MULTI COLOR CORP - 10-K Annual Report

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ¨.

The Company believes certain statements contained in this report that are not historical facts constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and are intended to be covered by the safe harbors created by that Act. Reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to differ materially from those expressed or implied. Any forward-looking statement speaks only as of the date made. The Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances after the date on which they are made.

Statements concerning expected financial performance, on-going business strategies, and possible future action which the Company intends to pursue in order to achieve strategic objectives constitute forward-looking information. Implementation of these strategies and the achievement of such financial performance are each subject to numerous conditions, uncertainties and risk factors. Factors which could cause actual performance by the Company to differ materially from these forward-looking statements include, without limitation, factors discussed in conjunction with a forward-looking statement; changes in general economic conditions; the success of its significant customers; acceptance of new product offerings; changes in business strategy or plans; quality of management; availability, terms and development of capital; the ability to successfully integrate new acquisitions; availability of raw materials; business abilities and judgment of personnel; changes in, or the failure to comply with, government regulations; competition; the ability to achieve cost reductions; and increases in general interest rate levels affecting the Company’s interest costs. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Multi-Color is a premier supplier of decorative label solutions and packaging services to consumer product companies, national retailers and container manufacturers worldwide. The Company’s customers include many of the world’s largest manufacturers of home care, personal care, lawn care, automotive and food and beverage products. The Company provides a wide range of products and services for the packaging needs of its customer through three divisions. The Company believes that its Decorating Solutions Division is the world’s largest producer of in-mold labels (IMLs) and a major manufacturer of high-end pressure sensitive labels and shrink sleeves. The Company’s Graphic Services Division, Laser Graphic Systems, provides digital

The Company is an Ohio corporation that was incorporated in 1985, succeeding to the predecessor business that began producing paper labels in 1918. The Company has maintained customer relationships that have existed since that time. The Company sells its labels in the United States, Canada, Mexico, South America and Asia. Multi-Color currently provides products and services for over 150 customers. Unless the context otherwise requires, the “Company” and “Multi-Color” refer to Multi-Color Corporation.

In 1980, Multi-Color invented the in-mold label in response to the increasing use of blow-molded plastic containers. Working in conjunction with a customer, the Company and a leading supplier of blow-molded plastic containers developed the in-mold label process which applies a label to a plastic container as the container is being formed in the mold cavity. Multi-Color developed the label and the method of applying the heat-activated adhesive to the label. The in-mold label solves many of the quality problems associated with conventional labels and produces a more attractive labeled container.

IML labels are complex and technically demanding products. The finished IML product is a finely detailed label that performs consistently well for plastic container manufacturers and adds marketing value and product security for consumer product companies. Each component of the label producing process, starting with substrates (the base material for the label) and the laser-exposed gravure cylinder to the printing with up to eight colors—along with over-coats and adhesives—requires a special expertise for success. The Company believes that its strength lies in several areas, two of which are the substrates used in the printing process and the production of the gravure cylinder.

Multi-Color has developed proprietary substrates that the Company uses in its printing process and also sells to other printers, both in the United States and abroad. There are several critical characteristics of a successful substrate. The material needs a proper coefficient of friction so that the finished label is easily and consistently picked up and applied to the blow-molded container. A second is the ability to hold the label’s inks, including metallics and flourescents, overlay varnishes and adhesives. Still another characteristic, is the ability to lay smoothly, without wrinkle or bulge, when applied to a very hot, just molded plastic container that will quickly shrink, along with the label, as its temperature falls.

A new product line that is gaining interest is injection in-mold labeling. Historically, injection molded products have been decorated with pressure sensitive or direct print products. However, several years ago, injection in-mold technology was successfully developed in Europe. Several U.S. injection molding companies are starting to explore IML as a decorating method and the Company intends to be a leading supplier of this technology. The majority of these products are printed using the lithographic printing process which is one of the technologies utilized at the Company’s Batavia, Ohio location.

A pressure sensitive label is one that adheres to a surface by press-on contact. The label will usually consist of four elements—a base material, which may include paper, foil or plastic; an adhesive, which may be permanent or removable; a release coating; and a backing material to protect the adhesive against premature contact with other surfaces. When the labels are to be applied to containers or bottles, the release coating and protective backing are removed, which exposes the adhesive, and the label is pressed or rolled into place.

