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, 1998 to March 31, 1998
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 March 31, 1998, 5,440,256 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, 1998
and December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Income for the Three
Months ended March 31, 1998 and March 31, 1997. . . . . . . . . . . . . . . . 2
Consolidated Statements of Cash Flows for the
Three Months ended March 31, 1998 and March 31, 1997 . . . . . . . . . . . . .3
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . .4
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . .6
PART II - OTHER INFORMATION
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
<PAGE>
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
As of March 31, 1998 and December 31, 1997
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
(unaudited)
--------- ----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 161,085 $ 31,753
Accounts receivable, net of allowance for doubtful accounts
of $1,247,000 and $1,162,000 respectively 10,908,398 11,698,364
Inventories 2,276,584 1,906,694
Prepaid expenses and other current assets 368,178 345,701
Current maturities of notes receivable 28,157 43,958
Deferred Income Taxes 549,000 549,000
----------- -----------
Total current assets 14,291,402 14,575,470
Plant and equipment, net 10,149,110 10,510,266
Goodwill, net of amortization of $150,084 and $125,994 respectively 1,338,593 1,379,408
Security deposits and other assets 322,978 281,503
----------- -----------
Total assets $26,102,083 $26,746,647
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of equipment notes payable $ 441,751 $ 451,403
Current portion, long-term debt 143,419 103,530
Current maturities of capitalized lease obligations payable 1,079,918 1,069,209
Accounts payable and accrued expenses 5,369,192 5,007,072
Income taxes payable 441,097 509,927
----------- -----------
Total current liabilities 7,475,377 7,141,141
Long Term Debt 2,068,704 2,805,113
Equipment notes payable, less current maturities 1,344,044 1,447,860
Capitalized lease obligations payable, less current maturities 3,237,153 3,492,857
Deferred income taxes 748,000 748,000
----------- -----------
Total liabilities 14,873,278 15,634,971
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
5,440,256 54,403 54,403
Additional paid in capital 5,044,934 5,044,934
Retained earnings 6,159,838 6,042,154
----------- -----------
11,259,175 11,141,491
Less: Treasury stock, at cost, 10,415 and 10,295 shares at
March 31, 1998 and December 31, 1997 respectively (30,370) (29,815)
----------- -----------
Total stockholders' equity 11,228,805 11,111,676
Total liabilities and stockholders' equity $26,102,083 $26,746,647
=========== ===========
<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, 1998 and March 31, 1997
(unaudited)
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Sales $12,612,460 $11,197,838
Cost of sales 9,715,028 8,214,806
----------- -----------
Gross Profit 2,897,432 2,983,032
Operating expenses:
Selling and shipping 1,373,754 950,073
General and administrative 1,156,036 1,043,086
----------- -----------
Operating income 367,642 989,873
Interest expense, net 170,957 149,367
----------- -----------
Income before provision for income taxes 196,685 840,506
----------- -----------
Provision for income taxes 79,000 336,203
----------- -----------
Net income $117,685 $504,303
=========== ===========
Net Income per share:
Basic $0.02 $0.09
===== =====
Diluted $0.02 $0.09
===== =====
Weighted average number of shares outstanding:
Basic 5,429,922 5,369,425
========= =========
Diluted 5,447,450 5,376,217
========= =========
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
<PAGE>
DISC GRAPHICS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 1998 and March 31, 1997
(unaudited)
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $117,685 $504,303
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 483,068 474,777
Allowance for doubtful accounts 85,000 84,141
Change in assets and liabilities,
net of acquisition of Business:
Accounts receivable 704,966 8,947
Inventory (369,890) 137,743
Prepaid expenses and other current assets (33,721) (179,315)
Accounts payable and accrued expenses 362,120 83,810
Income taxes payable (68,830) (789,197)
Security deposits and other assets (41,475) (69,260)
--------- ----------
Net cash provided by operating activities 1,238,923 255,949
--------- ----------
Cash flows from investing activities:
Capital expenditures (86,479) (1,056,852)
Purchase of net assets of business acquired 16,625 ----
--------- ----------
Net cash used in investing activities (69,854) (1,056,852)
--------- ----------
Cash flows from financing activities:
Proceeds of long term debt, net of repayments (696,520) 1,015,972
Principal payments of equipment notes payable (113,468) (90,886)
Principal payments of capital lease obligations (244,995) (147,732)
Payments of notes receivable 15,801 28,009
Purchase of treasury stock (555) (4,681)
---------- ----------
Net cash provided by (used in) financing activities (1,039,737) 800,682
---------- ----------
Net increase (decrease) in cash 129,332 (221)
---------- ----------
Cash, December 31 $ 31,753 $ 30,859
========== ==========
Cash, March 31 $ 161,085 $ 30,638
========== ==========
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
<PAGE>
DISC GRAPHICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED 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, 1997 and the Company's Annual
Report on Form 10-K for the period ended December 31, 1997. The December 31,
1997 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.
