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EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
The following table shows, for the periods indicated, certain components of
the Company's consolidated statements of operations as a percentage of net sales
and the percentage changes in the dollar amounts of such components compared to
the indicated prior period.
Period to Period Change
-------------------------
Fiscal 1996 Fiscal 1995
Percentage of Net Sales to to
-----------------------------------
1997 1996 1995 Fiscal 1997 Fiscal 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Net Sales 100.0% 100.0% 100.0% (13.1%) (10.4%)
Cost of Goods Sold 82.8% 84.6% 95.5% (14.9%) (20.5%)
Gross Profit 17.2% 15.4% 4.5% (2.8%) 203.5%
Selling, General & Administrative Expenses 11.8% 10.4% 10.1% (1.3%) (7.8%)
Restructuring Charge - - (.1%) - (100.0%)
Impairment Loss on Long-Lived Assets - .2% 6.1% (100.0%) (97.1%)
Operating Income 5.4% 4.8% (11.6%) (2.0%) 136.7%
Interest Expense 2.1% 2.6% 2.3% (28.9%) (1.2%)
Other (.1%) .1% .3% (211.0%) (66.3%)
Income (Loss) Before Taxes 3.4% 2.1% (14.2%) 41.0% 113.2%
Credit for income taxes - (.1%) (.4%) (100.0%) (85.0%)
Extraordinary Item- Loss on Extinguishment
of Debt - - .4% - -
Net Income (Loss) 3.4% 2.2% (14.2%) 36.6% 113.7%
Comparison of Fiscal Years Ended March 30, 1997 and March 31, 1996
1997 1996 Change % Change
- -----------------------------------------------------------------------------------------------------------------------------------
Net Sales $48,142,920 $55,374,711 $(7,231,791) (13.1%)
The 1997 decrease in sales resulted from the combination of the anticipated
decline in conventional label sales and a change in mix in the in-mold label
market resulting in a small revenue decline offset by an increase in cylinder
sales. Conventional label sales declined $6,348,000 to approximately $12,552,000
in 1997. The decline in conventional label business was the result of the
Company eliminating some unprofitable conventional label activities and the
reduced sales to one major customer as the existing profitability did not meet
the expected returns established by management. The Company is continuing its
relationship with this customer and was awarded some new business which met the
profitability standards. The Company continues to take steps to improve the
profitability of its conventional label business and may experience further
sales declines as a result of these efforts.
Although 1997 unit volume was consistent with 1996, the Company's in-mold
label sales decreased by $1,258,000 to approximately $32,742,000 in 1997. The
decrease resulted from a change in mix in the in-mold market resulting in a
small revenue decline; however, the Company has confidence in the long-term
growth of the in-mold market. To accommodate this expected sales growth, the
Company is doubling its printing capacity and adding both a new short-run,
Italian-made press and a rebuilt press at the Scottsburg facility.
Sales at the Graphics division increased $394,000 due to the division now
providing the majority of the cylinder requirements for the Company's label
customers. The Company is currently marketing its cylinder manufacturing
capabilities externally to increase sales for this division. In anticipation of
increased sales, the Company started a new subsidiary with
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Think Laboratories, Inc. of Kashiwa, Japan, through a corporation owned 80%
by the Company and entitled Laser Graphic Systems, Incorporated. With this
subsidiary, the cylinder making capacity of the Graphics division will be
doubled.
1997 1996 Change % Change
- -----------------------------------------------------------------------------
Gross Profit $ 8,266,949 $ 8,507,987 $ (241,038) (2.8%)
As a % of Sales 17.2% 15.4% 1.8% -
The 1997 gross profit percentage of 17.2% represents the highest gross profit
percentage in the Company's history. The Company's success at improving its
consolidated gross profit percentage with lower sales volumes supports
management's commitment to lower the Company's cost structure. Gross profit was
favorably impacted by consistent levels of in-mold label sales which generate
higher margins than conventional label sales, coupled with improved efficiency
at the Scottsburg and Graphics divisions. Gross profit was also favorably
impacted by the Company continuing its cost-cutting programs in 1997 at the
Cincinnati division to handle the lower levels of conventional label sales.
Additionally, the 1996 gross profit was favorably impacted by a one-time
$300,000 "out of period" supplier claim settlement.
With lower sales volumes in 1997 than in 1996, the 1997 Cincinnati gross
profit performance was down slightly from 1996 gross profit performance. This
resulted from a different mix of product being produced at Cincinnati in 1997
due to the successful transfer of all gravure in-mold label production to the
Scottsburg plant during 1996. The Company has continued its cost containment
programs at the Cincinnati plant to handle expected lower levels of conventional
label sales and is focusing on growing those businesses that generate a positive
contribution to gross profit.
Scottsburg's gross profit increased over 1996 and was favorably impacted by
higher sales volumes. Although an improvement in gross profit was realized,
there was a slight decline in gross profit percentage due to an increase in
employment to handle the production from the installation of the rebuilt and new
Italian rotogravure presses. Additionally, during 1996, the division benefited
from a one-time $300,000 "out of period" supplier claim settlement.
The Graphics division realized an increase of $523,000 in 1997 gross profit
over 1996. This was the result of the division providing the majority of the
cylinder requirements for the Company's label customers. During 1997, the
Company started a new entity with Think Laboratories, Inc. of Kashiwa, Japan,
through a corporation owned 80% by the Company and entitled Laser Graphic
Systems, Incorporated. With this subsidiary, the capacity of the Graphics
division will be doubled and the Company is currently seeking new markets for
its cylinder making capabilities to increase sales for this division.
1997 1996 Change % Change
- -------------------------------------------------------------------------------
Selling, General and
Administrative
Expenses $ 5,688,392 $ 5,764,988 $ (76,596) (1.3%)
As a % of Sales 11.8% 10.4% 1.4% -
Selling, general, and administrative expense decreased $77,000. This decrease
was attributable to the Company no longer using an outside consulting firm
during fiscal 1996 to assist with its equity financing offset by additional
staffing to handle the Scottsburg plant expansion and the hiring of additional
in-mold label sales personnel during fiscal 1997 to assist with the expected
future growth of in-mold label sales.
1997 1996 Change % Change
- -------------------------------------------------------------------------------
Impairment Loss on
Long-Lived Assets $ - $111,698 $(111,698) (100.0%)
In 1995, the Company recorded a $3,800,000 impairment loss due to the
recurring losses at the Cincinnati location. This impairment loss reduced the
carrying value of certain equipment at the Cincinnati location to fair value as
generally determined by an independent appraiser. An overall management plan to
restore the Cincinnati operations to profitability was initiated in 1995. This
plan called for the elimination of unprofitable business activities in the
conventional label division and the rationalization of the overhead cost
structure to align it with the remaining business. While the remaining business
was expected to be profitable, projected sales levels were expected to be lower.
These expected lower sales levels resulted in the corresponding recording of the
1995 impairment loss against printing and finishing equipment. The additional
impairment loss recorded in 1996 on printing equipment reflects management's
ongoing assessment of expected sales levels, expected utilization of specific
assets in meeting those sales levels, and the corresponding carrying value and
fair value of such assets as established by an independent appraisal. The
conclusion of this assessment in 1997 was that no additional impairment loss was
required.
1997 1996 Change % Change
- -------------------------------------------------------------------------------
Interest Expense $1,011,709 $1,423,022 $(411,313) (28.9%)
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Interest expense decreased due to principal payments on the Company's
Industrial Revenue Bonds.
The Company recorded no amounts for income taxes in 1997 as it anticipates
utilizing net operating loss carryforward benefits generated in prior periods.
There is no net deferred tax balance.
The Company recorded a net profit for 1997 of $1,627,000 or an increase of
$436,000 from the net profit of $1,191,000 in 1996, due to the factors discussed
above.
Comparison of Fiscal Years Ended March 31, 1996 and April 2, 1995
1996 1995 Change % Change
- -------------------------------------------------------------------------------
Net Sales $55,374,711 $61,776,951 $(6,402,240) (10.4%)
The 1996 decrease in sales was anticipated by management and was the direct
result of declines in the conventional label business partially offset by
increased in-mold label sales. Conventional label sales declined $7,900,000 to
approximately $18,900,000 in 1996. The decline in conventional label business
was the result of the Company eliminating some unprofitable conventional label
activities and the reduced sales to one major customer. The expected declines
from the 1995 sales levels accommodated management's successful implementation
of cost-cutting strategies which positively impacted 1996 results. The Company
continues to take steps to improve the profitability of its conventional label
business and may experience further sales declines as a result of these efforts.
