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 September 30, 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)
100 Burma Road
Jersey City, NJ
(Address of principal executive offices)
07305
(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 November 4, 1999 was 5,704,299.
<PAGE>
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I -- Financial Information
Item 1 -- Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of December 31, 1998
and September 30, 1999 ............................................... 1
Condensed Consolidated Statements of Income for the Three Months
and Nine Months Ended September 30, 1998 and 1999 .................... 2
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1998 and 1999 ........................ 3
Notes to Condensed Consolidated Financial Statements - September 30, 1999 4
Item 2 -- Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................................... 11
Item 3 -- Quantitative and Qualitative Disclosure of Market Risk ............ 19
Part II -- Other Information
Item 4 -- Submission of Matters to a Vote of Securtiy Holders ............... 20
Item 6 -- Exhibits and Reports on Form 8-K .................................. 20
(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, September 30,
1998 1999
------------ -------------
(Note 1) (Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents .......................................... $ 2,179 $ 3,073
Accounts receivable ................................................ 9,199 26,167
Inventories ........................................................ 1,301 2,943
Prepaid expenses and other current assets .......................... 383 1,784
Deferred income taxes .............................................. 520 724
-------- --------
Total current assets ................................................... 13,582 34,691
Cash held for acquisitions and building addition ....................... 9,700 --
Property and equipment - net ........................................... 8,652 39,960
Goodwill - net ......................................................... 10,795 39,544
Other assets ........................................................... 860 2,027
-------- --------
$ 43,589 $116,222
======== ========
Liabilities and stockholders' equity Current liabilities:
Current portion of long-term debt .................................. $ 419 $ 821
Revolving lines of credit .......................................... 580 1,651
Current portion of obligations under capital leases ................ 493 1,628
Accounts payable ................................................... 3,102 14,208
Accrued expenses ................................................... 3,504 8,651
-------- --------
Total current liabilities .............................................. 8,098 26,959
Long-term debt - net of current portion ................................ 769 6,218
Revolving line of credit - net of current portion ...................... -- 29,876
Obligations under capital leases - net of current portion .............. 1,216 7,170
Deferred income taxes .................................................. 932 2,553
Other liabilities ...................................................... 64 53
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, 5,305,000 and
5,704,299 issued and outstanding for 1998 and 1999, respectively 29,395 35,637
Accumulated other comprehensive income (loss) ...................... 1 335
Retained earnings .................................................. 3,114 7,421
-------- --------
Total stockholders' equity ............................................. 32,510 43,393
-------- --------
$ 43,589 $116,222
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
1
<PAGE>
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except shares and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1999 September 30
------------------------ -------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales ............................... $ 14,191 $ 31,335 $ 38,118 $ 72,199
Operating expenses:
Costs of production ................. 10,139 21,016 27,609 48,199
Selling, general and administration . 2,070 5,318 5,565 12,139
Non-recurring moving costs .......... -- 177 -- 1,017
Depreciation and amortization ....... 370 1,452 837 3,095
----------- ----------- ----------- -----------
12,579 27,963 34,011 64,450
Income from operations .................. 1,612 3,372 4,107 7,749
Interest income (expense) ........... 78 (728) 36 (1,038)
Other income ........................ 27 141 46 169
----------- ----------- ----------- -----------
Income before income taxes .............. 1,717 2,785 4,189 6,880
Provision for income taxes .......... 687 961 1,483 2,571
----------- ----------- ----------- -----------
Net income .............................. $ 1,030 $ 1,824 $ 2,706 $ 4,309
=========== =========== =========== ===========
Pro Forma Data:
Income before income taxes .............. $ 4,189
Pro forma provision for income taxes 1,803
-----------
Pro forma net income .................... $ 2,386
===========
Pro forma earnings per share:
Basic ............................... $ 0.55
===========
