CONFORMED COPY
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 1997
Commission file number 0-27664
UNIDIGITAL INC.
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(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)
545 West 45th Street, New York, New York 10036
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(Address of Principal Executive Offices) (Zip Code)
(212) 337-0330
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(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:
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State the number of shares outstanding of each of the Issuer's classes
of common equity, as of June 30, 1997:
Class Number of Shares
- ----- ----------------
Common Stock, $.01 par value 3,243,243
Transitional Small Business Disclosure Format (check one):
Yes: No: X
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UNIDIGITAL INC. AND SUBSIDIARIES
TABLE OF CONTENTS
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Page
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements................................................................1
CONSOLIDATED BALANCE SHEETS
as at August 31, 1996 (audited)
and May 31, 1997 (unaudited)..............................................................2
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Nine Months Ended
May 31, 1997 and May 31, 1996 (unaudited).................................................3
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended
May 31, 1997 and May 31, 1996 (unaudited).................................................4
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)....................................................................5
Item 2. Management's Discussion and Analysis
or Plan of Operation................................................................11
Results of Operations.....................................................................11
Liquidity, Capital Resources and Other Matters............................................14
PART II OTHER INFORMATION
Item 5. Other Information...................................................................16
Item 6. Exhibits and Reports on Form 8-K....................................................16
SIGNATURES................................................................................................17
-i-
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
-1-
UNIDIGITAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
May 31, August 31,
1997 1996
-------- ----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 3,475,176 $ 4,145,514
Accounts receivable (less allowance for doubtful
accounts of 389,288 and $200,814 at
May 31, 1997 and August 31, 1996, respectively).............. 7,502,190 3,207,857
Prepaid expenses and other current assets...................... 3,187,677 835,129
----------- -----------
Total current assets....................................... 14,165,043 8,188,500
Property, plant and equipment, net................................ 11,277,710 8,594,985
Intangible assets, net............................................ 5,904,563 797,213
Deferred Financing................................................ 500,000 --
Other assets...................................................... 81,723 42,628
----------- -----------
Total Assets............................................... $31,929,039 $17,623,326
=========== ===========
LIABILITIES
Current liabilities:
Due to banks................................................... $ 4,485,712 $ 1,741,973
Current portion of long-term debt.............................. 199,072 77,800
Current portion of capital lease obligations................... 1,943,835 1,476,076
Accrued payments for acquisition
of business and cancellation of options....................... -- 202,930
Accounts payable and accrued expenses.......................... 4,762,961 1,792,973
Income taxes payable........................................... 409,832 216,366
Loans and notes payable to stockholders........................ 366,513 361,039
----------- -----------
Total current liabilities.................................. 12,167,925 5,869,157
Non-current portion of long-term debt............................. 3,465,517 1,898,865
Non-current portion of capital lease obligations.................. 3,389,570 1,974,033
Deferred income taxes............................................. 481,033 516,596
Other liabilities................................................. 412,500 --
Notes payable..................................................... 2,600,000 --
----------- -----------
Total liabilities.......................................... $22,516,545 $10,258,651
=========== ===========
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; 3,243,243 and 3,189,216 shares
issued and outstanding at May 31, 1997 and
August 31, 1996, respectively.................................. 32,243 31,892
Additional paid-in capital........................................ 6,207,007 5,462,153
Retained earnings................................................. 3,142,668 1,897,252
Cumulative foreign translation adjustment......................... 30,576 (26,622)
----------- -----------
Total stockholders' equity................................. 9,412,494 7,364,675
----------- -----------
Total Liabilities and Stockholders' Equity................. $31,929,039 $17,623,326
=========== ===========
The Notes to Consolidated Financial Statements are made a part hereof.
