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 June 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 June 30, 1998, 5,494,442 shares of the Registrant's Common Stock, par
value $.01, were outstanding.
<PAGE>
DISC GRAPHICS, INC.
FORM 10-Q
Quarter Ended June 30, 1998
INDEX
Page
PART I - FINANCIAL INFORMATION ................................................2
Item 1 Financial Statements
Consolidated Balance Sheets as of June 30, 1998 (unaudited)
and December 31, 1997.................................3
Consolidated Statements of Income (unaudited) for the
Three and Six Months ended June 30, 1998 and 1997 ....4
Consolidated Statements of Cash Flows (unaudited) for the
Six Months ended June 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 ..................................................12
Item 1 Legal Proceedings ..........................................12
Item 2 Changes in Securities ......................................12
Item 3 Defaults Upon Senior Securities ............................13
Item 4 Submission of Matters to a Vote of Security Holders ........13
Item 5 Other Information ..........................................13
Item 6(a) Exhibits ...................................................13
Item 6(b) Reports on Form 8-K ........................................13
Signatures ............................................................14
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
See pages 3-5.
-2-
<PAGE>
DISC GRAPHICS, INC.
Consolidated Balance Sheets
As of June 30, 1998 (unaudited) and December 31, 1997
<TABLE>
<S> <C> <C>
June 30, December 31,
1998 1997
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 32,832 $ 31,753
Accounts receivable, net of allowance for doubtful accounts
of $1,260,000 and $1,162,000, respectively 12,110,177 11,698,364
Inventories 2,219,477 1,906,694
Prepaid expenses and other current assets 347,181 345,701
Current maturities of notes receivable 19,379 43,958
Deferred income taxes 549,000 549,000
Total current assets 15,278,046 14,575,470
Plant and equipment, net 10,074,554 10,510,266
Goodwill, net of amortization of $175,715 and $125,994, respectively 1,327,061 1,379,408
Security deposits and other assets 415,205 281,503
Total assets $ 27,094,866 $ 26,746,647
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of equipment notes payable $ 431,938 $ 451,403
Current portion, long-term debt 135,185 103,530
Current maturities of capitalized lease obligations payable 1,095,514 1,069,209
Accounts payable and accrued expenses 5,617,148 5,007,072
Income tax payable 752,412 509,927
Total current liabilities $ 8,032,197 7,141,141
Long term debt 2,294,389 2,805,113
Equipment notes payable, less current maturities 1,240,047 1,447,860
Capitalized lease obligations payable, less current maturities 2,954,181 3,492,857
Deferred income taxes 748,000 748,000
Total liabilities 15,268,814 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 and
outstanding 5,524,761 and 5,440,256, respectively 55,248 54,403
Additional paid in capital 5,009,911 5,044,934
Retained earnings 6,792,081 6,042,154
11,857,240 11,141,491
Less:
Treasury stock, at cost, 30,319 and 10,295 shares at
June 30, 1998 and December 31, 1997, respectively (31,188) (29,815)
Total stockholders' equity 11,826,052 11,111,676
Total liabilities and stockholders' equity $ 27,094,866 $ 26,746,647
</TABLE>
See accompanying notes to unaudited Consolidated Financial Statements
-3-
<PAGE>
DISC GRAPHICS, INC.
Consolidated Statements of Income
For the Three and Six Months Ended June 30, 1998 and 1997
(unaudited)
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
Net sales $14,305,668 $11,065,030 $26,918,128 $22,262,868
Cost of sales 10,465,860 8,374,657 20,180,888 16,589,463
Gross profit 3,839,808 2,690,373 6,737,240 5,673,405
Operating Expenses:
Selling and shipping 1,455,147 1,018,049 2,828,901 1,968,122
General and administrative 1,169,153 1,114,730 2,325,189 2,157,816
Operating income 1,215,508 557,594 1,583,150 1,547,467
Interest expense, net 170,653 150,261 341,610 299,628
Income before provision for income taxes 1,044,855 407,333 1,241,540 1,247,839
Provision for income taxes 412,615 162,807 491,616 499,010
Net income $ 632,240 $ 244,526 $ 749,924 $ 748,829
Net income per share:
Basic $ .12 $ .05 $ .14 $ .14
Diluted $ .12 $ .05 $ .14 $ .14
Weighted average number of shares outstanding
Basic 5,450,066 5,368,358 5,439,994 5,368,889
Diluted 5,462,409 5,377,279 5,454,930 5,376,814
</TABLE>
See accompanying notes to unaudited Consolidated Financial Statements
-4-
<PAGE>
DISC GRAPHICS, INC.
