UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended March 31, 1999
Commission File Number 000-24021
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
New Jersey 22-3561164
(State of incorporation) (I.R.S. Employer
Identification Number)
629 Grove Street
Jersey City, NJ
(Address of principal executive offices)
07310
(Zip Code)
201-217-1990
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether 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 [_]
The number of shares of Common Stock, no par value, of the Registrant
outstanding at May 10, 1999 was 5,703,216
<PAGE>
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
INDEX
<TABLE>
<CAPTION>
Page
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Part I -- Financial Information
Item 1 -- Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of December 31, 1998
and, March 31, 1999........................................................... 1
Condensed Consolidated Statements of Income for the Three Months
Ended March 31, 1998 and 1999................................................. 2
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1998 and 1999................................................. 3
Notes to Condensed Consolidated Financial Statements - March 31, 1999........... 4
Item 2 -- Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................................... 8
Part II -- Other Information
Item 2 -- Changes in Securities and Use of Proceeds .............................. 16
Item 6 -- Exhibits and Reports on Form 8-K ....................................... 19
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
</TABLE>
<PAGE>
Part I. FINANCIAL INFORMATION
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31, March 31
1998 1999
------------ -----------
(Note 1) (Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ........................... $ 2,179 $ 1,064
Accounts receivable ................................. 9,199 13,489
Inventories ......................................... 1,301 1,518
Prepaid expenses and other current assets ........... 383 700
Deferred income taxes ............................... 520 313
------- -------
Total current assets .................................... 13,582 17,084
Cash held for acquisitions and building addition ........ 9,700 1,489
Property and equipment - net ............................ 8,652 20,640
Goodwill - net .......................................... 10,795 26,184
Other assets ............................................ 860 181
------- -------
$43,589 $65,578
======= =======
Liabilities and stockholders' equity
Current liabilities:
Current portion of long-term debt ................... $ 419 $ 525
Revolving lines of credit ........................... 580 755
Current portion of obligations under capital leases . 493 718
Accounts payable .................................... 3,102 3,674
Accrued expenses .................................... 3,504 4,737
------- -------
Total current liabilities ............................... 8,098 10,409
Long-term debt - net of current portion ................. 769 4,071
Revolving line of credit - net of current portion ....... -- 7,877
Obligations under capital leases - net of current portion 1,216 1,460
Deferred income taxes ................................... 932 1,611
Other liabilities ....................................... 64 47
Commitments and contingencies
Stockholders' equity:
Preferred stock, no par value, 10,000,000 authorized,
none issued ...................................... -- --
Common stock, no par value, 30,000,000 authorized,
5,703,216 issued and outstanding ................. 29,395 35,577
Accumulated other comprehensive income .............. 1 17
Retained earnings ................................... 3,114 4,509
------- -------
Total stockholders' equity .............................. 32,510 40,103
------- -------
$43,589 $65,578
======= =======
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
1
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CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except shares and per share amounts)
(Unaudited)
Three Months Ended
March 31,
-------------------------------
1998 1999
----------- -----------
Net sales ............................... $ 10,850 $ 18,301
Operating expenses:
Costs of production ................. 8,124 12,251
Selling, general and administration . 1,601 2,965
Depreciation and amortization ....... 183 762
----------- -----------
9,908 15,978
Income from operations .................. 942 2,323
Interest expense .................... (60) (42)
Other income ........................ 7 13
----------- -----------
Income before income taxes .............. 889 2,294
Provision for income taxes .......... 73 899
----------- -----------
Net income .............................. $ 816 $ 1,395
=========== ===========
Pro Forma Data:
Income before income taxes .............. $ 889
Pro forma provision for income taxes 364
-----------
Pro forma net income .................... $ 525
===========
Pro forma earnings per share ............ $ 0.18
===========
Pro forma shares outstanding ............ 2,964,492
===========
Earnings per common share:
Basic ............................... $ 0.25
===========
Diluted ............................. $ 0.25
===========
Weighted average number of common shares:
Basic ............................... 5,645,696
===========
Diluted ............................. 5,676,985
===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
2
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CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1998 1999
-------- --------
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Cash flows from operating activities
Net income ................................................................ $ 816 $ 1,395
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization ......................................... 183 762
Gain on sale of equipment ............................................. -- 5