In December 1999, Multi-Color began offering pressure sensitive labels to customers in conjunction with the acquisition of Buriot International, Inc. (“Buriot”). In this acquisition, the Company acquired a two year-old manufacturing facility that is equipped with an offset press and a flexographic press. Both presses are equipped with interstation ultraviolet (UV) drying equipment. The flexographic press is also equipped for hot foil stamping and rotary screen capabilities. In September of 2000, the Company installed a second flexographic press to produce pressure sensitive labels.

The pressure sensitive market is the largest single segment within the overall label market and represents a significant growth opportunity. The Company’s strategy is to be a premier supplier of pressure sensitive labels in categories that demand high impact graphics or are otherwise technically challenging.

Shrink sleeve labels are produced in colorful, cutting edge styles and materials; these labels are manufactured as sleeves, slid over glass or plastic bottles and then heated to conform precisely to the contours of the container. In June 2000, Multi-Color began offering shrink sleeve labels and tamper-evident neckbands in conjunction with the acquisition of Uniflex Corporation (“Uniflex”). In this acquisition, the Company acquired a manufacturing facility that is equipped with a gravure press and finishing equipment.

The shrink sleeve market is growing rapidly as consumer products companies look for ways to differentiate their products. New age beverages, sports drinks, and spirits are among the segments that have adopted this decorating technology. However, there is demand growing in the food and the personal care markets that will greatly increase the sales opportunities for shrink sleeve labels. The Company has expanded its manufacturing base for these products and is producing shrink sleeve labels in three of its locations.

Technology for gravure cylinder and plate-making is another key competitive advantage for the Company. At the Company’s Laser Graphic Systems plant in Erlanger, Kentucky, the Company employs laser-exposing and chemical-engraving technology developed by Think Laboratories of Japan to produce gravure cylinders. Currently, Multi-Color is the only cylinder manufacturer in the United States with this technology. The Think process has many advantages. The process uses a laser to expose the cylinder directly from the computer without ever having to generate films. The cylinders are then chemically etched to produce very fine and highly accurate cells. The process is quicker and less costly than other engraving processes as several process steps are removed since the system is completely digital. Equally important, this technology creates cells with fineness of depth and surface size to eliminate the stairstep edges that have limited the application of gravure printing. It creates smooth and feathered patterns of color. It also gives clear definition to ever-smaller type sizes required as companies add more information and more languages to their labels. The Company also uses a copper ballard shell technology that cuts cost and time from cylinder production.

Historically, the Laser Graphic Systems facility has been an integrated supplier of cylinders and plates to the Company’s other facilities. Minimal sales of cylinders and plates were made to outside third parties. In fiscal 2001 and 2002, the Company upgraded the pre-press area of Laser Graphic Systems as well as made improvements in the manufacturing system leading to increased capacity. A number of specialized users of gravure cylinders have been targeted and the special abilities of the Think system are being offered to a select portion of the cylinder market. Plates for the Batavia and Troy, Ohio facilities are also produced in the Laser Graphic Systems facility.

The Company’s Quick Pak division, located in Cincinnati, Ohio, is a leading provider of promotional packaging, assembling and fulfillment services to major health and beauty companies, consumer product manufacturers and national retailers. Because many of Multi-Color’s customers utilize these types of packaging services, the addition of Quick Pak allows the Company to broaden and deepen its relationship with its current clients while also providing the Company an opportunity to offer label solutions to Quick Pak customers.

Multi-Color believes research and development of new products helps it maintain its leading position in the in-mold label business. While the process for making in-mold labels is not patented, Multi-Color believes its experience and expertise related to the production of in-mold labels have enabled it to maintain its leadership in the in-mold label and substrate market.

The Company’s emphasis is to develop and market new products for applications where superior technical characteristics are required. Multi-Color developed and is successfully marketing a range of plastic in-mold labels for applications in which plastic containers are subjected to more demanding physical requirements. Also, the Company works closely with container manufacturers developing improved label products that result in increased efficiencies and lower waste that translates to lower cost for its consumer products customers.

The Company maintains a technical support staff of 7 people who are responsible for developing innovative solutions, including new labels, for customers’ label needs. Included in the support staff are field engineers whose job is to assist the customers with technically demanding products and processes. In this manner, the Company differentiates itself from its competitors and is often chosen for the most challenging projects.

The Company sells to a broad range of consumer products companies located in the United States, Canada, Mexico and Latin America. In some cases, multi-year agreements are in place and in other cases the customers provide quarterly or annual requirements. Often the Company is the sole supplier of specific families of products.

