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 March 31, 2000
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: (631) 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, 2000, 5,518,262 shares of the Registrant's Common Stock, par
value $.01, were outstanding.
<PAGE>
DISC GRAPHICS, INC.
FORM 10-Q
Quarter Ended March 31, 2000
INDEX
-----
Page
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets as of March 31, 2000 (unaudited)
and December 31, 1999........................................... 3
Consolidated Statements of Operations (unaudited) for the
Three Months ended March 31, 2000 and 1999 ..................... 4
Consolidated Statements of Cash Flows (unaudited) for the
Three Months ended March 31, 2000 and 1999 ..................... 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
Item 1 Legal Proceedings ................................................ 11
Item 2 Changes in Securities ............................................ 11
Item 3 Defaults Upon Senior Securities................................... 11
Item 4 Submission of Matters to a Vote of Security Holders .............. 11
Item 5 Other Information ................................................ 11
Item 6(a) Exhibits.......................................................... 11
Item 6(b) Reports on Form 8-K............................................... 11
Signatures .................................................................. 12
-2-
<PAGE>
DISC GRAPHICS, INC.
Consolidated Balance Sheets
As of March 31, 2000 (unaudited) and December 31, 1999
<TABLE>
March 31, 2000 December 31, 1999
(unaudited)
Assets
Current assets:
<S> <C> <C>
Cash $ 69,196 $ 142,531
Accounts receivable, net of allowance for doubtful accounts
of $1,404,000 and $1,418,000, respectively 11,222,482 13,579,201
Inventories 3,893,152 4,428,374
Prepaid expenses and other current assets 569,390 448,364
Deferred income taxes 1,092,000 1,092,000
---------- ---------
Total current assets 16,846,220 19,690,470
Plant and equipment, net 15,027,584 14,574,393
Goodwill, net of amortization of $612,000 and $499,000, respectively 6,142,484 6,247,588
Covenants not to compete, net of amortization of $199,000
and $144,000, respectively 901,236 956,236
Security deposits and other assets 1,538,880 1,039,119
---------- ---------
Total assets $ 40,456,404 $ 42,507,806
========== ============
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long term debt $ 869,723 $ 564,425
Current maturities of capitalized lease obligations 977,404 1,287,753
Accounts payable and accrued expenses 5,615,145 8,125,209
Income taxes payable - 590,104
--------- ---------
Total current liabilities 7,462,272 10,567,491
Long term debt, less current maturities 14,600,169 11,309,675
Capitalized lease obligations payable, less current maturities 913,585 2,604,586
Deferred income taxes 1,579,000 1,579,000
---------- ---------
Total liabilities 24,555,026 26,060,752
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 shares 55,488 55,488
Additional paid in capital 5,009,671 5,009,671
Retained earnings 10,868,147 11,413,501
----------- ----------
15,933,306 16,478,660
Less:
Treasury stock, at cost, 30,499 and 30,409 shares at
March 31, 2000 and December 31, 1999, respectively (31,928) (31,606)
-------- --------
Total stockholders' equity 15,901,378 16,447,054
----------- ----------
Total liabilities and stockholders' equity $ 40,456,404 $ 42,507,806
=========== ==========
</TABLE>
See accompanying notes to unaudited Consolidated Financial Statements
-3-
<PAGE>
DISC GRAPHICS, INC.
Consolidated Statements of Operations
For the Three Months Ended March 31, 2000 and 1999
(unaudited)
<TABLE>
March 31, 2000 March 31, 1999
<S> <C> <C>
Net sales $ 16,572,439 $ 14,894,995
Cost of sales 13,678,907 11,470,472
---------- ----------
Gross profit 2,893,532 3,424,523
Operating Expenses:
Selling and shipping 1,780,227 1,523,540
General and administrative 1,673,897 1,275,680
--------- ---------
Operating income (loss) (560,592) 625,303
Interest expense, net 345,762 122,923
------- -------
Income (loss) before income taxes (906,354) 502,380
Provision (benefit) for income taxes (361,000) 201,000
-------- --------
Net income (loss) $ (545,354) $ 301,380
=========== ===========
Net income (loss) per share:
Basic $ (0.10) $ 0.05
============ ===========
Diluted $ (0.10) $ 0.05
============ ===========
Weighted average number of shares outstanding
Basic 5,518,306 5,518,387
Diluted 5,518,306 5,555,661
</TABLE>
See accompanying notes to unaudited Consolidated Financial Statements
-4-
<PAGE>
DISC GRAPHICS, INC.
