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 July 1, 1997 to September 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 September 30, 1997, 5,412,766 shares of the Registrant's Common Stock,
par value $.01, were outstanding.
<PAGE>
INDEX TO FORM 10-Q
------------------
<TABLE>
<CAPTION>
<S> <C>
Page
----
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets as of September 30, 1997 and December 31, 1996 ...............................3
Consolidated Statements of Income for the Three Months and Nine Months ended September 30, 1997
and 1996 .................................................................................................4
Consolidated Statements of Cash Flows for the Nine Months ended September 30, 1997
and 1996 .................................................................................................5
Notes to Consolidated Financial Statements ...............................................................6
Management's Discussion and Analysis of Financial Condiition and Results of Operations ...................8
PART II - OTHER INFORMATION
Signatures ............................................................................................11
</TABLE>
<PAGE>
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
As of September 30, 1997 and December 31, 1996
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
(unaudited)
------------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 31,575 $ 30,859
Accounts receivable, net of allowance for doubtful accounts of
$869,000 and $844,000, respectively 11,590,009 9,055,995
Inventories 2,042,604 2,013,333
Prepaid expenses and other current assets 334,136 599,927
Current maturities of notes receivable 17,394 85,014
Deferred income taxes 700,000 700,000
------------ -----------
Total current assets 14,715,718 12,485,128
Plant and equipment, net 8,853,547 8,254,920
Goodwill, net of amortization of $102,286 and $46,493, respectively 1,010,889 1,069,363
Security deposits and other assets 193,700 236,271
------------ -----------
Total assets $24,773,854 $22,045,682
============ ===========
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of equipment notes payable $ 455,769 $ 456,651
Current portion, long-term debt 101,901 97,167
Current maturities of capitalized lease obligations payable 811,463 692,852
Accounts payable and accrued expenses 5,901,012 5,282,571
Income taxes payable 383,305 954,088
---------- -----------
Total current liabilities 7,653,450 7,483,329
Long-term debt 1,556,615 515,234
Equipment notes payable, less current maturities 1,557,710 1,902,838
Capitalized lease obligations payable, less current maturities 2,531,360 2,192,235
Deferred income taxes 988,000 988,000
--------- ---------
Total liabilities 14,287,135 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
5,429,757 and 5,378,518 outstanding 54,298 53,786
Additional paid in capital 5,031,589 5,051,555
Retained earnings 5,430,647 3,883,366
10,516,534 8,988,707
Less: Treasury stock at cost, 10,295 and 8,710 shares at
September 30, 1997 and December 31, 1996 respectively (29,815) (24,661)
---------- ----------
Total stockholders' equity 10,486,719 8,964,046
---------- ----------
Total liabilities and stockholders' equity $24,773,854 $22,045,682
========== ==========
<FN>
See accompanying notes to unaudited consolidated financial statements
</FN>
</TABLE>
<PAGE>
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Consolidated Statements of Income
For the Three and Nine Months Ended September 30, 1997 and September 30, 1996
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales $13,233,758 $12,773,183 $35,496,626 $31,229,022
Cost of sales 9,609,412 9,235,532 26,198,875 23,552,257
----------- ----------- ----------- -----------
Gross Profit 3,624,346 3,537,651 9,297,751 7,676,765
Operating expenses:
Selling and shipping 1,029,066 1,072,468 2,997,188 2,560,719
General and administrative 1,089,780 1,046,703 3,247,596 2,898,678
---------- ----------- ----------- -----------
Operating income 1,505,500 1,418,480 3,052,967 2,217,368
Interest expense, net 174,541 242,017 474,169 606,062
---------- ----------- ----------- -----------
Income before provision for income taxes 1,330,959 1,176,463 2,578,798 1,611,306
Provision for income taxes 532,510 505,877 1,031,520 692,860
Net Income $ 798,499 $ 670,586 $1,547,278 $ 918,446
========== ========== ========== ==========
Net income per share $ 0.15 $ 0.13 $ 0.29 $ 0.18
========== ========== ========== ==========
Weighted average number of shares outstanding 5,412,766 5,029,599 5,400,661 4,996,988