The Company's in-mold label sales increased by $1,900,000 to approximately
$34,000,000 in 1996. This increase resulted from increased penetration of the
household cleaning product markets with both new and existing customers. The
Company expects the in-mold label market to continue to increase due to higher
volumes to existing customers and new business. To accommodate this expected
sales growth, the Company is planning an expansion in capacity at its Scottsburg
manufacturing division during 1997.
Sales at the Graphics division declined $400,000 due to the decline in label
sales and general industry conditions. To offset this decline, the Company is
currently marketing its cylinder manufacturing capabilities to increase sales
for this division.
1996 1995 Change % Change
- -------------------------------------------------------------------------------
Gross Profit $ 8,507,987 $ 2,803,041 $ 5,704,946 203.5%
As a % of Sales 15.4% 4.5% 10.9% -
The 1996 gross profit percentage of 15.4% represents the highest gross profit
percentage in the Company's history. Gross profit was favorably impacted
primarily by higher levels of in-mold label sales which generate higher margins
than conventional label sales coupled with improved efficiency at the Scottsburg
division. Additionally, the gross profit was favorably impacted by a one-time
$300,000 supplier claim settlement, the cost-cutting programs initiated at
Cincinnati to handle the lower levels of conventional label sales, and the
transfer of all gravure in-mold label manufacturing to the Scottsburg division.
With lower sales volumes in 1996 than in 1995, the 1996 Cincinnati gross
profit performance exceeded the 1995 gross profit performance due to the cost
containment program implemented by management to handle the expected lower
levels of conventional label sales. The Company also eliminated unprofitable
Cincinnati conventional label businesses and is focusing on growing those
businesses that generate a positive contribution to gross profit.
Scottsburg had record gross profit performance due to higher volumes from
increased sales, the successful transfer of all gravure in-mold label
production, lower waste, and improved efficiencies. The Company is planning to
expand this facility and the division is expected to continue its upward growth.
During 1996, the division benefited from the $300,000 one-time supplier claim
settlement. Additionally, the gross profit was adversely impacted during 1995 by
a $1,400,000 accrual for blocking (sticking together) of labels, which has
successfully been resolved, and also accounts for the comparative improvement in
gross profit.
The Graphics division realized a decline of $252,000 in 1996 gross profit
over 1995. This was the result of lower label sales in 1996 and general industry
conditions. The Company is currently seeking new markets for its cylinder making
capabilities to increase sales for this division.
1996 1995 Change % Change
- -------------------------------------------------------------------------------
Selling, General and
Administrative
Expenses $5,764,988 $6,255,948 $(490,960) (7.8%)
As a % of Sales 10.4% 10.1% .3% -
The decrease in selling, general, and administrative expenses of $491,000 in
1996 was attributable to the implemented cost-cutting programs initiated during
1996. The
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reductions were partially offset by consulting services (approximately
$213,000) utilized to assist with the Company's financial restructuring plan.
1996 1995 Change % Change
- -------------------------------------------------------------------------------
Restructuring Charge $ - $(85,000) $85,000 (100.0%)
During 1994, the Company incurred a $1,777,000 restructuring charge which
primarily included the costs associated with consolidating operations and
closing and disposing of the Lockport, Illinois, facility. The $85,000 credit
realized during 1995 represents overaccrual of expenses associated with the
restructuring.
1996 1995 Change % Change
- -------------------------------------------------------------------------------
Impairment Loss on
Long-Lived Assets $111,698 $3,800,000 $(3,688,302) (97.1%)
In 1995, the Company recorded a $3,800,000 impairment loss due to the
recurring losses at the Cincinnati location. This impairment loss reduced the
carrying value of certain equipment at the Cincinnati location to fair value as
generally determined by an independent appraiser. An overall management plan to
restore the Cincinnati operations to profitability was initiated in 1995. This
plan called for the elimination of unprofitable business activities in the
conventional label division and the rationalization of the overhead cost
structure to align it with the remaining business. While the remaining business
was expected to be profitable, projected sales levels were expected to be lower.
These expected lower sales levels resulted in the corresponding recording of the
1995 impairment loss against printing and finishing equipment. The additional
impairment loss recorded in 1996 on printing equipment reflects management's
ongoing assessment of expected sales levels, expected utilization of specific
assets in meeting those sales levels, and the corresponding carrying value and
fair value of such assets as established by an independent appraisal.
1996 1995 Change % Change
- --------------------------------------------------------------------------------
Interest Expense $1,423,022 $1,440,575 $(17,533) (1.2%)
Interest expense decreased due to the combination of lower borrowings against
the revolving loan offset by higher interest rates on the Company's Industrial
Revenue Bonds.
The Company recorded an income tax credit in 1996. There is no deferred tax
balance.
The Company recorded a net profit for 1996 of $1,191,000 or an increase of
$9,939,000 from the net loss of $(8,748,000) in 1995, due to the factors
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
In July 1994, the Company entered into a new Credit Agreement with PNC Bank,
Ohio, National Association, and Star Bank, National Association, extending
through July 1997. This agreement was to provide available borrowings under the
revolving line of credit of up to a maximum of $5,000,000, subject to certain
borrowing base limitations, and to provide for up to an additional $1,400,000 of
long-term financing for capital expenditures. During 1995, the Company was in
violation of certain of its financial covenants and received waivers from its
lenders with respect to these violations until April 2, 1995. In connection with
the waivers, the Credit Agreement was amended to restrict the borrowing base,
increase the interest rate and fees applicable to the borrowings under the
Credit Agreement, and restricted the $1,400,000 term loan and lease lines. The
Company remained in violation of the cashflow coverage ratio, the leverage
ratio, and the current ratio covenants until February 23, 1996, at which time,
the Credit Agreement was restated. As the Company was in violation of certain
covenants that gave the lenders the right to accelerate the due dates of their
loans, the 1995 annual report was issued with the otherwise long-term debt
classified as short-term. This resulted in a significant deterioration in the
Company's working capital position.
During 1996, management launched a three-tiered initiative designed to
overcome the Company's financial difficulties. First was a plan to restore the
Cincinnati operations to profitability as measured on an Earnings Before
Interest, Taxes, Depreciation, and Amortization (EBITDA) basis. This plan is
described in the "Comparison of Fiscal Years Ended March 31, 1996 and April 2,
1995" section. Second was a strategy to continue growing the in-mold label
business while improving gross margins in this area. This strategy called for
consolidating all the gravure in-mold label manufacturing in the Scottsburg
facility thereby increasing operating efficiencies and operating leverage. The
third aspect of the initiative called for the Company to raise approximately
$3,000,000 in equity to strengthen the capital structure of the Company. The
Company was successful in its efforts as four consecutive quarters of
profitability resulted during 1996 each having EBITDA exceeding $1,000,000.
Additionally, the Company was successful in raising $500,000 in equity prior to
year-end 1996
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and $2,418,000 during the first quarter of 1997, supporting its commitment to
strengthen its overall financial structure.
Regaining profitability during 1996 coupled with significant improvements in
cashflow and debt reduction enabled the Company to restate its loan agreement
with its lenders on February 23, 1996. The restated loan agreement provided for
available borrowings under the revolving line of credit of up to $3,750,000 and
a $500,000 standby letter of credit to purchase raw materials included as a
sub-limit to the revolving credit facility. Additionally, the restated agreement
allowed for annual capital expenditures not to exceed $1,500,000.
With the infusion of equity, the Company expanded the Scottsburg division
during 1997 by adding additional capacity. This added capacity supports the
strategy of growing the in-mold label business. Recognizing the importance of
this expansion program to the overall success of the Company, the lenders
amended the restated loan agreement on May 2, 1996, permitting the asset
acquisitions associated with the Scottsburg expansion. This amendment allowed
total capital expenditures of $3,500,000 for 1997. Additionally, the associated
covenants impacted by the increased capital expenditures were appropriately
amended and the Company remains in compliance with the revised covenant
requirements.
On July 22, 1996, the February 23, 1996 restated loan agreement was amended
to improve the borrowing base calculation, reduce the annual agency fees, and
improve the reporting requirements of the Borrowing Base Certificate to a
monthly versus weekly requirement. Additionally, the Company started a new
entity with Think Laboratories, Inc. of Kashiwa, Japan, through a corporation
owned 80% by the Company and entitled Laser Graphic Systems, Incorporated,
during the second quarter to develop the market for engraving services in the
United States. Although the banks previously had verbally consented to the
creation of this subsidiary, the loan agreement required written consent.
