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 For the quarterly period ended September 30, 1998
OR
[ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 11788-8831
(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, 1998, 5,518,412 shares of the Registrant's Common Stock, par
value $.01, were outstanding.
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DISC GRAPHICS, INC.
FORM 10-Q
Quarter Ended September 30, 1998
INDEX
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Page
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PART I - FINANCIAL INFORMATION ................................................2
Item 1 Financial Statements
Consolidated Balance Sheets as of September 30, 1998 (unaudited)
and December 31, 1997......................................3
Consolidated Statements of Income (unaudited) for the
Three and Nine Months ended September 30, 1998 and 1997 ...4
Consolidated Statements of Cash Flows (unaudited) for the
Nine Months ended September 30, 1998 and 1997 .............5
Notes to Unaudited Consolidated Financial Statements ...........6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations ......................................8
PART II - OTHER INFORMATION ..................................................14
Item 1 Legal Proceedings ..................................................14
Item 2 Changes in Securities ..............................................14
Item 3 Defaults Upon Senior Securities ....................................14
Item 4 Submission of Matters to a Vote of Security Holders ................14
Item 5 Other Information ..................................................14
Item 6(a) Exhibits ...........................................................14
Item 6(b) Reports on Form 8-K ................................................14
Signatures....................................................................15
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
See pages 3-5.
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<TABLE>
<CAPTION>
DISC GRAPHICS, INC.
Consolidated Balance Sheets
As of September 30, 1998 (unaudited) and December 31, 1997
September 30, December 31,
1998 1997
(unaudited)
Assets
Current assets:
<S> <C> <C>
Cash $ 68,054 $ 31,753
Accounts receivable, net of allowance for doubtful accounts
of $1,393,000 and $1,162,000, respectively 12,850,503 11,698,364
Inventories 2,490,718 1,906,694
Prepaid expenses and other current assets 318,680 389,659
Deferred income taxes 549,000 549,000
------- -------
Total current assets 16,276,955 14,575,470
Plant and equipment, net 10,363,458 10,510,266
Goodwill, net of amortization of $199,787 and $125,994, respectively 1,287,368 1,379,408
Security deposits and other assets 462,795 281,503
------- -------
Total assets $ 28,390,576 $ 26,746,647
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of equipment notes payable $ 139,523 $ 451,403
Current portion of long-term debt 139,115 103,530
Current maturities of capitalized lease obligations payable 1,433,053 1,069,209
Accounts payable and accrued expenses 5,957,090 5,007,072
Income taxes payable 1,068,715 509,927
--------- -------
Total current liabilities 8,737,496 7,141,141
Long term debt 1,747,500 2,805,113
Equipment notes payable, less current maturities 77,009 1,447,860
Capitalized lease obligations payable, less current maturities 4,304,081 3,492,857
Deferred income taxes 748,000 748,000
------- -------
Total liabilities 15,614,086 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
5,548,761 and 5,440,256, respectively 55,488 54,403
Additional paid in capital 5,009,671 5,044,934
Retained earnings 7,742,667 6,042,154
--------- ---------
12,807,826 11,141,491
Less:
Treasury stock, at cost, 30,349 and 10,295 shares at
September 30, 1998 and December 31, 1997, respectively (31,336) (29,815)
------- -------
Total stockholders' equity 12,776,490 11,111,676
---------- ----------
Total liabilities and stockholders' equity $ 28,390,576 $ 26,746,647
============= =============
See accompanying notes to unaudited Consolidated Financial Statements
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</TABLE>
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<TABLE>
<CAPTION>
DISC GRAPHICS, INC.