========== ========== ========== ==========
<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 September 30, 1997 and 1996
(unaudited)
<TABLE>
<CAPTION>
September 30, September 30,
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,547,278 $ 918,446
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 1,521,564 1,057,642
Change in assets and liabilities, net of acquisition of
business in 1996:
Accounts receivable (2,534,014) (1,562,088)
Inventory (29,271) 430,439
Prepaid expenses and other current assets 250,541 226,254
Accounts payable and accrued expenses 618,441 1,438,126
Income taxes payable (570,783) 321,415
Security deposits and other assets 42,571 (269,312)
---------- ----------
Net cash provided by operating activities 846,327 2,560,922
---------- ----------
Cash flows from investing activities:
Capital expenditures (1,037,569) (109,993)
Proceeds from sale of equipment 55,200 --
Purchase of Pointille, Inc. -- (621,578)
---------- ---------
Net cash used in investing activities (982,369) (731,571)
---------- ---------
Cash flows from financing activities:
Proceeds of long-term debt, net of repayments 1,046,115 (2,093,052)
Payments of equipment notes payable (346,011) (362,025)
Payments of capital lease obligations (609,040) (657,082)
Decrease in paid in capital -- (35,000)
Payments of notes receivable 70,302 65,435
Purchase of treasury stock (5,154) (24,000)
Expenses incurred in relation to the exchange offer (19,454) --
--------- ----------
Net cash used in financing activities 136,758 (3,105,724)
--------- ----------
Net increase (decrease) in cash 716 (1,276,373)
--------- ----------
Cash and cash equivalents, December 31 $ 30,859 $ 1,309,677
========= ==========
Cash and cash equivalents, September 30 $ 31,575 $ 33,304
========= ==========
<FN>
See accompanying notes to unaudited 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 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 in which 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>
September 30, December 31,
1997 1996
------------- -------------
<S> <C> <C>
Raw materials $ 1,329,412 $ 1,425,230
Work-in-process 338,080 248,210
Finished goods 375,112 339,893
------------ ------------
$ 2,042,604 $ 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", now operating as the Company's "California Division") , 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 issued at the estimated fair
value at the date of Acquisition. The Acquisiton was accounted for using the
purchase method of accounting and in accordance with generally accepted
accounting principles.
<PAGE>
The allocation of the purchase price of Pointille was as follows:
<TABLE>
<S> <C>
Purchase price
Cash $ 662,545
Promissory Note 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 the 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 Pointille's bank line of credit and notes payable). These unaudited pro forma
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 pro forma 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 $35,497 $35,054
Net income $1,547 $818
Earnings per Common share $.29 $.16
</TABLE>
<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 September 30, 1997 as well as the nine month
period ended September 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 October 24, 1997, Disc Graphics, Inc. acquired (the "Indiana
Acquisition") substantially all of the assets and certain liabilities of Benham
Press, Inc., an Indiana corporation ("Benham"), pursuant to an Asset Purchase
Agreement dated as of September 19, 1997, by and among the Company, Benham and
the sole shareholder of Benham (the "Asset Agreement"). The purchase price
consisted of approximately $130,000 in cash, 10,499 shares of the Company's
common stock, $.01 par value per share ("Common Stock"), and the assumption of
certain liabilities. The purchase price was paid with borrowings under the
Company's bank loan agreement. This acquisition is anticipated to significantly
increase Disc Graphics ability to serve present and potential customers in the
Midwestern markets.
Three Months Ended September 30, 1997 Compared to the Three Months Ended
- ------------------------------------------------------------------------
September 30, 1996
------------------
Results of operations
- ---------------------
Net sales
- ---------
Net sales for the three months ended September 30, 1997 were $13,234,000,
compared to $12,773,000 for the same period the prior year, representing an
increase of $461,000, or 3.6%. Music/audio packaging grew of $106,000 or 4.4%.