-2-
UNIDIGITAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended, Nine Months Ended,
------------------------- --------------------------
May 31, May 31, May 31, May 31,
1997 1996 1997 1996
------- ------- ------- -------
Net sales...................................... $7,664,033 $3,298,072 $18,157,668 $8,557,322
---------- ---------- ----------- ----------
Cost of sales.................................. 4,239,289 1,422,973 9,624,915 3,852,896
Selling, general and
administrative expenses ..................... 1,769,870 1,041,776 4,784,420 2,577,711
Corporate expenses*............................ 503,857 108,715 1,233,671 381,484
---------- ---------- ----------- ----------
Total operating expenses................ 6,513,016 2,573,464 15,643,006 6,812,091
---------- ---------- ----------- ----------
Income from operations.................. 1,151,017 724,608 2,514,662 1,745,231
Interest expense............................... 396,921 88,374 695,660 231,591
Interest and other income...................... (67,175) (30,567) (60,792) (61,399)
---------- ---------- ----------- ----------
Income before income taxes..................... 821,271 666,801 1,879,794 1,575,039
---------- ---------- ----------- ----------
Income taxes (including $367,000
nonrecurring provision relating to
termination of Subchapter S status
on February 1, 1996) ........................ 281,162 270,711 634,378 906,711
---------- ---------- ----------- ----------
NET INCOME .................................... $ 540,109 $ 396,090 $ 1,245,416 $ 668,328
========== ========== =========== ==========
Net income per common share.................... $ 0.17 $ 0.13 $ 0.39 $ 0.27
========== ========== =========== ==========
Weighted average common shares outstanding..... 3,228,083 3,150,000 3,203,121 2,472,000
========== ========== =========== ==========
*For the three-month and nine-month periods ended May 31, 1996, this line item
was referred to as "Principal stockholder/officers' compensation."
The Notes to Consolidated Financial Statements are made a part hereof.
-3-
UNIDIGITAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended,
-------------------------
May 31, May 31,
1997 1996
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities:
Net income.................................................... $ 1,245,416 $ 668,328
----------- ----------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................... 1,346,217 651,915
Provision for deferred income taxes......................... (73,530) 362,272
Provision for doubtful accounts............................. 77,182 41,035
Loss on sale of equipment................................... -- 1,181
Net changes in assets and liabilities net of purchase
of Boris Image Group, Inc. and Libra City Corporate
Printing Ltd.:
Accounts receivable....................................... (1,376,573) (800,634)
Prepaid expenses and other current assets................. (1,841,527) (304,193)
Other assets.............................................. (6,184) (18,153)
Accounts payable and accrued expenses..................... 2,004,481 436,301
Income taxes payable...................................... 181,743 124,164
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Total adjustments......................................... 311,809 493,888
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Net cash provided by operating activities................. 1,557,225 1,162,216
----------- ----------
Cash flows from investing activities:
Additions to property and equipment............................. (959,996) (898,530)
Proceeds from sale of equipment................................. -- 9,234
Purchase of Boris Image Group, Inc. and Libra City
Corporate Printing Ltd......................................... (5,320,902) (85,000)
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Net cash used for investing activities.................... (6,280,898) (974,296)
---------- ----------
Cash flows from financing activities:
Net proceeds from bank borrowings............................... 5,721,404 735,037
Payments on capital lease obligations........................... (1,493,261) (682,894)
Payments of notes for cancellation of options
and acquisition of business................................... (177,893) (250,250)
Dividends paid.................................................. -- (750,000)
Net proceeds from public offering of common stock............... -- 5,353,755
IPO issuance costs.............................................. (4,214) --
Stockholder loans............................................... 687 --
Common Stock issued............................................. 460 --
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Net cash provided by financing activities................. 4,047,183 4,405,648
----------- ----------
Effect of foreign exchange rates on cash........................... 6,152 (14,407)
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NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............... (670,338) 4,579,161
Cash and cash equivalents -- beginning of period................... 4,145,514 186,802
----------- ----------
Cash and cash equivalents -- end of period......................... $ 3,475,176 $4,765,963
=========== ==========
Supplemental disclosures:
Interest paid................................................... $ 685,467 $ 214,622
=========== ==========
Income taxes paid............................................... $ 706,879 $ 349,036
=========== ==========
Noncash transactions:
Equipment acquired under capital lease obligations.............. $ 2,025,673 $1,013,849
=========== ==========
Notes payable issued as dividends............................... $ -- $ 498,000
=========== ==========
The Notes to Consolidated Financial Statements are made a part hereof.