Diluted ............................. $ 0.54
===========
Pro forma shares outstanding
Basic ............................... 4,347,431
===========
Diluted ............................. 4,407,190
===========
Earnings per common share:
Basic ............................... $ 0.19 $ 0.32 $ 0.76
=========== =========== ===========
Diluted ............................. $ 0.19 $ 0.32 $ 0.75
=========== =========== ===========
Weighted average number of common shares:
Basic ............................... 5,295,000 5,704,299 5,684,618
=========== =========== ===========
Diluted ............................. 5,332,762 5,739,562 5,720,657
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
2
<PAGE>
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
Nine Months Ended September 30, 1998 and 1999
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income ................................................................ $ 2,706 $ 4,309
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ......................................... 874 3,095
Deferred income taxes ................................................. 153 (4)
Changes in operating assets and liabilities, net of effects of acquisition:
Accounts receivable ................................................... (2,379) (7,549)
Inventory ............................................................. (292) (740)
Prepaid expenses and other assets ..................................... (275) (347)
Other assets .......................................................... 198 (1,105)
Advance to officers ................................................... 136 --
Accounts payable ...................................................... (1,024) 4,835
Accrued expenses ...................................................... 530 1,620
Other liabilities ..................................................... (40) (39)
-------- --------
Net cash provided by operating activities ................................. 587 4,075
Cash flows from investing activities
Acquisition of property and equipment ................................. (2,944) (14,727)
Acquisition of businesses, net of cash acquired ....................... (6,149) (32,520)
-------- --------
Net cash used in investing activities ..................................... (9,093) (47,247)
Cash flows from financing activities
Net proceeds from sale of common stock ................................ 29,250 --
Net (payments) proceeds on revolving lines of credit .................. (320) 29,813
Proceeds from long-term borrowings .................................... -- 6,458
Principal payments on long-term borrowings ............................ (2,901) (474)
Principal payments on obligations under capital lease ................. (241) (1,499)
Distributions to stockholders ......................................... (6,237) --
-------- --------
Net cash provided by financing activities ................................. 19,551 34,298
Effect of exchange rate changes on cash and cash equivalents .............. (41) 68
-------- --------
Net increase (decrease) in cash and cash equivalents ..................... 11,004 (8,806)
Cash and cash equivalents, beginning of period ............................ 67 11,879
-------- --------
Cash and cash equivalents, end of period .................................. $ 11,071 $ 3,073
======== ========
Supplemental disclosure of noncash investing and
financing activities
Issuance of common stock in conjunction with the acquisition
of Roda and Workable Company Limited and affiliates, respectively ..... $ 2,207 $ 6,181
======== ========
Acquisition of equipment under capital leases ............................. $ 967 $ --
======== ========
Debt assumed in business acquisitions ..................................... $ -- $ 16,445
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE>
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 and nine months ended
September 30, 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
<PAGE>
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 from January 1, 1998 through April 22, 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
nine months ended September 30, 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 period January 1, 1998
through April 22, 1998.
3. 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.
5
<PAGE>
4. Acquisitions (continued)
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) $6,371 in cash, and (iii) the assumption of $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 $7,798 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.
Acquisition of Venus Holdings Limited
On June 21, 1999, the Company acquired all of the issued and outstanding
capital stock of Venus Holdings Limited and its wholly owned subsidiaries,
Apollo UK Limited and Artemis Colour Limited, located in London, England
("Apollo"). Apollo is a commercial printer. The aggregate purchase price,
including all direct costs, was $6,304, 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
$900 depending upon the earnings of Apollo during the years 2000 and 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 $4,056 and has been recorded as goodwill.
