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 April 1, 1997 to June 30, 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 August 15, 1997, 5,380,905 shares of the Registrant's Common Stock,
par value $.01, were outstanding.
<PAGE>
INDEX TO FORM 10-Q
Page
<TABLE>
----
<S> <C>
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996..... 3
Consolidated Statements of Income for the Three Months and Six Months
ended June 30, 1997 and 1996............................................... 4
Consolidated Statements of Cash Flows for the Six Months ended June 30,
1997 and 1996............................................................... 5
Notes to Consolidated Financial Statements.................................. 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................... 8
PART II - OTHER INFORMATION
Signatures ...............................................................12
</TABLE>
2
<PAGE>
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
As of June 30, 1997 and December 31, 1996
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 31,334 $ 30,859
Accounts receivable, net of allowance for doubtful
accounts of $973,000 and $844,000, respectively 9,672,942 9,055,995
Inventories 2,397,513 2,013,333
Prepaid expenses and other current assets 512,792 599,927
Current maturities of notes receivable 19,524 85,014
Income taxes receivable 134,093 -
Deferred income taxes 700,000 700,000
---------- ----------
Total current assets 13,468,198 12,485,128
Plant and equipment, net 9,084,254 8,254,920
Goodwill, net of amortization of $83,689 and $46,493,
respectively 1,029,486 1,069,363
Security deposits and other assets 176,297 236,271
----------- -----------
Total assets $23,758,235 $22,045,682
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of equipment notes payable $ 455,145 $ 456,651
Current portion, long-term debt 100,298 97,167
Current maturities of capitalized lease obligations payable 806,270 692,852
Accounts payable and accrued expenses 5,457,567 5,282,571
Income taxes payable - 954,088
---------- ----------
Total current liabilities 6,819,280 7,483,329
Long term debt 1,835,804 515,234
Equipment notes payable, less current maturities 1,673,733 1,902,838
Capitalized lease obligations payable, less current maturities 2,733,223 2,192,235
Deferred income taxes 988,000 988,000
---------- ----------
Total liabilities 14,050,040 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 53,785 53,786
Additional paid in capital 5,051,555 5,051,555
Retained earnings 4,632,197 3,883,366
---------- ----------
9,737,538 8,988,707
Less: Treasury stock at cost, 10,160 and 8,710 shares at
June 30, 1997 and December 31, 1996 respectively (29,342) (24,661)
---------- ----------
Total stockholders' equity 9,708,195 8,964,046
Total liabilities and stockholders' equity $23,758,235 $22,045,682
=========== ===========
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
3
<PAGE>
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Consolidated Statements of Income
For the Three and Six Months Ended June 30, 1997 and June 30, 1996
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Sales $11,065,030 $10,151,518 $ 22,262,868 $18,455,839
Cost of sales 8,374,657 7,744,549 16,589,463 14,316,725
----------- ----------- ------------ -----------
Gross profit 2,690,373 2,406,969 5,673,405 4,139,114
Operating expenses:
Selling and shipping 1,018,049 832,083 1,968,122 1,488,251
General and administrative 1,114,730 984,671 2,157,816 1,851,975
----------- ----------- ------------ -----------
Operating income 557,594 590,215 1,547,467 798,888
Interest expense, net 150,261 185,366 299,628 364,045
----------- ----------- ------------ -----------
Income before provision for
income taxes 407,333 404,849 1,247,839 434,843
----------- ----------- ------------ -----------
Provision for income taxes 162,807 174,086 499,010 186,983
----------- ----------- ------------ -----------
Net income $244,526 $230,763 $748,829 $ 247,860
=========== =========== ============ ===========
Net Income per share $0.05 $0.05 $0.14 $0.05
=========== =========== ============ ===========
Weighted average number of
shares outstanding 5,380,905 4,998,818 5,382,431 4,980,507
=========== =========== ============ ===========
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
4
<PAGE>
DISC GRAPHICS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 1997 and June 30, 1996
(unaudited)
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
<S> <C> <C>
Cash flows from operating activities:
Net income $ 748,829 $ 247,860
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,000,368 686,977
(Increase) in accounts receivable (616,947) (539,526)
Decrease (increase) in inventory (384,180) 2,319
Decrease in prepaid expenses and other current
assets 76,969 227,416
(Decrease) in prepaid taxes - (44,954)