-4-
UNIDIGITAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note A - Basis of Presentation:
The information presented for May 31, 1997, and for the three-month and
the nine-month periods ended May 31, 1997 and May 31, 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 May 31, 1997 and the
results of its operations and its cash flows for the three-month and the
nine-month periods ended May 31, 1997 and May 31, 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 Inc. 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 ("Unidigital/Cardinal") and Unidigital/Boris Corporation
("Unidigital/Boris"). Elements (NY) engages in the on-demand print and prepress
business in
-5-
UNIDIGITAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
New York City. Elements (UK) engages in the on-demand print and prepress
business and, through its wholly-owned subsidiary, Regent Communication (UK)
Limited, operates the digital print business in London. Elements (UK) also
provides printing services to the London financial community through its
wholly-owned subsidiary Libra City Corporate Printing Limited ("Libra"). Libra
was acquired on May 22, 1997 when the Company, through Elements (UK), purchased
all of the issued and outstanding capital stock of Libra. Elements (SF) owns and
operates the San Francisco on-demand prepress business and retouching studio.
Unidigital/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.
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 ((pound)1.00 = $1.56 at August 31, 1996 and
$1.64 at May 31, 1997) for balance sheet accounts and average exchange rates
((pound)1.00 = $1.55 for the year ended August 31, 1996; and $1.64 and $1.53 for
the three months ended May 31, 1997 and May 31, 1996, respectively; and $1.64
and $1.54 for the nine months ended May 31, 1997 and May 31, 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 using the weighed average number of
common and common equivalent shares outstanding during the applicable period.
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
nine-month period ended May 31, 1996. Such charge results solely from the
termination of the Subchapter S status in the United States and is nonrecurring.
-6-
UNIDIGITAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note D - Stockholders' Equity:
Common Stock:
The Company has authorized 10,000,000 shares of Common Stock, $.01 par
value per share. As at May 31, 1997, 3,243,243 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 Option Plans, see Note E, (ii) 92,000 shares of Common Stock upon exercise
of warrants issued to Burnham Securities Inc., the managing underwriter for the
IPO, exercisable at a price of $7.20 per share for a period of four years
commencing February 1, 1997, and (iii) 400,000 shares of Common Stock upon
exercise of warrants issued in connection with certain loans to be made to the
Company in an aggregate principal amount not to exceed $4,000,000. Such warrants
shall be exercisable at a price of $4.00 per share for a period of five years
commencing on the date of issuance of such warrants. As at May 31, 1997, the
Company had issued warrants to purchase up to 260,000 shares of Common Stock in
connection with such loans. As at June 30, 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
May 31, 1997.
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 291,700 shares of Common
Stock at an exercise price ranging from $4.50 to $6.75 per share as of May 31,
1997 under the 1995 Stock Plan. In addition, as of May 31, 1997, the Company has
granted options to purchase (i) 60,000 shares of Common Stock at an exercise
price ranging from $5.25 to $5.375 per share under the 1997 Plan, and (ii)
10,000 shares
-7-
UNIDIGITAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
of Common Stock at an exercise price of $5.125 per share under the 1997
Non-Employee Director Plan. As of May 31, 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 May 31, 1997.
Note F - Acquisitions:
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 consisted 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. The Company funded the purchase price from its renegotiated credit
facility arrangements with its New York bank. See "Note G - Bank Credit
Facilities and Other Loans." The acquisition was recorded using the purchase
method of accounting and the results of operations are included in the financial
statements since the date of acquisition. The preliminary allocation of purchase
price, which includes goodwill of approximately $2,627,000, may change upon
final determination of the fair value of the net assets acquired. The related
goodwill will be amortized on a straight-line basis over 15 years.
On May 22, 1997, Elements (UK) acquired all of the issued and
outstanding capital stock of Libra, a London-based financial printer (the "Libra
Acquisition"). The purchase price included cash payments of (pound)1,823,750
(approximately $2,972,700) and a potential earn-out payment of up to
(pound)500,000 (approximately $815,000) payable by March 31, 1998. The Company
funded the purchase price from the proceeds of certain five-year loans and a
line of credit from its United Kingdom bank. See "Note G - Bank Credit
Facilities and Other Loans." The acquisition was recorded using the purchase
method of accounting and the results of operations are included in the financial
statements since the date of acquisition. The preliminary allocation of purchase
price, which includes assets of $3,618,000, liabilities of $2,199,000 and
goodwill of approximately $2,369,000, may change upon final determination of the
fair value of the net assets acquired. The related goodwill will be amortized on
a straight-line basis over 15 years.
The following supplemental pro forma information is presented as if the
Company had completed the Cardinal Acquisition, the Boris Acquisition and
the Libra Acquisition, and the related borrowings as of September 1, 1995 and
1996, respectively:
Nine Months Ended May 31,
-------------------------
1997 1996
---- ----
Net Sales $25,964,371 $25,356,664
Net income 657,352 310,952
Net income per share 0.21 0.13
Note G - Bank Credit Facilities and Other Loans:
On April 3, 1997, the Company renegotiated its credit facility
arrangements with its New York bank, and 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
-8-
UNIDIGITAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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.
