UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________________ TO
________________________
COMMISSION FILE NUMBER 0-24068
CONSOLIDATED GRAPHICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 76-0190827
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
2210 WEST DALLAS STREET
HOUSTON, TEXAS 77019
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (713) 529-4200
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of Common Stock, par value $.01 per share, of the
Registrant outstanding at
January 31, 1996 was 12,439,730.
<PAGE>
CONSOLIDATED GRAPHICS, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1996
INDEX
PAGE
Part I -- Financial Information
Item 1 -- Financial Statements
Consolidated Balance Sheets
at December 31, 1996 and
March 31, 1996............. 1
Consolidated Income
Statements for each of the
three months and
nine months ended
December 31, 1996 and
1995....................... 2
Consolidated Statements of
Cash Flows for the nine
months ended
December 31, 1996 and
1995....................... 3
Notes to Consolidated
Financial Statements....... 4
Item 2 -- Management's
Discussion and Analysis of
Financial Condition and
Results of
Operations...................... 6
Part II -- Other Information
Item 1 -- Legal Proceedings..... 11
Item 4 -- Submission of Matters
to a Vote of Security
Holders........................ 11
Item 5 -- Other Information..... 11
Item 6 -- Exhibits and Reports
on Form 8-K.................... 12
Signatures........................... 13
(i)
<PAGE>
CONSOLIDATED GRAPHICS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, MARCH 31,
1996 1996
------------ ----------
(UNAUDITED) (AUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 2,175 $ 3,086
Accounts receivable, net........ 25,278 19,317
Inventories..................... 7,254 8,023
Prepaid expenses................ 945 1,077
------------ ----------
Total current assets....... 35,652 31,503
PROPERTY AND EQUIPMENT, net.......... 79,267 50,591
GOODWILL, net........................ 5,458 5,015
OTHER ASSETS......................... 1,314 700
------------ ----------
$121,691 $ 87,809
============ ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term
debt........................... $ 2,476 $ 1,221
Accounts payable................ 5,825 5,719
Accrued liabilities............. 8,362 5,648
Income taxes payable............ 462 60
------------ ----------
Total current
liabilities............. 17,125 12,648
LONG-TERM DEBT, net of current
portion............................ 35,275 20,105
DEFERRED INCOME TAXES................ 6,919 5,180
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value;
20,000,000 shares authorized,
12,374,680 and 11,854,720
issued and outstanding,
respectively................... 124 119
Additional paid-in capital...... 38,296 32,702
Retained earnings............... 23,952 17,055
------------ ----------
Total shareholders'
equity.................. 62,372 49,876
------------ ----------
$121,691 $ 87,809
============ ==========
See accompanying notes to consolidated financial statements.
1
<PAGE>
CONSOLIDATED GRAPHICS, INC.
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- ---------------------
1996 1995 1996 1995
--------- --------- ---------- ---------
SALES.............................. $ 38,186 $ 22,255 $ 100,895 $ 61,041
COST OF SALES...................... 26,391 16,117 70,421 43,796
--------- --------- ---------- ---------
Gross profit.................. 11,795 6,138 30,474 17,245
SELLING EXPENSES................... 3,754 2,138 10,012 6,021
GENERAL AND ADMINISTRATIVE
EXPENSES......................... 2,966 1,810 7,980 4,814
RESTRUCTURING CHARGE............... -- 1,500 -- 1,500
--------- --------- ---------- ---------
Operating income.............. 5,075 690 12,482 4,910
INTEREST EXPENSE................... 643 236 1,577 594
--------- --------- ---------- ---------
Income before provision for
income taxes................ 4,432 454 10,905 4,316
PROVISION FOR INCOME TAXES......... 1,640 160 4,008 1,511
--------- --------- ---------- ---------
NET INCOME......................... $ 2,792 $ 294 $ 6,897 $ 2,805
========= ========= ========== =========
EARNINGS PER SHARE OF COMMON STOCK. $.22 $.03 $.56 $.26
========= ========= ========== =========
See accompanying notes to consolidated financial statements.