Video/entertainment software packaging was flat for the quarter with the
decrease in the video market offset by the strong growth in computer software
sales. Commercial printing grew $209,000 or 18.6%; this segment of the business
will benefit most significantly from the Indiana Acquisition as substantially
all of their work is commercial printing. Pharmaceutical sales improved by
$300,000 or 29.9%. There was a slight decline in both consumer product packaging
and label sales of $61,000 and $92,000 or 1.6% and 12.2% respectively.
Gross profit
- ------------
Gross profit for the three months ended September 30, 1997 was $3,624,000
(27.4% profit margin), compared to $3,537,000 (27.7% profit margin) for the same
period of the prior year, representing an increase of $86,000, or 2.4%. This
increase was the result of the 3.6% increase in sales.
Selling, general and administrative expense
- -------------------------------------------
Selling, general, and administrative ("SG&A") expenses for both the three
months ended September 30, 1997 and 1996 were $2,119,000. The continued focus on
cost management has effectively offset increases in SG&A due to inflation and
revenue growth.
Interest expense
- ----------------
Interest expense for the three months ended September 30, 1997 was $170,000,
compared to $244,000 for the same period of the prior year. Interest expense
<PAGE>
includes interest on notes payable to the Company's bank lender and capital
lease obligations on equipment. The decrease in interest expense is due to
approximatley a two percentage point decrease in the interest rates provided by
the new revolving credit agreement entered into on February 26, 1997 with Key
Bank (the "Credit Agreement") which provides for borrowing at a rate equal to
the London Interbank Offered Rate (LIBOR) plus 150 basis points, versus the
interest rate payable under the Company's prior revolving credit agreement for
the same three month period last year. The lower interest expense due to the
favorable rate was slightly offset by the increased capital investment,
specifically in the California Division.
Income taxes
- ------------
The provision for income taxes for the three months ended September 30, 1997
was $533,000, compared to $506,000 for the same period of the prior year, an
increase of $27,000, or 5%. The decrease in the Company's effective tax rate,
from 43% in 1996 to 40% in 1997, slightly offset the increase in pretax profit.
Net income
- ----------
Net income for the three month period ended September 30, 1997 was $799,000,
compared to $671,000 for the same period of the prior year, an increase of
$128,000, or 19%. The increase in net income was the result of the 3.6% increase
in sales, improvement in SG&A as a percentage of revenue, lower interest rates
charged to the Company, and the decline in the effective tax rate charged to the
Company.
Nine months ended September 30, 1997 compared to the nine months ended September
30, 1996
Results of operations
- ---------------------
Net sales
- ---------
Net sales for the nine months ended September 30, 1997 were $35,497,000,
compared to $31,229,000 for the same period the of prior year, representing an
increase of $4,268,000, or 13.7%. This increase was primarily due to the
inclusion of the results of the California Division for a full nine month period
in 1997. Music/audio packaging grew $727,000 or 13.4%. Video/entertainment
software packaging increased $2,357,000 or 28.2%; this was both a function of
the California Acquisition and continued growth in computer software offseting
the softness in the video market. Commercial and consumer product packaging
experienced growth of $1,173,000 and $375,000 or 40.8% and 4.2% respectively.
Both pharmaceutical/vitamin packaging and label experienced slight declines of
$244,000 and $120,000 or 7.1% and 5.6% respectively. For pharmaceutical/vitamin
packaging the focus has shifted from segments with lower quality and margins to
segments with higher quality and improved margins.
Gross profit
- ------------
Gross profit for the nine months ended September 30, 1997 was $9,298,000
(26.2% profit margin), compared to $7,677,000 (24.6% profit margin) for the same
period of the prior year, representing an increase of $1,621,000, or 21%. This
increase was due to the 4% sales growth in the base business, the inclusion of
the results of the California Division for the full nine month period of 1997,
and the 1.6 percentage point improvement in the cost of sales as a percentage of
revenue. This improvement in the cost of sales as a percentage of sales is the
result of improved manufacturing efficiencies generated by capital investment in
equipment.