Deferred income taxes ................................................. -- 1
Changes in operating assets and liabilities, net of effects of acquisition:
Accounts receivable ................................................... 233 (1,393)
Inventory ............................................................. 17 19
Prepaid expenses and other assets ..................................... 34 (30)
Other assets .......................................................... (476) 220
Advance to officers ................................................... (15) --
Accounts payable ...................................................... (470) (1,571)
Accrued expenses ...................................................... 885 951
Other liabilities ..................................................... -- (16)
-------- --------
Net cash provided by (used in) operating activities ....................... 1,207 343
Cash flows from investing activities
Acquisition of property and equipment ................................. (234) (5,329)
Acquisition of businesses, net of cash acquired ....................... -- (15,625)
-------- --------
Net cash used in investing activities ..................................... (234) (20,954)
Cash flows from financing activities
Net principal (payments) proceeds on revolving lines of credit ........ (300) 8,226
Proceeds from long-term borrowings .................................... -- 3,425
Principal payments on long-term borrowings ............................ (125) (145)
Principal payments on obligations under capital lease ................. (49) (191)
-------- --------
Net cash (used in) provided by financing activities ....................... (474) 11,315
-------- --------
Effect of exchange rate changes on cash and cash equivalents .............. -- (30)
-------- --------
Net increase (decrease) in cash and cash equivalent ...................... 499 (9,326)
Cash and cash equivalents, beginning of period ............................ 67 11,879
-------- --------
Cash and cash equivalents, end of period .................................. $ 566 $ 2,553
======== ========
Supplemental disclosure of noncash investing and
financing activities
Issuance of common stock in conjunction with the acquisition
of Workable Company Limited and affiliates ............................ $ -- $ 6,181
======== ========
Acquisition of equipment under capital leases ............................. $ 83 $ --
======== ========
Debt assumed in business acquisitions ..................................... $ -- $ 700
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
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CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(dollars in thousands, except per share amounts)
1. Basis of Presentation
On April 22, 1998 Cunningham Graphics, Inc. (the "Predecessor") reorganized
(the "Reorganization") such that all the stockholders of the Predecessor
contributed all of the outstanding shares of common stock of the Predecessor to
Cunningham Graphics International, Inc. (the "Company"), in exchange for a total
of 2,595,261 shares of common stock, no par value (the "Common Stock") and
promissory notes (the "Exchange Notes") in the aggregate principal amount of
$2.6 million. In the Reorganization, the Company also assumed the Predecessor's
obligations under promissory notes in the aggregate principal amount of $2.2
million, representing undistributed S corporation taxable income (the
"Distribution Notes"). Collectively, the Exchange Notes and Distribution Notes
are known as the "Reorganization Notes." Concurrently with the Reorganization,
the Company sold 2,530,000 shares of Common Stock in an initial public offering
(the "Offering"). The Company used a portion of the proceeds to repay the
Reorganization Notes.
The accompanying unaudited condensed consolidated financial statements
include the accounts of Cunningham Graphics International, Inc. and its wholly-
owned subsidiaries (the "Company"). All intercompany accounts and transactions
have been eliminated.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-months ended March 31, 1999 are
not necessarily indicative of the results that may be expected for the entire
year ending December 31, 1999.
The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial requirements.
The Company has accounted for all business combinations under the purchase
method of accounting. Under this method the purchase price is allocated to the
assets and liabilities of the acquired enterprise as of the acquisition date
based on their estimated respective fair values and,
4
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1. Basis of Presentation (continued)
under certain circumstances, are subject to revision for a period not to exceed
one year from the date of acquisition. In certain cases, the purchase price is
subject to adjustment based upon the verification of financial position and
results of operations of the acquired business as of a specified date. The
results of operations of the acquired enterprises are included in the Company's
consolidated financial statements for the period subsequent to the acquisitions.
All goodwill generated from the business combinations is being amortized over 40
years.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 1998.
2. Pro forma Income Taxes
Through April 22, 1998, the Company and its shareholders had elected to be
taxed as an S corporation pursuant to the Internal Revenue Code and certain
state and local tax regulations. Therefore, with regard to the Company's actual
results through March 31, 1998, no provision has been made in the accompanying
financial statements for federal and certain state and local income taxes, since
such income taxes were the liability of the Predecessor's stockholders.
As a result of the Reorganization the Company's S corporation election
terminated on April 22, 1998 and the Company is subject to federal and
additional state income taxes.
