1
CONFORMED COPY
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 1997
Commission File No. 0-27664
UNIDIGITAL INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 13-3856672
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
20 West 20th Street, New York, New York 10011
(Address of Principal Executive Offices) (Zip Code)
(212) 337-0330
(Issuer's Telephone Number,
Including Area Code)
Check whether the Issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the Issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes: _X_ No:___
State the number of shares outstanding of each of the Issuer's classes
of common stock, as of April 7, 1997:
Class Number of Shares
- ----- ----------------
Common Stock, $.01 par value 3,243,243
Transitional Small Business Disclosure Format:
Yes: ___ No: _X_
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UNIDIGITAL INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements.....................................1
CONSOLIDATED BALANCE SHEETS
as at August 31, 1996 (audited)
and February 28, 1997 (unaudited)............................2
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Six Months Ended
February 28, 1997 and February 29, 1996
(unaudited)..................................................3
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended
February 28, 1997 and February 29, 1996
(unaudited)..................................................4
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (unaudited).......................................5
Item 2. Management's Discussion and Analysis or
Plan of Operation........................................10
Results of Operations........................................10
Liquidity, Capital Resources and Other Matters...............14
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders......17
Item 5. Other Information........................................17
Item 6. Exhibits and Reports on Form 8-K.........................18
SIGNATURES..............................................................20
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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UNIDIGITAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FEBRUARY 28, AUGUST 31,
1997 1996
----------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ........................... $ 2,458,704 $ 4,145,514
Accounts receivable (less allowance for doubtful
accounts of $233,058 and $200,814 at
February 28, 1997 and August 31, 1996, respectively) 5,322,473 3,207,857
Prepaid expenses and other current assets ........... 1,786,526 835,129
----------- ------------
Total current assets ............................. 9,567,703 8,188,500
Property, plant and equipment, net .................... 9,815,768 8,594,985
Intangible assets, net ................................ 951,494 797,213
Other assets .......................................... 54,047 42,628
----------- ------------
Total Assets ..................................... $20,389,012 $ 17,623,326
=========== ============
LIABILITIES
Current liabilities:
Due to banks ........................................ $ 1,497,375 $ 1,741,973
Current portion of long-term debt ................... 79,071 77,800
Current portion of capital lease obligations ........ 1,467,751 1,476,076
Accrued payments for acquisition
of business and cancellation of options ............ 24,442 202,930
Accounts payable and accrued expenses ............... 3,620,790 1,792,973
Income taxes payable ................................ 163,069 216,366
Loans and notes payable to stockholders ............. 364,604 361,039
----------- ------------
Total current liabilities ........................ 7,217,102 5,869,157
Non-current portion of long-term debt ................. 1,846,932 1,898,865
Non-current portion of capital lease obligations ...... 2,732,932 1,974,033
Deferred income taxes ................................. 473,582 516,596
----------- ------------
Total liabilities ................................ 12,270,548 10,258,651
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STOCKHOLDERS' EQUITY
Preferred stock -- authorized 5,000,000 shares,
$.01 par value each; none issued or ................. -- --
outstanding
Common stock -- authorized 10,000,000 shares,
$.01 par value each; 3,197,763 and 3,189,216 shares
issued and outstanding at February 28, 1997 and ..... 31,978 31,892
August 31, 1996, respectively
Additional paid-in capital ............................ 5,458,283 5,462,153
Retained earnings ..................................... 2,602,559 1,897,252
Cumulative foreign translation adjustment ............. 25,644 (26,622)
----------- ------------
Total stockholders' equity ....................... 8,118,464 7,364,675
----------- ------------
Total Liabilities and Stockholders' Equity ....... $20,389,012 $ 17,623,326
=========== ============
The Notes to Consolidated Financial Statements are made a part hereof.
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UNIDIGITAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED, SIX MONTHS ENDED,
------------------------------ -------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 29,
1997 1996 1997 1996
----------- ----------- ------------ -----------
Net sales ................................ $ 5,265,916 $ 2,541,428 $ 10,493,635 $ 5,259,250
----------- ----------- ------------ -----------
Cost of sales ............................ 2,735,523 1,241,438 5,385,626 2,429,923
Selling, general and
administrative expenses ............... 1,592,516 774,241 3,014,550 1,535,935
Corporate expenses* ...................... 342,110 117,769 729,814 272,769
----------- ----------- ------------ -----------
Total operating expenses ............ 4,670,149 2,133,448 9,129,990 4,238,627
----------- ----------- ------------ -----------
Income from operations .............. 595,767 407,980 1,363,645 1,020,623
Interest expense ......................... 164,462 82,333 298,739 143,217
Interest and other expenses/
(income) .............................. 47,077 (30,832) 6,383 (30,832)
----------- ----------- ------------ -----------
Income before income taxes ............... 384,228 356,479 1,058,523 908,238
----------- ----------- ------------ -----------
Income taxes (including $367,000
nonrecurring provision relating to
termination of Subchapter S status
on February 1, 1996) ................... 140,741 520,000 353,216 636,000
----------- ----------- ------------ -----------
NET INCOME (LOSS) ........................ $ 243,487 $ (163,521) $ 705,307 $ 272,238
=========== =========== ============ ===========
Net income (loss) per common share ....... $ 0.08 $ (0.07) $ 0.22 $ 0.13
=========== =========== ============ ===========
Weighted average common shares outstanding 3,192,065 2,265,934 3,190,641 2,132,967
=========== =========== ============ ===========
* For the three-month and six-month periods ended February 29, 1996, this line
item was referred to as "Principal stockholder/officers' compensation."