Interest under such credit facilities is at the Company's option at the
Alternate Base Rate, as defined, plus 0.25% or the Adjusted LIBO Rate, as
defined, plus 0.25%. As of May 31, 1997, the Company had an outstanding balance
of $1,725,000 under the revolving credit facility and $2,710,110 under the line
of credit.
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 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 (pound)1,145,000
(approximately $1,877,800) 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 (pound)600,000
and bear interest at 2.75% over the Bank's Base Rate for borrowings in excess of
such amount. At May 31, 1997, the Company had an outstanding balance of
(pound)1,138,798 (approximately $1,867,629) under these lines of credit which
bear interest at a rate of 8.67% 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 (pound)500,000.
As of May 31, 1997, the Company was in compliance with all covenants
under its credit facilities.
In May 1997, the Company borrowed an aggregate principal amount of
$2,600,000 pursuant to certain five-year loans which have a put option after one
year. In connection with such loans, the Company granted five-year warrants to
the lenders to purchase up to an aggregate amount of 260,000 shares of the
Company's Common Stock at an exercise price of $4.00 per share. In addition, the
Company granted "piggyback" registration rights, subject to certain limitations,
to such lenders. Included among the lenders were David Wachsman and Harvey
Silverman, directors of the Company. Such directors loaned an aggregate of
$300,000 of the above amount to the Company and received warrants to purchase an
aggregate of 30,000 shares of the Company's Common Stock. The warrants, which
were deemed to have a value of $500,000, have been recorded as deferred
financing fees, which are being amortized on a straight-line basis over one
year.
-9-
UNIDIGITAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note H - Subsequent Events:
Subsequent to the end of the quarter, the Company borrowed an
additional aggregate principal amount of $1,400,000 pursuant to certain
five-year loans which have a put option after one year. In connection with such
loans, the Company granted five-year warrants to the lenders to purchase up to
an aggregate amount of 140,000 shares of the Company's Common Stock at an
exercise price of $4.00 per share. In addition, the Company granted "piggyback"
registration rights, subject to certain limitations, to such lenders.
-10-
Item 2. Management's Discussion and Analysis or Plan of Operation.
General
The Company provides a full range of digital imaging, prepress and
print services to the New York City, San Francisco, London and Boston 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, traditional photographic services, financial
printing services 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. On April 4, 1997, the Company, through a wholly-owned
subsidiary, consummated the Boris Acquisition and, as a result, engages in the
business of digital imaging and photographic processing. On May 22, 1997, the
Company, through a wholly-owned subsidiary, consummated the Libra Acquisition
and, as a result, provides financial printing services to the London financial
community.
Three Months Ended May 31, 1997 and May 31, 1996
Net Sales. Net sales for the three months ended May 31, 1997 ("Third
Quarter of Fiscal 1997") increased by 132%, or $4,365,961, to $7,664,033 from
$3,298,072 for the three months ended May 31, 1996 ("Third Quarter of Fiscal
1996"). Net sales for the Company's United States operations increased by 218%,
or $3,322,914, from $1,521,651 in the Third Quarter of Fiscal 1996 to $4,844,565
in the Third Quarter of Fiscal 1997. This increase was attributable primarily to
an increase in net sales resulting from the Cardinal Acquisition and the Boris
Acquisition. Net sales for the Company's United Kingdom operations increased by
59%, or $1,043,047, from $1,776,421 in the Third Quarter of Fiscal 1996 to
$2,819,468 in the Third Quarter of Fiscal 1997. This increase was attributable
primarily to increases in the Company's short-run digital print operations and,
to a lesser extent, the inclusion of net sales resulting from the Libra
Acquisition.