6
<PAGE>
4. Acquisitions (continued)
Other Acquisitions
In addition to the acquisitions described above, the Company closed the
following acquisitions during the nine months ended September 30, 1999:
Company Primary Market Date
- --------------------------------------------------------------------------------
Griffin House Graphics Toronto, Canada March 16, 1999
Goldhawk Reprographics Limited London, England April 1, 1999
Bengal Graphics, Inc. and Affiliate New York, New York June 3, 1999
MVP Graphics, Inc. and Affiliate Santa Fe Springs, CA July 14, 1999
D&L Graphics, Inc. Hawthorne, NJ September 2, 1999
Golden Crane, Incorporated San Francisco, CA September 10, 1999
To close the six acquisitions above, in the aggregate, the Company paid
cash of $17,199 and assumed debt of the acquired businesses totaling $6,251.
Under the terms of the purchase agreements, the Company may be required to pay
the sellers up to an additional $5,866 depending upon the earnings of the
acquired companies through 2002. The aggregate cost of the acquisitions exceeded
the fair value of the acquired net assets by $12,626 and has been recorded as
goodwill.
The pro forma unaudited results of operations for the nine months ended
September 30, 1998 and 1999, assuming the Reorganization, the consummation of
the acquisitions and issuance of the common stock as of January 1, 1998, are as
follows:
Nine Months Ended September 30
------------------------------
1998 1999
---------- ----------
Net sales $ 86,032 $ 93,192
Net income, 4,513 4,931
Per share data:
Basic earnings 0.95 0.86
Diluted earnings 0.94 0.86
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 Company
relocated its existing Jersey City and midtown New York City operations to the
acquired facility.
7
<PAGE>
5. Acquisition of Real Estate (continued)
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.
In connection with the relocation of the facilities, the Company has
provided for non-recurring moving costs related to the move of $177 ($104 after
taxes) and $1,017 ($597 after taxes) for the three and nine months ended
September 30, 1999, respectively.
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. The following table presents financial information based on the
Company's geographic segments for the three months and nine months ended
September 30, 1998 and 1999 (dollars in thousands):
For the Three Months Ended September 30, 1998
Income from Identifiable
Net Sales Operations Assets
--------- ---------- -----------
United States $11,727 $ 1,100 $29,515
United Kingdom 2,464 512 14,074
------- ------- -------
Total $14,191 $ 1,612 $43,589
======= ======= =======
For the Nine Months Ended September 30, 1998
Income from Identifiable
Net Sales Operations Assets
--------- ---------- -----------
United States $33,802 $ 3,252 $29,515
United Kingdom 4,316 855 14,074
------- ------- -------
Total $38,118 $ 4,107 $43,589
======= ======= =======
8
<PAGE>
7. Segment and Geographic Information (continued)
For the Three Months Ended September 30, 1999
Income from Identifiable
Net Sales Operations Assets
--------- ---------- -----------
United States $ 20,414 $ 1,720 $ 90,822
United Kingdom 7,342 631 17,802
Hong Kong and Singapore 2,487 661 6,364
Canada 1,092 360 1,234
-------- -------- --------
Total $ 31,335 $ 3,372 $116,222
======== ======== ========
For the Nine Months Ended September 30, 1999
Income from Identifiable
Net Sales Operations Assets
--------- ---------- -----------
United States $ 48,299 $ 3,980 $ 90,822
United Kingdom 14,670 1,463 17,802
Hong Kong and Singapore 6,737 1,479 6,364
Canada 2,493 827 1,234
-------- -------- --------
Total $ 72,199 $ 7,749 $116,222
======== ======== ========
8. Comprehensive Income
Total comprehensive income was $992 and $2,401 for the three months ended
September 30, 1998 and 1999, respectively, and $2,680 and $4,643 for the nine
months ended September 30, 1998 and 1999, respectively. Other comprehensive
income is entirely related to foreign exchange differences.
