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FORM 10-QSB
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 1996
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 January 10, 1997 is 3,189,216 shares.
Transitional Small Business Disclosure Format. Yes No X .
--- ---
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UNIDIGITAL INC.
FORM 10-QSB
INDEX
10-QSB PART AND ITEM NO. PAGE NO.
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PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Consolidated Balance Sheets as of November 30, 1996
(unaudited) and August 31, 1996 3
Consolidated Income Statements for the Three Months
Ended November 30, 1996 and 1995 (unaudited) 4
Consolidated Statements of Cash Flows for the Three
Months Ended November 30, 1996 and 1995 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION. 8
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 12
SIGNATURES 13
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PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNIDIGITAL INC.
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, AUGUST 31,
1996 1996
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(unaudited)
ASSETS
Cash and cash equivalents $ 2,953,914 $ 4,145,514
Accounts receivable, net of allowance of
$210,926 and $200,814, respectively 5,179,609 3,207,857
Prepaid expenses and other current assets 1,187,171 835,129
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Total current assets 9,320,694 8,188,500
Property, plant and equipment, net 9,272,252 8,594,985
Intangible assets, net 890,330 797,213
Other assets 47,457 42,628
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Total Assets $19,530,733 $ 17,623,326
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LIABILITIES & STOCKHOLDERS' EQUITY
Due to banks $ 2,626,178 $ 1,741,973
Current portion of long term debt 79,072 77,800
Current portion of capital lease obligations 1,473,811 1,476,076
Accrued payments for acquisition of
business and cancellation of options 50,475 202,930
Accounts payable and accrued expenses 1,862,842 1,792,973
Income taxes payable 387,618 216,366
Loans and notes payable to stockholders 362,726 361,039
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Total current liabilities 6,842,722 5,869,157
Non-current portion of long term debt 1,868,009 1,898,865
Non-current portion of capital lease obligations 2,417,804 1,974,033
Deferred income taxes 480,524 516,596
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Total liabilities 11,609,059 10,258,651
Stockholders' equity:
Preferred stock, par value $.01; 5,000,000 shares
authorized; none issued & outstanding -- --
Common stock, par value $.01; 10,000,000 shares
authorized; 3,189,216 shares issued & outstanding 31,892 31,892
Additional-paid-in-capital 5,459,841 5,462,153
Retained earnings 2,359,072 1,897,252
Cumulative foreign translation adjustment 70,869 (26,622)
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Total stockholders' equity 7,921,674 7,364,675
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Total Liabilities and Stockholders' Equity $19,530,733 $ 17,623,326
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See notes to financial statements.
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UNIDIGITAL INC.
CONSOLIDATED INCOME STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30,
(UNAUDITED)
1996 1995*
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REVENUES
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Net sales $ 5,227,719 $ 2,717,822
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EXPENSES
Cost of sales 2,650,103 1,188,485
Selling, general and administrative expenses 1,422,034 761,694
Corporate expenses 387,704 155,000
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Total operating expenses 4,459,841 2,105,179
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Income from operations 767,878 612,643
Interest expense (134,277) (60,884)
Interest and other income 40,694 --
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Income before income tax 674,295 551,759
Provision for income tax 212,475 116,000 (a)
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Net Income $ 461,820 $ 435,759
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Net income per share $ .14 $ .22
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Weighted average common shares outstanding 3,189,216 2,000,000
See notes to financial statements.
*Combined Predecessors
(a) U.S. operations taxed as a Subchapter S Corporation, no provision for
federal income tax.