Consolidated Statement of Cash Flows
For the Six Months Ended June 30, 1998 and 1997
(unaudited)
<TABLE>
<S> <C> <C>
June 30, 1998 June 30, 1997
Cash flows from operating activities:
Net income $ 749,924 $ 748,829
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 979,409 1,000,368
Allowance for doubtful accounts 194,059 166,481
Change in assets and liabilities, net of acquisition of
business:
Accounts receivable (605,872) (783,428)
Inventory (312,783) (384,180)
Prepaid expenses and other current assets (11,647) 76,969
Accounts payable and accrued expenses 610,076 174,996
Income taxes payable 242,485 (1,088,181)
Security deposits and other assets (143,702) 59,974
Total adjustments 952,025 (777,001)
Net cash provided by (used in) operating activities 1,701,949 (28,172)
Cash flows from investing activities:
Capital expenditures (495,707) (1,782,340)
Purchase of net assets of business acquired 2,626
Proceeds from sale of equipment 21,900
Net cash used in investing activities (471,181) (1,782,340)
Cash flows from financing activities:
Proceeds of long-term debt, net of repayments (479,069) 1,323,701
Principal payments of equipment notes payable (227,278) (230,611)
Principal payments of capital lease obligations (512,371) (371,957)
Borrowings under long-term debt capital lease obligations 1,026,363
Payments of notes receivable 24,579 68,172
Purchase of Treasury stock (1,175) (4,681)
Purchase of warrants (34,375)
Net cash provided by (used in) financing activities (1,229,689) 1,810,987
Net increase in cash 1,079 475
Cash and cash equivalents at December 31 31,753 30,859
Cash and cash equivalents at June 30 $ 32,832 $ 31,334
</TABLE>
See accompanying notes to unaudited Consolidated Financial Statements
-5-
<PAGE>
DISC GRAPHICS, INC.
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. Although the
Company believes that the disclosures made herein are adequate to make the
information presented not misleading, it is recommended that these 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 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.
-6-
<PAGE>
Inventories
Inventories consist of the following:
<TABLE>
<S> <C> <C>
June 30, 1998 December 31, 1997
Raw materials $1,669,313 $1,412,613
Work-in-process 432,640 359,743
Finished goods 117,524 134,338
$2,219,477 $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.
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. Adoption of this Statement is not expected to
have a material impact on information previously disclosed in the Company's
consolidated financial statements.
-7-
<PAGE>
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 potential inability of the
Company to implement its acquisition, marketing and other business strategies;
the amounts required for capital expenditures in future periods; the
availability and cost of materials; and 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 Conditions 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 six-month periods
ended June 30, 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 of Operations for the Three Months Ended June 30, 1998 and 1997
Net Sales
Net sales for the three months ended June 30, 1998 were $14,305,668
compared to $11,065,030 for the same period in 1997, representing an increase of
$3,240,638, or 29%. 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, consumer product 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 and commercial printing 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 increased $1,385,410, or 41%, from the second
quarter of 1997. This increase resulted from the Company's combined focus on
increasing both unit sales volume and sales of specialty packaging items within
this category.
Consumer Product Packaging: Net sales of consumer product packaging
increased $698,804, or 27%, from the second quarter of 1997, resulting primarily
from the Company's success in penetrating national markets, as wellas its
continued focus on growing its existing customer base.
-8-
<PAGE>
Commercial Printing: Net sales of products in the commercial printing
category increased by $569,915, or 41%, from the second quarter 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 $451,384, or 23%, from the second 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 $367,386, or 54%, from the second
quarter of 1997, primarily due to refinement of the Company's pricing schedules
and improvements in product quality and production times.