Therefore, the third amendment and waiver to the February 23, 1996 restated loan
agreement was signed on October 31, 1996, whereby the lenders consented to the
new company. The third amendment also increased the annual lease lines by
$200,000 allowing the Company an annual exposure of $600,000 for rental payments
under all lease agreements on real and personal property in support of the
Company's Scottsburg plant expansion plans.
On January 9, 1997, the Company and its lenders, PNC Bank, Ohio, National
Association, and Star Bank, National Association, entered into a new Credit
Agreement extending its revolving line of credit through July 31, 1998. The new
loan agreement also provides for a $2,000,000 non-revolving credit facility
expiring August 25, 1997. Borrowings under the revolving line of credit are
limited to $4,500,000 and a $500,000 standby letter of credit to purchase raw
materials is included as a sub-limit to the revolving credit facility. The
agreement also allows the Company to make capital expenditures of $3,200,000
during fiscal year 1997, $2,600,000 during fiscal year 1998, and $1,800,000
during fiscal year 1999 in support of its capital expansion program. Unexpended
amounts during one fiscal year can be accumulated and carried over to the next
fiscal year. Additionally, the new agreement allows the Company an annual
exposure of $600,000 for rental payments under all lease agreements on real and
personal property. The new agreement also reduces the fee structure of the
Company's loan portfolio and establishes reduced interest rates if certain
performance targets are accomplished. The Company is in compliance with all
covenants included in the agreements. No borrowing beyond the existing credit
facilities is anticipated.
PNC Bank, Ohio, National Association, and Star Bank, National Association,
also entered into a new loan agreement on January 9, 1997 with Laser Graphic
Systems, Incorporated providing a revolving line of credit of $500,000 until
August 1, 1997, at which time, it will be converted to an evenly amortized term
note due June 30, 2002.
Cash provided by operating activities was $2,600,000 in 1997 compared to cash
provided by operating activities of $3,800,000 in 1996. The decrease was
primarily due to less significant reductions in inventories and accounts
receivables in 1997 than occurred in 1996. The Company's working capital was
$661,000 at the end of 1997 as compared to zero at the end of 1996. The
resulting current ratios were 1.08 to 1 and 1 to 1, respectively. The
improvement in working capital was primarily attributable to the reduction in
accounts payable resulting from the infusion of equity. At March 30, 1997 and
June 1, 1997, the Company was in compliance with its loan covenants and current
in its principal and interest payments on all debt. As of June 16, 1997,
approximately $1,600,000 was available under the revolving line of credit.
INFLATION
The Company does not believe that its operations have been materially
affected by inflation.
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CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended March 30, 1997, March 31, 1996 and April 2, 1995
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Net sales $ 48,142,920 $ 55,374,711 $ 61,776,951
Cost of goods sold 39,875,971 46,866,724 58,973,910
- -------------------------------------------------------------------------------------------------------------------
Gross profit 8,266,949 8,507,987 2,803,041
Selling, general and administrative expenses 5,688,392 5,764,988 6,255,948
Restructuring charge (income) (Note 13) - - (85,000)
Impairment loss on long-lived assets (Note 2 (f)) - 111,698 3,800,000
- -------------------------------------------------------------------------------------------------------------------
Operating income (loss) 2,578,557 2,631,301 (7,167,907)
Interest expense 1,011,709 1,423,022 1,440,575
Minority interest in losses of subsidiary (Note 11) (13,424) - -
Other (income) expense, net (46,886) 54,311 161,300
- -------------------------------------------------------------------------------------------------------------------
Income (loss) before credit for income taxes 1,627,158 1,153,968 (8,769,782)
Credit for income taxes (Note 5) - (37,000) (246,537)
- -------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item 1,627,158 1,190,968 (8,523,245)
Extraordinary item (Note 3) - - 225,000
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1,627,158 $ 1,190,968 $ (8,748,245)
Weighted average shares and equivalents outstanding:
Primary 2,211,317 2,177,927 2,168,577
Fully diluted 2,823,533 2,200,595 2,168,577
- -------------------------------------------------------------------------------------------------------------------
Per share information:
Primary earnings (loss) before extraordinary item $ 0.62 $ 0.55 $ (3.93)
Extraordinary item $ - - $ (0.10)
- -------------------------------------------------------------------------------------------------------------------
Primary earnings (loss) per common and common
equivalent share $ 0.62 $ 0.55 $ (4.03)
- -------------------------------------------------------------------------------------------------------------------
Fully diluted earnings per common and common equivalent share $ 0.58 $ 0.54 $ (4.03)
- -------------------------------------------------------------------------------------------------------------------
The accompanying notes to financial statements are an integral part of these
statements.
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CONSOLIDATED BALANCE SHEETS
As of March 30, 1997 and March 31, 1996
1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents (Note 2(d)) $ 80,780 $ 40,449
Accounts receivable, net:
Trade (Notes 3 and 9) 2,865,652 4,437,344
Other 383,515 38,266
Note receivable (Note 8) 118,585 108,415
Inventories (Notes 2(e) and 3) 5,092,074 4,745,535
Deferred tax benefit (Note 5) 240,675 255,744
Prepaid expenses, supplies and other 91,628 22,650
Refundable income taxes 45,818 33,000
- -----------------------------------------------------------------------------------------------------------------------------------
Total current assets 8,918,727 9,681,403
Property, Plant and Equipment, net (Notes 2(f) and 3) 19,083,988 18,107,508
Equipment held for sale, net (Note 2(g)) 144,248 -
Sinking Fund Deposits (Note 3) 74,451 2,236,939
Deferred Charges, net 2,652 55,886
Note Receivable (Note 8) 162,685 272,552
Note Receivable from Officer/Shareholder (Note 8) 100,000 100,000
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 28,486,751 $ 30,454,288
===================================================================================================================================
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Short-term debt (Note 3) $ 2,293,794 $ 1,891,554
Current portion of long-term debt (Note 3) 1,003,133 952,910
Current portion of capital lease obligations (Note 10) 114,497 58,028
Accounts payable 3,631,548 5,250,856
Accrued liabilities:
Payroll benefits and related taxes (Note 4(a)) 671,257 843,773
Vacations 115,051 300,115
Real estate and personal property taxes 348,430 309,467
Interest and other 79,932 78,003
- -----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 8,257,642 9,684,706
Long-Term Debt (Note 3) 9,600,000 14,552,183
Capital Lease Obligations (Note 10) 301,687 320,907
Deferred Income Taxes (Note 5) 240,675 255,744
Deferred Compensation (Note 4(c)) 691,920 603,139
Pension Liability (Note 4(a)) 1,363 117,566
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 19,093,287 25,534,245
- -----------------------------------------------------------------------------------------------------------------------------------
Minority Interest (Note 11) 486,576 -
---------------------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 12)
Shareholders' Investment (Notes 3, 7 and 14):
Preferred stock, no par value; 1,000,000 shares authorized,
- 13,242 shares issued at March 30, 1997 and March 31, 1996
(aggregate liquidation preference of $529,666) Series B 529,666 529,666
- 52,500 shares issued at March 30, 1997
(aggregate liquidation preference of $2,625,000) Series A 2,418,303 -
Common stock, no par value; 10,000,000 shares authorized, 2,191,419 and
2,172,569 shares issued at March 30, 1997 and March 31, 1996 218,052 217,257
Paid-in capital 9,174,645 9,140,334
Accumulated deficit (3,343,096) (4,709,445)
Excess of additional pension liability over unrecognized prior service cost (Note 4(a)) (45,682) (257,769)
Treasury stock, at cost; 10,900 shares (45,000) -
- -----------------------------------------------------------------------------------------------------------------------------------
Total shareholders' investment 8,906,888 4,920,043
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' investment $ 28,486,751 $ 30,454,288
===================================================================================================================================
The accompanying notes to financial statements are an integral part of these
balance sheets.