Consolidated Statements of Income
For the Three and Nine Months Ended September 30, 1998 and 1997
(unaudited)
Three Months Ended September 30 Nine Months Ended September 30
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net Sales $ 15,674,053 $ 13,233,758 $ 42,592,181 $ 35,496,626
Cost of sales 11,225,936 9,609,412 31,406,824 26,198,875
---------- --------- ---------- ----------
Gross Profit 4,448,117 3,624,346 11,185,357 9,297,751
Operating Expenses:
Selling and shipping 1,725,206 1,029,066 4,554,107 2,997,188
General and administrative 968,397 1,089,780 3,293,586 3,247,596
------- --------- --------- ---------
Operating income 1,754,514 1,505,500 3,337,664 3,052,967
Interest expense, net 170,202 174,541 511,812 474,169
------- ------- ------- -------
Income before provision
for income taxes 1,584,312 1,330,959 2,825,852 2,578,798
Provision for income taxes 633,724 532,510 1,125,339 1,031,520
------- ------- --------- ---------
Net Income $ 950,588 $ 798,449 $ 1,700,513 $ 1,547,278
============= ============== ============= =============
Net Income per share:
Basic $ .17 $ .15 $ .31 $ .29
Diluted $ .17 $ .15 $ .31 $ .29
Weighted average number of shares outstanding
Basic 5,499,378 5,383,364 5,459,789 5,372,500
Diluted 5,518,486 5,393,088 5,476,566 5,381,062
</TABLE>
See accompanying notes to unaudited Consolidated Financial Statements
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<TABLE>
<CAPTION>
DISC GRAPHICS, INC.
Consolidated Statement of Cash Flows
For the Nine Months Ended September 30, 1998 and 1997
(unaudited)
September 30, 1998 September 30, 1997
Cash flows from operating activities:
<S> <C> <C>
Net income $ 1,700,513 $ 1,547,278
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 1,489,437 1,521,564
Allowance for doubtful accounts 402,499 264,816
Change in assets and liabilities, net of acquisition of business:
Accounts receivable (1,554,638) (2,798,830)
Inventory (584,024) (29,271)
Prepaid expenses and other current assets 55,729 320,843
Accounts payable and accrued expenses 950,018 618,441
Income taxes payable 558,788 (570,783)
Security deposits and other assets (196,292) 42,571
-------- ------
Net cash provided by operating activities 2,822,030 916,629
--------- -------
Cash flows from investing activities:
Capital expenditures (702,803) (1,037,569)
Purchase of net assets of business acquired 18,211
Proceeds from sale of equipment 21,900 55,200
------ ------
Net cash used in investing activities (662,692) (982,369)
-------- --------
Cash flows from financing activities:
Proceeds of long-term debt, net of (repayments) 1,022,028) 1,046,115
Principal payments of equipment notes payable (236,722) (346,011)
Principal payments of capital lease obligations (1,574,178) (609,040)
Borrowings under long-term debt capital lease obligations 745,589 ----
Purchase of treasury stock (1,323) (5,154)
Purchase of warrants (34,375) ----
Expenses incurred in relation to the exchange offer ---- (19,454)
--------- -------
Net cash provided by (used in) financing activities (2,123,037) 66,456
---------- ------
Net increase in cash 36,301 716
Cash at December 31 31,753 30,859
------ ------
Cash at September 30 $ 68,054 $ 31,575
============ ============
</TABLE>
See accompanying notes to unaudited Consolidated Financial Statements.
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FF2/113357_1
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DISC GRAPHICS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
Note 1 - Organization, Operation and Summary of Significant Accounting Policies:
General
- - -------
The consolidated financial statements included herein have been prepared
by Disc Graphics, Inc., and its subsidiaries (collectively, the "Company")
without audit. Certain information and footnote disclosures normally included in
consolidated 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. Although the Company believes that the
disclosures made herein are adequate to make the information presented not
misleading, it is recommended that these consolidated financial statements be
read in conjunction with the audited Consolidated Financial Statements and the
Notes thereto for the year ended December 31, 1997 included in the Company's
Annual Report on Form 10-K for its fiscal year ended December 31, 1997. The
December 31, 1997 figures included herein were derived from such audited
Consolidated Financial Statements. In the opinion of management, the information
furnished herein reflects all normal recurring adjustments that are necessary to
present fairly such information.