Consolidated Statement of Cash Flows
For the Months Ended March 31, 2000 and 1999
(unaudited)
<TABLE>
March 31, 2000 March 31, 1999
Cash flows from operating activities:
<S> <C> <C>
Net income(loss) $ (545,354) $ 301,380
Adjustments to reconcile net income(loss) to net cash provided by(used in)
operating activities:
Depreciation and amortization 837,549 395,428
Provision for doubtful accounts - 100,000
Changes in assets and liabilities:
Accounts receivable 2,356,719 1,335,181
Inventory 535,222 55,775
Prepaid expenses and other current assets (121,026) (86,017)
Accounts payable and accrued expenses (2,510,064) 258,922
Income taxes payable (590,104) (332,010)
Security deposits and other assets (500,453) 285,419
-------- -------
Net cash provided by(used in) operating activities (537,511) 2,314,078
-------- ---------
Cash flows from investing activities:
Capital expenditures (1,122,444) (202,355)
Purchase of net assets of business acquired (7,500) ----
------ ------
Net cash used in investing activities (1,129,944) (202,355)
---------- ----------
Cash flows from financing activities:
Net proceeds from (repayments of) long-term debt 3,595,792 (947,027)
Principal payments of capital lease obligations (2,001,350) (393,854)
Purchase of treasury stock (322) (270)
---- ----
Net cash provided by(used in) financing activities 1,594,120 (1,341,151)
Net increase (decrease) in cash (73,335) 770,572
Cash at December 31 142,531 43,313
------- ------
Cash at March 31 $ 69,196 $ 813,885
================ ===============
Cash paid during the year for:
Interest $ 291,617 $ 134,776
Income taxes $ 338,830 $ 533,010
</TABLE>
See accompanying notes to unaudited Consolidated Financial Statements
-5-
<PAGE>
DISC GRAPHICS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
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, 1999 included
in the Company's Annual Report on Form 10-K for its fiscal year ended December
31, 1999. The December 31, 1999 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.
Acquisition
- -----------
On July 1, 1999, the Company acquired substantially all of the assets and
certain liabilities of Contemporary Color Graphics, Inc. ("CCG"), a commercial
printer. The notes to the audited consolidated financial statements referred to
above contain a description of the terms of the acquisition. The following
unaudited pro forma results have been prepared for comparative purposes only and
include certain adjustments such as (i) additional amortization expense due to
goodwill (15 years) and a covenant not to compete (5 years) resulting from the
acquisition and (ii) increased interest expense due to cash borrowed under the
Company's financing agreement for the payment of the purchase price, the
repayment of CCG's notes payable and a note, supplemental note and convertible
debenture issued by the Company. These unaudited pro forma results are not
necessarily indicative of the results of operations which actually would have
resulted had the purchase been effected on January 1, 1999, nor of future
results of operations of the consolidated entities.
Three Months Ended
March 31, 1999
(In thousands, except per share amounts)
Net sales $16,688
Net income 190
Net income (loss) per share:
Basic .03
Diluted .03
-6-
<PAGE>
Inventories
- -----------
Inventories consist of the following:
March 31, 2000 December 31, 1999
Raw materials $3,188,506 $3,477,610
Work-in-process 546,498 700,981
Finished goods 158,148 249,783
------- -------
$3,893,152 $4,428,374
========== ==========
Consolidation of Facilities
- ---------------------------
In March 2000, the Company announced that it would close its CCG facility
and consolidate its operations with its Hauppauge, New York facility. A summary
of the charges relating to the consolidation of facilities in the first quarter
of 2000 is presented below:
Severance $ 58,000
Equipment write-offs 100,000
Lease termination costs 126,000
Other 40,000
-----------
Total $ 324,000
=========
These charges for the three months ended March 31, 2000 are included in
cost of sales and general and administrative expenses in the amounts of $302,000
and $22,000 respectively.
New Accounting Pronouncements
- -----------------------------
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS No. 133) as amended by SFAS 137, which is effective for
quarters of fiscal years beginning after June 15, 2000. SFAS No. 133 provides
guidance for accounting for all derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
The management of the Company does not believe that the implementation of SFAS
No. 133 will have a material impact on its financial position or results of
operations.
-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 Company's ability to fulfill
its stated business strategies; the Company's ability to identify and consummate
future acquisitions and other strategic business opportunities, and to integrate
any such businesses into the Company's operations; the Company's ability to
identify and develop additional product innovations; the Company's ability to
sustain current growth rates in net sales of certain products; the effects of
recent equipment purchases and leases for additional space on the Company's
operations; the Company's ability to continue to improve efficiencies through
the purchase or lease of equipment; the effects of the Company's ISO
certification efforts; the amounts required for capital expenditures in future
periods; the availability and cost of materials; 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 period ended March 31,
2000 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,
1999, as filed with the Securities and Exchange Commission (the "1999 Form
10-K"). Results for the periods reported herein are not necessarily indicative
of results that may be expected for the full year or in future periods.