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
For the Years Ended March 30, 1997, March 31, 1996 and April 2, 1995
Preferred Stock Common Stock
---------------- ------------ Retained
Number of Number of Earnings Additional
Shares Shares Paid-In (Accumulated Pension Treasury
Outstanding Amount Outstanding Amount Capital Deficit) Liability Stock Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balance,
April 3, 1994 - $ - 2,151,006 $215,101 $9,013,340 $ 2,847,832 $(258,435) $ - $11,817,838
Add (deduct):
Net loss - - - - - (8,748,245) - - (8,748,245)
Purchases of treasury stock - - (8,733) - - - - (87,330) (87,330)
Sale and distribution
of treasury stock - - 8,733 - (37,115) - - 87,330 50,215
Sale of common stock - - 21,563 2,156 164,109 - - - 166,265
Change in additional
pension liability - - - - - - (200,678) - (200,678)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance,
April 2, 1995 - - 2,172,569 217,257 9,140,334 (5,900,413) (459,113) - 2,998,065
Add (deduct):
Net income - - - - - 1,190,968 - - 1,190,968
Conversion of convertible
debt to preferred stock 13,242 529,666 - - - - - - 529,666
Change in additional
pension liability - - - - - - 201,344 - 201,344
- -----------------------------------------------------------------------------------------------------------------------------------
Balance,
March 31, 1996 13,242 529,666 2,172,569 217,257 9,140,334 (4,709,445) (257,769) - 4,920,043
Add (deduct):
Net income - - - - - 1,627,158 - - 1,627,158
Preferred stock issued 52,500 2,418,303 - - - - - - 2,418,303
Purchase of treasury stock - - - - - - (45,000) (45,000)
Issuance of common stock - - 7,950 795 34,311 - - - 35,106
Preferred dividends paid - - - - - (260,809) - - (260,809)
Change in additional
pension liability - - - - - - 212,087 - 212,087
- -----------------------------------------------------------------------------------------------------------------------------------
Balance,
MARCH 30, 1997 65,742 $2,947,969 2,180,519 $218,052 $9,174,645 $(3,343,096) $ (45,682) $(45,000) $8,906,888
===================================================================================================================================
The accompanying notes to financial statements are an integral part of these
statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended March 30, 1997, March 31, 1996 and April 2, 1995
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,627,158 $ 1,190,968 $(8,748,245)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 1,739,065 1,890,120 2,667,491
Amortization 53,234 86,780 84,484
Minority interest in losses of subsidiary (13,424) - -
Net gain on disposal of equipment (186) (48,667) -
Interest expensed on convertible debt - 29,666 -
Decrease in deferred income taxes, net - - (109,867)
Increase (decrease) in non-current deferred compensation, net 88,781 73,514 (288,258)
Increase (decrease) in non-current pension obligation, net of equity charge 95,884 99,015 (158,195)
(Increase) decrease in notes receivable 99,697 108,683 (30,767)
Net decrease in accounts receivable, inventories,
prepaid expenses, supplies, and other and refundable income taxes 798,108 5,139,845 1,994,948
Net decrease in accounts payable, accrued liabilities (excluding restructuring charge) (1,935,996) (4,918,973) (26,539)
Restructuring charges - - (85,000)
Payment of restructuring liabilities - - (195,450)
Impairment loss on long-lived assets - 111,698 3,800,000
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 2,552,321 3,762,649 (1,095,398)
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (3,051,607) (931,085) (1,527,496)
Proceeds from sale of equipment 352,415 1,117,700 -
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (2,699,192) 186,615 (1,527,496)
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in revolving line of credit, net 402,240 (2,213,347) 3,421,026
Sinking fund withdrawals (payments) 2,162,488 (1,836,939) (400,000)
Treasury stock, net (45,000) - (37,115)
Proceeds from issuance of common stock, net 35,106 - 166,265
Proceeds from issuance of preferred stock, net 2,418,303 - -
Repayment of long-term debt (4,901,960) (295,997) (314,269)
Preferred stock dividend payments (260,809) - -
Proceeds from minority shareholder of subsidiary 500,000 - -
Capitalized bank fees - - (207,150)
Repayment of capital lease obligation (123,166) (79,065) -
Proceeds from issuance of convertible debt - 500,000 -
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 187,202 (3,925,348) 2,628,757
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 40,331 23,916 5,863
Cash and Cash Equivalents, beginning of year 40,449 16,533 10,670
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, end of year $ 80,780 $ 40,449 $ 16,533
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 1,079,629 $ 1,389,555 $ 1,344,411
Income taxes paid (refunds received) $ - $ 43,574 $ (550,740)
Supplemental Disclosure of Non Cash Activities:
Restructuring charge (Note 13) $ - $ - $ 59,201
Note receivable from sale of Lockport facility (Note 8) $ - $ - $ 450,000
Increase in property, plant and equipment and capital lease obligation $ 160,415 $ 458,000 $ -
Increase in non-current deferred compensation and decrease in accrued liabilities $ - $ 529,625 $ -
====================================================================================================================================
The accompanying notes to financial statements are an integral part of these
statements.
14
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 30, 1997, March 31, 1996 and April 2, 1995
(1) THE COMPANY
Multi-Color Corporation (the Company), located in Cincinnati, Ohio, primarily
supplies printed labels and engravings to various name brand consumer products
companies located throughout the United States. The Company has plants located
in Cincinnati, Ohio, Scottsburg, Indiana and Erlanger, Kentucky.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) FISCAL YEAR
The fiscal year of the Company commences on the Monday closest to March 31.
References to fiscal 1997, 1996, and 1995 are for the fiscal years ended March
30, 1997, March 31, 1996 and April 2, 1995, respectively.
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financials statements include the accounts of the Company
and its majority-owned subsidiary (Note 11). All significant intercompany
transactions have been eliminated.
(C) REVENUE RECOGNITION
Sales and related costs of goods sold are recognized upon shipment to the
customers.
(D) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include operating cash accounts and money market
funds.
(E) INVENTORIES
Inventories are stated at the lower of FIFO (first-in, first-out) cost or
market. Inventories as of year-end consisted of the following:
1997 1996
- -------------------------------------------------------------------------------
Finished goods $2,801,622 $2,383,016
Work-in-process 641,487 909,460
Raw materials 1,648,965 1,453,059
- -------------------------------------------------------------------------------
$5,092,074 $4,745,535
===============================================================================
(F) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following as of year-end:
1997 1996
- -------------------------------------------------------------------------------
Land and buildings $ 4,026,842 $ 3,829,712
Machinery and equipment 25,478,077 26,439,064
Furniture and fixtures 1,006,120 856,568
Construction in progress 2,954,688 255,373
- -------------------------------------------------------------------------------
33,465,727 31,380,717
Accumulated depreciation (14,381,739) (13,273,209)
- -------------------------------------------------------------------------------
$ 19,083,988 $18,107,508
===============================================================================
Property, plant and equipment are stated at the lower of fair value or cost.
In recognition of the losses experienced by the Company at the Cincinnati
location in prior years, the Company recorded a $3,800,000 impairment loss in
1995 on certain long-lived assets at the Cincinnati location to reduce the
carrying cost to the fair value as generally determined by an independent
appraiser. The impairment loss was recorded under the implementation of SFAS No.
121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to
be disposed of." An additional impairment loss of $112,000 was recorded in 1996
on the Cincinnati location's assets, while assets with an assigned impairment
value of $246,000 and $677,000 were either sold or disposed of in 1997 and 1996,
respectively. Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets, as follows:
Building................... 20-30 years
Machinery and equipment..... 3-15 years
Furniture and fixtures...... 5-10 years
(G) EQUIPMENT HELD FOR SALE
The Company has made available for sale certain equipment considered by
management to be excess and no longer necessary for the operations of the
Company. Accordingly, this equipment, net of accumulated depreciation of
$296,391 and impairment loss of $79,178, is classified as equipment held for
sale. The aggregate carrying values of such equipment are periodically reviewed
and are stated at the lower of cost or market.
(H) DEFERRED CHARGES
Deferred charges, net, consist primarily of costs associated with the 1995
refinancing of the credit agreement which are amortized over the term of the
agreement (Note 3).
(I) INCOME TAXES
Deferred income tax assets and liabilities are provided for temporary
differences between the tax basis and reported amounts of assets and liabilities
that will result in taxable or deductible amounts in future years.
(J) EARNINGS (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE
Primary earnings (loss) per common and common equivalent share are computed
by dividing net income (loss) by the weighted average number of common shares
and related equivalents outstanding during the period. Fully diluted earnings
per common and common equivalent share are computed based on the assumption that
the Series A and Series B convertible preferred stock had been converted to
common stock from the date of issue.
15
11
Common equivalent shares are shares issuable upon the exercise of stock
options, when dilutive, net of shares assumed to have been repurchased with the
proceeds and shares issuable upon conversion of the convertible preferred stock.
Due to the net loss in 1995, common equivalent shares are excluded from the 1995
primary and fully diluted earnings (loss) per share calculations as they would
be anti-dilutive.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". SFAS No.