The Notes to Consolidated Financial Statements are made a part hereof.
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UNIDIGITAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED,
------------------------------
FEBRUARY 28, FEBRUARY 29,
1997 1996
----------- -----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
Cash flows from operating activities:
Net income ........................................... $ 705,307 $ 272,238
----------- -----------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization ...................... 884,584 392,956
Provision for deferred income taxes ................ (42,861) 366,000
Provision for doubtful accounts .................... 59,325 34,000
Loss on sale of equipment .......................... -- 1,967
Net changes in assets and liabilities:
Accounts receivable ............................... (2,124,397) (384,961)
Prepaid expenses and other current assets ......... (953,865) (104,987)
Other assets ...................................... (209,013) (13,203)
Accounts payable and accrued expenses ............. 1,831,800 455,377
Income taxes payable .............................. (51,269) 207,579
----------- -----------
Total adjustments ................................. (605,696) 954,728
----------- -----------
Net cash provided by operating activities ......... 99,611 1,226,966
----------- -----------
Cash flows from investing activities:
Additions to property and equipment ................... (464,125) (373,023)
Proceeds from sale of equipment ....................... -- 8,509
----------- -----------
Net cash used for investing activities ............ (464,125) (364,514)
Cash flows from financing activities:
Net proceeds from bank borrowings ..................... (295,241) 204,273
Payments on capital lease obligations ................. (903,654) (411,262)
Payments of notes for cancellation of options
and acquisition of business ......................... (178,383) (228,478)
Dividends paid ........................................ -- (750,000)
Net proceeds from public offering of common stock ..... -- 5,503,830
IPO issuance costs .................................... (4,214) --
Shareholder loans/(repayments) ........................ 4,008 --
Common Stock issued ................................... 430 --
----------- -----------
Net cash (used in) provided by financing activities (1,377,054) 4,318,363
----------- -----------
Effect of foreign exchange rates on cash ................ 54,758 5,772
----------- -----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS ........................................ (1,686,810) 5,186,587
Cash and cash equivalents -- beginning of period ........ 4,145,514 186,802
----------- -----------
Cash and cash equivalents -- end of period .............. $ 2,458,704 $ 5,373,389
=========== ===========
Supplemental disclosures:
Interest paid ......................................... $ 225,102 $ 132,917
=========== ===========
Income taxes paid ..................................... $ 563,746 $ 60,911
=========== ===========
Noncash transactions:
Equipment acquired under capital lease obligations .... $ 1,570,875 $ 231,052
=========== ===========
Notes payable issued as dividends ..................... $ -- $ 498,000
=========== ===========
The Notes to Consolidated Financial Statements are made a part hereof.
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UNIDIGITAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE A - BASIS OF PRESENTATION:
The information presented for February 28, 1997, and for the three-month
and the six-month periods ended February 28, 1997 and February 29, 1996, is
unaudited, but, in the opinion of the Company's management, the accompanying
unaudited consolidated financial statements contain all adjustments (consisting
only of normal recurring accruals) which the Company considers necessary for the
fair presentation of the Company's financial position as of February 28, 1997
and the results of its operations and its cash flows for the three-month and the
six-month periods ended February 28, 1997 and February 29, 1996.
The consolidated financial statements included herein have been prepared
by the Company in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-QSB and Rule 10-01
of Regulation S-X. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. These
consolidated financial statements should be read in conjunction with the
Company's audited financial statements for the year ended August 31, 1996, which
were included as part of the Company's Annual Report on Form 10-KSB.
The consolidated financial statements include the accounts of Unidigital
and its direct and indirect subsidiaries. All significant intercompany balances
have been eliminated.
Interim results are not necessarily indicative of results that may be
expected for the full fiscal year.