Recent acquisitions have allowed the Company to increase its value to both new and existing customers. The sales strategy is to adopt a consultative selling approach which allows the sales organization to review the requirements of the container to be decorated and then offer a number of alternative decorating methods. Thereby, the Company is viewed as an expert source of material and methods, able to cut across numerous technologies, and offer the best possible cost effective solution.

The Company employs a sales staff of 15 people. The sales organization also includes representatives in Canada and Mexico in order to increase sales in those regions. There is also a growing need to serve markets in the Pacific Rim. Multi-national customers are searching for companies that are capable of supporting global brands and the Company’s leadership in IML and shrink sleeve products drives increased interest in our capabilities.

Approximately 51% of the Company’s total sales in fiscal 2002 were to two customers: The Procter & Gamble Company, 41% (divided among six product categories and three separate purchasing groups) and The Quaker Oats Company, 10%. The loss or substantial reduction of the business of any of the major customers in a particular year could have a material adverse effect on the Company.

Multi-Color’s printing equipment consists of four gravure printing presses in its Scottsburg plant, an offset press and two flexographic presses in its Batavia plant, a gravure printing press in its Las Vegas plant and five flexographic presses in its Troy plant. All of the Company’s presses are capable of multi-color, high-speed and high-quality graphic printing. The Company also has a wide variety of cutting and finishing equipment used to process printed material. The wide range of capabilities and versatility provided by the Company’s equipment permits it to respond rapidly to changing customer needs, including the development of new products. The Company believes it has sufficient capacity to meet any expected growth of its products. At March 31, 2002 and March 31, 2001, the label backlog was approximately $4,300,000 and $6,100,000, respectively. The label backlog represents 3-4 weeks of production volume at current staffing levels. The prior year backlog was significantly higher than the current year due to two large new product introductions by our customers. All backlog is expected to be completed in the next fiscal year.

As of March 31, 2002, the Company had 347 employees. Multi-Color considers its labor relations to be good and has not experienced any work stoppages during the previous ten years. All human resource and compensation systems have been developed to align the Company with the goals and objectives of its customers and shareholders.

Multi-Color purchases proprietary products from a number of printing suppliers which is common in the printing industry. To prevent potential disruptions to its manufacturing facilities, Multi-Color has developed relationships with more than one supply source for each of its critical raw materials. Additionally, its raw material suppliers are major corporations, each demonstrating successful historical performance. Although this should prevent any long term business interruption due to the inability of obtaining raw materials, there could be short term manufacturing disruptions during the customer qualification period for any new raw material source.

The Company is pursuing acquisitions in order to contribute to the Company’s growth. The Company believes that acquisitions are one method of increasing its presence in existing markets, expanding into new markets, gaining new product offerings and improving operating efficiencies through economies of scale. Through acquisitions, the Company plans to broaden its revenue stream by providing complimentary consumer packaging services that support our customers’ marketing strategies.

The printing industry is highly fragmented and offers many opportunities for acquisitions. During fiscal 2002, the Company completed its third acquisition. In October 2001, the Company, through its wholly owned subsidiary, MCC-Troy, LLC, acquired the stock of Premiere Labels, Inc., a pressure sensitive label printing company with a production facility in Troy, Ohio.

The Company continually seeks to identify and evaluate potential acquisition candidates and from time to time, engages in discussions with such candidates. Presently management has not entered into any agreements relating to new acquisitions and future acquisitions may or may not occur.

The Company has a large number of competitors in the traditional and pressure sensitive label markets and three principal competitors in each of the in-mold label and shrink sleeve label markets. Some of these competitors in the traditional and pressure sensitive label markets have greater financial and other resources than the Company. The competitors in the in-mold label and shrink sleeve label markets are either private companies or subsidiaries of public companies and the Company cannot access the financial resources of these organizations. Multi-Color could be adversely affected should a competitor develop labels similar or technologically superior to the Company’s in-mold label. Although price is an important competitive factor in the Company’s business, the Company believes competition is principally dependent upon product performance, service and technical support. Customer service, quality and qualification requirements present barriers to new entrants into Multi-Color’s markets.

The Company operations are subject to regulation by federal and state environmental protection agencies. To insure ongoing compliance with federal and state environmental protection agency requirements, the Company retains an outside environmental consultant to monitor environmental compliance. Additionally, the Company continues to make capital investments to maintain compliance with federal and state environmental requirements and to improve its existing equipment as part of its ongoing environmental compliance strategy.