Pharmaceutical and Vitamin Packaging: Net sales of pharmaceutical and
vitamin packaging products for the quarter declined $232,261, or 23%, from the
second quarter of 1997, as a result of the Company's decision to concentrate on
the development of more profitable accounts within this category, at the expense
of less profitable accounts.
Gross Profit
The Company recognized gross profit of $3,839,808 (27% of total net sales)
for the three months ended June 30, 1998, as compared to $2,690,373 (24% of
total net sales) for the same period in 1997, representing an increase of
$1,149,435, or 43%. This increase resulted primarily from increased net sales,
coupled with reduced costs as a percentage of net sales. Inflationary increases
in certain costs, including wages, overhead and materials, were more than offset
by cost savings attributable to capital expenditures in new equipment which
resulted in an improvement in manufacturing efficiencies. The Company's strategy
of penetrating national markets resulted in greater earnings in the second
quarter of 1998 than in the first quarter. This was a result of such
manufacturing efficiencies and certain improved processes, which improved the
Company's ability to serve its national customers. In addition, the Company has
continued to focus on controlling its fixed manufacturing costs, in an effort to
maximize profit margins.
Selling, General, and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for the three months
ended June 30, 1998 were $2,624,300 (18% of net sales) compared to $2,132,779
(19% of net sales) for the same period a year ago, an increase of $491,521 or
23%. 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. In the second quarter of 1998, the Company experienced a slight
improvement (a 1% decrease) in SG&A as a percentage of net sales. This
improvement is directly attributable to the Company's investment in its sales
force and customer service department, which resulted in an increase in total
net sales.
Interest Expense
Interest expense for the three months ended June 30, 1998 was $170,653
compared to $150,261 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 increase in interest expense resulted from
increased borrowing related to the 1997 acquisition of the Indiana facility and
additional Company-wide capital investments.
-9-
<PAGE>
Income Taxes
The provision for income taxes for the three months ended June 30, 1998 was
$412,615 compared to $162,807 for the same period in 1997, an increase of
approximately $250,000. 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 June 30, 1998 was $632,240, compared
to $244,526 for the same period of the prior year, an increase of $387,714, or
159%. This increase in net income was a result of the increase in net sales, the
improvement in gross profit, and a reduction in SG&A as a percentage of net
sales.
Results of Operations for the Six Months Ended June 30, 1998 and 1997
Net Sales
Net sales for the six months ended June 30, 1998 were $26,918,128 compared
to $22,262,868 for the same period in 1997, representing an increase of
$4,655,260, or 21%. 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 and commercial printing
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. See "Results of Operations for the Three Months
Ended June 30, 1998 and 1997."
Video and Entertainment Software Packaging: Net sales of video and
entertainment software packaging increased $1,427,064, or 20%, from the first
six 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 $1,329,655, or 49%, from the first six 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 $967,004, or 27%, from the first six 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 $678,192, or 12%, from the first six months of 1997, resulting
primarily from the Company's success in penetrating national markets, as well as
its continued focus on growing its existing customer base.
Labels: Net sales of labels increased by $400,651, or 30%, from the first
six months of 1997, primarily due to refinement of the Company's pricing
schedules and improvements in product quality and production times.
Pharmaceutical and Vitamin Packaging: Net sales of pharmaceutical and
vitamin packaging products for the six months ended June 30, 1998 declined
$147,306, or 8%, from the same period in 1997, as a result of the Company's
decision to concentrate on the development of more profitable accounts within
this category, at the expense of less profitable accounts.
-10-
<PAGE>
Gross Profit
The Company recognized gross profit of $6,737,240 (25% of total net sales)
for the six months ended June 30, 1998, as compared to $5,673,405 (also 25% of
total net sales) for the same period in 1997, representing an increase of
$1,063,835, or a 19% increase in gross profit from the 1997 comparison period.
This increase resulted primarily from increased net sales. Inflationary
increases in certain costs, including wages, overhead and materials, were more
than offset by cost savings attributable to capital expenditures in new
equipment, which resulted in an improvement in manufacturing efficiencies. In
addition, the Company has continued to focus on controlling its fixed
manufacturing costs, in an effort to maximize profit margins.