Unless the context requires otherwise, all references herein to
"Unidigital" mean Unidigital Inc. and all references to the "Issuer" or the
"Company" mean collectively, Unidigital, its wholly-owned subsidiaries and its
and their subsidiaries, affiliated companies and predecessors.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Business:
Unidigital Inc., a Delaware corporation, is the parent holding company
of five wholly-owned operating subsidiaries, Unidigital Elements (NY), Inc.,
formerly known as LinoGraphics Corporation ("Elements (NY)"), Elements (UK)
Limited ("Elements (UK)"), Unidigital Elements (SF), Inc., formerly known as
LinoGraphics (Delaware) Corporation ("Elements (SF)"), Unidigital/Cardinal
Corporation ("Cardinal"), and Unidigital/Boris Corporation
("Unidigital/Boris"). Elements (NY) engages in the on-demand print and prepress
business in New York City. Elements (UK) engages in the on-demand print and
prepress business and, through its wholly-owned subsidiary, Regent
Communications Limited (UK) ("Regent"), operates the document production and
digital print business in London. Elements (SF) owns and operates the San
Francisco
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UNIDIGITAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
on-demand prepress business and retouching studio. Cardinal engages in
the digital prepress and digital printing business services to advertising
agencies and corporations in the New York City area. Unidigital/Boris engages
in the business of digital imaging and photographic processing in the Boston
area.
On March 17, 1997, the Company announced a brand strategy that unifies the
marketing identity of the Company's on-demand print and prepress operations
which employ the same products and service strategy worldwide. In connection
therewith, the Company has changed the name of LinoGraphics Corporation and
LinoGraphics (Delaware) Corporation to Elements (NY) and Elements (SF),
respectively.
On March 31, 1997, the Company formed Unidigital/Boris in order to
consummate the Boris Acquisition (as hereinafter defined).
Foreign Currency Translation:
The portion of the Company's financial statements relating to the
Company's United Kingdom operations are translated into United States Dollars
using period-end exchange rates (POUNDS STERLING 1.00 = $1.56 at August 31, 1996
and $1.6295 at February 28, 1997) for balance sheets accounts and average
exchange rates (POUNDS STERLING 1.00 = $1.55 for the year ended August 31, 1996;
and $1.6365 and $1.53 for the three months ended February 28, 1997 and February
29, 1996, respectively; and $1.6365 and $1.55 for the six months ended February
28, 1997 and February 29, 1996, respectively) for the statements of operations
and cash flows for the respective periods. The translation difference is
recorded as a separate component of stockholders' equity.
Net Income Per Share:
Net income per share is computed is using the weighed average number of
common and common equivalent shares outstanding during the applicable period.
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UNIDIGITAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE C - TERMINATION OF S CORPORATION STATUS AND RELATED INCOME TAX MATTERS:
Prior to the Company's initial public offering on February 1, 1996 (the
"IPO"), Elements (NY) filed its federal and state income tax returns under the
provisions of Subchapter S of the Internal Revenue Code, pursuant to which its
taxable income was reportable on the personal tax returns of its stockholders
and the applicable federal and state income taxes thereon were payable directly
by them. As a result of the IPO, the Subchapter S status was terminated
effective February 1, 1996. Accordingly, $367,000 additional federal and state
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, have been recorded and charged to operations for the
three-month and six-month periods ended February 29, 1996. Such charge results
solely from the termination of the Subchapter S status in the United States and
is nonrecurring.
NOTE D - STOCKHOLDERS' EQUITY:
Common Stock:
The Company has authorized 10,000,000 shares of Common Stock, $.01 par
value per share. As at February 28, 1997, 3,197,763 shares of Common Stock were
issued and outstanding. The Company has reserved for issuance (i) 675,000 shares
of Common Stock upon exercise of options granted or to be granted under its
Stock Options Plans, see Note E, and (ii) 92,000 shares of Common Stock upon
exercise of warrants issued to Burnham Securities Inc., the managing underwriter
for the IPO. The underwriter's warrants are exercisable at a price of $7.20 for
a period of four years commencing February 1, 1997. As at April 7, 1997,
3,243,243 shares of Common Stock were issued and outstanding.
Preferred Stock:
The Company has an authorized class of 5,000,000 shares of Preferred
Stock, $.01 par value per share, 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
February 28, 1997.
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UNIDIGITAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE E - STOCK OPTION PLANS:
Unidigital's Board of Directors has adopted, and the stockholders of
Unidigital have approved, the 1995 Unidigital Inc. Long-Term Stock Investment
Plan (the "1995 Stock Plan"), the 1995 Directors Stock Option Plan (the "1995
Directors Plan"), the 1997 Equity Incentive Plan (the "1997 Plan"), and the 1997
Non-Employee Director Stock Option Plan (the "1997 Non-Employee Director Plan"
and, together with the 1995 Stock Plan, the 1995 Directors Plan, the 1997 Plan,
the "Stock Option Plans"). The total aggregate number of shares of Common Stock
for which options may be granted under the Stock Option Plans is 675,000,
subject to certain adjustments to reflect changes in Unidigital's capital stock.