128 requires the presentation of basic earnings per share and diluted earnings
per share, instead of primary and fully diluted earnings per share. The Company
will implement this statement in the fourth quarter 1998. The effect of adopting
SFAS No. 128 has not been determined.
(K) ADVERTISING COSTS
Advertising costs are charged to expense as incurred. Expenses are minimal
for the three fiscal years ended March 30, 1997.
(L) RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred. Expenses
were $246,000, $141,000 and $183,000 for 1997, 1996 and 1995, respectively.
(M) STOCK-BASED COMPENSATION
The provisions of SFAS No. 123 "Accounting for Stock-Based Compensation" are
effective for the Company in 1997. This recent standard requires that employee
stock-based compensation either continue to be determined under Accounting
Principles Board Opinion (APB) No. 25 "Accounting for Stock Issued to Employees"
or in accordance with the provisions of SFAS No. 123, whereby compensation
expense is recognized based on the fair value of stock-based awards on the grant
date. The Company accounts for such awards under the provisions of APB No. 25
and, accordingly, no compensation cost has been recognized for the stock awards.
The Company has made the required additional disclosures under SFAS No. 123 for
1997 and 1996 (Note 7).
(N) USE OF ESTIMATES IN FINANCIAL STATEMENTS
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(O) RECLASSIFICATION
Certain 1995 amounts have been reclassified to conform to the 1997 and 1996
presentation.
(3) DEBT
The components of the Company's debt are as follows:
1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM DEBT
Revolving line of credit $ 2,293,794 $ 1,891,554
===================================================================================================================================
LONG-TERM DEBT
Cincinnati Industrial Revenue Bonds, floating weekly rate, which approximates
3.60% at March 30, 1997, scheduled balloon payment of $1,600,000 in November 2000 1,600,000 6,500,000
Scottsburg Industrial Revenue Bonds, floating weekly rate, which approximates 3.45% at
March 30, 1997, scheduled balloon payment of $5,750,000 in October 2009 5,750,000 5,750,000
Boone County Industrial Revenue Bonds, floating weekly rate, which approximates 3.45% at
March 30, 1997, scheduled balloon payment of $3,250,000 in December 2009 3,250,000 3,250,000
Other 3,133 5,093
- -----------------------------------------------------------------------------------------------------------------------------------
$ 10,603,133 $ 15,505,093
Less-current portion of debt and sinking fund payments (1,003,133) (952,910)
- -----------------------------------------------------------------------------------------------------------------------------------
$ 9,600,000 $ 14,552,183
===================================================================================================================================
The following is a schedule of future annual principal payments payable after
one year (including sinking fund payments):
1999 $ 500,000
2000 -
2001 100,000
2002 and thereafter 9,000,000
------------------------------------
$9,600,000
====================================
On January 9, 1997, the Company restated its credit agreement with its
existing lenders covering the Company's line of credit and letters of credit
which secure all three Industrial Revenue Bonds (the Bonds). The restatement
extended the previous agreement until July 31, 1998 in support of its expansion
plans and also enables the Company to borrow additional monies under a
non-revolving credit facility. The current credit agreement is secured by
substantially all assets of the Company and requires sinking fund payments of
$250,000 per quarter until the termination of the credit agreement (July 31,
1998) plus
16
12
other sinking fund payments as defined. Under this credit agreement, the
revolving line of credit provides for borrowings up to the lesser of $4,500,000
or specified percentages of trade receivables and inventories less $500,000
through March 30, 1997; $250,000 from March 31, 1997 to June 29, 1997; and $0
from June 30, 1997 and thereafter so long as no event of default has occurred.
This revolving line of credit expires July 31, 1998 and related interest rates
are based on prime rates or Eurodollar loan rates and the Company's leverage, as
defined. The non-revolving credit facility provides for borrowings up to
$2,000,000 at interest rates similar to the revolving line of credit and expires
August 25, 1997. The non-revolving credit facility is intended to be temporary
until the new industrial revenue bonds relating to the Company's Scottsburg
facility are issued (Note 15). At March 30, 1997, the average interest rate was
9.2% and the Company had approximately $1,180,000 in available borrowings under
the revolving line of credit and $2,000,000 under the non-revolving line of
credit.
The credit agreement also contains certain covenants which,
among others, require the Company to maintain certain leverage, working capital
and cash flow ratios, and limit capital expenditures and dividends.
With respect to the Bonds, the Company has the option to establish the Bonds'
interest rate form (variable or fixed interest rate). When a fixed interest rate
is selected, the fixed rate assigned will approximate the market rate for
comparable securities. When a variable rate is selected, or at the end of a
fixed interest rate period, the Bondholders reserve the right to demand payment
of the bonds. In the event that any of the Bondholders exercise their rights, a
remarketing agent is responsible for remarketing the Bonds on a best efforts
basis for not less than the outstanding principal and accrued interest. In the
event the Bonds are not able to be remarketed and the letters of credit are
exercised, the lender is committed to providing financing for up to 458 days.
These letters of credit expire July 31, 1998.
In 1996, the Company had also restated its credit agreement that covered the
Company's short-term debt and letters of credit which secured the Bonds. The
prepayment fees of $225,000 associated with a previous financing agreement were
expensed as an extraordinary item in the 1995 statement of operations. The
restated credit agreement was secured by substantially all assets of the Company
and required sinking fund payments of $200,000 per quarter beginning in October
1994, increased to $250,000 per quarter after June 30, 1996.
During 1997, the Company redeemed $4,900,000 of the Cincinnati Industrial
Revenue Bonds with funds from the Sinking Fund Deposit account.
The fair value of the Company's debt approximates carrying value.
(4) EMPLOYEE BENEFIT PLANS
(a) The Company has a defined benefit plan covering hourly employees at its
Cincinnati facility who meet certain age and service requirements. The Company's
funding policy is to contribute the recommended actuarially determined
contribution. Pension costs are based on length of service after May 1, 1985
using the unit credit method.
Net periodic pension cost includes the following components:
1997 1996 1995
- -------------------------------------------------------------------------------
Service cost-benefits earned
during period $ 140,074 $ 183,913 $ 166,698
Interest cost on projected
benefit obligations 158,341 142,207 116,499
Actual (return) loss on
plan assets (375,606) (412,624) 57,395
Net amortization, deferral
and other 194,311 304,846 (153,592)
- -------------------------------------------------------------------------------
Total net periodic
pension costs $ 117,120 $ 218,342 $ 187,000
===============================================================================
The actuarial assumptions used were:
1997 1996 1995
- -------------------------------------------------------------------------------
Discount rate 7 1/4% 7 1/4% 7 1/4%
Rate of return on assets 9% 9% 9%
- -------------------------------------------------------------------------------
The following table sets forth the plan's funded status and amounts
recognized in the Company's accompanying balance sheets:
MARCH 30, 1997 March 31, 1996
- -------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested benefit obligation $ 2,403,278 $ 2,186,718
Non-vested benefit obligation 45,785 46,278
- -------------------------------------------------------------------------------
Accumulated benefit obligation 2,449,063 2,232,996
- -------------------------------------------------------------------------------
Projected benefit obligation for
services rendered to date 2,449,063 2,232,996
Plan assets at fair value,
primarily composed of equity
securities 2,447,700 1,967,460
- -------------------------------------------------------------------------------
Projected benefit obligation
in excess of plan assets 1,363 265,536
Prior service cost not yet
recognized in net periodic
pension cost (3,633) (4,839)
Unrecognized net loss from
past experience different from
that assumed and effects of
changes in assumptions (45,682) (257,769)
Adjustment to recognize
minimum liability 49,315 262,608
- -------------------------------------------------------------------------------
Accrued pension cost $ 1,363 $ 265,536
================================================================================
17
13
(b) The Company has established a profit sharing/401(k) retirement savings
plan which covers those employees who meet certain service requirements and are
not participants in the other Company retirement plan discussed above. The plan
provides for voluntary contributions by the Company's employees up to a
specified maximum percentage of gross pay. At the discretion of the Company's
Board of Directors, the Company will contribute a specified matching percentage
of the employee contributions. Company contributions in 1997, 1996 and 1995
approximated $124,000, $101,000 and $93,000, respectively, which represent
one-half of the employee contributions not exceeding 6% of gross pay.