Selling, General, and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for the six months
ended June 30, 1998 were $5,154,090 (19% of net sales) compared to $4,125,938
(19% of net sales) for the same period a year ago, an increase of $1,028,152 or
25%. 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 six months ended June 30, 1998 was $341,610,
compared to $299,628 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 six months ended June 30, 1998 was
$491,616, compared to $499,010 for the same period in 1997, a decrease of
$7,394. The provision for income taxes and the Company's effective tax rate
remained relatively unchanged between the comparison periods.
Net Income
Net income for the six months ended June 30, 1998 was $749,924, compared to
$748,829 for the same period of the prior year, remaining virtually unchanged.
However, net income for the second quarter of 1998 increased $387,714 from the
second quarter of 1997, offsetting the reduction in net income experienced in
the first quarter of 1998 as compared to the first quarter of 1997. Such
reduction was due primarily to reduced gross profit associated with the
Company's penetration of national markets in the consumer product packaging
category. See "Results of Operations for the Three Months Ended June 30, 1998
and 1997 - Net Income."
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, 1998, the Company had working capital of $7,245,849 and $1,685,000
outstanding under its revolving credit facility. Net cash provided by operating
activities for the six months ended June 30, 1998 was $1,701,949, due to
increased net income and non-cash related expenses.
The Company anticipates additional capital expenditures of approximately
$1,500,000 for the remainder of 1998, primarily for the purchase of
manufacturing equipment to increase capacity and further improve plant
efficiencies. However, capital expenditures in future periods may vary depending
upon the future costs of such
-11-
<PAGE>
equipment, the rate of obsolescence of the Company's existing equipment,
unanticipated purchases of equipment, and other factors. The Company intends to
finance such capital expenditures through capital leases. In addition,
consistent with its growth strategy, the Company may expend between $4 million
and $6 million during the remainder of 1998, in the event it identifies and
consummates acquisitions of compatible businesses. There can be no assurance
that the Company will successfully identify and/or consummate any acquisitions
of such businesses or realize any financial benefit therefrom. The Company plans
to finance any such acquisitions through conventional bank financing and capital
leases, but there can be no assurance that such acquisitions will not be
financed in part through the issuance of stock or stock options, which are not
expected to be material.
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 software used in the
newly-implemented system uses a five-bit date field compared to the standard
two-bit date field and calculates the date incrementally from a fixed past date.
For example, with a fixed date of March 1, 1916, the system can calculate
incrementally 99,999 days from that fixed date, approximately until year 2272.
Consequently, the software will accommodate the millennium rollover. In addition
to the above-mentioned computer system, the Company also relies heavily on
computer-controlled equipment such as presses and sheeters, specialized
computers, software and the external systems of its suppliers, and is dependent
upon vendors whose systems may or may not be Year 2000 compliant.
The Company recently established a Year 2000 Compliance Committee to assess
the impact of the Year 2000 problem on the Company's business. The Committee is
comprised of representatives from all major departments and all facilities
within the Company. The goal of the Committee is to ensure that all critical
computers and programs are Year 2000 compliant. The Committee is taking steps to
obtain Year 2000 certifications from each of its trade vendors, software
manufacturers and equipment manufacturers. The Committee will also establish a
program to test each computer and each piece of equipment that utilizes a
computer to control or monitor its operations. While the Company believes it
will be Year 2000 compliant, there can be no assurance that the Company will
successfully identify all systems or vendors which are not Year 2000 compliant
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 second quarter of 1998, a holder of 548,300 of the Company's
outstanding Class A Redeemable Common Stock Purchase Warrants (the "Warrants")
tendered all such warrants to the Company. In exchange for the tendered
Warrants, in May 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 64,505 shares of its Common
Stock. In addition, during the second quarter of 1998, Allen & Company
Incorporated ("Allen & Co.") tendered to the Company 170,000 of the Company's
outstanding Warrants held by such holder. In exchange for the tendered Warrants,
in June 1998 the Company issued shares of its Common Stock at the same Exchange
Rate, issuing an aggregate of 20,000 shares of its Common Stock to Allen & Co.
Each of the foregoing exchanges between the Company and its existing holders of
outstanding
-12-
<PAGE>
Warrants 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 foregoing exchanges were canceled.