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UNIDIGITAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED NOVEMBER 30,
(UNAUDITED)
1996 1995*
---- -----
Operating Activities:
Net income $ 461,820 $ 435,759
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Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortization 424,466 194,208
Provision for deferred income taxes (39,903) 12,000
Provision for bad debts 10,112 4,600
Changes in assets and liabilities:
Accounts receivable (1,819,354) (397,448)
Prepaid expenses and other current assets (321,343) (136,843)
Other assets (4,829) (19,730)
Accounts payable and accrued expenses 3,081 220,438
Income taxes payable 147,454 42,372
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Total adjustments (1,600,316) (80,403)
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Net cash (used in) provided by operating activities (1,138,496) 355,356
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Investing Activities:
Additions to property and equipment (116,532) (98,591)
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Net cash used in investing activities (116,532) (98,591)
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Financing Activities:
Proceeds from due to banks and long-term debt 783,047 174,681
Payments of due to banks and long-term debt (29,584) --
Payments of capital lease obligations (549,510) (173,442)
Payments of notes for cancellation of options
and acquisition of business (162,490) (163,968)
Shareholder loans/(repayments) (5,859) --
IPO issuance costs (2,312) --
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Net cash (provided by) used in financing activities 33,292 (162,729)
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Effect of Foreign Exchange Rates on Cash 30,136 (12,510)
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NET INCREASE/(DECREASE) IN CASH/CASH
EQUIVALENTS (1,191,600) 81,526
Cash and cash equivalents at beginning of period 4,145,514 186,802
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Cash and cash equivalents at end of period $ 2,953,914 $ 268,328
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Supplemental disclosures:
Interest paid $ 122,494 $ 58,584
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Income taxes paid -- $ 61,362
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Non cash transactions:
Equipment acquired under
capital lease obligations $ 878,116 $ 31,661
=========== =========
See notes to financial statements
* Combined Predecessors
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UNIDIGITAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996
1. ORGANIZATION AND BASIS OF PRESENTATION
Unidigital Inc. ("Unidigital"), a Delaware corporation, is the parent holding
company for Linographics Corporation ("Linographics") and Elements (UK) Limited
("Elements") (collectively the "Predecessor Companies"), Linographics (Delaware)
Corporation ("Linographics Delaware") and Unidigital/Cardinal Corporation
("Cardinal"). All references herein to the "Company" mean collectively
Unidigital, the Predecessor Companies, Linographics Delaware and Cardinal unless
the context requires otherwise.
Unidigital conducts operations through four wholly-owned subsidiaries.
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, operates the document production and digital print business
in London. Linographics Delaware owns and operates the San Francisco prepress
business. Cardinal engages in the digital prepress and digital printing business
services to advertising agencies and corporations in the New York City area.
The accompanying unaudited 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 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 current financial position of the Company and its results of
operations and the cash flows for the periods presented. Results for the interim
period(s) 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
Annual Report on Form 10-KSB for the year ended August 31, 1996.
2. RECENT DEVELOPMENTS
On November 27, 1996, the Company amended its Unidigital/Cardinal Corporation
$1.4 million long-term loan extending the maturity until January 31, 1998.
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 = $1.68 at November 30, 1996 and $1.56 at August 31, 1996) and average
exchange rates (One Pound = $1.62 for the three months ended November 30, 1996
and $1.57 for the three months ended November 30, 1995). The translation
difference is reflected as a separate component of stockholders' equity.
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4. STOCKHOLDERS' EQUITY
Common Stock
The Company has authorized 10,000,000 shares of Common Stock, $.01 par value, of
which 3,189,216 shares were issued and outstanding at November 30, 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. The
underwriter's warrants are exercisable at a price of $7.20 per share for a
period of four years commencing February 1, 1997.
In addition, the Company has granted options to purchase 209,667 shares of
common stock at exercise prices ranging from $5.50 to $6.75.
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 November 30, 1996.
5. PER SHARE DATA
Income per common share is based on net income for the period(s) divided by the
weighted average number of common shares outstanding. Average common shares
outstanding includes 3,189,216 shares of Common Stock.
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PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The Company provides a full range of digital prepress and digital printing
services to the corporate and professional graphic arts 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 artists in connection with the creation of designs
for their clients, which includes end-users of printed media such as consumer
product packaging, marketing and advertising materials. The Company's services
afford graphic artists the ability to make numerous changes and enhancements in
their designs throughout the design and approval process with shorter turnaround
times and at reduced costs compared to traditional prepress methods. Once a
design is approved, the Company provides the vital technological and service
interface between graphic artists and traditional commercial volume printers
necessary to translate the approved design into the format required for volume
printing. The Company services also include scanning, document creation services
such as typesetting, and short-run digital printing.
Financial condition at November 30, 1996:
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Working Capital $ 2,477,972
Total Assets $ 19,530,733
Stockholders' Equity $ 7,921,674
Results of Operations
The following analysis of the results of operations includes the Company and its
wholly-owned subsidiaries for the three months ended November 30, 1996. The
Company's results include the first full quarter of the Cardinal operations,
which were acquired in an asset acquisition through a wholly-owned subsidiary on
August 9, 1996. The Cardinal acquisition expands the Company's digital prepress
and digital print operations in the New York City and surrounding area. For the
three months ended November 30, 1995, the combined results of operations include
Linographics Corporation, Elements and Regent. All intercompany transactions
have been eliminated.
