1 FORM 10-QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE --- ACT OF 1934 For the quarterly period ended May 31, 1996 TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT --- For the transition period period from to -------------- -------------- Commission File Number 0-27664 UNIDIGITAL INC. (Exact name of small business issuer as specified in its charter) DELAWARE 13-3856672 (State of Incorporation) (IRS Employer Identification No.) 20 West 20th Street 9th Floor New York, NY 10011 (Address of principal executive offices) (212) 337-0330 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 --- --- APPLICABLE ONLY TO CORPORATE ISSUERS The number of shares of the Company's $.01 par value Common Stock outstanding as of July 12, 1996 is 3,150,000 shares. Transitional Small Business Disclosure Format. Yes No X --- --- - 1 - 2 UNIDIGITAL INC. FORM 10-QSB INDEX Page PART I-FINANCIAL INFORMATION Item 1. Financial Statements. Consolidated Balance Sheets as of May 31, 1996 (unaudited) and August 31, 1995 3 Consolidated Statements of Operations for the Three Months Ended May 31, 1996 and 1995 (unaudited) 4 Consolidated Statements of Operations for the Nine Months Ended May 31, 1996 and 1995 (unaudited) 5 Consolidated Statements of Cash Flows for the Nine Months Ended May 31, 1996 and 1995 (unaudited) 6 Notes to Consolidated Financial Statements (unaudited) 7 Item 2. Management's Discussion and Analysis or Plan of Operation. 10 PART II-OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. 15 SIGNATURES 16 - 2 - 3 PART I - FINANCIAL INFORMATION Item 1. Financial Statements UNIDIGITAL INC. CONSOLIDATED BALANCE SHEETS May 31, August 31, 1996 1995 ------------ ------------ (unaudited) ASSETS Cash & cash equivalents $ 4,765,963 $ 186,802 Accounts receivable, net of allowance of $138,000 in 1996 and $110,000 in 1995 3,171,621 2,334,275 Prepaid expenses and other current assets 497,065 266,115 ------------ ------------ Total current assets 8,434,649 2,787,192 Property, plant and equipment, net 4,403,441 2,965,376 Goodwill 790,443 776,539 Other assets 95,918 20,905 ------------ ------------ Total Assets $ 13,724,451 $ 6,550,012 ============ ============ LIABILITIES & STOCKHOLDERS' EQUITY Due to banks $ 1,320,174 $ 816,317 Current portion of long term bank debt 157,500 - Current portion of capital lease obligations 709,207 644,299 Current portion of payments for acquisition of business and cancellation of options 306,323 139,545 Accounts payable and accrued expenses 1,259,924 792,936 Income taxes payable 533,543 310,675 Loans and notes payable to stockholders 694,139 - Deferred income taxes 117,835 62,000 ------------ ------------ Total current liabilities 5,098,645 2,765,772 Loans and notes payable to stockholders - 190,172 Long term bank debt less current portion 76,666 - Noncurrent portion of capital lease obligations 1,129,455 810,888 Noncurrent portion of payments for acquisition of business and cancellation of options - 139,545 Deferred income taxes 358,000 39,000 ------------ ------------ Total liabilities 6,662,766 3,945,377 Stockholders' equity: Preferred stock, par value $.01 - - Common stock, par value $.01 31,500 3,015 Additional paid-in-capital 5,319,480 162,803 Retained earnings 1,735,739 2,450,834 Cumulative foreign translation adjustment (25,034) (12,017) ------------ ------------ Total stockholders' equity 7,061,685 2,604,635 ------------ ------------ Total Liabilities and Stockholders' Equity $ 13,724,451 $ 6,550,012 ============ ============ See notes to financial statements. - 3 - 4 UNIDIGITAL INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MAY 31, 1996 & 1995 (unaudited) 1996 1995 ---- ---- REVENUES Net sales $ 3,298,072 $ 2,480,805 EXPENSES Cost of sales 1,422,973 1,137,598 Selling general and administrative expenses 1,041,776 645,291 Principal stockholder/officers' compensation 108,715 175,201 ----------- ----------- Total operating expenses 2,573,464 1,958,090 ----------- ----------- Income from operations 724,608 522,715 Interest expense (88,374) (44,466) Interest and other income 30,567 - ----------- ----------- Income before income tax 666,801 478,249 Provision for income taxes 270,711 107,470 ----------- ----------- Net income $ 396,090 $ 370,779 =========== =========== Net income per common share $ .13 $ .19 =========== =========== Weighted average common shares outstanding 3,150,000 2,000,000 See notes to financial statements. - 4 - 5 UNIDIGITAL INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED MAY 31, 1996 & 1995 (unaudited) 1996 1995 ---- ---- REVENUES Net sales $ 8,557,322 $ 6,203,066 EXPENSES Cost of sales 3,852,896 2,809,151 Selling general and administrative expenses 2,577,711 1,596,246 Principal stockholder/officers' compensation 381,484 562,201 ----------- ----------- Total operating expenses 6,812,091 4,967,598 ----------- ----------- Income from operations 1,745,231 1,235,468 Interest expense (231,591) (130,184) Interest and other income 61,399 - ----------- ----------- Income