Increase in accounts payable and accrued expenses 174,996 1,319,126
(Decrease) in income taxes payable and receivable (1,088,181) (105,083)
Decrease (increase) in security deposits and
other assets 59,974 (75,896)
----------- ----------
Total adjustments (775,190) 1,470,279
----------- ----------
Net cash (used in) provided by
operating activities (26,361) 1,718,139
----------- ----------
Cash flows from investing activities:
Capital expenditures (1,782,340) -
Purchase of Pointille - (621,578)
----------- ----------
Net cash used in investing activities (1,782,340) (621,578)
----------- ----------
Cash flows from financing activities:
Proceeds of secured bank loan payable,
net of repayments 1,323,701 (1,834,158)
Payments of notes receivable 68,172 67,864
Borrowings under long term debt 1,026,363 -
Payments of long-term debt (602,568) (573,160)
Expenses in connection with merger - (35,000)
Purchase of treasury stock (4,681) -
----------- ----------
Net cash provided by (used in) financing
activities 1,810,987 (2,374,454)
----------- ----------
Net increase (decrease) in cash 475 (1,277,893)
----------- ----------
Cash, December 31 $ 30,859 $ 1,309,677
=========== ==========
Cash, June 30 $ 31,334 $ 31,784
=========== ==========
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
5
<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 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.
Net Income Per Share
Net income per share is computed under the treasury stock method which
assumes the exercise of all outstanding options and warrants which are dilutive.
The computation of weighted average shares outstanding does not include
incremental shares relating to outstanding options as the exercise price of the
options exceed the market price.
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>
June 30, December 31,
1997 1996
<S> <C> <C>
Raw materials $ 1,448,741 $ 1,425,230
Work-in-process 597,599 248,210
Finished goods 351,173 339,893
----------- ------------
$ 2,397,513 $ 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 "Acquisition"). The
Company recorded the value of the 74,074 shares of the Company's Common Stock
6
<PAGE>
DISC GRAPHICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
issued at the estimated fair value at the date of the Acquisition. The
Acquisition was accounted for using the purchase method of accounting and in
accordance with generally accepted accounting principles.
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>
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 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
Acquisition had occurred January 1, 1996.
<TABLE>
<CAPTION>
1997 1996
(in thousands except per share amounts)
<S> <C> <C>
Net sales $22,263 $21,281
Net income $749 $147
Earnings per Common share $.14 $.03
</TABLE>
7
<PAGE>
DISC GRAPHICS, INC.
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 Disc Graphics, Inc. ("Disc Graphics" or "the Company")
for the three month period ended June 30, 1997 as well as the six month period
ended June 30, 1997. The discussion should be read in conjunction with the
Company's consolidated financial statements and the notes thereto included in
the Annual Report.
On July 11, 1997, Disc Graphics announced that its Board of Directors
authorized an exchange offer for its Class A Redeemable Common Stock Purchase
Warrants ("Class A Warrants"). This offer is for one share of Common Stock, $.01
par value for each 8.5 Class A Warrants validly tendered. This offer expires at
4:00 PM Eastern Standard Time on August 22, 1997. The Class A Warrants currently
trade on the NASDAQ Small Cap Market under the symbol DSGRW.
On July 25, 1997, Disc Graphics announced the signing of two letters of
intent to acquire two Midwestern commercial printing companies with unaudited
1996 revenues of $4.5 million and $7.5 million, respectively. Either of these
potential acquisitions would provide Disc Graphics with a presence in the
Midwest in addition to both its east coast and west coast facilities. These
potential acquisitions are subject to the audit of their financial statements,
due-diligence, financing, and other customary conditions. It is estimated that
these potential acquisitions could be completed in the later stages of the third
and fourth quarters of fiscal 1997. As of the date of this report, terms of the
potential acquisitions are still to be determined.
Pointille Acquisition
On May 18, 1996, Disc Graphics acquired 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, and a promissory
note in the amount of $330,000, payable in 36 equal monthly installments of
principal and interest beginning on June 17, 1996, and transaction costs. The
acquisition of Pointille 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 after
amortization related to Pointille was approximately $1,055,115 at June 30, 1997.
