger
------
On October 30, 1995, RCL consummated the merger (the "Merger") pursuant to
the Agreement and Plan of Merger dated as of May 8, 1995 (the "Merger
Agreement") between RCL and Old Disc. The merger was subject to, among other
things, approval by RCL's stockholders, which approval was obtained at a
special meeting of stockholders held on October 27, 1995. Pursuant to the
Merger Agreement (i) Old Disc merged with and into RCL, (ii) RCL's name was
changed to Disc Graphics, Inc. and (iii) all of the outstanding shares of
Class A Common Stock, no par value, and the Class B Common Stock, no par
value, of Old Disc were converted into (a) an aggregate of 3,100,000 shares of
Common Stock of RCL and (b) and an aggregate of 1,000,000 warrants to purchase
an aggregate of 1,000,000 shares of Common Stock of RCL, one-quarter of which
shall be exercisable at a price of each of $7.00, $8.00, $9.00 and $10.00.
Potential Future Issuance's of Shares of Common Stock by the Company
--------------------------------------------------------------------
Pursuant to the Merger Agreement as modified by a certain Agreement as of
October 30, 1995 by and among certain stockholders of RCL (the "RCL
Stockholders") and the former shareholders of Old Disc (the "Old Disc
Shareholders") and RCL, if the Old Disc Shareholders subsequently determine
from time to time until up to five years after October 30, 1995 (the
"Effective Time") that, as of the Effective Time, either (i) RCL did not have
cash or marketable securities with a fair market value as of the Effective
Time of not less than $6,000,000 (the actual amount of cash and marketable
securities held by RCL as of the Effective Time, the "First Amount") or (ii)
the cash and marketable securities of RCL did not exceed all the liabilities
of RCL of any kind or nature (whether fixed or contingent, matured or
unmatured) (including, without limitation, all liabilities based upon,
relating to or arising from any actions taken by or on behalf of RCL or the
failure of RCL to take any actions prior to the Effective Time or any facts or
circumstances existing prior to the Effective Time, which is any such case
result in any liabilities, obligations or claims against the Company after the
Effective Time) (all such liabilities collectively, the "RCL Liabilities") by
not less than $6,000,000 (the actual amount of cash and marketable securities
held by RCL as of the Effective Time less such liabilities, the "Second
Amount"), then promptly upon notice of such determination by the Old Disc
Shareholders to the Company, the Company shall issue to such Old Disc
Shareholders, on a pro rata basis based on the number of shares of Old Disc
Common Stock held by such shareholders immediately prior to the Effective
Time, the number of shares of the Company's Common Stock (the "RCL Designated
Shares") sufficient (without duplication) to increase the percentage of
ownership of the Company by all of such shareholders that such shareholders
have had immediately after the Effective Time (excluding any RCL Indemnity
Shares (as defined below) issued after the Effective Time) from 60.23% to a
percentage determined by a formula defined in the Merger Agreement. Although
the formula in the Merger Agreement allows for the Old Disc Shareholders to
receive as much as three times the number of RCL Designated Shares the Old
Disc Shareholders agreed to limit the calculation to two times the number of
RCL Designated Shares.
Notwithstanding the provision of the Merger Agreement described in the
immediately preceding paragraph, the RCL Stockholders and the Old Disc
Shareholders have entered into an agreement pursuant to which the RCL
Stockholders will transfer to the Old Disc Shareholders shares of Disc Common
Stock owned by the RCL Stockholders instead of the Company issuing certain
shares of Disc Common Stock to the old Disc Shareholders, but only if and to
the extent that Net Assets are between $4,900,000 and $5,304,750. "Net Assets"
means RCL's cash and marketable securities at the Effective Time less the RCL
Liabilities.
Pursuant to the agreement the Old Disc Shareholders were issued 342,256
shares of Company Common Stock on December 3, 1996. The RCL Stockholders also
transferred 60,000 shares of Common Stock to the Old Disc Shareholders.
<PAGE>
Proceeds of the Merger
----------------------
Net proceeds of the merger after the payment for the redemption of
approximately 185,000 shares of Common Stock at $5.15 per share, in accordance
with the terms of the original RCL offering, yielded proceeds to the Company
of approximately $5,000,000. These proceeds were used primarily to reduce
certain indebtedness of the Company and for working capital purposes.
The Merger has been treated for accounting and financial reporting purposes
as a reverse merger of RCL into Old Disc. Accordingly, the Company's results
of operations prior to October 30, 1995 are those of Old Disc. In addition, in
connection with the merger, Disc adopted a December 31 fiscal year.
Pointille Acquisition
---------------------
On May 18, 1996, the Company, acquired (the "California Acquisition")
substantially all of the assets and certain liabilities of Pointille, Inc., a
California corporation ("Pointille"), pursuant to an asset purchase agreement
dated as of May 17, 1996, by and among the Company, Pointille and the sole
shareholder of Pointille (the "Asset Purchase Agreement"). The purchase price
consisted of $662,545 in cash, 74,074 shares of the Company's Common Stock,
$.01 par value per share, a promissory note in the amount of $330,000, payable
in 36 equal monthly installments of principal and interest beginning on June
16, 1996, and transaction costs. The California Acquisition was recorded using
the purchase method of accounting and accordingly, the results of Pointille's
operations are included in the Company's results of operation from May 18,
1996. The goodwill related to Pointille was approximately $1,055,115 at March
31, 1997.