before income tax 1,575,039 1,105,284 Provision for income taxes (including nonrecurring provision relating to termination of subchapter S status on February 1, 1996) 906,711 262,470 ----------- ----------- Net income $ 668,328 $ 842,814 =========== =========== Net income per common share $ .27 $ .42 =========== =========== Weighted average common shares outstanding 2,472,000 2,000,000 Pro forma income data: Historical income before income taxes $ 1,575,039 Pro forma adjustment for principal stockholder/officers' compensation 72,769 ----------- Pro forma income before income taxes 1,647,808 Pro forma income taxes 687,000 ----------- Pro forma net income $ 960,808 =========== Pro forma income per common share $ .39 =========== See notes to financial statements. - 5 - 6 UNIDIGITAL INC. CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED MAY 31, 1996 AND 1995 (unaudited) 1996 1995 ---- ---- Cash Flows From Operating Activities: Net income $ 668,328 $ 842,814 ----------- ----------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 651,915 366,237 Provision for deferred income taxes 362,272 92,530 Provision for doubtful accounts 41,035 54,745 Loss on sale of equipment 1,181 - Changes in assets and liabilities- Accounts receivable (800,634) (1,283,155) Prepaid expenses and other current assets (304,193) (80,232) Other assets (18,153) (725) Accounts payable and accrued expenses 436,301 211,419 Income taxes payable 124,164 195,576 ----------- ----------- Total adjustments 493,888 (443,605) ----------- ----------- Net cash provided by operating activities 1,162,216 399,209 ----------- ----------- Cash Flows from Investing Activities: Additions to property and equipment (898,530) (356,503) Proceeds from sale of equipment 9,234 - Business acquisitions (85,000) (348,591) ----------- ----------- Net cash used in investing activities (974,296) (705,094) ----------- ----------- Cash Flows from Financing Activities: Net proceeds from lines of credit and other bank borrowings 500,871 423,208 Proceeds from long-term bank borrowings 250,000 - Payments of long-term bank borrowings (15,834) - Payments on capital lease obligations (682,894) (381,608) Payments of notes for cancellation of options and acquisition of business (250,250) - Stockholder loans 190,172 Dividends paid (750,000) - Proceeds from sale of common stock, net of issuance costs 5,353,755 - ----------- ----------- Net cash provided by financing activities 4,405,648 231,772 ----------- ----------- Effect of Foreign Exchange Rates on Cash: (14,407) 6,472 ----------- ----------- NET INCREASE (DECREASE) IN CASH/CASH EQUIVALENTS 4,579,161 (67,641) Cash and cash equivalents at beginning of period 186,802 167,420 ----------- ----------- Cash and cash equivalents at end of period $ 4,765,963 $ 99,779 =========== =========== Supplemental disclosures: Interest paid $ 214,622 $ 147,919 =========== =========== Income taxes paid $ 349,036 $ 16,521 =========== =========== Noncash transactions: Equipment acquired under capital lease obligations $ 1,013,849 $ 569,018 =========== =========== Notes payable issued as dividends $ 498,000 =========== See notes to financial statements - 6 - 7 UNIDIGITAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1996 1. Organization and Basis of Presentation Unidigital Inc. ("Unidigital"), a Delaware corporation, was organized on October 18, 1995 for the purpose of becoming the parent holding company for Linographics Corporation ("Linographics") and Elements (UK) Limited ("Elements") (collectively, the "Predecessor Companies") and Linographics (Delaware) Corporation ("Linographics Delaware"). Unless the context requires otherwise, all references herein to the "Company" mean collectively, Unidigital, the Predecessor Companies, Linographics Delaware and TX Corporation. Unidigital conducts operations through three wholly owned subsidiaries, Linographics, Elements and Linographics Delaware. Linographics engages in the digital prepress business in New York City. Elements engages in the digital prepress business and through its wholly-owned subsidiary, Regent Communications Limited ("Regent") operates the document production and digital print business in London. Linographics Delaware owns and operates the San Francisco based operations ("TX Corporation"). See Note 2. On February 6, 1996 Unidigital completed an initial public offering (the "IPO") of 1,000,000 shares of Common Stock at a price of $6.00 per share, and on February 21, 1996 the underwriters exercised their overallotment option for the purchase of an additional 150,000 shares. Unidigital realized net proceeds of approximately $5,500,000. The Company used a portion of the net proceeds of the IPO to repay certain indebtedness under the Company's credit facilities and for general operational and working capital purposes. The Company intends to use the balance of such funds for acquisitions of businesses and working capital. The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with Item 310(b) of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the unaudited interim consolidated financial statements contain all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position of the Company at May 31, 1996 and its results of operations and the cash flows for the periods presented. Results for the interim periods are not necessarily indicative of results to be expected for the full year. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Registration Statement on Form SB-2 (File No. 33-99656) declared effective February 1, 1996. - 7 - 8 UNIDIGITAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. Recent Developments On March 14, 1996 Linographics Delaware purchased certain assets for $170,000 and assumed certain liabilities aggregating $140,500 of TX Unlimited, Inc. ("TX"), a San Francisco, California based graphics arts company. The purchase price included an $85,000 payment at closing and the balance of $85,000 which is payable in eight quarterly installments of $11,600, which includes interest at 6% per annum. The acquisition was recorded using the purchase method of accounting. The assets, liabilities and operations of TX are not material in relation to those of the Company. 3. Foreign Currency Translation The portion of the Company's financial statements relating to the United Kingdom operations are translated into U.S. Dollars using period end exchange rates (One Pound = $1.55 at August 31, 1995 and $1.55 at May 31, 1996 for balance sheet accounts) and average exchange rates (One pound = $1.58 for the year ended August 31, 1995; and $1.53 and $1.61 for the three months ended May 31, 1996 and 1995, respectively; and $1.54 and $1.59 for the nine months ended May 31, 1996 and 1995, respectively. The translation difference is reflected as a separate component of stockholders' equity. 4. Termination of Subchapter S Status and Related Income Tax Matters Linographics previously filed federal and state income tax returns under Subchapter S of the Internal Revenue Code in which its income was reportable by and taxed to its stockholders. As a result of the IPO, the Subchapter S status was necessarily terminated effective February 1, 1996. Accordingly, $367,000 of federal, state and local income taxes, applicable to temporary differences in the recognition of income and expenses for financial accounting and income tax reporting purposes existing at February 1, 1996, has been recorded and charged to operations for the nine month period ended May 31, 1996. These nonrecurring charges result solely from the termination of the Subchapter S status in the United States. Subsequent to February 1, 1996 income taxes on U.S. earnings are taxed at a combined effective tax rate of approximately 46.5%, whereas previously, only local income taxes on U.S. earnings were payable at the corporate level. 5. Stockholders' Equity Common Stock The Company has authorized 10,000,000 shares of Common Stock, $.01 par value, of which 3,150,000 shares were issued and outstanding at May 31, 1996. The Company has reserved for issuance i) 300,000 shares of Common Stock upon exercise of options granted or to be granted under its Stock Option Plans and ii) 80,000 shares of Common Stock upon exercise of warrants issued to Burnham Securities Inc., the managing underwriter of the Company's IPO. In addition, the Company has granted options to purchase 50,000 shares of Common Stock at an exercise price of $6.00 per share as of May 31, 1996. - 8 - 9 UNIDIGITAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 5. Stockholders' Equity (continued) Preferred Stock The Company has authorized 5,000,000 shares of Preferred Stock, $.01 par value, which may be issued by the Board of Directors on such terms and with such rights, preferences and designations as the Board of Directors may determine without further action by the Company's stockholders. There were no shares of Preferred Stock issued, or approved for issuance as of May 31, 1996. 6. Per Share Data Net income per common share is based on net income for the period divided by the weighted average number of common shares outstanding. Average common shares outstanding includes 3,150,000 shares of Common Stock. 7. Pro Forma Income Data The pro forma net income and income per share data on the consolidated statement of operations for the nine months ended May 31, 1996 presents the results that would have been reported for this period based upon (i) the current level of compensation of the Company's two principal stockholder/officers pursuant to employment agreements effective January 1, 1996 and (ii) income taxes on United States earnings based on a combined effective tax rate of 46.5% as if these had occurred throughout the nine month period. See Note 4. 