Earnings 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 common shares outstanding during the period. Diluted earnings per share
reflects the potential dilution that would occur if all securities exercisable
or exchangeable for or convertible into shares of common stock that were
outstanding during the period, such as stock options and warrants, were
exercised or exchanged for or converted into shares of common stock. The
computation of weighted average shares outstanding used in the calculation of
diluted earnings per share does not include shares of Common Stock that would be
issuable upon the exercise of the Company's outstanding Class A Warrants,
because the exercise price of such warrants exceeded the market price of the
Company's Common Stock during the relevant periods.
Goodwill
- - --------
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over a period of 15
years. The Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its remaining
life can be recovered through undiscounted future operating cash flows of the
acquired operation. The amount of goodwill impairment, if any, is measured based
on projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds. The assessment of the
recoverability of goodwill will be impacted if estimated future operating cash
flows are not achieved.
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Inventories
- - -----------
Inventories consist of the following:
September 30, 1998 December 31, 1997
Raw materials $1,966,492 $1,412,613
Work-in-process 467,617 359,743
Finished goods 56,609 134,338
$2,490,718 $1,906,694
Non-Cash Financing and Investing Activities
- - -------------------------------------------
Capital lease obligations of $2,003,657 were incurred in 1998 when the
Company entered into leases for new machinery and equipment.
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 annual consolidated financial
statements and be displayed with the same prominence as other items in annual
consolidated 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.
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 consolidated financial
statements and requires selected information about operating segments in interim
financial reports issued to shareholders. Adoption of this Statement is not
expected to have a material impact on information previously disclosed in the
Company's consolidated financial statements.
Recently the FASB issued statements No. 132 and 133 related to "Pensions
and Other Postretirement Benefit Disclosures" and "Accounting for Derivative
Instruments and Hedging Activities," respectively. Statement No. 132 is not
applicable to the Company, and Statement No. 133 has not yet been determined to
be applicable, but in any event is not expected to be material to the financial
statements of the Company.
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DISC GRAPHICS, INC.
This Form 10-Q contains predictions, projections and other statements
about the future that are intended to be "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties, and
other important factors that could cause the actual results, performance or
achievements of the Company, or industry results, to differ materially from
those expressed or implied by such statements. Such risks, uncertainties, and
other important factors include, among others: the Company's ability to sustain
current growth rates in net sales of certain product categories; the potential
inability of the Company to implement its marketing and other business
strategies; the amounts required for capital expenditures in future periods; the
availability and cost of materials; potential effects of Year 2000 problems on
the Company's business; and continuing industry-wide pricing pressures and other
industry conditions. Such forward-looking statements speak only as of the date
of this Report, and the Company disclaims any obligation or undertaking to
update such statements. Each forward- looking statement that the Company
believes is material is accompanied by one or more cautionary statements
identifying important factors that could cause actual results to differ
materially from those described in the forward-looking statement. The cautionary
statements are set forth following the forward-looking statement, in other
sections of this Form 10-Q, and/or in the Company's other documents filed with
the Securities and Exchange Commission, whether or not such documents are
incorporated herein by reference. In assessing forward-looking statements,
readers are urged to read carefully all such cautionary statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
- - -------
The following discussion and analysis of the financial condition and
results of operations of Disc Graphics, Inc. and its subsidiaries (collectively
"Disc Graphics" or the "Company") for the three-month and nine-month periods
ended September 1998 should be read in conjunction with the unaudited
Consolidated Financial Statements and the Notes thereto included elsewhere in
this Report, and the Company's Annual Report on Form 10-K for its fiscal year
ended December 31, 1997, as filed with the Securities and Exchange Commission
(the "1997 Form 10-K"). Results for the periods reported herein are not
necessarily indicative of results that may be expected in future periods.