The United States Food and Drug Administration regulates the raw materials used in labels for food products. These regulations apply to the consumer products companies for which Multi-Color produces labels. Multi-Color uses materials specified by the consumer products companies in producing labels for food products.

Facility	Address	Owned/Leased	Approximate Size
Corporate Offices	425 Walnut Street, Suite 1300 Cincinnati, Ohio 45202	Leased	7,400 sq. ft.

Scottsburg Plant	2281 South US 31 Scottsburg, Indiana 47170	Leased	120,500 sq. ft.

Erlanger Plant	3520 Turfway Road Erlanger, Kentucky 41018	Owned	12,000 sq. ft.

Batavia Plant	4064 Clough Woods Drive Batavia, Ohio 45103	Owned	29,000 sq. ft.

Las Vegas Plant	1151 M Grier Drive Las Vegas, NV 89119	Leased	41,000 sq. ft.

Troy Plant	635 Olympic Boulevard Troy, Ohio	Owned	22,800 sq. ft.

Francis D. Gerace, 49, was promoted to President and appointed a Director on May 18, 1999 and was elected Chief Executive Officer in August 1999. Prior to that time Mr. Gerace served as the Company’s Vice President of Operations from April 1998 to May 1999. Mr. Gerace held various operating positions and was Director of Strategic Business Systems for Fort James Corporation’s Packaging Business from 1993 to 1998. From 1974 to 1993, Mr. Gerace held various general management

Steven G. Mulch, 52, was promoted to Senior Vice President of Sales and Marketing in April of 2000. He previously held the position of Vice President of Corporate Sales and Business Development with the Company from April 1998 to April 2000. Prior to joining Multi-Color, Mr. Mulch was Vice President and General Manager of a four plant division of Fort James Corporation’s Packaging Business from 1991 to 1998. From 1972 to 1991, Mr. Mulch held various positions with Tenneco, Inc. including general manager of the offset carton converting plant in Grand Rapids, Michigan.

Dawn H. Bertsche, 45, was appointed Vice President of Finance, Chief Financial Officer and Secretary in August 1999. Prior to joining Multi-Color, Ms. Bertsche was Chief Financial Officer for Hill Top Research, Inc. from 1997 to 1999 and held the position of Vice President and Controller and other financial positions for Clopay Corporation from 1987 to 1997. From 1977 to 1987, Ms. Bertsche held various financial management positions with LSI Lighting Systems, Inc. and Price Waterhouse.

John P. McKeough, 35, was promoted to Vice President of Operations in June 2000. Prior to that time he served as Plant Manager of the Company’s Scottsburg, Indiana facility. Before joining the Company, he held various production management positions at Fort James Corporation’s Packaging Business from 1992 to 1999.

Thomas J. Vogt, 53, was appointed Vice President of Sales in December of 1999. Prior to joining Multi-Color, Mr. Vogt was Vice President of Sales at Gar Doc, Inc. from 1994 to 1999. From 1970 to 1994, Mr. Vogt held various officer and stock ownership positions in companies that he formed in the color separation, computer design and label printing industries.

The Company’s shares trade in the over-the-counter market under the NASDAQ-NMS symbol LABL. The following table sets forth the high and low sales prices of the Company’s common stock (“Common Stock”) as reported in the NASDAQ National Market System during fiscal years 2001 and 2002. Prices have been adjusted to reflect the Company’s 3 for 2 stock split effective November 30, 2001. The Company’s stock is thinly traded. Accordingly, the prices below may not be indicative of prices at which a large number of shares can be traded or reflective of prices that would prevail in a more active market.

	High		Low
April 1, 2000 to June 30, 2000	$	5.33	$	4.33
July 1, 2000 to September 30, 2000	$	5.83	$	5.17
October 1, 2000 to December 31, 2000	$	6.92	$	5.25
January 1, 2001 to March 31, 2001	$	7.83	$	5.67
April 1, 2001 to June 30, 2001	$	10.39	$	6.27
July 1, 2001 to September 30, 2001	$	14.33	$	7.80
October 1, 2001 to December 31, 2001	$	18.10	$	10.07
January 1, 2002 to March 31, 2002	$	20.25	$	12.15

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 currently prohibit the payment of Common Stock cash dividends.