The accompanying condensed consolidated statement of operations for the
three months ended March 31, 1998 include a provision for income taxes on an
unaudited pro forma basis as if the Company had been a C corporation subject to
applicable federal and state income taxes during the entire period presented.
3. Pro Forma Earnings Per Share
Pro forma earnings per share for the three months ended March 31, 1998 is
computed using pro forma net income and pro forma shares outstanding of
2,964,492 consisting of (i) the initial Cunningham Graphics International, Inc.
founding share, (ii) 2,595,260 shares issued in the Reorganization and (iii)
369,231 shares, representing the value of the $4.8 million principal amount of
notes issued in the Reorganization at the offering price of $13.00 per share.
5
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4. Acquisitions
Acquisition of Workable Company Limited and Affiliates (Collectively "Workable")
On January 13, 1999, the Company acquired all of the issued and outstanding
capital stock of Workable Company Limited, a Hong Kong corporation. In addition,
the Company acquired from the selling shareholders the 60% of the outstanding
capital stock of Plainduty Limited, a Hong Kong corporation, which was not owned
directly by Workable. Workable also has a wholly-owned subsidiary in Singapore.
Workable is a full service printing company.
The aggregate purchase price, including all direct costs was $13,251, which
was comprised of the following: (i) 398,216 shares of Common Stock, valued at
15.52 per share, (ii) cash in the amount of $6,371, and (iii) the Company
assumed $700 of indebtedness. The Company utilized proceeds from its initial
public offering of Common Stock to fund the cash portion of the purchase price.
Under the terms of the purchase agreement, the Company may be required to pay to
the Sellers up to an additional $3,800, depending upon the earnings, as defined,
of Workable during the years 1999 through 2001. Any additional amounts paid
under the terms of the purchase agreement will be recorded as goodwill. The cost
of the acquisition exceeded the fair value of the acquired net assets by $7,782
and has been recorded as goodwill.
Acquisition of Boston Towne Press
On February 16, 1999, the Company acquired the business, substantially all
of the assets and assumed certain liabilities of Boston Towne Press, Inc.
("Boston Towne Press"), a high quality commercial printer. The aggregate
purchase price, including all direct costs was $5,581, and was paid in cash and
partially funded by the utilization of $3,400 of the revolving line of credit.
Under the terms of the purchase agreement, the Company may be required to pay
the seller up to an additional $715, depending upon the earnings of Boston Towne
Press during the years 1999 and 2000. Any additional amounts paid under the
terms of the purchase agreement will be recorded as goodwill. The cost of the
acquisition exceeded the fair value of the acquired net assets by $3,667 and has
been recorded as goodwill.
6
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4. Acquisitions (continued)
Acquisition of Griffin House Graphics Limited
On March 16, 1999, the Company acquired all of the issued and outstanding
capital stock of Griffin House Graphics Limited and affiliates, Canadian
corporations ("Griffin House Graphics"). The aggregate purchase price, including
all direct costs, was $5,343, and was paid in cash and funded by the utilization
of the revolving line of credit. Under the terms of the purchase agreement, the
Company may be required to pay the seller up to an additional $1,720 depending
upon the earnings of Griffin House Graphics during the years 1999 and 2000. Any
additional amounts paid under the terms of the purchase agreement will be
recorded as goodwill. The cost of the acquisition exceeded the fair value of the
acquired net assets by $4,062 and has been recorded as goodwill. Griffin House
Graphics is a commercial printer.
The pro forma unaudited results of operations for the three months ended
March 31, 1998 and 1999, assuming the Reorganization, the consummation of the
purchases and issuance of the common stock as of January 1, 1998, are as
follows:
Three Months Ended March 31
------------------------------
1998 1999
---------- ----------
Net sales $ 15,552 $ 20,236
Net income 1,103 1,646
Per share data:
Basic earnings 0.33 0.29
Diluted earnings 0.33 0.29
5. Acquisition of Real Estate
On February 3, 1999, the Company purchased a 150,000 square foot building
located in Jersey City, New Jersey for approximately $5,500. The Company
obtained a mortgage loan for $7,400 through its existing bank to finance the
purchase of the building and to make necessary improvements. The acquired
building will replace the Company's current Jersey City and midtown New York
City facilities. The Company anticipates completing the move to the new building
during the third quarter of 1999. The Company does not anticipate its remaining
lease obligations on its current lease facilities will be significant at the
date it vacates the properties. However any unutilized obligations will be
charged to operations when the property is vacated.