Results of Operations for the Three Months Ended September 30, 1998 and 1997
- - ----------------------------------------------------------------------------
Net Sales
- - ---------
Net sales for the three months ended September 30, 1998 were $15,674,053
compared to $13,233,758 for the same period in 1997, representing an increase of
$2,440,295, or 18%. Net sales of most of the Company's products contributed to
this increase, with the largest increases recognized in net sales of video and
entertainment software packaging and commercial printing, as discussed below. In
recent periods, the Company has experienced significant industry-wide pressure
to reduce the per-unit prices of its video, music and audio packaging products.
The Company has overcome the effects of such price reductions by increasing the
unit volume of sales of such products through intensified marketing efforts and
expansion of its sales force and customer service department. A significant
portion of the Company's marketing efforts have been focused on increasing sales
of higher-margin, custom-designed specialty packaging items in its entertainment
software and consumer product categories.
Video and Entertainment Software Packaging: Net sales of video and
entertainment software packaging products increased by $1,329,000, or 36%, from
the third quarter of 1997. This increase was the result of the Company's
combined focus on increasing both unit sales volume and sales of specialty
packaging items within this category. The Company has continued to experience
exceptional growth in entertainment software packaging.
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<PAGE>
Commercial Printing: Net sales of products in the commercial printing
category increased by $1,095,000, or 82%, from the third quarter of 1997,
resulting primarily from increased sales volume attributable to the Indiana
facility acquired by the Company in October 1997.
Consumer Product Packaging: Net sales of consumer product packaging
increased $267,000, or 7%, from the third quarter of 1997, resulting primarily
from the Company's success in penetrating national accounts, as well as its
continued focus on expanding its existing customer base. The national accounts
have contributed to increases in sales volume; however, this increased sales
volume has been partially offset by related pricing discounts.
Music and Audio Packaging: Net sales of music and audio packaging products
increased by $252,000, or 10%, from the third quarter of 1997, primarily as a
result of increased unit volume in sales of compact disc ("CD") packaging.
Labels: Net sales of labels increased by $165,000, or 25%, from the third
quarter of 1997, primarily due to expansion in new markets and improvements in
product quality and production times.
Pharmaceutical and Vitamin Packaging: Net sales of pharmaceutical and
vitamin packaging products for the quarter declined $668,000, or 51%, from the
third quarter of 1997, as a result of the Company's decision to move from
private label business to national brand business. This strategy is intended to
produce higher margins over the long term.
Gross Profit
- - ------------
The Company recognized gross profit of $4,448,117 (28% of total net sales)
for the three months ended September 30, 1998, as compared to $3,624,346 (27% of
total net sales) for the same period in 1997, representing an increase of
$823,771, or 23%. This increase resulted primarily from increased net sales,
coupled with reduced costs as a percentage of net sales. The Company's planned
replacement of a major press during this quarter resulted in downtime and
capacity constraints. This caused a substantial increase ($857,100 or 111%) in
the cost of outsourcing work in the three months ended September 30, 1998
compared to the same period in 1997. This cost, along with normal inflationary
cost increases, were offset by the Company's continued focus on both
manufacturing efficiencies and managing fixed costs, resulting in total cost of
sales declining as a percent of revenue to 72% from 73%.
Selling, General, and Administrative Expenses
- - ---------------------------------------------
Selling, general and administrative ("SG&A") expenses for the three months
ended September 30, 1998 were $2,693,603 (17% of net sales) compared to
$2,118,846 (16% of net sales) for the same period a year ago, an increase of
$574,757 or 27%. This increase in SG&A expenses was due primarily to SG&A
expenses incurred by the Indiana facility acquired in October 1997 and expansion
of the Company's sales force and customer service department, as well as normal
inflationary increases and other revenue-driven expenses, such as freight
charges and commissions.