	Year Ended
	March 31 2002		March 31 2001		March 31 2000(3)			March 28 1999(1)			March 29 1998(2)
	(In thousands, except per share amounts)
Net sales	$	72,624	$	66,618	$	53,331		$	49,786		$	47,576
Gross profit		14,503		13,288		9,014			6,929			4,840
Operating income (loss)		8,927		8,305		4,280			2,165			(2,455	)
Income (loss) before cumulative effect of a change in accounting principle		4,699		3,559		5,626			1,259			(4,071	)
Cumulative effect of a change in accounting principle		—		—		—			224			—
Net income (loss)		4,699		3,559		5,626			1,484			(4,071	)
Diluted earnings (loss) per share (4)		1.14		.91		1.34			.33			(1.33	)
Weighted average shares outstanding—diluted		4,108		3,900		4,206			4,424			3,258
Preferred dividends		—		—		177			275			279
Working capital		3,324		2,944		(281	)		(1,869	)		(1,827	)
Total assets		47,924		44,650		37,151			29,781			30,854
Short-term debt		3,607		3,417		5,143			4,369			4,782
Long-term debt		18,691		20,870		17,292			11,086			11,208
Stockholders’ equity		17,659		12,967		9,136			6,010			4,665

	Percentage of Net Sales
	2002		2001		2000
Net sales	100.0	%	100.0	%	100.0	%
Cost of goods sold	80.0	%	80.1	%	83.1	%

Gross profit	20.0	%	19.9	%	16.9	%
Selling, general & administrative expenses	7.7	%	7.5	%	7.4	%
Impairment loss on long-lived assets	—		—		1.5	%

Operating income	12.3	%	12.4	%	8.0	%
Interest expense	2.0	%	3.0	%	2.4	%
Other	.2	%	.5	%	(.2	)%

Income before income taxes	10.1	%	8.9	%	5.8	%
Income taxes (benefit)	3.6	%	3.6	%	(4.8	)%

Net income	6.5	%	5.3	%	10.6	%

Net sales increased $6,006,227 or 9% to $72,624,006 in 2002 from $66,617,779 in 2001. The increase in sales is due primarily to unit growth of the Company’s pressure sensitive label sales. The acquisitions completed in June 2000 and October 2001 accounted for 29% of the growth in sales for the year.

Gross profit increased $1,214,420 or 9% to $14,502,600 in 2002 from $13,288,180 in 2001. In 2002 and 2001, gross profit as a percentage of sales remained at 20%. The Company’s focus on operating efficiencies and waste reduction has allowed the Company to maintain consistent margins.

Selling, general and administrative expenses increased $591,637 or 12% to $5,575,282 in 2002 from $4,983,645 in 2001. Expenses as a percentage of sales increased slightly to 8% in 2002 from 7% in 2001. Expenses increased as a result of the Company expanding its sales force in order to achieve higher organic growth during fiscal 2002.

Other expense decreased $233,527 or 66% to $121,314 in 2002 from $354,841 in 2001. Goodwill is no longer being amortized in accordance with the Company’s adoption of SFAS No. 142 “Goodwill and Other Intangible Assets”. Also, the Company incurred some expense in the prior year in connection with the termination of the Company’s pension plan.

Income tax expense was increased $245,213 or 10% to $2,634,650 in 2002 from $2,389,437 in 2001. The effective tax rates for fiscal 2002 and 2001 were 36% and 40%, respectively. The reduction in the effective tax rate is due to the Company earning income in lower rate states such as Nevada and Indiana.

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	PART I

Item 1 —	Business	2

Item 2 —	Properties	6

Item 3 —	Legal Proceedings	6

Item 4 —	Submission of Matters to a Vote of Security Holders	6

	PART II

Item 5 —	Market for the Registrant’s Common Stock and Related Stockholder Matters	7

Item 6 —	Selected Financial Data	8

Item 7 —	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9

Item 7A —	Quantitative and Qualitative Disclosures About Market Risk	11

Item 8 —	Financial Statements and Supplementary Data	11

Item 9 —	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	27

	PART III

	Part III (except for certain information relating to Executive Officers included in Part I and the Equity Plan Compensation Information) is omitted. The Company intends to file with the Securities and Exchange Commission within 120 days of the close of the fiscal year ended March 31, 2002 a definitive proxy statement containing such information pursuant to Regulation 14A of the Securities Exchange Act of 1934 and such information shall be deemed to be incorporated herein by reference from the date of filing such document.	27

	PART IV

Item 14 —	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	28

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