Except for historical information contained herein, the matters set
forth are forward looking statements that involve certain risks and
uncertainties that could cause actual results to differ materially from those in
the forward looking statements. Potential risks and uncertainties include, among
other things, such factors as a difference between projections and actual orders
and the amount of sales of the Company's products.
Net Income Per Share
- --------------------
Earnings per share is computed in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 128. Basic earnings per
share is computed by dividing income available to common stockholders (which for
the Company equals its recorded net income) by the weighted average number of
shares outstanding during the period. Diluted earnings per share reflects the
potential dilution that could occur if securities to issue common stock, such as
stock options and warrants, were exercised, converted into common stock or
otherwise resulted in the issuance of common stock. The computation of weighted
average shares outstanding does not include incremental shares relating to
outstanding warrants since the exercise price of the warrants exceeded 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>
March 31, December 31,
1998 1997
-------- -----------
<S> <C> <C>
Raw materials $ 1,564,796 $ 1,412,613
Work-in-process 487,854 359,743
Finished goods 223,934 134,338
----------- ------------
$ 2,276,584 $ 1,906,694
=========== ============
</TABLE>
New Accounting Pronouncements
- -----------------------------
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." This
Statement requires that all items recognized under accounting standards as
components of comprehensive income be reported in an annual financial statement
and be displayed with the same prominence as other annual financial statements.
Other comprehensive income may include foreign currency translation adjustments,
minimum pension liability adjustments, and unrealized gains and losses on
marketable securities classified as available-for-sale. The Company has no
elements of other comprehensive income other than net income; therefore,
comprehensive income equals reported net income.
<PAGE>
DISC GRAPHICS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS 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 March 31, 1998. The discussion
should be read in conjunction with the Company's consolidated financial
statements and the notes thereto included in the annual Report.
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
- -------------------------------------------------------------------------------
Results of Operations
- ---------------------
Net Sales
- ---------
Net sales for the three months ended March 31, 1998 were $12,612,000
compared to $11,198,000 for the same period the prior year, representing an
increase of $1,414,000 or 12.6%. This increase in net sales can be attributed to
the growth within two business categories: commercial sales $759,000 (57.4%) and
music/audio $517,000 (30.5%). The commercial sales category growth is a direct
result of the Company's 1997 acquisition of its Indiana branch, which in the
aggregate contributed $1,000,000 to the $1,400,000 increase in net sales over
the same period last year. The increase in sales within the music/audio category
is attributed to sales to new customers and continued growth within our existing
customer base. Video/software packaging, labels, and consumer product packaging
categories' sales all remained relatively unchanged for the three months ended
March 31, 1998 compared to the same three months of the prior year.
Gross Profit
- ------------
Gross profit for the three months ended March 31, 1998 was $2,897,000 (a
23.0% profit margin) compared to $2,983,000 (a 26.6% profit margin) for the same
period the prior year, representing an decrease of $86,000 or 2.9%. The decrease
in gross profit for the three months ended March 31, 1998, on increased sales of
$1,400,000, is principally due to the change in product mix within the consumer
product packaging category. The Company's strategy to penetrate national market
accounts contributed approximately $917,000 of the quarter's $12,600,000 net
sales. This strategy, in the short term, is expected to increase the volume of
units produced without a corresponding increase in net sales or margin growth
due to current equipment make up used to produce these products. The Company
will evaluate when sufficient market share is achieved, financially justifying
the investment in new equipment. This diversification and market expansion is
believed to be critical to the Company's long-term growth, both in net sales and
gross margin, and its competitive strategy.
<PAGE>
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative ("SG&A") expenses for the three
months ended March 31, 1998 were $2,530,000 compared to $1,993,000 for the same
period the prior year, an increase of $537,000 or 26.9%. This increase is due
primarily to normal inflationary increases, costs associated with the facility
acquired in Indiana and revenue related expenses (such as freight to customers
and commissions). The continued investment in sales and customer service has not
had a corresponding effect on sales to date, however, the Company continues to
monitor these costs, aggressively focusing on reducing non-business building
components of these fixed costs.