(c) The Company previously entered into deferred compensation agreements with
certain officers/shareholders and management employees. Amounts due under
deferred compensation agreements are classified as long-term liabilities at
March 30, 1997 and March 31, 1996. Interest on the deferred amounts which are
included in the balances due were accrued at 10 1/4%, 11%, and 8 1/4% in 1997,
1996 and 1995, respectively. Expenses in 1997, 1996 and 1995 approximated
$88,000, $54,000 and $34,000, respectively.
(d) The Company allows retirees between the ages of 62 and 65 to continue to
participate in its health plan. The retirees reimburse the Company a stipulated
premium amount so the net cost to the Company is immaterial. The Company offers
no other programs requiring recognition of the cost of postretirement or
postemployment benefits under the Financial Accounting Standards Board
statements on accounting for postretirement and postemployment benefits.
(e) During 1992 the Company established a supplemental retirement program for
key executives which allows a maximum of $300,000 in loans to such employees
with a maximum of $100,000 to any one individual. At March 30, 1997 and March
31, 1996 a $100,000 loan at no interest was outstanding under this program from
an officer/shareholder (Note 8).
(f) The Company has an employee stock purchase plan whereby eligible
employees may purchase up to 1,000 shares of Company stock per year through
payroll deductions. The Company will contribute one bonus share for every four
shares purchased up to a maximum of twenty bonus shares per year to any one
employee; however, in 1997, 1996 and 1995 the Company contributed cash rather
than stock.
(5) INCOME TAXES
The provision (credit) for income taxes includes the following components:
1997 1996 1995
- --------------------------------------------------------------------------------
CURRENTLY PAYABLE
(receivable)
Federal $ 1,151,000 $ -- $ (255,000)
State and local 107,000 (37,000) 47,000
Benefit of operating loss
carryforwards (1,258,000) -- --
- --------------------------------------------------------------------------------
-- (37,000) (208,000)
- --------------------------------------------------------------------------------
DEFERRED
Federal 7,000 (256,000) 314,000
State and local (7,000) 256,000 (353,000)
$ -- $ (37,000) $ (247,000)
================================================================================
The following is a reconciliation between the statutory federal income tax
rate and the effective rate shown above:
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
Amount Rate Amount Rate Amount Rate
Computed provision (credit) for federal income
taxes at the statutory rate $ 553,000 34% $ 392,000 34% $(3,058,226) (34%)
State and local income taxes, net of federal
income tax benefit 100,000 6% 145,000 12% (325,173) (4%)
Valuation allowance (708,000) (43%) (708,000) (61%) 3,156,604 35%
Changes in estimates for deferred components - - 147,000 13% - -
Other 55,000 3% (13,000) (1%) (19,742) -
- ---------------------------------------------------------------------------------------------------------------------------
$ - - $ (37,000) (3%) $ (246,537) (3%)
============================================================================================================================
18
14
At year end the net deferred tax components consisted of the following:
1997 1996
- ----------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Tax depreciation over book depreciation $(3,890,541) $(4,625,417)
- ----------------------------------------------------------------------------------------------------
Other 3,671 (9,814)
- ----------------------------------------------------------------------------------------------------
$(3,886,870) $(4,635,231)
====================================================================================================
Deferred tax assets:
Asset impairment loss $ 1,016,135 $ 1,099,631
Deferred compensation 235,253 205,067
Vacation 27,217 71,439
Self-insured benefits 3,400 24,771
Inventory reserves 24,135 40,138
Other 208,520 255,531
AMT credit carryforward 70,980 70,980
Tax credit carryforward 142,215 147,215
State deferred tax asset, net of
federal benefit 15,303 8,600
Net operating loss carryforward 3,884,954 5,160,810
- ----------------------------------------------------------------------------------------------------
5,628,112 7,084,182
Valuation allowance (1,741,242) (2,448,951)
- ----------------------------------------------------------------------------------------------------
$ 3,886,870 $ 4,635,231
- ----------------------------------------------------------------------------------------------------
Net deferred tax components $ -- $ --
- ----------------------------------------------------------------------------------------------------
For tax reporting purposes, the Company has approximately $71,000 of
alternative minimum tax (AMT) credits available for an indefinite period. The
regular tax net operating loss of approximately $11,426,000 can be carried
forward and used to reduce future taxable income in addition to tax credits of
approximately $142,000, which can be carried forward through the following
expiration dates:
Year Net Operating Losses Tax Credits
- --------------------------------------------------------------
2005 $ - $ 25,000
2006 - 48,000
2007 - 37,000
2008 - 9,000
2009 5,610,000 18,000
2010 5,204,000 5,000
2011 612,000 -
- --------------------------------------------------------------
$ 11,426,000 $ 142,000
==============================================================
The valuation allowance, which decreased by approximately $708,000 in 1997,
is required due to the uncertainty of realizing the net deferred tax asset
through future operations.
(6) MAJOR CUSTOMERS
During 1997, 1996 and 1995, sales to three companies and their
related subsidiaries and divisions approximated 51%, 49%, and 42%,
respectively, of the Company's net sales individually presented as follows:
1997 1996 1995
- -----------------------------------------------------------------------------
27% 23% 16%
13% 14% 16%
11% 12% 10%
- -----------------------------------------------------------------------------
51% 49% 42%
=============================================================================
In addition, the year end accounts receivable balances of these companies
approximated 43%, 34%, and 25% of the Company's total trade receivable balance
at year end 1997, 1996, and 1995, respectively.
(7) STOCK OPTIONS
As of March 30, 1997, 569,163 of the authorized but unissued common shares
were reserved for issuance to key employees and directors under the Company's
qualified and non-qualified stock option plans. Stock options granted under the
plans enable the holder to purchase common stock at an exercise price not less
than the market value on the date of grant. To the extent not exercised, options
will expire not more than ten years after the date of grant. The applicable
options vest immediately or ratably over a three to five year period. A summary
of the changes in the options outstanding during 1997, 1996, and 1995 is set
forth below:
Number of Shares Weighted Average Exercise Price Option Price Range (Per Share)
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding at April 3, 1994 363,000 $ 5.75-$12.63
Granted 51,500 4.65- 9.25
Exercised (15,187) 5.75
Cancelled (39,700) 5.75- 12.63
Expired (25,000) 12.63
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding at April 2, 1995 334,613 $8.24 $ 4.65-$12.63
Granted 74,000 2.89 2.63- 4.05
Cancelled (82,000) 9.08 5.75- 9.25
Expired (13,813) 6.75 5.75- 12.63
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding at March 31, 1996 312,800 $6.82 $ 2.63-$11.00
Granted 42,500 6.12 $ 6.00-$ 6.25
Exercised (1,250) 2.63 2.63
Cancelled (5,000) 9.25 9.25
Expired (20,000) 11.00 11.00
- ------------------------------------------------------------------------------------------------------------------------------------
OUTSTANDING AT MARCH 30, 1997 329,050 $6.47 $ 2.63-$11.00
- ------------------------------------------------------------------------------------------------------------------------------------
EXERCISABLE (VESTED) OPTIONS AT MARCH 30, 1997 242,250 $7.18 $ 2.63-$11.00
====================================================================================================================================
19
15
The following summarizes options outstanding and exercisable at March 30, 1997:
Options Outstanding Options Exercisable
----------------------------------------------------- ------------------------------------
Weighted Weighted
Number Average Average Number Weighted
Range of Outstanding Remaining Exercise Exercisable at Average
Exercise Prices at 3/30/97 Contractual Life Price 3/30/97 Exercise Price
- ----------------------------------------------------------------------------------------------------------------------
$2.63 to $6.25 131,250 6.57 $4.16 54,450 $4.57
$6.26 to $11.00 197,800 1.02 $7.99 187,800 $7.94
------- -------
329,050 3.22 $6.47 242,250 $7.18
======= =======
The weighted average fair value at date of grant for options granted during
1997 and 1996 was $3.17 and $1.04, respectively. The fair value of options at
the date of grant was estimated using the binomial model with the following
weighted average assumptions:
1997 1996
- ---------------------------------------------------------------------
Expected life (years) 5.00 3.26
Interest rate 6.04% 5.67%
Volatility 51.71% 40.81%
Dividend yield 0% 0%
Had compensation cost for the Company's stock option plans been determined
based on the fair value at the grant date for awards in 1997 and 1996 consistent
with the provisions of SFAS No. 123, the Company's net income and earnings per
share would have been reduced to the pro forma amounts indicated below:
1997 1996
- ----------------------------------------------------------------------
Net income - as reported 1,627,158 1,190,968
Net income - pro forma 1,547,054 1,159,332
Net income per common and common
equivalent share - as reported
Primary $.62 $.55
Fully diluted $.58 $.54
Net income per common and common
equivalent share - pro forma
Primary $.58 $.53
Fully diluted $.55 $.53
The initial application of SFAS No. 123 for pro forma disclosure may not be
representative of the future effects of applying the statement.