The Company has committed to grant options to purchase 291,770 shares of
Common Stock at an exercise price ranging from $4.50 to $6.75 per share as of
February 28, 1997 under the 1995 Stock Plan. In addition, as of February 28,
1997, the Company has granted options to purchase (i) 10,000 shares of Common
Stock at an exercise price of $5.375 per share under the 1997 Plan, and (ii)
10,000 shares of Common Stock at an exercise price of $5.125 per share under the
1997 Non-Employee Director Plan. As of February 28, 1997, no options have been
granted under the 1995 Directors Plan. The Company has also granted options to
purchase 50,000 shares of Common Stock at an exercise price of $6.00 per share
outside the Plans as of February 28, 1997. Subsequent to the end of the quarter,
the Company granted options to purchase 50,000 shares of Common Stock at an
exercise price of $5.25 per share under the 1997 Plan in connection with the
Boris Acquisition.
NOTE F -SUBSEQUENT EVENTS:
Subsequent to the end of the quarter, on April 3, 1997, the Company
renegotiated its credit facility arrangements with its New York bank for the
Company's United States operations. The Company now has combined credit
facilities for its United States operations in the aggregate amount of
$8,350,000, which consist of a: (i) $4,500,000 revolving credit facility which
is available for corporate acquisition purposes; and (ii) $3,850,000 line of
credit facility which is available for working capital purposes. Such credit
facilities are available to be used by each of the Company's four United States
subsidiaries. Under such credit facilities, an ABR Loan (as defined in the
Credit Agreement) bears interest at the Alternate Base Rate (as defined in the
Credit Agreement) plus 0.25%. A Eurodollar Loan (as defined in the Credit
Agreement) bears interest at the Adjusted LIBO Rate (as defined in the Credit
Agreement) plus 2.50%. As at April 4, 1997, the Company had an outstanding
balance of approximately $1,725,000 under the revolving credit facility and
$2,503,000 under the line of credit. The foregoing information relating to the
Company's new credit facilities is qualified in its entirety by reference to
the complete text of the related documents which are filed as exhibits hereto.
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UNIDIGITAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Subsequent to the end of the quarter, on April 4, 1997, Unidigital/Boris
purchased certain assets and assumed certain liabilities of Boris Image Group,
Inc. ("Boris Image Group"), a Boston, Massachusetts based company which
principally engages in the business of digital imaging and photographic
processing (the "Boris Acquisition"). The aggregate purchase price consists of
the following: (i) $1,725,000 in cash; (ii) an aggregate of $300,000 in
guaranteed future payments to Boris Image Group and its management team; (iii)
$250,000 in restricted Common Stock; and (iv) a potential earn-out payment of up
to $500,000 payable at the end of the Company's next fiscal year.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
GENERAL
The Company provides a full range of digital prepress and digital print
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 artists 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
are designed to 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 as 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 also provides scanning,
document creation services such as typesetting, and short-run digital printing.
RESULTS OF OPERATIONS
The consolidated financial information includes both the Company's United
States operations and its United Kingdom operations. On August 9, 1996, the
Company, through a wholly-owned subsidiary, acquired the business and certain
assets of a competing company located in New York City (the "Cardinal
Acquisition"). As a result of such acquisition, the Company has expanded its
digital prepress and digital print operations in the New York City and
surrounding area.
THREE MONTHS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
Net Sales. Net sales for the three months ended February 28, 1997 ("Second
Quarter of Fiscal 1997") increased by 107.2%, or $2,724,488, to $5,265,916 from
$2,541,428 for the three months ended February 29, 1996 ("Second Quarter of
Fiscal 1996"). Net sales for the Company's United States operations increased by
168.4%, or $2,028,228, from $1,204,296 in the Second Quarter of Fiscal 1996 to
$3,232,524 in the Second Quarter of Fiscal 1997. This increase was attributable
primarily to an increase in net sales resulting from the Cardinal Acquisition
and, to a lesser extent, the inclusion of net sales from the Elements (SF)
operations for the Second Quarter of Fiscal 1997. Net sales for the Company's
United Kingdom operations increased by 52.1%, or $696,260, from $1,337,132 in
the Second Quarter of Fiscal 1996 to $2,033,392 in the Second Quarter of Fiscal
1997. This increase was attributable primarily to increases in the Company's
short-run digital print operations.