Comparison of Three Months Ended November 30, 1996 and November 30, 1995
Net Sales. Net sales for the three months ended November 30, 1996 increased 92%
to $5,227,719 compared to $2,717,822 for the three months ended November 30,
1995. The United States sales increased 123% from $1,355,453 to $3,027,175 due
to the Cardinal and Linographics Delaware acquisitions, offset in part by
decreases in revenue at the Linographics operations due to personnel turnover.
The United Kingdom sales in increased 62% from $1,362,369 to $2,200,544
attributable to increases in the Company's short-run digital print and prepress
operations.
Cost of Sales. Cost of sales for the three months ended November 30, 1996
increased 123% to $2,650,103 compared to $1,188,485 for the three months ended
November 30, 1995. The United States cost of sales increased 191% from
$507,030 to $1,473,640 primarily attributable to the Cardinal acquisition and
depreciation expense relative to new capital leases at each of the Company's
United States operating subsidiaries. The United Kingdom cost of sales
increased 73% from $681,455 to $1,176,463 due to increased sales and higher
production costs associated with digital print and depreciation expenses
relative to the Company's investment in digital print equipment capital leases.
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Cost of sales as a percentage of net sales increased from 44% for the three
months ended November 30, 1995 to 51% for the three months ended November 30,
1996 due to the increase in the Company's short-run digital print operations in
the United States and United Kingdom and the associated higher production costs.
Digital print operating margins are generally lower than digital prepress
operating margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended November 30, 1996 increased
87% to $1,422,034 compared to $761,694 for the three months ended November 30,
1995. The United States selling, general and administrative expenses increased
147% primarily attributable to the Cardinal acquisition, offset in part by a
decrease in selling, general and administrative expenses at Linographics due to
a decline in sales. The United States selling, general and administrative
expenses as a percentage of sales increased from 28% to 31% due to an overall
increase in sales and higher commissions with digital print. The United Kingdom
selling, general and administrative expenses increased commensurate with
sales; however, as a percentage of net sales, selling, general and
administrative expenses decreased from 28% to 22%.
Selling, general and administrative expenses as a percentage of net sales
decreased from 28% for the three months ended November 30, 1995 to 27% for the
three months ended November 30, 1996 for the reasons discussed above.
Corporate Expenses. Corporate expenses for the three months ended November 30,
1996 increased 150% to $387,704 compared to $155,000 for the three months ended
November 30, 1995 due to additional management and administrative personnel and
costs associated with Unidigital which did not exist in 1995. Corporate expenses
of Unidigital include financial and administrative personnel, investor
relations, legal and other professional fees and facilities cost.
Income From Operations. Income from operations for the three months ended
November 30, 1996 increased 25% to $767,878 compared to $612,643 for the three
months ended November 30, 1995 due to increased sales, offset in part by reduced
margins and increased selling, general and administrative expenses.
Interest Expense. Interest expense for the three months ended November 30, 1996
increased 121% to $134,277 compared to $60,884 for the three months ended
November 30, 1995. This increase is primarily attributable to the Company's
expanded United States credit facilities and capital leases assumed as part of
the Cardinal acquisition.
Interest and Other Income. Interest and other income, consisting primarily of
interest income associated with the Company's Initial Public Offering proceeds,
was $40,694 for the three months ended November 30, 1996.
Income Taxes. Income taxes for the three months ended November 30, 1996
increased 83% to $212,475 compared to $116,000 for the three months ended
November 30, 1995. The Company currently pays Federal, state and local income
tax for its U.S. operations where previously Linographics paid only local
corporate income tax as a result of its Subchapter S Corporation status.
Net Income. Net income for the three months ended November 30, 1996 increased 6%
to $461,820 compared to $435,759 for the three months ended November 30, 1995
due to the factors described above.