9
<PAGE>
9. Earnings Per Share Data
The following table sets forth the computation of basic and diluted
earnings per share for the periods indicated:
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
---------------------- ----------------------
1998 1999 1998 1999
---------- ---------- ---------- ----------
(Pro forma)
<S> <C> <C> <C> <C>
Numerator:
Net income for basic and diluted
earnings per share $ 1,030 $ 1,824 $ 2,386 $ 4,309
========== ========== ========== ==========
Denominator
Denominator for basic earnings per share 5,295,000 5,704,299 4,347,431 5,684,618
- - weighted average common shares
Effect of dilutive securities - employee
stock options 37,762 35,263 59,759 36,039
---------- ---------- ---------- ----------
Denominator for diluted earnings per
share- adjusted weighted average
common shares and assumed
conversion 5,332,762 5,739,562 4,407,190 5,720,657
========== ========== ========== ==========
Basic earnings per common share $ 0.19 $ 0.32 $ 0.55 $ 0.76
========== ========== ========== ==========
Diluted earnings per common share $ 0.19 $ 0.32 $ 0.54 $ 0.75
========== ========== ========== ==========
</TABLE>
10
<PAGE>
Item 2. Management's Discussion and Analysis and Analysis of Financial
Conditions of Operations
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 and
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,
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, Goldman, Sachs & Co., PaineWebber Inc., Lehman Brothers
Inc., Merrill Lynch & Co., Inc., The Prudential Insurance Company of America,
Blue Cross/Blue Shield, New York Life Insurance Company, and The McGraw-Hill
Company, among others.
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.
11
<PAGE>
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 Nine Months Ended
September 30 September 30
-------------- --------------
1998 1999 1998 1999
----- ----- ----- -----
Net sales 100.0% 100.0% 100.0% 100.0%
Costs of production 71.4 67.0 72.4 66.8
Selling, general and administrative 14.6 17.0 14.6 16.8
Non-recurring moving costs 0.6 1.4
Depreciation and amortization 2.6 4.6 2.2 4.3
----- ----- ----- -----
Income from operations 11.4 10.8 10.8 10.7
Interest income (expense) 0.5 (2.3) 0.1 (1.4)
Other income 0.2 0 .4 0.1 0.2
----- ----- ----- -----
Income before income taxes 12.1 8.9 11.0 9.5
Provision for income taxes 4.8 3.1 3.9 3.6
----- ----- ----- -----
Net income 7.3% 5.8% 7.1% 5.9%
===== ===== ===== =====
Pro Forma Data:
Income before income taxes 11.0%
Pro forma provision for income taxes 4.7
=====
Pro forma net income 6.3%
-----
Acquisitions in 1998 and 1999 are the primary causes of the increases in
revenues and expenses since September 30, 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.
12
<PAGE>
The following table sets forth the Company's 1998 and 1999 acquisitions
through September 30, 1999 (collectively the "1998/99 Acquired Businesses") and
indicates the month 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
Goldhawk Reprographics Limited and Affiliates April 1999
Bengal Graphics, Inc. and Affiliate June 1999
Venus Holdings Limited and Affiliates June 1999
MVP Graphics, Inc. and Affiliate July 1999
D&L Graphics, Inc. September 1999
Golden Crane, Incorporated September 1999
Three months ended September 30, 1999 compared with three months ended September
30, 1998
Net sales. The Company reported net sales of $31.3 million for the three
months ended September 30, 1999 compared to $14.2 million for the same period in
1998, an increase of $17.1 million or 120.4%. This increase is due to the
addition of the 1998/1999 Acquired Businesses and internal growth from the
Company's existing customer base. 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 $21.0 million for the three
months ended September 30, 1999, as compared to $10.1 million for the same
period in 1998, an increase of $10.9 million or 107.9%. Costs of production were
approximately 67.0% of net sales for the three months ended September 30, 1999,
compared to 71.4% 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 existing operations.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $5.3 million for the three months ended September
30, 1999, as compared to $2.1 million for the same period in 1998, an increase
of $3.2 million or 152.4%. Selling, general and administrative expenses were
17.0% of net sales for the three months ended September 30, 1999 compared to
14.6% 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.