8. Other Pro Forma Information The Company's results of operations include those of Regent which was acquired on March 1, 1995 using the purchase method of accounting. Unaudited pro forma results of operations for the nine months ended May 31, 1995, assuming the acquisition of Regent on September 1, 1994, are as follows: Net sales $6,978,125 ========== Income before taxes 890,160 ========== Net income 992,938 ========== Pro forma net income per common share $ .50 ========== Common shares outstanding 2,000,000 The operations of TX prior to the acquisition on March 14, 1996 have not been included in the above pro forma information since they were not material. - 9 - 10 PART I - FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis or Plan of Operation. The Company provides a full range of digital prepress services to the professional graphic design industry in the New York City, San Francisco and London markets. Digital prepress services involve preparing an image for reproduction by any of several printing processes. Using advanced computer technology, the Company provides the imaging and reproduction services required by graphic designers in connection with the creation of designs for their clients, which include end-users of printed media such as consumer product packaging, marketing and advertising materials. The Company's services afford graphic designers the ability to make numerous changes and enhancements in their designs throughout the design approval process with shorter turnaround times and at reduced costs as compared to traditional prepress methods. Once a design is approved, the Company provides the vital technological and service interface between graphic designers and traditional commercial volume printers necessary to translate the approved design into the format required for volume printing. The Company's services also include digital scanning, document creation services such as typesetting and short run digital printing. Financial Condition at May 31, 1996: Working Capital $ 3,336,004 Total Assets 13,724,451 Stockholders' Equity 7,061,685 Results of Operations Comparison of Three Months Ended May 31, 1996 and 1995 Net sales for the three months ended May 31, 1996 increased 32.9% to $3,298,072 compared to $2,480,805 for the three months ended May 31, 1995. These increases are principally due to volume growth in both the U.S. and London operations. Net sales for the Company's United Kingdom operations for the three months ended May 31, 1996 increased 38.3% to $1,776,421 compared to $1,284,684 for the three months ended May 31, 1995. Net sales for the Company's U.S. operations for the three months ended May 31, 1996 increased 27.2% to $1,521,651 compared to $1,196,121 for the three months ended May 31, 1995. Cost of sales for the three months ended May 31, 1996 increased 25.1% to $1,422,973 compared to $1,137,598 for the three months ended May 31, 1995. These increases in production costs are directly related to the increase in revenues. Cost of sales for the Company's United Kingdom operations for the three months ended May 31, 1996 increased 44.1% to $881,747 compared to $611,735 for the three months ended May 31, 1995 primarily associated with the increase in sales and Regent's digital print business which commenced operations in the first quarter of fiscal 1996 and the associated higher cost of sales related to digital print. Cost of sales for the Company's U.S. operations for the three months ended May 31, 1996 increased 2.9% to $541,226 compared to $525,863 for the three months ended May 31, 1995. - 10 - 11 Selling general and administrative expenses for the three months ended May 31, 1996 increased 61.4% to $1,041,776 compared to $645,291 for the three months ended May 31, 1995. These increases are primarily attributable to variable expenses commensurate with increased revenues. Selling general and administrative expenses for the Company's U.K. operations for the three months ended May 31, 1996 increased 18.5% to $419,256 compared to $353,698 for the three months ended May 31, 1995. Selling general and administrative expenses for the Company's U.S. operations for the three months ended May 31, 1996 increased 113% to $622,520 compared to $291,593 for the three months ended May 31, 1995. This growth in U.S. costs primarily relates to additional administrative personnel, costs associated with Unidigital which didn't exist in 1995 and the transition of customer accounts (from non-commission) to commissioned sales personnel. Principal stockholder/officers' compensation for the three months ended May 31, 1996 decreased 37.9% to $108,715 compared to $175,201 for the three months ended May 31, 1995. This decrease is due to the implementation of employment contracts with the Company's two principal stockholders/officers. Income from operations for the three months ended May 31, 1996 increased 38.6% to $724,608 compared to $522,715 for the three months ended May 31, 1995 primarily attributable to increased sales. Net interest expense for the three months ended May 31, 1996 was $88,374 compared to $44,466 for the three months ended May 31, 1995. This increase is due to higher borrowings under the Company's combined credit facilities and increase in