Selling, general and administrative expense
- -------------------------------------------
Selling, general and administrative ("SG&A") expenses for the nine months
ended September 30, 1997 were $6,244,000, compared to $5,459,000 for the same
<PAGE>
period of the prior year, an increase of $785,000, or 14%. This increase in SG&A
expenses was due primarily to the inclusion of the results of the California
Division for a full nine months in 1997 as well as the sales growth, inflation,
and the investment in the infastructure of the Company in the form of additional
personnel and capital investment in accordance with the Company's long-term
growth strategy. Notwithstanding the foregoing investments, theSG&A as a
percentage of sales only increased 0.1 percentage point for the nine months
ended September 30, 1997 versus the same period in 1996.
Interest expense
- ----------------
Interest expense for the nine months ended September 30, 1997 was
$474,000 compared to $606,000 for the same period in 1996, a decrease of
$132,000 or 22%. This decrease is due to the approximately one percentage point
decrease in the interest rate under the credit agreement entered into on
February 26, 1997 compared to the prior period. Under this agreement, the
Company is able to borrow funds at a rate of 150 basis points above LIBOR.
Income taxes
- ------------
The provision for income taxes for the nine months ended September
30, 1997 was $1,032,000 compared to $693,000 for the same nine month period in
1996, a increase of $339,000, or 49%. This increase is primarily due to the
increase in pretax net income, slightly offset by a decline in the effective tax
rate from 43% in 1996 to 40% in 1997.
Net income
- ----------
Net income for the nine month period ended September 30, 1997 was
$1,547,000 compared to $918,000 for the same nine month period in 1996, an
increase of $629,0000 or 69%. This increase was principally driven by the
increase in sales, improvement in manufacturing efficiencies, and the lower
interest and effective tax rates.
Liquidity and capital resources
- -------------------------------
The primary source of cash for the Company's business has been cash flow
from operations and borrowings under the Company's revolving credit agreement.
As of September 30, 1997, the Company had working capital of $7,062,268. Net
cash provided by operating activities for the nine months ended September 30,
1997 was $848,443, principally driven by the net income of the Company.
Capital expenditures of $2,106,000 were primarily for the purchases of
manufacturing equipment to increase capacity and improve plant efficiencies.
On February 26, 1997, the Company entered into the Credit Agreement 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 September 30, 1997,
the Company's eligible borrowing base was $8,160,505. 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
September 30, 1997, the Company was in compliance with the covenants specified
in the Credit Agreement.
<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)
November 14 , 1997 /s/ Donald Sinkin
- ------------------ -------------------------
Date Donald Sinkin - President
November 14, 1997 /s/ Margaret Krumholz
- ----------------- --------------------------
Date Margaret Krumholz - Chief
Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1997
<CASH> 31,575
<SECURITIES> 0
<RECEIVABLES> 12,459,009
<ALLOWANCES> (869,000)
<INVENTORY> 2,042,604
<CURRENT-ASSETS> 14,715,718
<PP&E> 15,802,868
<DEPRECIATION> 6,949,321
<TOTAL-ASSETS> 24,773,854
<CURRENT-LIABILITIES> 7,653,450
<BONDS> 6,633,685
0
0
<COMMON> 54,298
<OTHER-SE> 10,432,421
<TOTAL-LIABILITY-AND-EQUITY> 24,773,854
<SALES> 35,496,626
<TOTAL-REVENUES> 35,496,626
<CGS> 26,198,875
<TOTAL-COSTS> 26,198,875
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 26,816
<INTEREST-EXPENSE> 474,169
<INCOME-PRETAX> 2,578,798
<INCOME-TAX> 1,031,520
<INCOME-CONTINUING> 1,547,278
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,547,278
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.29
</TABLE>