(8) NOTES RECEIVABLE
The components of notes receivable are summarized as follows:
1997 1996
- -------------------------------------------------------------------------------
Officer/shareholder note established under the
supplemental retirement program (Note 4(e)) $ 100,000 $ 100,000
===============================================================================
Note receivable related to the sale of the
Lockport facility, interest at 9%, payable in
monthly installments through July 1999,
secured by a mortgage on
the property and
personal guarantees $281,270 $ 380,967
- ------------------------------------------------------------------------------
Less-current portion (118,585) (108,415)
- ------------------------------------------------------------------------------
$ 162,685 $ 272,552
=============================================================================
(9) ACCOUNTS RECEIVABLE
The Company values its trade accounts receivable on the reserve method.
During 1995, the allowance for doubtful accounts was increased in anticipation
of customer claims relating to the blocking (sticking together) of labels. The
allowance was reduced during 1996 as the claims were successfully resolved. The
following table summarizes the activity in the allowance for doubtful accounts
for fiscal 1997, 1996 and 1995.
1997 1996 1995
- ----------------------------------------------------------------------
Balance at beginning of year $ 35,716 $ 297,391 $ 92,129
Provision 58,654 (185,153) 465,400
Accounts written-off (68,293) (76,522) (260,138)
- ----------------------------------------------------------------------
Balance at end of year $ 26,077 $ 35,716 $297,391
======================================================================
(10) CAPITAL LEASE OBLIGATIONS
The Company has entered into capital leases for certain equipment. The amount
recorded for the equipment and related obligations under the capital leases
amounted to $618,415 and $458,000 at year end 1997 and 1996, respectively. The
accumulated depreciation is $54,913 and $5,089 at year end 1997 and 1996,
respectively. The following is a schedule of future annual minimum lease
payments under the capital leases together with the present value of the net
minimum lease payments, as of March 30, 1997:
Total future minimum lease payments $507,206
Less: Interest (91,022)
- -----------------------------------------------------------------------
Present value of minimum lease payments 416,184
Less: Current portion (114,497)
- ------------------------------------------------------------------------
$301,687
========================================================================
The following is a schedule of future annual minimum lease payments payable
after one year:
1999 $ 99,792
2000 114,063
2001 85,928
2002 1,904
- --------------------------------------------
$301,687
============================================
20
16
(11) MAJORITY-OWNED SUBSIDIARY
In July 1996, the Company started a new entity with Think Laboratories,
Inc. (Think) of Kashiwa, Japan to develop the market for engraving services in
the United States. The new company, Laser Graphic Systems, Incorporated (LGSI),
is owned 80% by the Company. For financial reporting purposes, LGSI's assets,
liabilities and earnings are consolidated with those of the Company, and Think's
interest in the Company is included in the accompanying financial statements as
minority interest.
The Company and Think are subject to a shareholders' agreement. Under the
terms of the agreement, Think will sell to LGSI any equipment it requires that
is manufactured by Think at a price no greater than 80% of Think's normal
wholesale price. During 1997, LGSI purchased equipment from Think totaling
$422,849. Additionally, a royalty of 5% of cylinders produced by LGSI will be
paid by LGSI to Think beginning July 1, 1997. The two parties will dissolve LGSI
after five years, unless mutually extended for an additional three years. The
parties may agree to dissolve LGSI upon either party providing 90 days written
notice of its desire to do so.
During January 1997, LGSI also entered into a revolving line of credit
agreement with two lenders for a total facility of $500,000. Borrowings under
the agreement bear interest at prime plus .5% and will be converted to a term
note on August 1, 1997 to be evenly amortized over the period ending June 30,
2002. The credit agreement is secured by substantially all of LGSI's assets and
is guaranteed by the Company. There were no borrowings outstanding under the
credit agreement at March 30, 1997.
(12) COMMITMENTS AND CONTINGENCIES
(A) OPERATING LEASE AGREEMENTS
During 1994, the Company entered into a leasing arrangement that provided
for total availability of $609,000 from a bank. As of year end 1997, 1996 and
1995, the Company had utilized $405,000 of the total lease arrangement. During
1995, the bank limited the availability to $405,000. The Company also has
certain other miscellaneous equipment leases and leases for certain office and
plant facilities. Leases expire on various dates through October 2001. Rent
expense during 1997, 1996 and 1995 was approximately $256,000, $238,000 and
$106,000, respectively.
The annual future minimum rental obligations as of March 30, 1997 are as
follows:
Year
- --------------------------------------------
1998 $289,037
1999 184,667
2000 134,966
2001 58,106
2002 17,079
- --------------------------------------------
Total $683,855
============================================
(B) ENVIRONMENTAL MATTERS
The Company is a party to an agreed administrative order with the Indiana
Department of Environmental Management (IDEM) concerning past violations of
certain air emissions standards at its Scottsburg location. Prior to the
execution of the order, the IDEM and the Company tentatively reached an
agreement whereby a civil penalty would be assessed of up to $235,000 which the
Company accrued and expensed in 1995. When the agreement was finalized, the
penalty was reduced to $185,000. The difference of $50,000 between the estimated
and actual penalty was recorded as income in 1996. In connection with this
agreement, the Company installed certain environmental control equipment and
structures having a total cost of approximately $600,000 in 1996.
(C) LITIGATION
Litigation is instituted from time to time against the Company which
involves routine matters incident to the Company's business. In the opinion of
management, the ultimate disposition of such litigation will not have a material
effect upon the Company's financial statements.
(D) UNION CONTRACT
Hourly employees at the Company's Cincinnati plant, approximately 22% of
the Company's total workforce, are covered under a union contract that expired
July 15, 1996. The Company is currently under negotiations with the union and
believes that it will be successful in renegotiating the contract.
(13) RESTRUCTURING PLAN
The Company began implementing a restructuring plan in the second quarter of
1994 which resulted in a pre-tax charge to operating results of $1,777,187
primarily related to closing the Lockport facility. The restructuring charge
included the anticipated loss and holding costs on property, plant and equipment
to be disposed of, severance pay, and certain other costs. During 1995 the
restructuring plan was completed and the difference of $85,000 between the
estimated and actual costs was recorded as income.
(14) PREFERRED STOCK
On May 2, 1996, the Company sold to Label Venture Group LLC 52,500 shares of
a newly created issue of Series A Convertible Preferred Stock for $2,432,000.
Each share of Series A Convertible Preferred Stock is immediately convertible,
at the option of the Shareholder, into ten shares of the Company's Common Stock
and may be redeemed by the Company starting in May 1998. The Series A
Convertible Preferred Stock bears a preferred dividend of $4.25 per share and
has a liquidation value of $50 per share, plus unpaid dividends. The Company's
lenders required $1,000,000 of the proceeds to be deposited into the Company's
Sinking Fund Deposit
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account (Note 3). The remaining proceeds are intended to support future capital
expansion plans. Had the $1,000,000 of proceeds that will ultimately be used to
retire a portion of the Industrial Revenue Bonds (Note 3) been received at the
beginning of the 1996 fiscal year, 215,775 shares of Common Stock would have
been treated as common stock equivalents in the earnings per share calculation.
These common stock equivalents represent a proportional share of the net
proceeds received and the total number of shares of Common Stock into which the
Preferred Stock that was issued may be converted. The primary earnings per share
would have been $.50 per share.
Effective March 31, 1996, 13,242 shares of Series B Convertible Preferred
Stock were issued upon conversion of the entire outstanding balance, including
accrued interest, of Subordinated Convertible Notes that were issued in October
1995. The Series B Convertible Preferred Stock was issued at $40 per share and
also has a liquidation value of $40 per share, plus unpaid dividends. These
shares are immediately convertible , at the option of the Shareholders, into
132,420 shares of Common Stock and may be redeemed by the Company starting in
May 1998. Had the Subordinated Convertible Notes been immediately converted into
shares of Common Stock upon issuance in October 1995, the Common Stock would
have been included in the fiscal 1996 earnings per share calculation and the
primary earnings per share for fiscal 1996 would have been $.53 per share.
(15) SUBSEQUENT EVENTS
On April 1, 1997, the Company entered into a $3,000,000 industrial
development revenue bond financing (the Series 1997 Bonds) with the City of
Scottsburg, Indiana in support of its Scottsburg, Indiana, plant expansion. The
Series 1997 Bonds will bear interest, and contain the same Bondholder rights, as
described in Note 3. The bonds will be due in a balloon payment on April 1,
2007.