The Company also has contracted with the sellers of the building, for the
acquisition of an unimproved parcel of land adjacent to the building, for a
purchase price of $975. The closing of such transaction is contingent upon the
completion of certain environmental remediation to the satisfaction of the
Company and the New Jersey Department of Environmental Protection.
The Company has borrowed $3,425 under the mortgage loan. The remaining $3,975
will be borrowed as the improvements on the building are completed and upon the
completion of the environmental remediation on the parcel of land adjacent to
the building.
7
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6. Segment and Geographic Information
The Company's single business segment is the production and distribution of
time-sensitive analytical research marketing materials, commercial printing,
digital printing, outsourcing services and on providing on-demand printing
services.
All of the Company's financial results prior to April 27, 1998, the date of
the acquisition, of Roda Limited an English corporation ("Roda"), were from U.S.
operations only, accordingly segment information for the quarter ended March 31,
1998 has not been presented. The following table presents financial information
based on the Company's geographic segments for the three months ended March 31,
1999 (dollars in thousands):
Income
from Identifiable
Net Sales Operations Assets
--------- ---------- ------
United States $13,082 $ 1,472 $50,146
United Kingdom 3,026 413 3,413
Hong Kong and Singapore 2,024 408 5,927
Canada 169 30 6,092
======= ======= =======
Total $18,301 $ 2,323 $65,578
======= ======= =======
7. Comprehensive Income
Total comprehensive income was $816 and $1,411 for the three months ended
March 31, 1998 and 1999, respectively.
8. Earnings Per Share Data
The following table sets forth the computation of basic and diluted
earnings per share for the periods indicated:
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1999
-------------- --------------
(pro forma)
<S> <C> <C>
Numerator:
Net income for basic and diluted earnings per share $ 525 $ 1,395
=========== ==========
Denominator
Denominator for basic earnings per share - weighted average common shares 2,946,492 5,645,696
Effect of dilutive securities - employee stock options -- 31,289
=========== ==========
Denominator for diluted earnings per share- adjusted weighted average
common shares and assumed conversion 2,964,492 5,676,985
=========== ==========
Basic earnings per common share $ 0.18 $ 0.25
=========== ==========
Diluted earnings per common share $ 0.18 $ 0.25
=========== ==========
</TABLE>
8
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Item 2. Management's Discussion and Analysis and Analysis of Financial
Conditions of Operations.
The following discussion contains forward-looking information. Readers are
cautioned that such information involves risks and uncertainties, including
those created by general market conditions, competition and the possibility that
events may occur which limit the ability of the Company to maintain or improve
its operating results or execute its primary growth strategy of acquiring
additional printing businesses. Although the Company believes that the
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could be inaccurate, and there can therefore be no assurance that
the forward-looking statements included herein will prove to be accurate. The
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives and plans of the Company will be
achieved.
Overview
The Company, headquartered in Jersey City, New Jersey, provides a wide
range of graphic communications services to financial institutions and
corporations, focusing on printing and distributing time-sensitive analytical
research and marketing materials, commercial printing, digital printing,
outsourcing services to a blue-chip client base in the financial services,
insurance and publishing industries and on providing on-demand printing
services. The Company operates in select international markets through its
facilities in the United States, the United Kingdom, Canada, Hong Kong and
Singapore. The Company is a major producer of financial research reports and
provides services, on a non-exclusive basis, to a variety of major international
investment banking firms.
The sales of the Company are derived from, graphic communications services
provided by the Company including digital communications, document management,
offset printing, digital printing, data output, bindery, fulfillment services,
mailing services and outsource services. The Company prints brochures, booklets,
confirmations of trade, client statements and adhesive books to meet the daily,
weekly and monthly needs of its customers. To facilitate the rapid distribution
of documents globally, the Company has designed and implemented the World
Research Link(TM), an array of electronic data communication networks linking
each of the Company's facilities with its major customers. To date, the Company
has established extensive non-exclusive client relationships with leading
companies in the financial services, insurance and publishing industries,
providing certain of the printing and graphic communication needs of Credit
Suisse First Boston Corporation, Deutsche Morgan Grenfell, Goldman, Sachs & Co.,
Painewebber Inc., Lehman Brothers Inc., Merrill Lynch & Co., Inc., The
Prudential Insurance Company of America, Empire Blue Cross/Blue Shield, New York
Life Insurance Company, and The McGraw-Hill Company, among others.