In July 1998, the Company was approached by Allen & Co. with respect to its
tender of 204,000 additional Warrants in exchange for additional shares of
Common Stock at the Exchange Rate. The Company has agreed in principle to
consummate the proposed exchange and in connection therewith to issue an
additional 24,000 shares of Common Stock to such holder. Consumption of this
exchange is expected to occur in the third quarter, but is subject to execution
of definitive documentation and certain other factors.
Also in June 1998, the Company purchased an aggregate of 100,000 Warrants
in the market in two separate transactions (50,000 at $.375 and 50,000 at
$.2813, plus commissions). The Company has canceled and retired those
outstanding warrants.
After giving effect to all of the foregoing Warrant transactions, the total
number of outstanding Warrants will be reduced from 2,264,405 at December 31,
1997 to 1,242,105 upon consummation of the final transaction expected to occur
in the third quarter of 1998.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
On June 10, 1998, the Company held its Annual Meeting of Stockholders. The
stockholders elected Donald Sinkin and Daniel A. Levinson as the Class II
directors, to serve until the Annual Meeting of Stockholders in 2001 or until
their successors are chosen and qualified. Mr. Sinkin and Mr. Levinson each
received 4,959,246 votes in favor of his election, with 253,900 votes withheld,
no abstentions and no broker non-votes. The stockholders also ratified the
appointment of KPMG Peat Marwick LLP as independent auditors for 1998, with
5,209,146 votes in favor, 4,000 votes opposed, no abstentions and no broker
non-votes.
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 June 30, 1998.
-13-
<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 13, 1998 /s/ Donald Sinkin
Donald Sinkin - President
August 13, 1998 /s/ Margaret Krumholz
Margaret Krumholz - Chief Financial Officer
-14-
<PAGE>
DISC GRAPHICS, INC.
Quarterly Report on Form 10-Q
for the Fiscal Quarter Ended June 30, 1998
EXHIBIT INDEX
Exhibit
Number Description
10.1 Letter agreement dated April 21, 1998, between the Company and Robert
A. Mayer, relating to the exchange of 548,300 Warrants for 64,505
shares of Common Stock.
10.2 Letter agreement dated May 20, 1998, between the Company and Allen &
Company Incorporated, relating to the exchange of 170,000 Warrants
for 20,000 shares of Common Stock
27.1 Financial Data Schedule
-15-
EXHIBIT 10.1
Robert A. Mayer
Mr. Donald Sinkin
Disc Graphics, Inc.
10 Gilpin Avenue
Hauppauge, NY 11788
Re: Exchange of Warrants
Dear Mr. Sinkin:
This letter will serve to confirm the agreement of the undersigned and Disc
Graphics, Inc. (the "Company") with respect to the issuance by the Company to
the undersigned of Common Stock in exchange for the 548,300 Class A Redeemable
Common Stock Purchase Warrants ("Class A Warrants") owned by the undersigned at
the rate of one share of Common Stock, par value $.01 per share for each 8.5
Class A Warrants. The undersigned hereby acknowledges that this exchange was
initiated by the undersigned upon the terms made available by the Company in its
exchange offer dated July 11, 1997.
Effective upon the execution and delivery of this letter agreement by the
Company, the undersigned hereby exchanges, assigns and transfers to, or upon the
order of, the Company all right, title and interest in and to all such Class A
Warrants. The undersigned hereby represents and warrants that the undersigned
has full power and authority to exchange, assign and transfer the Class A
Warrants delivered herewith and to acquire the Common Stock issuable upon
exchange of such Class A Warrants and that, when the same are accepted for
exchange by the Company, the Company will acquire good and marketable title
thereto, free and clear of all liens, restrictions, charges and encumbrances and
that such Class A Warrants are not subject to any adverse claim. The undersigned
has delivered herewith the 548,300 Class A Warrants, together with executed
stock powers with the signature guaranteed by an eligible guarantor institution.
The undersigned, upon request, will execute and deliver any additional documents
deemed by the Company to be necessary or desirable to complete the exchange,
assignment and transfer of the Class A Warrants.