Interest Expense
- - ----------------
Interest expense for the three months ended September 30, 1998 was
$170,202 compared to $174,541 for the same period of the prior year. Interest
expense includes interest payable under the Company's revolving credit facility
and under capital lease obligations on equipment. The slight decrease is due to
the decline in the average borrowing under the Company's revolving credit
facility.
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Income Taxes
- - ------------
The provision for income taxes for the three months ended September 30,
1998 was $633,724 compared to $532,510 for the same period in 1997, an increase
of $101,214. This increase was due to the increase in pre-tax income, with no
significant change in the effective tax rate.
Net Income
- - ----------
Net income for the three months ended September 30, 1998 was $950,588,
compared to $798,449 for the same period of the prior year, an increase of
$152,139, or 19%. This increase in net income was a result of the increase in
net sales and the improvement in gross profit as a percentage of net sales.
Results of Operations for the Nine Months Ended September 30, 1998 and 1997
- - ---------------------------------------------------------------------------
Net Sales
- - ---------
Net sales for the nine months ended September 30, 1998 were $42,592,181
compared to $35,496,626 for the same period in 1997, representing an increase of
$7,095,555, or 20%. Most of the Company's product categories contributed to this
increase, with the largest increases recognized in net sales of video and
entertainment software packaging, commercial printing, music and audio packaging
and consumer product packaging. As discussed above, the Company has offset the
effects of recent industry-wide pricing pressures by increasing the unit volume
of sales of its video, music and audio packaging products through intensified
marketing efforts and expansion of its sales force and customer service
department. A significant portion of the Company's marketing efforts have been
focused on increasing sales of higher-margin, custom-designed specialty
packaging items in its entertainment software and consumer product categories.
The Company has also moved from private label to national brand customers in its
pharmaceutical and vitamin packaging to enhance operating results. See "Results
of Operations for the Three Months Ended September 30, 1998 and 1997 -
Pharmaceutical and Vitamin Packaging."
Video and Entertainment Software Packaging: Net sales of video and
entertainment software packaging increased $2,757,000, or 26%, from the first
nine months of 1997. This increase resulted from the Company's combined focus on
increasing unit sales volumes and sales of specialty packaging items in this
category.
Commercial Printing: Net sales of products in the commercial printing
category increased by $2,425,000, or 60%, from the first nine months of 1997, as
a direct result of increased sales volume attributable to the Indiana facility
acquired by the Company in October 1997.
Music and Audio Packaging: Net sales of music and audio packaging products
increased by $1,219,000, or 20%, from the first nine months of 1997, primarily
as a result of increased unit volume in sales of CD packaging.
Consumer Product Packaging: Net sales of consumer product packaging
increased $944,000, or 10%, from the first nine months of 1997, resulting
primarily from the Company's success in penetrating national accounts, as well
as its continued focus on growing its existing customer base.
Labels: Net sales of labels increased by $566,000, or 28%, from the first
nine months of 1997, primarily due to expansion in new markets and improvements
in product quality and production times.
Pharmaceutical and Vitamin Packaging: Net sales of pharmaceutical and
vitamin packaging products for the nine months ended September 30, 1998 declined
$816,000, or 26%, from the same period in 1997, as a result of the Company's
decision to move from private label business to national brand business. This
strategy is intended to produce higher margins over the long term.
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<PAGE>
Gross Profit
- - ------------
The Company recognized gross profit of $11,185,357 (26% of total net
sales) for the nine months ended September 30, 1998, as compared to $9,297,751
(also 26% of total net sales) for the same period in 1997, representing an
increase of $1,887,606, or a 20% increase in gross profit from the 1997
comparison period. This increase resulted primarily from increased net sales. As
discussed above, the Company replaced a press during the third quarter ended
September 30, 1998. The resulting downtime and capacity constraints contributed
to increased costs in outsourcing work. The Company also experienced
inflationary increases in certain costs, including wages, overhead and
materials, which were all more than offset by cost savings attributable to
capital expenditures in new equipment, which resulted in an improvement in
manufacturing efficiencies. The Company has also continued to focus on
controlling its fixed manufacturing costs, in an effort to maximize profit
margins. See "Results of Operations for the Three Months Ended September 30,
1998 and 1997 - Gross Profit."