9
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The Company believes that the fragmented nature of the graphic
communications industry and the limited capital resources available to many
small, private operators provide the Company with significant opportunities to
expand its base of operations. The Company intends to continue its growth
strategy by (i) pursuing acquisitions and establishing strategic alliances to
expand and strengthen the Company's business reach in target markets worldwide,
(ii) pursuing outsourcing opportunities through the assimilation of in-house
printing operations of third-party businesses, (iii) expanding the scope and
volume of services offered, (iv) actively cross-selling existing or newly-added
products or services to its customers worldwide, and (v) improving the operating
efficiency of its existing operations.
Results of Operations
The following tables set forth certain items from the Company's Statements
of Income as a percentage of net sales for the periods indicated:
Three Months Ended March 31
---------------------------
1998 1999
----- -----
Net sales 100.0% 100.0%
Costs of production 74.9 66.9
Selling, general and administrative 14.7 16.2
Depreciation and amortization 1.7 4.2
----- -----
Income from operations 8.7 12.7
Interest expense (0.6) (0.2)
Other income 0.1 0.0
----- -----
Income before income taxes 8.2 12.5
Provision for income taxes 0.7 4.9
----- -----
Net income 7.5% 7.6%
===== =====
Pro Forma Data:
Income before income taxes 8.2%
Pro forma provision for income taxes 3.4
=====
Pro forma net income 4.8%
=====
Acquisitions in 1998 and 1999 are the primary causes of the increases in
revenues and expenses since March 31, 1998. Each of the Company's acquisitions
in fiscal 1998 and 1999 have been accounted for under the purchase method of
accounting; accordingly, the Company's consolidated income statements reflect
revenues and expenses of acquired businesses only for post-acquisition periods.
10
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The following table sets forth the Company's 1998 and 1999 acquisitions
(collectively the "1998/99 Acquired Businesses") and indicates the period in
which each business was acquired.
1998 Acquisitions:
Roda Limited April 1998
1999 Acquisitions:
Workable Company Limited and Affiliates January 1999
Boston Towne Press, Inc February 1999
Griffin House Graphics Limited and Affiliates March 1999
Three months ended March 31, 1999 compared with three months ended March 31,
1998
Net sales. The Company reported net sales of $18.3 million for the three
months ended March 31, 1999 compared to $10.9 million for the same period in
1998, an increase of $7.4 million or 67.9%. This increase is due to the addition
of the 1998/1999 Acquired Businesses and internal growth of approximately 15%
for the Company's existing business. The internal growth resulted primarily from
the increase in business from existing customers and the assimilation of certain
in-house printing operations of third-party businesses.
Costs of production. Costs of production were $12.3 million for the three
months ended March 31, 1999, as compared to $8.1 million for the same period in
1998, an increase of $4.2 million or 51.9%. Costs of production were
approximately 66.9% of net sales for the three months ended March 31, 1999,
compared to 74.9% for the same period in 1998. The reduction of costs of
production as a percentage of net sales was attributable to the inclusion of
lower percentage costs of production for the 1998/99 Acquired Businesses and
certain improvements and benefits resulting from the fixed nature of certain
costs in the domestic operations.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $3.0 million for the three months ended March 31,
1999, as compared to $1.6 million for the same period in 1998, an increase of
$1.4 million or 87.5%. Selling, general and administrative expenses were 16.2 %
of net sales for the three months ended March 31, 1999 compared to 14.7% for the
same period in 1998. This increase is due to the addition of the 1998/99
Acquired Businesses and an increase in the corporate infrastructure to manage
the Company's accelerated acquisition program and internal growth.
Depreciation and amortization: Depreciation and amortization expenses were
$762,000 for the three months ended March 31, 1999, as compared to $183,000 for
the same period in 1998, an increase of $579,000, or 316.3%. This increase is
due to the addition of the depreciation expense from the 1998/99 Acquired
Businesses and the increase in goodwill amortization.