Cost of Sales. Cost of sales for the Second Quarter of Fiscal 1997
increased by 120.4% or $1,494,085, to $2,735,523 from $1,241,438 for the Second
Quarter of Fiscal 1996. As a percentage of net sales, cost of sales increased
from 48.9% for the Second Quarter of Fiscal 1996 to 51.9% for the Second Quarter
of Fiscal 1997. Cost of sales for the Company's United States
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operations decreased 1.3% as a percentage of net sales from 47.1% for the Second
Quarter of Fiscal 1996 to 45.8% for the Second Quarter of Fiscal 1997. Such
decrease was attributable primarily to the Company's renegotiation of its vendor
contracts resulting in reduced supply costs to the Company, offset in part by
higher costs associated with increased digital print services provided by the
Company's United States operations. Costs of sales for the Company's United
Kingdom operations increased 9.7% as a percentage of net sales from 52.1% for
the Second Quarter of Fiscal 1996 to 61.8% for the Second Quarter of Fiscal
1997. Such increase was attributable primarily to the change in product mix in
the Company's United Kingdom operations to include more digital print services.
Digital print services have higher costs compared to digital prepress services.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") increased 105.7%, or $818,275, from $774,241
for the Second Quarter of Fiscal 1996 to $1,592,516 for the Second Quarter of
Fiscal 1997. Such increase was attributable primarily to the increased level of
operations which resulted from the Cardinal Acquisition and, to a lesser extent,
the inclusion of the Elements (SF) operations in the Second Quarter of Fiscal
1997. As a percentage of net sales, SG&A decreased slightly from 30.5% for the
Second Quarter of Fiscal 1996 to 30.2% for the Second Quarter of Fiscal 1997.
Such decrease in SG&A as a percentage of net sales was due primarily to the
centralization of certain administrative functions.
Corporate Expenses. Corporate expenses for the Second Quarter of Fiscal
1997 increased 190.5%, or $224,341, to $342,110 from $117,769 for the Second
Quarter of Fiscal 1996. This increase was due to the hiring of additional
management and administrative personnel and costs associated with the Company's
acquisitions and the Company's status as a publicly held company. Such costs did
not exist in the Second Quarter of Fiscal 1996. 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 Second Quarter of
Fiscal 1997 increased 46.0%, or $187,787, to $595,767 from $407,980 for the
Second Quarter of Fiscal 1996. Of this amount, $346,085 was contributed by the
Company's United States operations and $249,682 by the Company's United Kingdom
operations. This increase resulted from higher net sales offset in part by
higher corporate expenses and, to a lesser extent, the higher production costs
associated with the changing product mix of the Company's operations to include
more digital print services.
Net Interest Expense. Net interest expense for the Second Quarter of
Fiscal 1997 increased by 127.9%, or $65,884, to $117,385 from $51,501 for the
Second Quarter of Fiscal 1996. This increase resulted from increased borrowings
under the Company's credit facilities and capital leases assumed by the Company
as part of the Cardinal Acquisition offset in part by the income earned on cash
balances from the IPO proceeds.
Income Taxes. Income taxes for the Second Quarter of Fiscal 1997 decreased
by 72.9%, or $379,259, to $140,741 from $520,000 for the Second Quarter of
Fiscal 1996. The Company
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currently pays Federal, state and local income tax for its United States
operations where Elements (NY) previously paid only local corporate income tax
on United States operations as a result of its Subchapter S corporation status.
As a result of the termination of Elements (NY)'s Subchapter S corporation
status in February 1996, the Company recorded a nonrecurring charge to
operations and liability of $367,000 for additional deferred Federal and state
income taxes on temporary differences in the recognition of revenues and
expenses for income tax and financial reporting purposes in the Second Quarter
of Fiscal 1996. The Company's effective tax rate was 36.7% in the Second Quarter
of Fiscal 1997.
Net Income. As a result of the factors described above, net income for the
Second Quarter of Fiscal 1997 increased by $407,008, to $243,487 as compared to
a net loss of $163,521 for the Second Quarter of Fiscal 1996.
SIX MONTHS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
Net Sales. Net sales for the six months ended February 28, 1997 increased
by 99.5%, or $5,234,385, to $10,493,635 from $5,259,250 for the six months ended
February 29, 1996. Net sales for the Company's United States operations
increased by 144.4%, or $3,698,637, from $2,561,062 in the six months ended
February 29, 1996 to $6,259,699 in the six months ended February 28, 1997. This
increase was attributable primarily to an increase in net sales resulting from
the Cardinal Acquisition and, to a lesser extent, the inclusion of net sales
from the Elements (SF) operations for the six months ended February 28, 1997,
offset in part by a slight decrease in net sales by the Elements (NY)
operations. Net sales for the Company's United Kingdom operations increased by
56.9%, or $1,535,748, from $2,698,188 in the six months ended February 29, 1996
to $4,233,936 in the six months ended February 28, 1997. This increase was
attributable primarily to increases in the Company's short-run digital print and
prepress operations.