capital leases, offset in part by interest income relative to the Company's IPO proceeds. Income tax expense for the three months ended May 31, 1996 increased to $270,711 compared to $107,470 for the three months ended May 31, 1995. The Company currently pays Federal, state and local income tax at the corporate level for its U.S. operations where previously Linographics paid only local corporate income tax on the U.S. operations as a result of its Subchapter S corporation status. Net income for the three months ended May 31, 1996 increased 6.8% to $396,090 compared to $370,779 for the three months ended May 31, 1995 due to the factors described above. Comparison of Nine Months Ended May 31, 1996 and 1995 Net sales for the nine months ended May 31, 1996 increased 38% to $8,557,322 compared to $6,203,066 for the nine months ended May 31, 1995. These increases are principally due to volume growth in both the U.S. and London operations. Net sales for the Company's United Kingdom operations for the nine months ended May 31, 1996 increased 58.7% to $4,474,685 compared to $2,820,328 for the nine months ended May 31, 1995. This growth is due, in part, to the inclusion of a full nine months of operations for Regent compared to three months (March 1, 1995 through May 31, 1995) of operations during which it was owned by the Company. Net sales for the Company's U.S. operations for the nine months ended May 31, 1996 increased 20.7% to $4,082,637 compared to $3,382,738 for the nine months ended May 31, 1995. - 11 - 12 Cost of sales for the nine months ended May 31, 1996 increased 37.2% to $3,852,896 compared to $2,809,151 for the nine months ended May 31, 1995. These increases are commensurate with the increase in revenues and the inclusion of Regent. Cost of sales for the Company's United Kingdom operations for the nine months ended May 31, 1996 increased 72.4% to $2,211,954 compared to $1,283,069 for the nine months ended May 31, 1995 principally due to the inclusion of Regent and the associated higher costs related to digital print. Cost of sales for the Company's U.S. operations for the nine months ended May 31, 1996 increased 7.5% to $1,640,942 compared to $1,526,082 for the nine months ended May 31, 1995. Selling general and administrative expenses for the nine months ended May 31, 1996 increased 61.5% to $2,577,711 compared to $1,596,246 for the nine months ended May 31, 1995. These increases are due to variable expenses commensurate with increased revenues and additional costs associated with the Regent acquisition. Selling general and administrative expenses for the Company's U.K. operations for the nine months ended May 31, 1996 increased 47.7% to $1,180,390 compared to $799,432 for the nine months ended May 31, 1995. Selling general and administrative expenses for the Company's U.S. operations for the nine months ended May 31, 1996 increased 75.4% to $1,397,321 compared to $796,814 for the nine months ended May 31, 1995. This growth in U.S. costs primarily relates to additional administrative personnel, costs associated with Unidigital which didn't exist in 1995 and the transition of customer accounts (from non-commission) to commissioned sales personnel. Principal stockholder/officers' compensation for the nine months ended May 31, 1996 decreased 32.1% to $381,484 compared to $562,201 for the nine months ended May 31, 1995. This decrease is due to the implementation of employment agreements with the two principal stockholders/officers. Income from operations for the nine months ended May 31, 1996 increased 41.3% to $1,745,231 compared to $1,235,468 for the nine months ended May 31, 1995 primarily attributable to increased sales and the inclusion of Regent sales for the full nine months ended May 31, 1996 compared to the three months it was owned by the Company in 1995 (March 1, 1995 through May 31, 1995). Net interest expense for the nine months ended May 31, 1996 increased 77.9% to $231,591 compared to $130,184 for the nine months ended May 31, 1995. This increase is due to higher borrowings under the Company's combined credit facilities and increases in capital leases offset in part by interest income relative to the Company's IPO proceeds. Income tax expense for the nine months ended May 31, 1996 increased to $906,711 compared to $262,470 for the nine months ended May 31, 1995. This increase is principally attributable to a nonrecurring charge relating to the termination of Linographics' Subchapter S corporation status. The Company currently pays Federal, state and local income tax at the corporate level for its U.S. operations where previously Linographics paid only local corporate income tax on the U.S. operations as a result of its Subchapter S corporation status. Net income for the nine months ended May 31, 1996 decreased 20.7% to $668,328 compared to $842,814 for the nine months ended May 31, 1995 due to the factors described above. - 12 - 13 Liquidity and Capital Resources Cash Flow The Company's principal