Selling, General, and Administrative Expenses
- - ---------------------------------------------
Selling, general and administrative ("SG&A") expenses for the nine months
ended September 30, 1998 were $7,847,693 (18% of net sales) compared to
$6,244,784 (18% of net sales) for the same period a year ago, an increase of
$1,602,909 or 26%. This increase in SG&A expenses was due to SG&A expenses
incurred by the Indiana facility acquired in October 1997 and expansion of the
Company's sales force and customer service department, as well as normal
inflationary increases and other revenue-driven expenses, such as freight
charges and commissions.
Interest Expense
- - ----------------
Interest expense for the nine months ended September 30, 1998 was
$511,812, compared to $474,169 for the same period of the prior year. The
increase in interest expense resulted from increased borrowing related to the
1997 acquisition of the Indiana facility and additional Company-wide capital
investments.
Income Taxes
- - ------------
The provision for income taxes for the nine months ended September 30,
1998 was $1,125,339, compared to $1,031,520 for the same period in 1997, an
increase of $93,819. This increase was due to the increase in pre-tax income,
with no significant change in the effective tax rate.
Net Income
- - ----------
Net income for the nine months ended September 30, 1998 was $1,700,513,
compared to $1,547,278 for the same period of the prior year, an increase of
$153,235 or 10%. This increase is primarily attributable to increased sales
volume and improved manufacturing efficiencies achieved by the Company, offset
in part by the effects of industry-wide pricing pressures. See "Results of
Operations for the Three Months Ended Septemer 30, 1998 and 1997 -- Net Income."
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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 $10 million revolving credit
facility. As of September 30, 1998, the Company had working capital of
$7,539,459 and $1,185,000 outstanding under its revolving credit facility. Net
cash provided by operating activities for the nine months ended September 30,
1998 was $2,822,030, due to increased net income and non-cash related expenses.
The Company anticipates additional capital expenditures of approximately
$200,000 for the remainder of 1998, primarily for the purchase of manufacturing
equipment to increase capacity and further improve plant efficiencies. The
Company intends to finance such capital expenditures through capital leases.
The Company recently engaged the services of B.T. Wolfenson, a division of
B.T. Alex.Brown, on an exclusive basis to provide advisory and investment
banking services, including the exploration of financial and strategic
alternatives to maximize shareholder value.
On September 3, 1998, the Company exchanged a printing press, which was
previously financed by an equipment note through GE Capital Public Finance
("GECPF"), for a new press. In connection with the transaction, the Company
entered into a seven year capital lease arrangement with the Suffolk County
Industrial Development Association ("SCIDA"), pursuant to which the SCIDA: (a)
issued a $2,003,657 industrial development bond to finance its purchase of the
press; (b) leased the press to the Company; and (c) assigned its rights in the
lease to GECPF, which purchased the bond. The lease contains certain provisions
limiting the Company's capital expenditures in Suffolk County over the next
three years, and certain debt covenants consistent with those contained in the
Company's revolving credit agreement with KeyBank, NA. The lease payments are
calculated on the basis of a below-market interest rate, which is subject to an
increase to the prevailing market rate in the event the Company exceeds the
capital expenditure limits or in certain other circumstances. The Company
believes that any such rate increase would not have a material effect on the
Company, because the Company presently has and intends to maintain the ability
to satisfy its lease obligations through its revolving credit facility with
KeyBank, NA. The Company also has the option to terminate the lease at any time
upon payment of a scheduled prepayment amount.