13
<PAGE>
Non-recurring moving costs. The Company relocated its New Jersey and
certain Manhattan operations to a new 150,000 square foot facility in Jersey
City, NJ. For the three months ended September 30, 1999, The Company has
provided $177,000 ($104,000 after taxes) for non-recurring costs related to the
move. Before non-recurring moving related costs, net income for the third
quarter increased 90.0% to $1.9 million, or $0.34 per diluted shares, compared
to net income of $1.0 million, or $0.19 per diluted share, for the three months
ended September 30, 1998.
Depreciation and amortization. Depreciation and amortization expenses were
$1.5 million for the three months ended September 30, 1999, as compared to
$370,000 for the same period in 1998, an increase of $1.1 million, or 305.4%.
This increase is due to the addition of the depreciation expense from the
1998/99 Acquired Businesses and the increase in goodwill amortization.
Provision for income taxes. The provision for income taxes was $961,000 for
the three months ended September 30, 1999, as compared to the provision for
income taxes of $687,000 for the same period in 1998. As a percentage of income
before taxes the tax rate was 34.5% for the three months ended September 30,
1999 and 40.0% for the same period in 1998. The decrease is attributable to the
inclusion of the 1998/99 Business Acquisitions, which generally have lower tax
rates offset by nondeductible goodwill.
Net income. Net income was $1.8 million or $0.32 per share on a diluted
basis with 5,739,562 weighted average common shares outstanding for the three
months ended September 30, 1999 compared to the net income of $1.0 million or
$0.19 per share on a diluted basis with 5,332,762 weighted average common shares
outstanding for the same period of the previous year.
Nine months ended September 30, 1999 compared with nine months ended September
30, 1998
Net sales. The Company reported net sales of $72.2 million for the nine
months ended September 30, 1999 compared to $38.1 million for the same period in
1998, an increase of $34.1 million or 89.5%. This increase is due to the
addition of the 1998/1999 Acquired Businesses and internal growth from the
Company's existing customer base. 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 $48.2 million for the nine
months ended September 30, 1999, as compared to $27.6 million for the same
period in 1998, an increase of $20.6 million or 74.6%. Costs of production were
approximately 66.8% of net sales for the nine months ended September 30, 1999,
compared to 72.4% 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 existing operations.
14
<PAGE>
Selling, general and administrative expenses. Selling, general and
administrative expenses were $12.1 million for the nine months ended September
30, 1999, as compared to $5.6 million for the same period in 1998, an increase
of $6.5 million or 116.1%. Selling, general and administrative expenses were
16.8% of net sales for the nine months ended September 30, 1999 compared to
14.6% 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.
Non-recurring moving costs. The Company relocated its New Jersey and
certain Manhattan operations to a new 150,000 square foot facility in Jersey
City, NJ. The Company has provided $1.0 million ($597 after taxes) for
non-recurring costs related to the move as of September 30, 1999. Before
non-recurring moving related costs, net income for the nine month period
increased 104.2% to $4.9 million, or $0.86 per diluted share, compared to pro
forma net income of $2.4 million, or $0.54 per diluted share, for the nine
months ended September 30, 1998.
Depreciation and amortization. Depreciation and amortization expenses were
$3.1 million for the nine months ended September 30, 1999, as compared to
$837,000 for the same period in 1998, an increase of $2.3 million, or 270.4%.
This increase is due to the addition of the depreciation expense from the
1998/99 Acquired Businesses and the increase in goodwill amortization.
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 $2.6 million for the nine months ended
September 30, 1999, as compared to the pro forma provision for income taxes of
$1.8 million for the same period in 1998. As a percentage of income before taxes
the tax rate was 37.4% for the nine months ended September 30, 1999 and 43.0%
for the same period in 1998. The decrease is primarily the result of a special
one-time income tax charge of $94,000 for the nine months ended September 30,
1998 attributable to the Conversion, coupled with the inclusion of the 1998/99
Business Acquisitions, which generally have lower tax rates offset by
nondeductible goodwill.