11
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Provision for income taxes. On April 22, 1998 the Company converted from an
S corporation to a C corporation for tax purposes (the "Conversion") in
conjunction with a reorganization. For comparative purposes pro forma provision
for income taxes was calculated as if the conversion had occurred on January 1,
1998. The provision for income taxes was $899,000 for the three months ended
March 31, 1999, as compared to the pro forma provision for income taxes of
$364,000 for the same period in 1998. As a percentage of income before taxes the
tax rate was 39.1% for the three months ended March 31, 1999 and 40.9% for the
same period in 1998. The decrease is the result of the inclusion of 1998/99
Business Acquisitions, which generally have lower tax rates offset by
nondeductible goodwill.
Net income. Net income was $1.4 million or $0.25 per share on a diluted
basis with 5,676,985 weighted average common shares outstanding for the quarter
ended March 31, 1999 compared to pro forma net income of $525,000 or $0.18 per
share on a diluted basis with 2,964,492 weighted average common shares
outstanding for the same period of the previous year.
Liquidity and Capital Resources
The Company's primary uses of cash are for business acquisitions,
acquisition of property and equipment and payments on long-term debt assumed in
connection with certain acquisitions or incurred to finance certain equipment
purchases or assumed in connection with certain acquisitions. Cash utilized to
complete acquisitions, net of cash acquired, totaled $15.6 million for the three
months ended March 31, 1999. Cash utilized for the acquisition of property and
equipment, was $5.3 million for the three months ended March 31, 1999. Payments
on long-term debt totaled $336,000 for the three months ended March 31, 1999.
Net cash used in operating activities was $632,000 for the three months
ended March 31, 1999.
The Company has a $30.0 million revolving line of credit facility with a
bank. The revolving line of credit may be used for acquisitions and includes
sub-limits of $5.0 million for the purchase of equipment and $7.5 million for
working capital. The facility has a term of three years through July 9, 2001 and
has annual extension options. The revolving line of credit contains certain
covenants that include, among other things, limitations on the disposition
12
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of material amounts of assets and the incurrence of additional indebtedness. In
addition certain financial covenants, as to minimum net worth, maximum leverage
and debt coverage ratios must be maintained. These covenants may restrict the
ability of the Company to pay dividends on the Common Stock, although the
Company does not have the intention of paying dividends for the foreseeable
future. As of May 10, 1999, approximately $17.5 million remained available for
borrowing under the line of credit subject to the sub-limits stated above. The
amount available for borrowing is net of $3.8 million in standby letters of
credit.
Roda has a credit facility consisting of a $2.0 million ((pound)1.2
million) term loan and a $750,000 ((pound)450,000) revolving line of credit. The
line of credit is reviewed by the bank annually for renewal, but is payable on
demand. The debt is collateralized by substantially all of Roda's assets. As of
May 10, 1999, approximately $1.1 million ((pound)643,000) was outstanding under
the term loan and $350,000 ((pound)213,000) was outstanding on the revolving
line of credit. The term loan is payable in equal monthly installments through
October 20, 2001.
On February 3, 1999, the Company purchased a 150,000 square foot building
located in Jersey City, New Jersey for approximately $5,500. The Company
obtained a mortgage loan for $7,400 through its existing bank to finance the
purchase of the building and to make necessary improvements. As of May 10, 1999
$4.4 million is outstanding on the mortgage loan.
In connection with the business acquisitions, the Company assumed $700,000 of
debt.
13
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Year 2000 Issue
General Description of the Year 2000 Issue and the Nature and Effects of the
Year 2000 on Information Technology (IT) and Non-IT Systems
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operation, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
The Company has undertaken various initiatives intended to ensure that its
computer equipment and software will function properly with respect to dates in
the Year 2000 and thereafter. For this purpose, the term "computer equipment and
software" includes systems that are commonly thought of as IT systems, including
accounting, data processing, and telephone/PBX systems, cash registers,
hand-held terminals, scanning equipment, and other miscellaneous systems, as
well as systems that are not commonly thought of as IT systems, such as alarm
systems, fax machines, or other miscellaneous systems. Both IT and non-IT
systems may contain imbedded technology, which complicates the Company's Year
2000 identification, assessment, remediation, and testing efforts.
Domestic and England Locations
In order to address the Year 2000 Issue, the Company was required to modify
or replace portions of its software and certain hardware so that those systems
will properly utilize dates beyond December 31, 1999. The Company presently
believes that with modification and replacement of existing software and certain
hardware, the Year 2000 Issue will be mitigated. However, if testing of such
modifications and replacements are not made, or are not completed timely, the
Year 2000 Issue could have a material impact on the operations of the Company.