Three Months Ended June 30, 1997 Compared to the Three Months Ended
June 30, 1996
Results of operations
Net sales
Net sales for the three months ended June 30, 1997 were $11,065,000,
compared to $10,152,000 for the same period the prior year, representing an
increase of $913,000, or 9%. This increase was primarily due to the inclusion of
the results of Pointille (the "California Division") which was acquired May 18,
1996, for the full 1997 quarter resulting in certain categories of the business
experiencing significant growth in this quarter compared to the three months
ended June 30, 1996. These were video/software packaging, which increased
$896,000, or 36%, commercial printing, which increased $454,000, or 48%, and
music/audio packaging which increased $263,000, or 16%. The growth in
video/software packaging was primarily due to the increase in CD ROM packaging
sales in the Company's New York and California offices as well as strong video
sales in California. The base music/audio packaging sales have remained stable,
with overall sales increase within this category coming from the California
acquisition.
8
<PAGE>
On the downside, consumer product packaging sales decreased $562,000 or 18%,
over the same period of the prior year while label sales were relatively flat
for the three months ended June 30, 1997 compared to the same period of the
prior year.
Gross profit
Gross profit for the three months ended June 30, 1997 was $2,690,000 (24.3%
profit margin), compared to $2,407,000 (23.7% profit margin) for the same period
of the prior year, representing an increase of $283,000, or 12%. The majority of
the increase was due to a 9% increase in sales offset by a slight decline in
cost as a percentage of sales. The decrease in cost of goods as a percentage of
sales was a result of manufacturing efficiencies from improved processes and the
purchase of new equipment.
Selling, general and administrative expenses
Selling, general, and administrative ("SG&A") expenses for the three months
ended June 30, 1997 were $2,133,000 (19.2% of net sales), compared to $1,817,000
(17.9% of net sales) for the same period year ago, an increase of $316,000, or
17%. This increase in SG&A expenses was due in part to a full quarter of
operating the California Office and the investment made to the Company's
infrastructure in the form of additional personnel and capital investment to
meet the long term growth strategy.
Interest expense
Interest expense for the three months ended June 30, 1997 was $150,261,
compared to $185,366 for the same period of the prior year. Interest expense
includes interest on notes payable to the Company's bank lender and capital
lease obligations on equipment. The lower interest rates provided by the new
revolving credit agreement entered into on February 26, 1997 providing for
borrowing at a rate equal to the London Interbank Offered Rate ("LIBOR") plus
150 basis points; represents approximately a two percentage point decrease from
the interest rate payable under the Company's prior revolving credit agreement
for the same three month period last year. This was somewhat offset by increased
capital based obligations.
Income taxes
The provision for income taxes for the three months ended June 30, 1997 was
$163,000, compared to $174,000 for the same period of the prior year, an
decrease of $11,000, or 7%. This decrease was due a decline in the company's
effective tax rate, from 43% in 1996 to 40% in 1997, slightly offset by the
increase in pretax income.
Net income
Net income for the three months ended June 30, 1997 was $245,000, compared
to $231,000 for the same period of the prior year, an increase of $14,000, or
6%. This increase in net income was a result of the increase in sales, the
improvement in gross profit margin, improved interest rates and a decline in the
effective tax rate.
9
<PAGE>
Six months ended June 30, 1997 compared to the six months ended June 30, 1996
Results of operations
Net sales
Net sales for the six months ended June 30, 1997 were $22,263,000, compared
to $18,456,000 for the same period for the prior year, representing an increase
of $3,807,000, or 20.6%. This increase was primarily due to inclusion of the
California Division for a full six month period in 1997. The categories of the
business which experienced significant growth were video/software packaging,
which increased $2,295,000, or 49%, commercial printing, which increased
$936,000, or 53%, and consumer product packaging, which increased $839,000, or
22%, over the same six month period of the prior year. Music/audio packaging
sales increased $582,000, or 19%.
The segments of the business which actually took a downturn for the first
six months in 1997 compared to the same period in 1996 were
pharmaceutical/vitamin packaging sales, which decreased $580,000, or 24%,
brokerage sales were down $479,000, or 33%, and label sales decreased $48,000,
or 3%.