Results of Operations for the Three Months Ended March 31, 2000 and 1999
- ------------------------------------------------------------------------
Net Sales
- ---------
Net sales for the three months ended March 31, 2000 were $16,572,000
compared to $14,895,000 for the same period in 1999, representing an increase of
$1,677,000, or 11.3%. The increase was primarily attributable to an approximate
$1,751,000 increase in net sales of commercial packaging products. The increase
in net sales of commercial packaging products resulted from the Company's
acquisition on July 1, 1999 of Contemporary Color Graphics, Inc. ("CCG") (the
"Acquisition"). Consumer product packaging and music/audio packaging sales
increased due to increased sales efforts within these categories. These
increases were partially offset by a decrease in video and entertainment
software packaging. These revenues
-8-
<PAGE>
for the first quarter where adversely impacted by the timing of orders, which
were expected to be received in the first quarter. The Company believes the
majority of such orders will be received in the second and third quarters of
2000, but there can be no assurance of the Company receiving such orders.
Gross Profit
- ------------
The Company recognized gross profit of $2,894,000 (a 17.5% profit margin)
for the three months ended March 31, 2000, as compared to $3,425,000 (a 23.0%
profit margin) for the same period in 1999, representing a decrease of $531,000,
or 15.5%. The decrease of 5.5 percentage points in gross profit margin is due to
the continued integration of CCG, costs associated with closing of the CCG
facility, production inefficiencies associated with the expansion of our
Hauppauge facility to accommodate Disc's substantial investment in large format
equipment, hard and soft costs associated with the implementation of ISO 9001
procedures and the impact of less than anticipated sales for the quarter. The
installation of this new equipment and the expansion of our Hauppauge facility,
by leasing additional space, will continue into the second quarter of the year
2000 and will most likely continue to have an adverse impact on earnings. The
Company's integration of this new equipment should enhance its operating
efficiencies and improve its ability to compete in new markets, but there can be
no assurance that the Company will be able to achieve these goals.
Selling, General, and Administrative Expenses
- ---------------------------------------------
Selling, general and administrative ("SG&A") expenses for the three
months ended March 31, 2000 were $3,454,000 (20.8% of net sales) compared to
$2,801,000 (18.8% of net sales) for the same period a year ago, an increase of
$653,000. The increase in the dollar amount of SG&A is primarily due to normal
operating expenses and the amortization of goodwill, in each case associated
with the CCG Acquisition. In addition, on April 29, 1999, Disc Graphics retained
a consulting firm to assist the Company in becoming ISO certified. The Company
expects to receive its ISO 9001 certification during fiscal 2000. Disc Graphics
has experienced and expects to continue to experience consulting and operating
expenses associated with this project throughout fiscal 2000, which may impact
future operating results. Disc Graphics believes that this investment will
ultimately transform the processes of the organization to improve product
quality, increase production efficiency, and shorten the manufacturing time
cycle. The Company believes that this commitment to improve customer
satisfaction should enhance its competitive edge in current and new markets, but
there can be no assurance of this. The remainder of the increase is due to
normal inflationary increases, and revenue related expenses such as freight to
customers and commissions.
Net Interest Expense
- --------------------
Net interest expense for the three months ended March 31, 2000 was $346,000
compared to $123,000 for the same period of the prior year. Interest expense
includes interest payable under the Company's revolving credit facility,
equipment notes payable, its capital lease obligations on equipment and its
note, supplemental note and debenture issued in connection with the Acquisition.
The increase in net interest expense is due to increased borrowings under the
Company's revolving credit facility and accrued interest payable on the note,
supplemental note and debenture related to the Acquisition.
Income Taxes
- ------------
As a result of the first quarter loss, the Company recorded a tax benefit
of $361,000 as compared to a provision for income taxes of $201,000 for the
first quarter of the prior year based on an effective tax rate of 40%. There
were no significant changes in the effective tax rate between the periods.
-9-
<PAGE>
Net Income (Loss)
- -----------------
The net loss for the three months ended March 31, 2000 was $545,000,
compared to net income of $301,000 for the same period in the prior year, a
decrease of $846,000. The decrease in net income is due to costs of integrating
CCG into our operations after its acquisition, costs associated with closing the
CCG facility, temporary production inefficiencies resulting from the expansion
of our Hauppauge facility to accommodate large format equipment, hard and soft
costs of implementing the ISO 9001 quality system, and the adverse impact by the
timing of orders.