The Company's plan to resolve the Year 2000 Issue involves the following
four phases: assessment, remediation, testing, and implementation. To date, the
Company has completed its assessment of all systems that could be significantly
affected by the Year 2000. The completed assessment indicated that most of the
Company's significant information technology systems could be affected,
particularly the general ledger, billing, and production and manufacturing
systems. The Company prints and distributes time-sensitive analytical research
and marketing materials, and accordingly does not have any exposure as it
relates to the products being sold. In addition, the Company has gathered
information about the Year 2000 compliance status of its significant suppliers
and subcontractors and continues to monitor their compliance.
14
<PAGE>
Status of Progress in Becoming Year 2000 Compliant, Including Timetable for
Completion of Each Remaining Phase
For its information technology exposure, to date the Company has received
the upgrade from its software manufacturer and has completed the upgrade. The
Company is currently testing the software upgrades. Completion of the testing
phase for all significant systems is expected to be complete by June 30, 1999,
with all remediated systems fully tested and implemented by September 30, 1999,
with 100% completion targeted for September 30, 1999.
The Company is currently in the process of assessing its operating
equipment and believes there is minimal risk with regards to the Year 2000
Issue. As such, the Company is 90% complete in the remediation and testing phase
of its operating equipment and is expected to be completed by June 30, 1999.
Nature and Level of Importance of Third Parties and their Exposure to the Year
2000.
The Company has had communications with all of its significant customers to
determine the extent to which the Company's interface systems are vulnerable to
any failure by third parties. The Company believes that its significant
customers are addressing the issues and will timely adjust their systems.
The Company has queried its significant suppliers and subcontractors that
do not share information systems with the Company (external agents). To date,
the Company is not aware of any external agent with a Year 2000 Issue that would
materially impact the Company's results of operations, liquidity, or capital
resources. However, the Company has no means of ensuring that external agents
will be Year 2000 ready. The inability of external agents to complete their Year
2000 resolution process in a timely fashion could materially impact the Company.
The effect of non-compliance by external agents is not determinable.
Costs of the Year 2000 Issue
The cost of the upgrade to the Company is included in its maintenance
contract with its software vendor and will not have a material impact on the
Company's future financial results. The Company also believes that the
miscellaneous hardware required to be purchased to become year 2000 compliant is
not material.
Other Foreign Locations
As more fully described in the notes to the financial statements, the
Company has acquired three foreign locations in the past four months. Management
of the subsidiaries have represented to the Company that they have established
plans to resolve the Year 2000 Issue timely. Based on the Company's initial
assessment of the Year 2000 Issue at the acquired businesses, management
believes that the acquired businesses all have established year 2000 plans and
will all be year 2000 compliant by September 30, 1999.
15
<PAGE>
Risks of the Year 2000
Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. As noted above, the Company has
not yet completed all necessary phases of the Year 2000 program. In the event
that the Company does not complete any additional phases, the Company may be
unable to take customer orders, manufacture and ship products, invoice customers
or collect payments. In addition, disruptions in the economy generally resulting
from Year 2000 issues could also materially adversely affect the Company. The
Company could be subject to litigation for computer systems product failure, for
example, equipment shutdown or failure to properly date business records. The
amount of potential liability and lost revenue cannot be reasonably estimated at
this time.
Contingency Plan
The Company currently has no contingency plans in place in the event it
does not complete all phases of the Year 2000 program. The Company plans to
evaluate the status of completion in June 1999 and determine whether such a plan
is necessary.
Forward Looking Statements
When used in this and in future filings by the Company with the Securities
and Exchange Commission, in the Company's press releases and in oral statements
made with the approval of an authorized executive officer of the Company, the
words or phrases "will likely result." "expects," "plans," "will continue," " is
anticipated," "estimated," "project" or "outlook" or similar expressions
(including confirmations by an authorized executive officer of the Company of
any such expressions made by a third party with respect to the Company) are
intended to identify forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements, each
of which speak only as of the date made. Such statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical earnings and those presently anticipated or projected. The
Company has no obligation to publicly release the result of any revisions that
may be made to any forward-looking statements to reflect anticipated or
unanticipated events or circumstances occurring after the date of such
statements.