On April 9, 1997, the Company entered into an agreement to sell the land and
building at its Cincinnati location for $744,000, net of commissions. If
consummated, a loss of approximately $31,000 would be realized. The sale is
subject to the results of an environmental investigation and agreement on what
remedies, if any, are necessary. The Company is currently reviewing its
alternatives for the Cincinnati operations in the event the sale of the
facilities is consummated.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
==================================================
To the Shareholders and Directors of
Multi-Color Corporation:
We have audited the accompanying consolidated balance sheets of Multi-Color
Corporation (an Ohio corporation) as of March 30, 1997 and March 31, 1996, and
the related consolidated statements of operations, shareholders' investment, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The financial
statements of Multi-Color Corporation as of and for the year ended April 2, 1995
were audited by other auditors whose report dated June 16, 1996, expressed an
unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the fiscal 1997 and 1996 financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Multi-Color Corporation as of March 30, 1997 and March 31, 1996, and
the consolidated results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
Cincinnati, Ohio
May 14, 1997
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OUR MARKETS
LABELS
Multi-Color labels enhance the marketing appeal of major branded consumer
products. Our labels add value to liquid detergents, beverages, health and
beauty aids, automotive liquids, and other consumer products. We offer
cost-effective, high-quality printing technologies - rotogravure, offset and
letterset - to meet each customer's special requirements. We are the leading
U.S. printer of in-mold labels - labels applied directly to plastic containers
as the container is being molded. Our expertise in adhesives, overprint coatings
and inks produce durable labels with consistently true and brilliant colors that
adhere extremely well to container surfaces and contours.
ROTOGRAVURE SERVICES
Rotogravure labels offer unparalleled graphic quality for branded consumer
products. Multi-Color is structured so that its rotogravure production is fully
competitive with other, traditionally lower-cost printing technologies. Our
state-of-the-art engraving system and rotogravure presses interface with
production processes that combine speed and cost-effectiveness. MCG and LGSI use
Think Laboratories' unique laser-exposing system and Ballard shell technology to
produce low-cost, ready-for-press cylinders in one-third the time of traditional
engraving methods. We have increased capacity at MCG and LGSI as a necessary
step to supply customers other than Multi-Color itself.
NEW MARKETS
Multi-Color's investment in research and development continues to improve the
quality of label substrates and labels to meet the requirements of consumer
product manufacturers and plastics molders. Specifically, a new, clear,
proprietary single-ply substrate holds great promise for offering health and
beauty-aid and beverage manufacturers a very economical "no-label-look" label
that adheres perfectly to a clear plastic container. We are also building new
markets for in-mold label applications beyond blow-molded products.
Specifically, we are developing the enormous potential in-mold labeling has with
injection-molded products. Through relationships with international companies
with expertise in applying in-mold labels in injection molding, we are seeking
to develop the U.S. market.
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SHAREHOLDER INFORMATION
=======================
Multi-Color's shares are traded in the over-the-counter market under the
NASDAQ-NMS symbol LABL.
ANNUAL MEETING NOTICE
Multi-Color's 1997 annual meeting of shareholders will be held at 12:00
noon, Eastern time on August 14, 1997, at the Company's offices located at 205
West Fourth Street, Suite 1140, Cincinnati, Ohio. Shareholders of record at the
close of business June 16, 1997, will be entitled to vote at this meeting.
CORPORATE HEADQUARTERS
Multi-Color Corporation
205 West Fourth Street
Suite 1140
Cincinnati, Ohio 45202
(513) 381-1480
TRANSFER AGENT AND REGISTRAR
Fifth Third Bank
Fifth Third Center
Cincinnati, Ohio 45263
Inquiries regarding stock transfers, lost certificates or address changes
should be directed to the Stock Transfer Department of Fifth Third Bank at the
above address.
INDEPENDENT PUBLIC ACCOUNTANTS
Grant Thornton LLP
Cincinnati, Ohio 45202
CORPORATE COUNSEL
Keating, Muething & Klekamp
Cincinnati, Ohio 45202
FORM 10-K/INVESTOR CONTACT
A copy of the Company's Form 10-K annual report as filed with the Securities
and Exchange Commission is available to shareholders without charge upon written
request. These requests and other inquiries should be directed to William R.
Cochran, Vice President and Chief Financial Officer, Multi-Color Corporation,
205 West Fourth Street, Suite 1140, Cincinnati, Ohio 45202.
MARKET INFORMATION
The Company's shares trade in the over-the-counter market under the
NASDAQ-NMS symbol LABL. The Stock Range Table on page 1 represents the high and
low sales prices for Multi-Color's common stock as reported in the NASDAQ
National Market System for fiscal years 1996 and 1997.
As of June 16, 1997, there were approximately 433 shareholders of record of
the Company's common stock.
DIVIDEND POLICY
Multi-Color currently intends to retain its earnings to fund the growth of
its business and does not anticipate paying any cash dividends on Common Stock
in the foreseeable future. The Company's financing agreements prohibit the
payment of Common Stock cash dividends. Additionally, the Company is prohibited
from paying dividends on the Common Stock unless all dividends declared on the
Company's Series A Convertible Preferred Stock and Series B Convertible
Preferred Stock have been fully paid.
DIRECTORS AND OFFICERS
======================
DIRECTORS
John C. Court
Chairman of the Board
Lorrence T. Kellar(1)
(Vice President, Real Estate, Kmart Corporation)
John D. Littlehale
Burton D. Morgan
(President of Basic Search, Inc.)
David H. Pease, Jr.(1)
(Chairman of Pease Industries, Inc.)
Louis M. Perlman(1)(2)
(Private Investor)
(1) Audit Committee Member
(2) Effective May 2, 1996
OFFICERS
John C. Court
President and Chief Executive Officer
John D. Littlehale
Vice President of Manufacturing, Secretary
William R. Cochran
Vice President and Chief Financial Officer
John R. Voelker
Vice President, Sales and Marketing
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SELECTED FINANCIAL DATA
=======================
The selected financial data set forth below are derived from the Company's
audited consolidated financial statements. This data should be read in
conjunction with the financial statements and notes thereto appearing elsewhere
in this report.
Fiscal Year Ended(1)
- ---------------------------------------------------------------------------------------------------------------------------
MARCH 30 March 31 April 2 April 3 March 28
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996 1995(3) 1994(4) 1993(5)
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands, except share amounts)
Net sales $ 48,143 $ 55,375 $ 61,777 $ 65,403 $ 65,868
Gross profit 8,267 8,508 2,803 2,558 9,558
Operating income (loss) 2,579 2,631 (7,168) (5,603) 3,347
Income (loss) before extraordinary item and
cumulative effect of accounting change 1,627 1,191 (8,523) (4,335) 1,230
Extraordinary item - - 225 - -
Income (loss) before accounting change 1,627 1,191 (8,748) (4,335) 1,230
Cumulative effect of accounting change - - - - 180
Net income (loss) 1,627 1,191 (8,748) (4,335) 1,410
Primary earnings (loss) per share(2) 0.62 0.55 (4.03) (2.02) 0.64
Weighted average shares outstanding - primary 2,211 2,178 2,169 2,151 2,195
Preferred dividends per share 261 - - - -
Working capital $ 661 $ (3) $(17,031)(6) $ 2,754 $ 8,168
Total assets 28,487 30,454 35,959 42,121 43,868
Short-term debt 3,411 2,902 19,898 (6) 1,395 902
Long-term debt 9,902 14,873 8 15,404 16,104
Shareholders' investment 8,907 4,920 2,998 11,818 16,572
===========================================================================================================================
(1) Multi-Color maintains a fiscal year of 52 or 53 weeks beginning on the
Monday nearest to March 31. Fiscal year 1994 was a 53 week fiscal year. All
other fiscal years set forth herein are 52 weeks.
(2) Includes $.08 impact of change in accounting for income taxes in 1993.
(3) Fiscal year 1995 results includes a write down of $3,800 on certain
equipment and an extraordinary charge of $225 related to prepayment fees
associated with the previous financing agreement.
(4) Fiscal year 1994 results includes a restructuring charge of $1,777.
(5) Fiscal year 1993 results includes insurance recoveries related to the
Scottsburg flood of $3,149.
(6) Includes $14,700 of long-term debt which was subject to acceleration and
therefore classified as current.