-11-
Cost of Sales. Cost of sales for the Third Quarter of Fiscal 1997
increased by 198%, or $2,816,316, to $4,239,289 from $1,422,973 for the Third
Quarter of Fiscal 1996. As a percentage of net sales, cost of sales increased
12% from 43% for the Third Quarter of Fiscal 1996 to 55% for the Third Quarter
of Fiscal 1997. Cost of sales for the Company's United States operations
increased 19% as a percentage of net sales from 36% for the Third Quarter of
Fiscal 1996 to 55% for the Third Quarter of Fiscal 1997. Such increase was
attributable primarily to 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 6% as a percentage of net
sales from 50% for the Third Quarter of Fiscal 1996 to 56% for the Third 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 and financial print services. Digital print and financial print services
have higher costs compared to digital prepress services.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") increased 70%, or $728,094, from $1,041,776 for
the Third Quarter of Fiscal 1996 to $1,769,870 for the Third Quarter of Fiscal
1997. Such increase was attributable primarily to the increased level of
operations which resulted from the Cardinal Acquisition, the Boris Acquisition
and, to a lesser extent, the Libra Acquisition. As a percentage of net sales,
SG&A decreased from 32% for the Third Quarter of Fiscal 1996 to 23% for the
Third 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 Third Quarter of Fiscal
1997 increased 363%, or $395,142, to $503,857 from $108,715 for the Third
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. 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 Third Quarter of
Fiscal 1997 increased 59%, or $426,409, to $1,151,017 from $724,608 for the
Third Quarter of Fiscal 1996. Of this amount, $933,525 was contributed by the
Company's United States operations and $721,349 by the Company's United Kingdom
operations, offset by $503,857 in corporate expenses. This increase resulted
from higher net sales offset by 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 Third Quarter of
Fiscal 1997 increased by 470%, or $271,939, to $329,746 from $57,807 for the
Third 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 and the Boris Acquisition.
Income Taxes. Income taxes for the Third Quarter of Fiscal 1997
increased by 4%, or $10,451, to $281,162 from $270,711 for the Third Quarter of
Fiscal 1996.
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Net Income. As a result of the factors described above, net income for
the Third Quarter of Fiscal 1997 increased by 36%, or $144,019, to $540,109 as
compared to net income of $396,090 for the Third Quarter of Fiscal 1996.
Nine Months Ended May 31, 1997 and May 31, 1996
Net Sales. Net sales for the nine months ended May 31, 1997 increased
by 112%, or $9,600,346, to $18,157,668 from $8,557,322 for the nine months ended
May 31, 1996. Net sales for the Company's United States operations increased by
172%, or $7,007,234, from $4,082,637 in the nine months ended May 31, 1996 to
$11,089,871 in the nine months ended May 31, 1997. This increase was
attributable primarily to an increase in net sales resulting from the Cardinal
Acquisition, the Boris Acquisition and, to a lesser extent, the inclusion of net
sales from the Elements (SF) operations for the nine months ended May 31, 1997.
Net sales for the Company's United Kingdom operations increased by 58%, or
$2,593,112, from $4,474,685 in the nine months ended May 31, 1996 to $7,067,797
in the nine months ended May 31, 1997. This increase was attributable primarily
to increases in the Company's short-run digital print and prepress operations
and, to a lesser extent, the inclusion of net sales resulting from the Libra
Acquisition.
Cost of Sales. Cost of sales for the nine months ended May 31, 1997
increased by 150%, or $5,772,019, to $9,624,915 from $3,852,896 for the nine
months ended May 31, 1996. As a percentage of net sales, cost of sales increased
8% from 45% for the nine months ended May 31, 1996 to 53% for the nine months
ended May 31, 1997. Cost of sales for the Company's United States operations
increased 11% as a percentage of net sales from 40% for the nine months ended
May 31, 1996 to 51% for the nine months ended May 31, 1997. Such increase was
attributable primarily to 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 8% as a percentage of net
sales from 49% for the nine months ended May 31, 1996 to 57% for the nine months
ended May 31, 1997. Such increase was attributable primarily to the change in
product mix in the Company's United Kingdom operations to include more digital
print and financial print services. Digital print and financial print services
have higher costs compared to digital prepress services.