Net income. Net income was $4.3 million or $0.75 per share on a diluted
basis with 5,720,657 weighted average common shares outstanding for the nine
months ended September 30, 1999 compared to pro forma net income of $2.4 million
or $0.54 per share on a diluted basis with 4,407,190 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, working
capital, acquisition of property and equipment and payments on long-term debt
assumed in connection with certain acquisitions or incurred to finance certain
equipment purchases. Cash utilized to complete acquisitions, net of cash
acquired, totaled $32.5 million for the nine months ended
15
<PAGE>
September 30, 1999. Cash utilized for the acquisition of property and equipment,
was $14.7 million for the nine months ended September 30, 1999. Payments on
long-term debt totaled $2.0 for the nine months ended September 30, 1999.
Net cash provided by operating activities was $4.1 million for the nine
months ended September 30, 1999.
On February 3, 1999, the Company purchased a 150,000 square foot building
located in Jersey City, New Jersey for approximately $5.5 million. The Company
obtained a mortgage loan for $7.4 million to finance the purchase of the land
and building and to make necessary improvements. The entire $7.4 million has
been utilized and is outstanding.
On August 3, 1999, the Company entered into a $60 million credit facility
with a group of banks. The Company may borrow up to $30 million until July 2001
for acquisitions, and $20.0 million until July 31, 2004 for working capital and
general business purposes, on a revolving basis. The Company also borrowed $10.0
million to repay its former lender. The loan agreement puts restrictions on the
ability to borrow more money, buy equipment, sell property, lend money to
foreign divisions and make acquisitions, among other matters, without the
consent of the lenders. The Company may not pay dividends without the consent of
the lenders. However, it is the Company's intention not to pay dividends for the
foreseeable future, but to retain earnings, if any, to fund the growth and
development of the business. Also, the Company must maintain certain financial
covenants, as to minimum net worth, maximum leverage and debt coverage ratios.
As of November 4, 1999, approximately $13.6 million remained available for
borrowing for acquisitions and approximately $3.1 million remained available for
working capital and general business purposes.
In connection with the business acquisitions, the Company assumed $16.4 million
of debt.
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
16
<PAGE>
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 U.K. 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 the modification and replacement of the existing software and
certain hardware, that all actions within its control have been performed to
make the systems Y2K compliant.
The Company's plan to resolve the Year 2000 Issue involved 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.
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 and
testing of the software upgrades and believes that all of the information
technology is year 2000 compliant.
The Company has completed its assessment of the operating equipment and
believes that all of the equipment is year 2000 compliant.
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.
17
<PAGE>
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.
Acquired Locations
As more fully described in the notes to the financial statements, the
Company has acquired several businesses during the nine months ended September
30, 1999. 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 December
31, 1999. Management of the Company will continue to monitor the acquired
locations' year 2000 compliance progress.
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 at the acquired
businesses. 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 believes that all the acquired locations will be year 2000
compliant. However, in the event that year 2000 compliance programs are not
completed at any of the locations, management believes that the corporate
accounting office would be able to perform the accounting functions with minimal
disruption to the financial reporting.
18
<PAGE>
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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in interest rates and foreign currency
exchange primarily in its cash, debt and foreign currency transactions.
A discussion of the Company's accounting policies for financial instruments
is included in the Summary of Significant Accounting Policies in the Notes to
the Consolidated Financial Statements included in the Company's annual report on
Form 10-K for the year ended December 31, 1998. Additional information relating
to financial instruments and debt is included in Note 8 - Revolving Line of
Credit, Long-Term Debt and Obligations Under Capital Leases.