Cost of Sales. Cost of sales for the six months ended February 28, 1997
increased by 121.6%, or $2,955,703, to $5,385,626 from $2,429,923 for the six
months ended February 29, 1996. As a percentage of net sales, cost of sales
increased 5.1% from 46.2% for the six months ended February 29, 1996 to 51.3%
for the six months ended February 28, 1997. Cost of sales for the
Company's United States operations increased 4.3% as a percentage of net sales
from 42.9% for the six months ended February 29, 1996 to 47.2% for the six
months ended February 28, 1997. Such increase was attributable primarily to
higher costs associated with increased digital print services provided by the
Company's United States operations, offset in part by reduced supply costs due
to the Company's renegotiation of certain of its contracts with its vendors.
Costs of sales for the Company's United Kingdom operations increased 8.2% as a
percentage of net sales from 49.3% for the six months ended February 29, 1996 to
57.5% for the six months ended February 28, 1997. Such increase was attributable
primarily to the change in product mix in the Company's United Kingdom
operations to include more digital print services. Digital print services have
higher costs compared to digital prepress services.
Selling, General and Administrative Expenses. SG&A increased 96.3%, or
$1,478,615, from $1,535,935 for the six months ended February 29, 1996 to
$3,014,550 for the six months
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ended February 28, 1997. Such increase was attributable primarily to the
increased level of operations which resulted from the Cardinal Acquisition and,
to a lesser extent, the inclusion of the Elements (SF) operations for the six
months ended February 28, 1997, offset in part by a decrease in SG&A at Elements
(NY) due to a decline in sales. As a percentage of net sales, SG&A decreased
slightly from 29.2% for the six months ended February 29, 1996 to 28.7% for the
six months ended February 28, 1997. Such decrease in SG&A as a percentage of net
sales was due primarily to the centralization of certain administrative
functions.
Corporate Expenses. Corporate expenses for the six months ended February
28, 1997 increased 167.6%, or $457,045, to $729,814 from $272,769 for the six
months ended February 29, 1996. This increase was due to the hiring of
additional management and administrative personnel and costs associated with the
Company's acquisitions and the Company's status as a publicly held company. Such
costs did not exist in the six months ended February 29, 1996. 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 six months ended
February 28, 1997 increased 33.6%, or $343,022, to $1,363,645 from $1,020,623
for the six months ended February 29, 1996. Of this amount, $587,631 was
contributed by the Company's United States operations and $776,014 by the
Company's United Kingdom operations. This increase resulted from higher net
sales offset in part by higher corporate expenses and, to a lesser extent, the
higher production costs associated with the changing product mix of the
Company's operations to include more digital print services.
Net Interest Expense. Net interest expense for the six months ended
February 28, 1997 increased by 171.5%, or $192,737, to $305,122 from $112,385
for the six months ended February 29, 1997. This increase resulted from
increased borrowings under the Company's credit facilities and capital leases
assumed by the Company as part of the Cardinal Acquisition offset in part by the
income earned on cash balances from the IPO proceeds.
Income Taxes. Income taxes for the six months ended February 28, 1997
decreased by 44.5%, or $282,784, to $353,216 from $636,000 for the six months
ended February 29, 1996. The Company currently pays Federal, state and local
income tax for its United States operations where Elements (NY) previously paid
only local corporate income tax on United States operations as a result of its
Subchapter S corporation status. As a result of the termination of Elements
(NY)'s Subchapter S corporation status in February 1996, the Company recorded a
nonrecurring charge to operations and liability of $367,000 for additional
deferred Federal and state income taxes on temporary differences in the
recognition of revenues and expenses for income tax and financial reporting
purposes in the six months ended February 29, 1996. The Company's effective tax
rate was 33.4% in the six months ended and February 28, 1997.
Net Income. As a result of the factors described above, net income for the
six months ended February 28, 1997 increased by 159.1%, or $433,069, to $705,307
from $272,238 for the six months ended February 29, 1996.
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LIQUIDITY, CAPITAL RESOURCES AND OTHER MATTERS
Cash Flow. Net cash provided by operations was $99,611 for the first six
months of fiscal 1997 and $1,226,966 for the first six months of fiscal 1996.
Net cash used for investing activities was $464,125 for the first six months of
fiscal 1997 and $364,514 for the first six months of fiscal 1996. The Company
used $464,125 and $373,023 for the acquisition of equipment by direct purchase
during such respective periods. For the first six months of fiscal 1997 and
fiscal 1996, the Company acquired equipment under capital leases of $1,570,875
and $231,052, respectively, and made payments under capital leases of $903,654
and $411,262, respectively. Net short-term bank borrowings provided funds of
$295,241 for the first six months of fiscal 1997 and $204,273 for the first six
months of fiscal 1996.