16
<PAGE>
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
(c) On January 13, 1999, the Company issued 398,216 shares of its common
stock, valued at $15.52 per share, as part of the purchase price for the
acquisition of Workable. The shares were issued in the name of Hacienda
Resources Limited, a British Virgin Islands corporation formed by the selling
shareholders of Workable. No underwriters were involved nor were any commissions
paid in connection with such transaction. The Company relied on Section 4(2) of
the Securities Act in making the foregoing private placement. No offer was made
to any person other than the selling shareholders of Workable.
(d) The Securities and Exchange Commission declared the Company's
Registration Statement on Form S-1 (File No. 333-46541) effective on April 21,
1998. The Company's Registration Statement on Form S-1 (File No. 333-50713),
filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended,
became effective on April 22, 1998. Pursuant to the foregoing Registration
Statements, the Company's initial public offering (the "Offering") of Common
Stock, no par value per share, began on April 22, 1998. All of the 2,530,000
shares of Common Stock offered by the Company, inclusive of 330,000 shares
subject to an over-allotment option, were sold on April 22 and 23, 1998. The
managing underwriters for the Offering were Schroder & Co. Inc. and Prudential
Securities Incorporated.
The aggregate offering price of the securities sold was $32,890,000. The
Company incurred underwriting discounts and commissions of $2,302,300 and
reasonably estimates that it incurred $1,250,000 on account of Securities and
Exchange Commission registration fees, NASD filing fee, Nasdaq National Market
Fee, "Blue Sky" fees, legal and accounting fees, printing costs and transfer
agent fees. None of the expenses were incurred to directors, officers or persons
owning 10% or more of any class of the Company's securities.
17
<PAGE>
The net proceeds of the Offering after deducting expenses was $29,337,700,
all of which has been expended to date, as follows:
(A) Acquisition of ordinary share capital
of Roda Limited, an English corporation
("Roda"): $ 4,103,148
(B) Acquisition of preference share capital
of Roda: $ 1,830,745
(C) Advance to Roda for repayment of
indebtedness: $ 1,429,305
(D) Acquisition cost associated with Roda $ 166,000
(E) Payment of indebtedness due to
stockholders of the Company prior to
the offering: $ 4,800,000
(F) Payment of indebtedness to bank: $ 2,200,000
(G) Payment of trade creditors to take
advantage of discounts: $ 2,162,391
(H) Equipment purchases $ 4,615,000
(I) Acquisition of Workable $ 6,347,000
(J) Acquisition of Boston Towne Press $ 1,684,111
-----------
TOTAL $29,337,700
===========
18
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
(1) Form 8-K, filed January 25, 1999 in connection with the press
release announcing the completion of the acquisition of Workable
Company Limited and affiliates.
(2) Form 8-K, filed February 9, 1999 in connection with the press
release announcing the purchase of the property and improvements
commonly known as 5 Burma Road, Jersey City, New Jersey.
(3) Form 8-K, filed February 23, 1999 in connection with the press
release announcing the completion of the acquisition of Boston
Town Press, Inc.
(4) Form 8-K, filed March 26, 1999 in connection with the press
release announcing the completion of the acquisition of Griffin
House Graphics Limited and affiliate.
(5) Form 8-K/A, filed March 29, 1999 amending and supplementing with
the inclusion of financial statements and pro forma financial
information (i) the Form 8-K dated January 13, 1999 filed with
the Securities and Exchange Commission (the "SEC") on January 25,
1999 relating to the acquisition of Workable Company Limited and
affiliates and (ii) the Form 8-K dated February 17, 1999 filed
with the SEC on February 23, 1999 relating to the acquisition by
the Company of Boston Towne Press, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Cunningham Graphics International, Inc.
(Registrant)
Dated: May 14, 1999 By: /s/ Robert M. Okin
---------------------------
Name: Robert M. Okin
Title: Senior Vice President
and Chief Financial Officer
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Consolidated Balance Sheet at March 31, 1999 and Consolidated
Statement of Income for the three months ended March 31, 1999, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,064
<SECURITIES> 0
<RECEIVABLES> 13,489
<ALLOWANCES> 0
<INVENTORY> 1,518
<CURRENT-ASSETS> 17,084
<PP&E> 20,640
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<TOTAL-ASSETS> 65,578
<CURRENT-LIABILITIES> 10,409
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0
0
<COMMON> 35,577
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<CGS> 12,251
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