International operations, excluding U.S. export sales which are principally
denominated in U.S. dollars, constitute 33.1% of the revenues and 21.9% of the
identifiable assets of the Company as of September 30, 1999, which were
denominated in British pounds, Hong Kong dollars and Canadian dollars. The
Company has loans to foreign affiliates which are denominated in foreign
currencies. Foreign currency changes against the U.S. dollar affect the foreign
currency translation adjustment of the Company's net investment in these
affiliates and the foreign currency transaction adjustments on long-term
advances to affiliates, which impact consolidated equity of the Company.
International operations result in a large volume of foreign currency commitment
and transaction exposures and significant foreign currency net asset exposures.
The Company prints in a number of locations around the world and has a cost base
that is diversified over a number of different currencies, as well as the U.S.
dollar, which serves to counterbalance partially its foreign currency
transaction risk. The Company does not hedge its exposure to translation gains
and losses relating to foreign currency net asset exposures; however, whenever
possible, it borrows in the local currency to reduce such exposure. Currently,
the Hong Kong dollar is "pegged" to the United States dollar, so there is
minimal foreign currency translation adjustment with respect to the Hong Kong
operations.
19
<PAGE>
The Company's cash position includes amounts denominated in foreign
currencies. The Company manages its worldwide cash requirements considering
available funds among its subsidiaries and the cost effectiveness with which
these funds can be accessed. The repatriation of cash balances from certain of
the Company's affiliates could have adverse tax consequences. However, those
balances are generally available without legal restrictions to fund ordinary
business operations.
The Company's interest expense is most sensitive to changes in the general
level of U.S. interest rates. In this regard, changes in U.S. interest rates
affect the interest paid on its debt. To mitigate the impact of fluctuations in
U.S. interest rates, the Company generally maintains a portion of its debt as
fixed rate in nature.
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
20
<PAGE>
(b) Reports on Form 8-K
(1) Form 8-K dated July 14, 1999 and filed August 2, 1999, announcing
the completion of the acquisition of MVP Graphics, Inc.
(2) Form 8-K dated June 21, 1999 and filed August 5, 1999, announcing
the completion of the acquisition of Venus Holdings Limited and
affiliates.
(3) Form 8-K/A, filed amending and supplementing with the inclusion
of financial statements and pro forma financial information; (1)
the form 8-K dated June 21, 1999, filed with the Securities and
Exchange Commission on August 6,1999, relating to the acquisition
of Venus Holdings Limited and affiliates, and (2) the form 8-K
dated July 14, 1999 relating to the acquisition of MVP Graphics,
Inc. and affiliates.
(4) Form 8-K dated September 2, 1999 filed September 16, 1999
announcing the completion of the acquisition of D&L Graphics,
Inc.
(5) Form 8-K dated September 10, 1999 filed September 16, 1999,
announcing the completion of the acquisition of Golden Crane,
Incorporated.
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: November 10, 1999 By: /s/ Michael R. Cunningham
-------------------------------
Name: Michael R. Cunningham
Title: President and
Chief Executive Officer
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Consolidated Balance Sheet at September 30, 1999 and Consolidated
Statement of Income for the nine months ended September 30, 1999, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,073
<SECURITIES> 0
<RECEIVABLES> 26,167
<ALLOWANCES> 0
<INVENTORY> 2,943
<CURRENT-ASSETS> 34,691
<PP&E> 39,960
<DEPRECIATION> 0
<TOTAL-ASSETS> 116,222
<CURRENT-LIABILITIES> 26,959
<BONDS> 0
0
0
<COMMON> 35,637
<OTHER-SE> 7,756
<TOTAL-LIABILITY-AND-EQUITY> 116,222
<SALES> 72,199
<TOTAL-REVENUES> 72,199
<CGS> 27,183
<TOTAL-COSTS> 64,450
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,038
<INCOME-PRETAX> 6,880
<INCOME-TAX> 2,571
<INCOME-CONTINUING> 4,309
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,309
<EPS-BASIC> 0.76
<EPS-DILUTED> 0.75
</TABLE>