Year 2000 Compliance
- - --------------------
The Company is in the process of identifying, assessing and developing
contingency plans to address problems that may arise as a result of the
inability of the Company's computers, or those of its material vendors and
customers, to properly recognize and manipulate dates in the Year 2000 beginning
with the first two digits "20" instead of "19." In its evaluation process, the
Company considers a computer to be Year 2000 compliant if: (a) any valid date,
both before and after December 31, 1999 (including February 29, 2000), does not
cause an interruption in the desired operation; and (b) (i) the computer will
correctly sort, calculate and compare all dates; and (ii) if the first two
digits of the date are implicit, ( i.e., the date is represented by only 2
digits, e.g., "99" for "1999" and "00" for "2000"), the computer will interpret
the dates consistently and with the result that "99" always means 1999, and "00"
always means 2000.
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<PAGE>
The Company's evaluation of the Year 2000 problem includes the assessment
of its computer systems and its equipment and other systems that are controlled
or monitored by computers or embedded computer chips, and the ability of its
critical vendors and customers to ensure timely delivery of goods and services
and payment of invoices, respectively.
In March 1997, the Company installed a fully-integrated computer system
that is Year 2000 compliant. The software calculates the date incrementally from
a fixed past date, using a five-byte data field (compared to the standard
two-byte data field). For example, from the date of March 1, 1916, the software
can calculate incrementally 99,999 days from that fixed date, approximately
until the year 2272. Each software module has been examined to confirm that it
uses the five-byte date field in all date sorts, calculations and comparisons.
During the fourth quarter of 1998, the Company plans to perform a full test of
the software by advancing the date past 2000 (including February 29, 2000) and
running each software module with test data to confirm empirically that the
system accommodates the millennium rollover.
The Company has also undertaken to test the Year 2000 compatibility of
each desktop and portable computer and each piece of equipment containing an
embedded computer chip, by confirming empirically that each computer and its
associated software and each piece of equipment will function properly with
dates occurring both before and after 2000.
The Company's business could be materially affected if various material
vendors and customers are not themselves Year 2000 compliant. In particular, if
the Company is unable to obtain necessary supplies, services or critical machine
parts, its operations could suffer. If its major customers are unable to make
payments or continue purchases, the Company's cash flow could suffer. The
inability of major utilities to supply power or telephone service after the
millennium rollover could also adversely affect the Company's operations. In
order to assess and address such problems, the Company is in the process of
surveying all its material vendors and customers to determine their likely state
of Year 2000 compliance at the millennium rollover.
Although the Company is currently unaware of any material vendor or
customer who will not be Year 2000 compliant, it has and will continue to
develop contingency plans in the event any material vendors or customers are
unable in the Year 2000 to fulfill their supply or payment obligations to the
Company. In particular, the Company has taken steps to ensure that no
significant vendor is a sole-source or limited-source supplier, by arranging
multiple sources for all critical resources, by warehousing or stocking a
limited supply of critical materials and parts, and by developing the ability to
fabricate critical machine parts in an in-house facility.
A possible worst-case scenario for the Company would be the inability of
its major utilities to supply electrical or telephone service. The Company
purchases electrical power through major utilities serving each of the Company's
facilities. In the event that power supply to any one of the Company's
facilities were to be interrupted due to Year 2000 problems, the Company
believes that an alternate source of power would not be reasonably available due
to the magnitude of the regional impact of such a failure. Subject to the
continued ability to function of the regional transportation system in the wake
of such a power failure, the Company has a limited capacity to shift work from
one facility to another and to out-source work to sub-contractors outside of the
region, so that its critical manufacturing operations could continue. In the
event of any post-millennium failure of a telephone utility to supply service,
the Company currently believes it can continue its critical operations using
cellular telephones.
The Company is exploring with its insurer whether present policies provide
any coverage for potential business losses and liability to third parties
resulting from the Company's failure or inability to be Year 2000 compliant due
to factors not under its control, and if not, whether such policies are
available.