<PAGE>
Three Months Ended March 31, 1997 Compared
to Three Months Ended March 31, 1996.
Results of Operations
---------------------
Net Sales
Net sales for the three months ended March 31, 1997 were $11,198,000
compared to $8,304,000 for the same period the prior year, representing an
increase of $2,894,000 or 34.9%. The California Acquisition continues to
contribute measurably to this growth, representing approximately $1,937,000 in
net sales. The categories of the business which continue to experience growth
are video/software packaging and consumer product packaging which increased
$1,399,000 or 64% and $1,028,000 or 51%, respectively. Commercial and music
sales also increased by 57% and 23%, respectively. The Company's base
music/audio packaging sales have stabilized, with the overall sales increase
within this category coming from the California Acquisition. The categories
which decreased in the three months ended March 31, 1997 compared to the same
three months of the prior year, were pharmaceutical, vitamin packaging and
labels. These categories decreased by $283,000 or 25%, and $57,000 or 7%,
respectively. The pharmaceutical/vitamin packaging decline is a result of the
change in the Company's focus to growing earnings, thereby concentrating on more
profitable segments within this business category.
Gross Profit
Gross profit for the three months ended March 31, 1997 was $2,983,000 (a
26.6% profit margin) compared to $1,732,000 (a 21% profit margin) for the same
period the prior year, representing an increase of $1,251,000 or 72%. This
increase was due primarily to the increase in sales, the California acquisition,
and continued focus on both variable and fixed manufacturing costs through
improved efficiencies.
Selling, General, and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for the three months
ended March 31, 1997 were $1,993,000 compared to $1,524,000 for the same period
the prior year, an increase of $469,000 or 31%. This increase is due primarily
to normal inflationary increases, costs associated with the facility acquired in
the California Acquisition and revenue related expenses (such as freight to
customers and commissions). SG&A as a percent of revenue declined from 18.4% for
the three months ended March 1996 compared to 17.8% for the same period in 1997
a 0.6 percentage point improvement.
Interest Expense
Interest expense for the three months ended March 31, 1997 was $149,000
compared to $179,000 for the same three months of the prior period, a decrease
of $30,000 or 17%. This decrease was due primarily to the repayment of debt
<PAGE>
with cash provided by operating activities. The Company also entered into a
new revolving credit agreement on February 26, 1997, providing for borrowing at
a rate of LIBOR plus 150; which represents approximately a 2 percentage point
decrease from the interest rate payable under the Company's prior revolving
credit agreement.
Income Taxes
The provision for income taxes for the three months ended March 31, 1997
was $336,000, compared to $13,000, an increase of $323,000. This increase is
primarily due to the increase in pretax income and offset by a decline in the
effective tax rate from 43% in 1996 to 40% in 1997.
Net Income
Net income for the three months ended March 31, 1997 was $504,000 compared
to $17,000 for the same period of the prior year, an increase of $487,000. This
net income improvement resulted from the increase in sales, coupled with
improved efficiencies in the manufacturing processes and the decline in the
effective tax rate.
Liquidity and Capital Resources
The primary source of cash for the Company's business has been cash flow
from operations and borrowing under the financing agreement with the Company's
prior revolving credit agreement. As of March 31, 1997, the Company had working
capital of $5,681,424. Net cash provided by operating activities for the three
months ended March 31, 1997 was $255,949, due to general business growth.
The Company anticipates capital expenditures of $700,000 for the remainder
of 1997, primarily for the purchases of manufacturing equipment to increase
capacity and improve plant efficiencies.
On February 26, 1997, the Company entered into a new revolving credit
agreement (the "Credit Agreement") with Key Bank which allows for borrowings
equal to 85% of eligible accounts receivable plus up to 70% of eligible
inventory, not to exceed $10,000,000. As of March 31, 1997 our eligible
borrowing lease was $8,000,000. The Credit Agreement is secured by substantially
all of the unencumbered assets of the Company. The borrowing rate under this
agreement is either (i) LIBOR plus 125 to 175 basis points depending on the Debt
Coverage Ratio or (ii) the Banks Base Rate. The Credit Agreement also provides
for a borrowing sublimit for acquisitions in an amount equal to the lesser of
$3,000,000 or 25% of the Companys tangible net worth. The utilization of this
sublimit must be in compliance with the Credit Agreement as a whole. As of March
31, 1997, DGI was in compliance with the covenants specified in the Credit
Agreement.
New Accounting Pronouncements
Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings per
Share", is effective for annual and interim periods ending after December 15,
1997. SFAS No. 128 specifies the computation, presentation and disclosure
requirement for earning per share for public entities. This statement requires
entities with complex capital structures to present both basic earnings per
share (EPS) and dilutive EPS, as defined in the pronouncement. SFAS No. 128 does
not permit early application and requires restatement of all prior EPS data
presented. The Company is continuing to assess the impact of this pronouncement
and does not believe that the adoption of SFAS No. 128 will have a material
effect on previously reported earnings per share.
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Disc Graphics, Inc.
(Registrant)
May 15, 1997 /s/ Donald Sinkin
--------------- ------------------------------
Date Donald Sinkin - President
May 15, 1997 /s/ Margaret Krumholz
--------------- -----------------------------
Date Margaret Krumholz -
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1997
<CASH> 30,638
<SECURITIES> 0
<RECEIVABLES> 9,781,907
<ALLOWANCES> (819,000)
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0
0
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</TABLE>