Liquidity and Capital Resources
- -------------------------------
The primary source of cash for the Company's business has been cash flow
from operations and availability under the Company's $15 million revolving
credit facility. Cash as of March 31, 2000 was $69,000, compared to $143,000 as
of December 31, 1999. Net cash used by operations for the three months ended
March 31, 2000 was $543,000 compared to $2,314,000 of cash provided by
operations, for the three months ended March 31, 1999. The decrease in cash
flows from operations is primarily attributable to the payments in the first
quarter of 2000 of inventory purchases made in the fourth quarter of 1999 to
avoid announced price increases for this quarter, as well as the loss from
operations discussed above. As of March 31, 2000 the Company had working capital
of $9,384,000, and $5,300,000 was available to the Company under its revolving
credit facility. The Credit Agreement contains covenants which requires Disc
Graphics to satisfy certain performance criteria, net worth levels and debt
service ratios. At March 31, 2000, and at the date of this report, the Company
was in compliance with the covenants.
As a result of the CCG Acquisition in 1999, the Company's total
indebtedness and future debt service obligations have increased significantly
from prior levels. The Company intends to fund these debt service obligations
from operating cash flow in future periods, and believes that it will have
sufficient funds to do so. There can be no assurance, however that the Company
will be able to integrate CCG's business successfully or realize any benefit
from the CCG Acquisition, or that earnings attributable to the CCG Acquisition
will be sufficient to offset the related costs associated with the Company's
debt service obligations.
Beginning in the third quarter of 1999 and through March 31, 2000, the
Company incurred a total of $3.9 million of capital improvements in connection
with the purchase, preparation, and installation of a new 56-inch high speed
diecutter and 56-inch six color press. The Company anticipates that by the end
of the second quarter of fiscal 2000 it will finance $8 to $9 million, which is
inclusive of the aforementioned 56-inch equipment, as well as additional
manufacturing equipment. The installation of the diecutter, press, and future
additional equipment is intended primarily to increase capacity and further
improve plant efficiencies. However, there can be no assurance that the Company
will be able to enter into financing agreements for such equipment on
satisfactory terms, that the installation of such equipment will result in
improved efficiencies, or that the Company's future results of operations will
be improved as a result of any such plans.
ISO 9001
- --------
With the goal of enhancing customer satisfaction and, thus, improving our
competitive edge and profitability, we retained consultants in 1999 to assist us
in implementing the ISO 9001 Quality System. The result will be improved
quality, increased production capacity and reduced cycle time. We are well on
our way to implementing the system and achieving both ISO 9001 certification and
the anticipated benefits in cost and efficiency. In the short run, the
consulting fees and the hard and soft costs of designing and implementing new
procedures throughout the sales and manufacturing processes are a burden on
earnings, but we expect the long-term effect to be positive.
-10-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
As of March 31, 2000, there were no lawsuits pending, or threatened claims,
which in the aggregate would be material, against the Company.
Item 2. Changes in Securities
Not applicable.
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
In March 2000, the Company signed a letter of understanding regarding its
potential acquisition of Industrial Publishing, Inc. d/b/a Koke Printing, a
Eugene, Oregon based commercial printer with $12 million of revenue. At this
time, the Company has decided not to proceed with this acquisition.
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 March 31, 2000.
-11-
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
DISC GRAPHICS, INC.
(Registrant)
May 12, 2000 /s/ Donald Sinkin
-----------------
Donald Sinkin
President & CEO
May 12, 2000 /s/ Margaret Krumholz
---------------------
Margaret Krumholz
Senior Vice President of Finance & CFO
-12-
DISC GRAPHICS, INC.
Quarterly Report on Form 10-Q
for the Fiscal Quarter Ended March 31, 2000
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
27.1 Financial Data Schedule
-13-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACED FROM THE COMPANY'S CONSOLIDATED FINANCIAL
STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2000
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENT.
</LEGEND>
<CIK> 0000904541
<NAME> DISC GRAPHICS, INC.
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-1-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 69,196
<SECURITIES> 0
<RECEIVABLES> 12,626,482
<ALLOWANCES> (1,404,000)
<INVENTORY> 3,893,152
<CURRENT-ASSETS> 16,846,220
<PP&E> 26,293,172
<DEPRECIATION> (11,265,587)
<TOTAL-ASSETS> 40,456,404
<CURRENT-LIABILITIES> 7,462,272
<BONDS> 15,513,754
0
0
<COMMON> 55,488
<OTHER-SE> 15,845,890
<TOTAL-LIABILITY-AND-EQUITY> 40,456,404
<SALES> 16,572,439
<TOTAL-REVENUES> 16,572,439
<CGS> 13,678,907
<TOTAL-COSTS> 13,678,907
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 345,762
<INCOME-PRETAX> (906,354)
<INCOME-TAX> (361,000)
<INCOME-CONTINUING> (545,354)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (545,354)
<EPS-BASIC> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