Bank Credit Facilities. The Company has borrowing arrangements with
commercial banks in both New York and London. During the second quarter of
fiscal 1997, the Company had combined credit facilities with a New York bank for
its United States operations in the aggregate amount of $4,050,000, which
consisted of: (i) $300,000 of five-year term loans, of which $150,000 was
available to Elements (NY) for leasehold improvements to its New York City
facilities, and $150,000 was available to Elements (SF) for the purchase of
equipment and for the Company's San Francisco operations; (ii) a $1,200,000 line
of credit which was available to Cardinal for working capital purposes; (iii) a
$1,400,000 term loan which was available to Cardinal for acquisition financing;
(iv) a $700,000 line of credit which was available to Elements (NY) for working
capital purposes; and (v) a $450,000 line of credit which was available to
Elements (SF) for working capital purposes. As at February 28, 1997, the Company
had an outstanding balance of approximately $1,523,324 under the term loans. As
at February 28, 1997, the Company had an outstanding balance of approximately
$1,493,000 under these lines of credit.
Subsequent to the end of the quarter, on April 3, 1997, the Company
renegotiated its credit facility arrangements with its New York bank for the
Company's United States operations. The Company now has combined credit
facilities for its United States operations in the aggregate amount of
$8,350,000, which consist of a: (i) $4,500,000 revolving credit facility which
is available for corporate acquisition purposes; and (ii) $3,850,000 line of
credit facility which is available for working capital purposes. Such credit
facilities are available to be used by each of the Company's four United States
subsidiaries. Under such credit facilities, an ABR Loan bears interest at the
Alternate Base Rate plus 0.25%. A Eurodollar Loan bears interest at the Adjusted
LIBO Rate plus 2.50%. As at April 4, 1997, the Company had an outstanding
balance of approximately $1,725,000 under the revolving credit facility and
$2,503,000 under the line of credit. The foregoing information relating to the
Company's new credit facilities is qualified in its entirety by reference to the
complete text of the related documents which are filed as exhibits hereto.
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 Company and its subsidiaries and limiting borrowings
up to specified amounts of accounts receivable aged 90 days or less. The credit
facilities are secured by a first priority lien on all of
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the assets of the borrowers. The lines of credit are renewable annually each
December. Unidigital is a guarantor on all bank debts of the Company's United
States operating subsidiaries.
The Company has combined lines of credit of Pounds Sterling 900,000
(approximately $1,404,000) for working capital for its United Kingdom
operations. These lines of credit are renewable annually and bear interest at
2.25% over the Bank's Base Rate, as defined, for borrowings up to Pounds
Sterling 600,000 and bear interest at 2.75% over the Bank's Base Rate for
borrowings in excess of such amount. At February 28, 1997, the Company had an
outstanding balance of Pounds Sterling 975,025 (approximately $1,588,803) under
these lines of credit which bear interest at a rate of 8.44% per annum. These
lines of credit contain covenants limiting borrowings up to specified amounts of
accounts receivable aged 120 days or less and are guaranteed by Unidigital for
the principal amount of up to Pounds Sterling 500,000.
As of February 28, 1997, 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 at least 12 months. The
Company may require additional financing to consummate future acquisitions.
There can be no assurance that the Company will be able to secure such
additional financing on terms favorable to the Company.
Working Capital. The Company's working capital increased by $31,258 from
$2,319,343 at August 31, 1996 to $2,350,601 at February 28, 1997. Such increase
was attributable primarily to increased net income offset in part by the
maturation of debt owing to the principal stockholder of the Company.
Acquisitions. Subsequent to the end of the quarter, on April 4, 1997,
Unidigital/Boris consummated the Boris Acquisition. The aggregate purchase price
consists of the following: (i) $1,725,000 in cash; (ii) an aggregate of $300,000
in guaranteed future payments to Boris Image Group and its management team;
(iii) $250,000 in restricted Common Stock; and (iv) a potential earn-out payment
of up to $500,000 payable at the end of the Company's next fiscal year.
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 the 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 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
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currency risk, and does not expect to do so in the future, since it does not
believe that it is practicable for it to do so at a reasonable cost.
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PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Stockholders of the Company was held on January 30,
1997.
There were 2,976,717 shares present at the meeting in person or by proxy.
The results of the vote taken at such meeting with respect to each nominee for
director were as follows:
NOMINEE FOR WITHHELD
------- --- --------
William E. Dye 2,974,523 2,194
Peter Saad 2,974,523 2,194
Anthony Manser 2,974,523 2,194
Harvey Silverman 2,974,523 2,194
David Wachsman 2,974,523 2,194
Also at the meeting, a vote was taken on the proposal to adopt the 1997
Equity Incentive Plan. Of the 2,976,717 shares present at the meeting in person
or by proxy, 2,562,605 shares were voted in favor of such proposal, 62,450
shares were voted against such proposal, and 5,500 shares abstained from voting.
There were also 346,162 broker non-votes with respect to such proposal.