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Liquidity and Capital Resources
The Company's principal source of funds has been cash flow from operations and
working capital borrowings under its credit facilities. Cash (used in) /provided
by operations for the three months ended November 30, 1996 and 1995 was
($1,138,496) and $355,356, respectively. Cash used in operations for the three
months ended November 30, 1996 is primarily attributable to three months of
sales from the August 9, 1996 Cardinal acquisition. Cash used in investing
activities for the three months ended November 30, 1996 and 1995 was $116,532
and $98,591, respectively. Cash flows (provided by)/used in financing activities
for the three months ended November 30, 1996 and 1995 was $33,292 and
($162,729), respectively.
The Company maintains borrowing arrangements with banks in New York and London
which include term loans and lines of credits which are renewable annually. The
combined United States lines of credit aggregate $2,350,000 and the combined
United Kingdom lines of credit aggregate approximately $1,404,000. The Company's
term loans, exclusively in the United States, aggregate $1,700,000. At November
30, 1996, $1,550,000 in term loans are outstanding.
The United States lines of credit bear interest at prime plus 1/2% and the
United Kingdom lines of credit bear interest at 2.25% over the Bank's Base Rate,
as defined, for borrowings up to 600,000 Pound Sterling and bear interest at
2.75% over the Bank's Base Rate for borrowings in excess of such amount. The
term loans, excluding the Cardinal $1,400,000 term loan which is at prime, bear
interest at, the Company's discretion of, either the bank's prime rate plus
1/2% or at a fixed rate determined at the time of borrowing.
The United States credit facilities contain covenants limiting borrowings up to
specified amounts of accounts receivable aged 90 days or less. The credit
facilities are collateralized by the assets of Linographics, Linographics
(Delaware) and Cardinal. Unidigital is a guarantor on all bank debts of the
United States operating subsidiaries.
The United Kingdom credit facilities consist of a combined overdraft facility
relative to Elements and Regent and contain covenants limiting borrowings up to
specified amounts of accounts receivable aged 120 days or less and guaranteed by
Unidigital Inc. for the principal amount of 500,000 pounds.
At November 30, 1996, the Company was in compliance with all covenants under its
credit facilities.
The Company expects that cash flow from operations will be sufficient to fund
its capital lease obligations, debt service payments under its credit
facilities, capital expenditures and operations for the foreseeable future. The
Company may require additional financing to consummate future acquisitions.
There can be no assurance that the Company will be able to secure additional
financing.
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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 may contain 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 expects that future cash flow from operations will be sufficient to
meet the anticipated requirements for working capital, capital expenditures and
scheduled payments of interest and principal under its credit facilities and
capital lease obligations.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On or about November 21, 1996, Cardinal was named as a defendant in an
action (the "Action") brought by Phoenixcor, Inc. ("Phoenixcor"). In the Action,
Phoenixcor filed an order to show cause for replevin with temporary restraining
order in the Supreme Court of the State of New York, County of New York. On or
about December 24, 1996 an order of replevin and preliminary injunction was
entered against Cardinal in the Action. Insofar as it relates to Cardinal, the
Action relates to, among other matters, Cardinal's alleged failure to fully
assume the obligations of Cardinal Communications Group, Inc. under certain
equipment leases (the "Leases") acquired in connection with the Cardinal
acquisition, Cardinal's alleged default under the Leases and Phoenixcor's
alleged right to possession of the leased equipment.
The Company denies the allegations asserted by Phoenixcor in the Action,
but has elected to settle the matter in order to avoid protracted litigation
with the resultant costs and management distractions. On or about January 9,
1997, the parties reached an agreement in principle pursuant to which the
Company has agreed to assume the obligations under the Leases and to retain
possession of the leased equipment in exchange for reduced monthly payments
under such Leases. The Company believes that the terms of the foregoing
settlement will not have an adverse effect on the Company's business, financial
condition or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
10.1 Line of Credit between Linographics Corporation and Chase
Manhattan Bank.
10.2 Line of Credit between Linographics (Delaware) Corporation and
Chase Manhattan Bank.
10.3 Line of Credit and term loan between Unidigital/Cardinal
Corporation and Chase Manhattan Bank.
(b) FORM 8-K
On September 4, 1996, the Company filed a Form 8-K disclosing a
change in the certifying accountants.
On October 15, 1996, the Company filed a Form 8-K/A containing
required financial statements and pro forma information relating to
the acquisition disclosed in its Form 8-K filed on August 19, 1996.
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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/ Kevin H. Rich
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Kevin H. Rich
Vice President & Chief Financial Officer
January 14, 1997
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