If the terms of the exchange are acceptable to the Company, please so
indicate in the space provided below for your signature, whereupon this
agreement will become binding upon the undersigned and the Company. In such
event, within three business days from the date of its execution and delivery of
this letter, the Company will cause the issuance to the undersigned of 64,505
shares of Common Stock and the delivery to the undersigned of a check for the
balance of .88 of a share multiplied by the last reported sale price of the
shares of the Company's Common Stock on the last business day prior to the date
of such execution as reported on the Nasdaq SmallCap Market.
Sincerely,
/s/ Robert A. Mayer
Robert A. Mayer
ACCEPTED AND AGREED:
DISC GRAPHICS, INC.
By: /s/ Margaret Krumholz
Its: CFO
Dated: 4/21/98
EXHIBIT 10.2
DATE: May 20, 1998
Mr. Donald Sinkin
Disc Graphics, Inc.
10 Gilpin Avenue
Hauppauge, NY 11788
Re: Exchange of Warrants
Dear Mr. Sinkin:
This letter will serve to confirm the agreement of the undersigned and Disc
Graphics, Inc. (the "Company") with respect to the issuance by the Company to
the undersigned of Common Stock in exchange for the 170,000 Class A Redeemable
Common Stock Purchase Warrants ("Class A Warrants") owned by the undersigned at
the rate of one share of Common Stock, par value $.01 per share for each 8.5
Class A Warrants. The undersigned hereby acknowledges that this exchange was
initiated by the undersigned upon the terms made available by the Company in its
exchange offer dated July 11, 1997.
Effective upon the execution and delivery of this letter agreement by the
Company, the undersigned hereby exchanges, assigns and transfers to, or upon the
order of, the Company all right, title and interest in and to all such Class A
Warrants. The undersigned hereby represents and warrants that the undersigned
has full power and authority to exchange, assign and transfer the Class A
Warrants delivered herewith and to acquire the Common Stock issuable upon
exchange of such Class A Warrants and that, when the same are accepted for
exchange by the Company, the Company will acquire good and marketable title
thereto, free and clear of all liens, restrictions, charges and encumbrances and
that such Class A Warrants are not subject to any adverse claim. The undersigned
has delivered herewith the 170,000 Class A Warrants, together with executed
stock powers with the signature guaranteed by an eligible guarantor institution.
The undersigned, upon request, will execute and deliver any additional documents
deemed by the Company to be necessary or desirable to complete the exchange,
assignment and transfer of the Class A Warrants.
If the terms of the exchange are acceptable to the Company, please so indicate
in the space provided below for your signature, whereupon this agreement will
become binding upon the undersigned and the Company. In such event, within three
business days from the date of its execution and delivery of this letter, the
Company will cause the issuance to the undersigned of 20,000 shares of Common
Stock.
Sincerely,
ALLEN & COMPANY INCORPORATED
By: /s/ Terence McCarthy
Name: Terence McCarthy
Title: Vice President
ACCEPTED AND AGREED:
DISC GRAPHICS, INC.
By: /s/ Donald Sinkin
Its: CEO
Dated: 6/5/98
(SIGNATURE GUARANTEED
MEDALLION GUARANTEED
ALLEN & COMPANY INCORPORATED
ALN02--X0006551)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE COMPANY'S CONSOLDIATED FINANCIAL
STATEMENTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> JUN-30-1998
<CASH> 32,832
<SECURITIES> 0
<RECEIVABLES> 13,370,177
<ALLOWANCES> (1,260,000)
<INVENTORY> 2,219,477
<CURRENT-ASSETS> 15,278,046
<PP&E> 18,497,217
<DEPRECIATION> (8,422,663)
<TOTAL-ASSETS> 27,094,866
<CURRENT-LIABILITIES> 8,032,197
<BONDS> 6,488,617
0
0
<COMMON> 55,248
<OTHER-SE> 11,770,804
<TOTAL-LIABILITY-AND-EQUITY> 27,094,866
<SALES> 26,918,128
<TOTAL-REVENUES> 26,918,128
<CGS> 20,180,888
<TOTAL-COSTS> 20,180,888
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 194,087
<INTEREST-EXPENSE> 341,610
<INCOME-PRETAX> 1,241,540
<INCOME-TAX> 491,616
<INCOME-CONTINUING> 749,924
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 749,924
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
</TABLE>