In addition, a vote was taken at the meeting on the proposal to adopt the
1997 Non-Employee Director Stock Option Plan. Of the 2,976,717 shares present at
the meeting in person or by proxy, 2,611,605 shares were voted in favor of such
proposal, 15,750 shares were voted against such proposal, and 4,500 shares were
abstained from voting. There were also 344,862 broker non-votes with respect to
such proposal.
Finally, a vote was taken at the meeting on the proposal to ratify the
appointment of Ernst & Young LLP as the independent certified public accountants
of the Company for the fiscal year ending August 31, 1997. Of the 2,976,717
shares present at the meeting in person or by proxy, 2,974,248 shares were voted
in favor of such proposal, 2,169 shares were voted against such proposal, and
300 shares abstained from voting.
ITEM 5. OTHER INFORMATION.
Subsequent to the end of the quarter, on April 3, 1997, the Company
renegotiated its credit facility arrangements with its New York bank for the
Company's United States operations. The Company now has combined credit
facilities for its United States operations in the aggregate amount of
$8,350,000, which consist of a: (i) $4,500,000 revolving credit facility which
is available for corporate acquisition purposes; and (ii) $3,850,000 line of
credit facility which is available for working capital purposes. Such credit
facilities are available to be used by each of the Company's four United States
subsidiaries. Under such credit facilities, an ABR Loan bears
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interest at the Alternate Base Rate plus 0.25%. A Eurodollar Loan bears interest
at the Adjusted LIBO Rate plus 2.50%. As at April 4, 1997, the Company had an
outstanding balance of approximately $1,725,000 under the revolving credit
facility and $2,503,000 under the line of credit. The foregoing information
relating to the Company's new credit facilities is qualified in its entirety by
reference to the complete text of the related documents which are filed as
exhibits hereto.
Subsequent to the end of the quarter, on April 4, 1997,
Unidigital/Boris consummated the Boris Acquisition. The Company intends to
continue such line of business. The assets purchased included Boris Image
Group's entire customer list, inventory, accounts receivable, equipment, trade
name and certain contract rights. The aggregate purchase price consists of the
following: (i) $1,725,000 in cash; (ii) an aggregate of $300,000 in guaranteed
future payments to Boris Image Group and its management team; (iii) $250,000 in
restricted Common Stock; and (iv) a potential earn-out payment of up to
$500,000 payable at the end of the Company's next fiscal year. In addition, the
Company granted options to purchase 50,000 shares of Common Stock to employees
of Boris Image Group at an exercise price of $5.25 per share under the 1997
Plan. The Company funded the purchase price from its renegotiated credit
facility arrangements with The Chase Manhattan Bank. In determining the
purchase price, the Company considered, among other factors, the past and
projected revenues generated from the customers of Boris Image Group and the
value of the acquired assets.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
10.1 Asset Purchase Agreement dated as of April 4, 1997 by
and among Unidigital Inc., Unidigital/Boris
Corporation, Boris Image Group, Inc., Leslie W.
Brewer, II and Michael Hartnett.
10.2 1997 Equity Incentive Plan.
10.3 1997 Non-Employee Director Stock Option Plan.
10.4 Credit Agreement dated as of April 3, 1997, among
Unidigital Elements (NY), Inc., Unidigital/Cardinal
Corporation, Unidigital Elements (SF), Inc.,
Unidigital/Boris Corporation, and The Chase Manhattan
Bank.
10.5 Revolving Credit Note dated April 3, 1997 in the
aggregate principal amount of $4,500,000 evidencing
revolving credit facility with The Chase Manhattan Bank.
10.6 Line Loan Note dated April 3, 1997 in the aggregate
principal amount of $3,850,000 evidencing line of credit
facility with The Chase Manhattan Bank.
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10.7 Security Agreement dated as of April 3, 1997, among
Unidigital Elements (NY), Inc., Unidigital/Cardinal
Corporation, Unidigital Elements (SF), Inc.,
Unidigital/Boris Corporation, and The Chase Manhattan
Bank.
10.8 Pledge Agreement dated as of April 3, 1997 made by
Unidigital Inc. in favor of The Chase Manhattan Bank.
10.9 Guarantee Agreement dated as of April 3, 1997 made by
Unidigital Inc. in favor of The Chase Manhattan Bank.
21 List of Subsidiaries.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter for which
this report on Form 10-QSB is filed. Financial statements with
respect to Boris Image Group shall be filed with the Securities and
Exchange Commission no later than sixty (60) days after the date of
the filing of this Form 10-QSB.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Issuer caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
UNIDIGITAL INC.
DATE: April 14, 1997 By: /s/William E. Dye
-------------------------------
William E. Dye, President,
Chief Executive Officer and
Chief Financial Officer
(Principal Executive, Financial
and Accounting Officer)
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