- 13 -
<PAGE>
The Company has established a Year 2000 Compliance Committee to assess the
impact of the Year 2000 problem on the Company's business and to ensure its Year
2000 compliance. The Committee is co-chaired by the Vice President for Legal
Affairs and the Management Information Systems Manager, and is comprised of
representatives from all major departments and all facilities within the
Company. Management has committed all resources, both financial and personnel,
reasonably necessary to achieve Year 2000 compliance and/or implement its
contingency plans for events outside its control. The Company does not believe
that the costs it has incurred to date or currently expects to incur in future
periods are or will be material, in the aggregate, primarily because these costs
have been and will be incurred in connection with projects begun before, and/or
budgeted without regard to, the Company's Year 2000 compliance efforts.
Although the Company believes it will be Year 2000 compliant no later than
June 30, 1999, there can be no assurance that the Company will successfully
identify all systems, vendors or customers which are not Year 2000 compliant,
that the Company will not have to increase significantly its expenditures
relating to any such noncompliance, or that its business will not be materially
adversely affected by any such non-compliance.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In the opinion of the Company's management, there are no pending legal
proceedings, other than ordinary routine litigation incidental to the Company's
business, which either individually or in the aggregate are likely to have a
material adverse effect on the Company's financial condition, results of
operations or cash flows.
Item 2. Changes in Securities
During the third quarter of 1998, Allen & Company ("Allen & Co.") tendered
to the Company 204,000 of the Company's outstanding Class A Warrants (the
"Warrants"). In exchange for the tendered Warrants, in September 1998 the
Company issued to such holder one share of its Common Stock, par value $.01 per
share (the "Common Stock"), for every 8.5 Warrants tendered (the "Exchange
Rate"), or an aggregate of 24,000 shares of its Common Stock. This exchange was
exempt from registration under the Securities Act of 1933, as amended, pursuant
to Section 3(a)(9) thereof. All of the Warrants tendered in the exchange were
canceled. After giving effect to the exchange, the total number of outstanding
Warrants was reduced to 1,242,105.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6(a) Exhibits
The Exhibits to this Quarterly Report on Form 10-Q are listed in the
Exhibit Index which appears elsewhere herein and is incorporated herein by
reference.
Item 6(b) Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K during its fiscal
quarter ended September 30, 1998.
- 14 -
<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 13, 1998 /s/ Donald Sinkin
-----------------------------
Donald Sinkin - President
November 13, 1998 /s/ Margaret Krumholz
---------------------------------
Margaret Krumholz - Chief Financial Officer
- 15 -
<PAGE>
DISC GRAPHICS, INC.
Quarterly Report on Form 10-Q
for the Fiscal Quarter Ended September 30, 1998
EXHIBIT INDEX
Exhibit
Number Description
- - -------- -----------
27.1 Financial Data Schedule
- 16 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE COMPANY'S CONSOLIDATED FINANCIAL
STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 68,054
<SECURITIES> 0
<RECEIVABLES> 14,243,503
<ALLOWANCES> (1,393,000)
<INVENTORY> 2,490,718
<CURRENT-ASSETS> 16,276,955
<PP&E> 18,635,184
<DEPRECIATION> (8,271,726)
<TOTAL-ASSETS> 28,390,576
<CURRENT-LIABILITIES> 8,737,496
<BONDS> 6,128,590
0
0
<COMMON> 55,488
<OTHER-SE> 12,721,002
<TOTAL-LIABILITY-AND-EQUITY> 28,390,576
<SALES> 42,592,181
<TOTAL-REVENUES> 42,592,181
<CGS> 31,406,824
<TOTAL-COSTS> 31,406,824
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 402,499
<INTEREST-EXPENSE> 511,812
<INCOME-PRETAX> 2,825,852
<INCOME-TAX> 1,125,339
<INCOME-CONTINUING> 1,700,513
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,700,513
<EPS-PRIMARY> 0.31
<EPS-DILUTED> 0.31
</TABLE>