Selling, General and Administrative Expenses. SG&A increased 86%, or
$2,206,709, from $2,577,711 for the nine months ended May 31, 1996 to $4,784,420
for the nine months ended May 31, 1997. Such increase was attributable primarily
to the increased level of operations which resulted from the Cardinal
Acquisition, the Boris Acquisition and, to a lesser extent, the Libra
Acquisition and the inclusion of the Elements (SF) operations for the nine
months ended May 31, 1997. As a percentage of net sales, SG&A decreased from 30%
for the nine months ended May 31, 1996 to 26% for the nine months ended May 31,
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 nine months ended May
31, 1997 increased 223%, or $852,187, to $1,233,671 from $381,484 for the nine
months ended May 31,
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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
prior to the Company's IPO. 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 nine months
ended May 31, 1997 increased 44%, or $769,431, to $2,514,662 from $1,745,231 for
the nine months ended May 31, 1996. Of this amount, $2,266,418 was contributed
by the Company's United States operations and $1,481,915 by the Company's United
Kingdom operations, offset by $1,233,671 in corporate expenses. This increase
resulted from higher net sales offset by 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 nine months ended
May 31, 1997 increased by 273%, or $464,676, to $634,868 from $170,192 for the
nine months ended May 31, 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 and the Boris Acquisition, offset, in part,
by the income earned on cash balances from the IPO proceeds.
Income Taxes. Income taxes for the nine months ended May 31, 1997
decreased by 30%, or $272,333, to $634,378 from $906,711 for the nine months
ended May 31, 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 nine months ended May 31, 1996.
Net Income. As a result of the factors described above, net income for
the nine months ended May 31, 1997 increased by 86%, or $577,088, to $1,245,416
from $668,328 for the nine months ended May 31, 1996.
Liquidity, Capital Resources and Other Matters
Cash Flow. Net cash provided by operations was $1,557,225 for the first
nine months of fiscal 1997 and $1,162,216 for the first nine months of fiscal
1996. Net cash used for investing activities was $6,280,898 for the first nine
months of fiscal 1997 and $974,296 for the first nine months of fiscal 1996. The
Company used $959,996 and $898,530 for the acquisition of equipment by direct
purchase during such respective periods. For the first nine months of fiscal
1997 and fiscal 1996, the Company acquired equipment under capital leases of
$2,025,673 and $1,013,849, respectively, and made payments under capital leases
of $1,493,261 and $682,894, respectively. Net short-term bank borrowings
provided funds of $5,721,404 for the first nine months of fiscal 1997 and
$735,037 for the first nine months of fiscal 1996.
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Bank Credit Facilities. The Company has borrowing arrangements with
commercial banks in both New York and London. During the Third Quarter of Fiscal
1997, the Company renegotiated its credit facility arrangements with its New
York bank, and now has combined credit facilities for its United States
operations in the aggregate amount of $8,350,000. See "Notes to Consolidated
Financial Statements - Note G."
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 decreased by $322,225
from $2,319,343 at August 31, 1996 to $1,997,118 at May 31, 1997. Such decrease
was attributable primarily to increased capital lease obligations incurred in
connection with the Cardinal Acquisition, the Boris Acquisition and the Libra
Acquisition offset, in part, by increased net income.
Acquisitions. On April 4, 1997, Unidigital/Boris consummated the Boris
Acquisition. The aggregate purchase price consisted 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.
On May 22, 1997, Elements (UK) consummated the Libra Acquisition. The
purchase price included cash payments of (pound)1,823,750 (approximately
$2,972,700) and a potential earn-out payment of up to (pound)500,000
(approximately $815,000) payable by March 31, 1998.
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
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.
-15-
PART II
Item 5. Other Information.
On May 15, 1997, Michael Brown was elected to the offices of Vice
President, Chief Financial Officer and Secretary of the Company.
Subsequent to the end of the quarter, on June 30, 1997, the Company
changed the address of its principal executive offices to 545 West 45th Street,
New York, New York 10036.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit No. Description of Exhibit
----------- ----------------------
4.1 Form of Subordinated Promissory Note, together with
Schedule of Holders.
4.2 Form of Warrant, together with Schedule of Holders.
4.3 Form of Registration Rights Agreement, together
with Schedule of Holders.
10.1 Employment Agreement dated as of March 1, 1997 by
and between Unidigital Inc.and Peter Saad.
(b) Reports on Form 8-K.
Subsequent to the end of the quarter, on June 6, 1997, the
Company filed a Current Report on Form 8-K ("Form 8-K") with the
Securities and Exchange Commission relating to the Libra Acquisition. The
Form 8-K also discloses the terms of certain loans made to the Company,
the proceeds of which the Company used to fund the purchase price of the
Libra Acquisition.
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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: July 15, 1997 By: /s/ William E. Dye
------------------
William E. Dye, President
and Chief Executive Officer
(Principal Executive Officer)
DATE: July 15, 1997 By: /s/ Michael Brown
-----------------
Michael Brown, Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
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