source of funds have been the net proceeds from its February 1, 1996 IPO of $5,500,000 and cash flow from operations. Cash flow from operations for the nine months ended May 31, 1996 and 1995 were $1,162,216 and $399,209, respectively. Cash used in investing activities for the nine months ended May 31, 1996 and 1995 was $974,296 and $705,094, respectively. Cash flow provided by financing activities for the nine months ended May 31, 1996 and 1995 was $4,405,648 and $231,772, respectively. Bank Credit Facilities The Company maintains borrowing arrangements with banks in both New York and London. The Company has combined credit facilities with its New York bank for its U.S. operations, aggregating $1,300,000 which consists of i) five year $300,000 term loans, and ii) a $1,000,000 line of credit. The term loans bear interest at either the bank's prime rate plus 1/2% or at a fixed rate determined at the time of borrowing, at the Company's option. The line of credit bears interest at prime plus 1/2%. At May 31, 1996 the Company's term loan balance was $234,166 bearing interest at 9% and $75,000 was outstanding under the line of credit. On June 27, 1996 the Company prepaid $137,500 of its term loans. The credit facilities contain covenants which require the Company to maintain certain tangible net worth and debt service coverage ratios based on the combined assets of the U.S. parent and subsidiaries. At May 31, 1996 the Company was in compliance with the covenants under the credit facilities. The credit facilities, which are renewable annually each December, are secured by a first priority lien on all of the assets of Linographics. The Company's London operations have combined lines of credit of $697,500 (450,000 pounds) for working capital purposes which are renewable annually. At May 31, 1996 the Company's outstanding balance under the line of credit is approximately $703,000 (453,000 pounds) bearing interest at 9.25%. At May 31, 1996 the Company was in compliance with the covenants under the lines of credit. Additionally, at May 31, 1996, the Company borrowed $542,500 (350,000 pounds) from its bank which was collateralized by accounts receivable approximating the same amount. Proposed Acquisition On June 5, 1996 the Company signed a letter of intent to acquire assets and assume certain liabilities of Cardinal Communications Group, Inc. and its affiliate, C-Max Graphics, Inc. (hereinafter, collectively "Cardinal"). Cardinal provides desk top, prepress, design and printing services primarily to major corporate accounts and publishing companies in the New York metropolitan area. The Company is currently performing due diligence and the transaction is subject to negotiation based upon the results of such due diligence procedures. - 13 - 14 Inflation, Foreign Currency Fluctuations and Interest Rate Changes Although the Company cannot accurately determine the precise effect thereof on its operations, it does not believe inflation, currency fluctuations or interest rate changes have historically had a material effect on revenues, sales or results of operations. Inflation, currency fluctuations and changes in interest rates have however, at various times, had significant effects on the economies of the United States and United Kingdom and could adversely impact the Company's revenues, sales and results of operations in the future. If there is a material adverse change in the relationship between the United Kingdom Pound Sterling and the United States Dollar, such change would adversely affect the results of the Company's United Kingdom operations as reflected in the Company's financial statements. The Company has not hedged its exposure with respect to this currency risk, and does not expect to do so in the future, since it does not believe that it is economically beneficial. Forward - Looking Information Except for the historical information contained in this Form 10-QSB, certain information herein contains forward looking information. The matters referred to in such statements could be affected by uncertainties involved in the Company's business, including without limitation the effect of economic and market conditions. Based upon the Company's current level of operations, management believes that cash flow from operations and existing cash on hand, will be adequate to meet the anticipated future requirements for working capital, capital expenditures and scheduled payments of interest and principal under its credit facilities and capital lease obligations. - 14 - 15 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits None (b) Form 8-K There were no reports filed on Form 8-K during the quarter ended May 31, 1996. - 15 - 16 UNIDIGITAL INC. SIGNATURES 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. UNIDIGITAL INC. /s/ William E. Dye -------------------------------------- William E. Dye President, Chief Executive Officer and Chief Financial Officer (Principal Executive, Financial and Accounting Officer) July 12, 1996 - 16 -