Gross profit
Gross profit for the six months ended June 30, 1997 was $5,673,000 (25.5%
profit margin), compared to $4,139,000 (22.4% profit margin) for the same period
of the prior year, representing an increase of $1,534,291, or 37%. The increase
was due to the increase in sales, a full six months results of the California
Division and a decline in cost of goods sold as a percentage of sales. The year
over year incremental sales contributed by the California Division increased
June 1997 year to date gross profit by $580,000 compared to the same time period
in 1996. The decrease in cost of goods sold as a percentage of sales was a
result of manufacturing efficiencies resulting from improved processes and the
purchase of equipment. The investment in more efficient equipment and the
Company's work to improve processes resulted in a three percentage point
decrease in cost of goods sold as a percentage of sales for the six months ended
June 30, 1997.
Selling, general and administrative expenses
Selling, general and administrative ("SG&A") expenses for the six months
ended June 30, 1997 were $4,126,000, compared to $3,340,000 for the same period
of the prior year, an increase of $786,000, or 24%. This increase in SG&A
expenses was due primarily to a full six months in 1997 of operating the
California Division and the investment to the infrastructure of the Company in
the form of additional personnel and capital investment to meet the Company's
long term growth strategy.
Interest expense
Interest expense for the six months ended June 30, 1997 were $300,000
compared to $405,000 for the same period in 1996, a decrease of $105,000 or 26%.
This was due to the lower cost of borrowing achieved in the new revolving credit
agreement entered into on February 26, 1997. Under this agreement, the Company
is able to borrow funds at a rate of 150 basis points above LIBOR, which is
approximately one percentage point lower than the Company's average borrowing
rate for the first six months in 1996.
10
<PAGE>
Income taxes
The provision for income taxes for the six months ended June 30, 1997
was $499,000 compared to $187,000 for the same six month period in 1996, a
increase of $312,000, or 167%. This increase is primarily due to the increase in
pretax income, slightly offset by the decline in the effective tax rate from 43%
in 1996 to 40% in 1997.
Net income
Net income for the six month period ended June 30, 1997 was $749,000
compared to $248,000 for the same six month period in 1996, an increase of
$500,969, or over 200%. This increase was principally driven by the increase in
sales, improvement in manufacturing efficiencies, and the lower 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 Company's revolving credit agreement. As
of June 30, 1997, the Company had working capital of $6,648,918. Net cash used
in operating activities for the six months ended June 30, 1997 was ($26,361),
due to the payment of income taxes previously deferred for the management of
cash flow in 1996.
The Company anticipates capital expenditures of $300,000 for the remainder
of 1997, primarily for the purchases of manufacturing equipment to increase
capacity and improve plant efficiencies. These capital expenditures do not
include any amounts which may be paid in connection with the Company's potential
acquisition of either of the two midwest printing companies.
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 June 30, 1997 the Company's eligible
borrowing base was $8,088,358. The Credit Agreement is secured by substantially
all of the unencumbered assets of the Company. The borrowing rate under the
Credit Agreement is, at the option of the Company, either (i) LIBOR plus 125 to
175 basis points dependent upon the Debt Coverage Ratio or (ii) the Bank's Base
Rate. The Credit Agreement also provides for a borrowing sublimit for
acquisitions in an amount equal to the lessor of $3,000,000 or 25% of the
Company's tangible net worth. The utilization of this sublimit must be in
compliance with the Credit Agreement as a whole. As of June 30, 1997, the
Company was in compliance with the covenants specified in the Credit Agreement.
11
<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)
August 15 , 1997 /s/ Donald Sinkin
Date Donald Sinkin - President
August 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> JUN-30-1997
<CASH> 31,334
<SECURITIES> 0
<RECEIVABLES> 10,645,942
<ALLOWANCES> (973,000)
<INVENTORY> 2,397,513
<CURRENT-ASSETS> 13,468,198
<PP&E> 15,563,605
<DEPRECIATION> 6,479,351
<TOTAL-ASSETS> 23,758,235
<CURRENT-LIABILITIES> 6,819,280
<BONDS> 7,230,760
0
0
<COMMON> 53,785
<OTHER-SE> 9,654,410
<TOTAL-LIABILITY-AND-EQUITY> 23,758,235
<SALES> 11,065,030
<TOTAL-REVENUES> 11,065,030
<CGS> 8,374,657
<TOTAL-COSTS> 8,374,657
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 82,340
<INTEREST-EXPENSE> 150,261
<INCOME-PRETAX> 407,333
<INCOME-TAX> 162,807
<INCOME-CONTINUING> 244,526
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 244,526
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