Interest Expense
- ----------------
Interest expense for the three months ended March 31, 1998 was $171,000
compared to $149,000 for the same three months of the prior period, an increase
of $22,000 or 14.8%. This increase was due primarily to the increase in amounts
paid under capital leases assumed in the Indiana acquisition.
Income Taxes
- ------------
The provision for income taxes for the three months ended March 31,
1998 was $79,000 compared to $336,000 a decrease of $257,000. This decrease is
primarily due to the decrease in pretax income.
Net Income
- ----------
Net income for the three months ended March 31, 1998 was $118,000
compared to $504,000 for the same period of the prior year, a decrease of
$386,000. The decline in net income resulted from the Company's strategic
decision to divert resources in an attempt to penetrate new markets and compete
for national accounts.
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 March 31, 1998 the Company had working capital of $6,816,000.
Net cash provided by operating activities for the three months-ended March
31,1998 was $1,239,000 due to general business growth.
The Company anticipates capital expenditures of approximately
$2,000,000 for the remainder of 1998, primarily for the purchases of
manufacturing equipment to increase capacity and improve plant efficiencies.
Subsequent Events
- -----------------
In July 1997, the Company made an exchange offer to the holders of the
Company's Class A warrants. Under the terms of the offer each warrant holder was
entitled to one share of the Company's common stock for approximately every
8-1/2 warrants exchanged. Upon termination of this offer, 435,595 warrants were
exchanged for 51,239 shares of common stock. In fiscal 1998, consistent with the
terms of the warrant exchange offer, the Company will exchange approximately
550,000 additional Class A warrants and will issue approximately 64,700 shares
of the Company's common stock. As a result of the exchange, the total
outstanding Class A warrants will be reduced to approximately 1,714,000.
<PAGE>
New Accounting Standards
- ------------------------
In June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information", effective for fiscal years
beginning after December 15, 1997. This Statement establishes standards for
reporting information about operating segments in annual financial statements
and requires selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. This Statement requires reporting segment profit or loss,
certain specific revenue and expense items and segment assets, and other amounts
disclosed for segments to corresponding amounts reported in the consolidated
financial statements. Restatement of comparative information for earlier periods
presented is required in the initial year of application. Interim information is
not required until the second year of application, at which time comparative
information is required. The Company has not determined the impact that the
adoption of this new accounting standard will have on its consolidated financial
statements disclosures. The Company will adopt this accounting standard
effective December 1, 1999, as required.
Year 2000 Date Conversion
- -------------------------
On March 1, 1997, the Company implemented a fully integrated computer
system. In preparing the system-specification for vendor selection, the Company
required that the system be Year 2000 compliant. The newly implemented software
uses a five-byte field compared to the standard two-byte numeric field.
Consequently, the software does accommodate century rollovers. The Company does
not anticipate any issues relating to Year 2000 system requirements. The Company
continues to assess the impact of Year 2000 compliance, if any, to its vendors
and customers.
<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)
/s/ Donald Sinkin
May 15, 1998 ---------------------------
Date Donald Sinkin
President & CEO
/s/ Margaret Krumholz
May 15, 1998 ---------------------------
Date Margaret Krumholz
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 161,085
<SECURITIES> 0
<RECEIVABLES> 12,155,398
<ALLOWANCES> (1,247,000)
<INVENTORY> 2,276,584
<CURRENT-ASSETS> 14,291,402
<PP&E> 18,117,786
<DEPRECIATION> (7,968,676)
<TOTAL-ASSETS> 26,102,083
<CURRENT-LIABILITIES> 7,475,377
<BONDS> 6,649,901
0
0
<COMMON> 54,403
<OTHER-SE> 11,174,402
<TOTAL-LIABILITY-AND-EQUITY> 26,102,083
<SALES> 12,612,460
<TOTAL-REVENUES> 12,612,460
<CGS> 9,715,028
<TOTAL-COSTS> 9,715,028
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 85,000
<INTEREST-EXPENSE> 170,957
<INCOME-PRETAX> 196,685
<INCOME-TAX> 79,000
<INCOME-CONTINUING> 117,685
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 117,685
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