2
<PAGE>
CONSOLIDATED GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
DECEMBER 31,
----------------------
1996 1995
---------- ----------
OPERATING ACTIVITIES:
Net income...................... $ 6,897 $ 2,805
Adjustments to reconcile net
income to net cash provided
by operating activities-
Depreciation and
amortization............ 4,272 2,726
Deferred tax provision..... 562 1,418
Changes in assets and
liabilities, net of
effects of acquisitions-
Accounts receivable..... (946) (638)
Inventories............. 1,878 1,083
Prepaid expenses........ (250) (1,015)
Other assets............ (598) (70)
Accounts payable and
accrued liabilities... (2,052) (1,583)
Income taxes payable.... 1,706 (773)
---------- ----------
Net cash provided
by operating
activities...... 11,469 3,953
---------- ----------
INVESTING ACTIVITIES:
Acquisitions of businesses...... (12,808) (6,461)
Purchases of property and
equipment...................... (8,097) (3,794)
Proceeds from disposition of
assets......................... 630 196
---------- ----------
Net cash used in
investing
activities...... (20,275) (10,059)
---------- ----------
FINANCING ACTIVITIES:
Proceeds from revolving credit
agreement...................... 49,595 21,945
Payments on revolving credit
agreement...................... (40,588) (13,945)
Payments on long-term debt...... (2,040) (1,000)
Proceeds from exercise of stock
options and other.............. 928 440
---------- ----------
Net cash provided
by financing
activities...... 7,895 7,440
---------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... (911) 1,334
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD................ 3,086 1,707
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD............................. $ 2,175 $ 3,041
========== ==========
See accompanying notes to consolidated financial statements.
3
<PAGE>
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements include the
accounts of Consolidated Graphics, Inc. and its wholly owned subsidiaries (the
"Company"). All intercompany balances and transactions have been eliminated.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and the
Securities and Exchange Commission's rules and regulations for reporting interim
financial information. 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
December 31, 1996 are not necessarily indicative of the results that may be
expected for the year ended March 31, 1997. Balance sheet information as of
March 31, 1996 has been derived from the 1996 annual audited financial
statements of the Company. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Form 10-K
filed with the Securities and Exchange Commission in July 1996.
On December 18, 1996, the Company declared a stock dividend to effect a
two-for-one split of the Company's common stock for shareholders of record on
December 31, 1996 and payable January 10, 1997. The accompanying financial
statements have been adjusted to reflect the effect of the split for all periods
presented. Earnings per share are calculated by dividing net income by the
weighted average number of shares outstanding, after giving effect to the split
and the dilutive effect of outstanding stock options, as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- --------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares outstanding at beginning of
period............................. 11,854,720 10,933,104 11,854,720 10,933,104
Weighted average effect of shares
issued during the period........... 418,127 51,702 227,233 23,412
Dilutive effect of outstanding stock
options............................ 457,193 -- 152,398 --
------------ ------------ ------------ ------------
12,730,040 10,984,806 12,234,351 10,956,516
============ ============ ============ ============
</TABLE>
The consolidated statements of cash flows provide information about changes
in cash and exclude the effects of noncash transactions. For purposes of the
consolidated statements of cash flows, the Company considers all highly liquid
investments purchased with original maturities of three months or less to be
cash equivalents. Interest paid during the nine months ended December 31, 1996
and 1995 was $1,590 and $605, respectively. Income tax payments during the nine
months ended December 31, 1996 and 1995 were $1,687 and $1,704, respectively.
Significant non-cash transactions in the nine month period ended December 31,
1996 include debt of $6,835 incurred by the Company to finance the purchase of
three printing presses and the issuance of common stock and assumption of debt
and capital leases in connection with certain of the Company's acquisitions (see
Note 3. Acquisitions).
4
<PAGE>
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
2. LONG-TERM DEBT
The following is a summary of the Company's long-term debt:
DECEMBER 31, MARCH 31,
1996 1996
------------ ---------
Revolving credit agreement........... $ 25,307 $16,300
Notes payable and capital leases..... 12,444 5,026
------------ ---------
Total long-term debt............ 37,751 21,326
Less current portion............ (2,476) (1,221)
------------ ---------
$ 35,275 $20,105
============ =========
3. ACQUISITIONS
During the nine months ended December 31, 1996, the Company completed the
following acquisitions: Bridgetown Printing in Portland, Oregon (June 1996),
Garner Printing in Des Moines, Iowa (July 1996), Eagle Press in Sacramento,
California (July 1996) and Mobility, Inc. in Richmond, Virginia (October 1996).
Each of these transactions were accounted for using the purchase method of
accounting. In addition to cash expended of $10,155, the Company issued 177,780
shares of common stock and assumed debt and capital leases totaling $2,622 in
connection with these transactions. In December 1996, the Company also paid
$2,653 to complete the reorganization of Tulsa Litho.
In January 1997, the Company announced that it had completed the
acquisitions of Direct Color in Long Beach, California and Theo Davis Sons,
Inc., located near Raleigh-Durham, North Carolina. In February 1997, the Company
announced that it had signed a nonbinding letter of intent to acquire Tucker
Printers in Rochester, New York.
5
<PAGE>
CONSOLIDATED GRAPHICS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSIONS CONTAIN 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 GROWTH STRATEGY OF ACQUIRING ADDITIONAL
COMPANIES. 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.
GENERAL
Consolidated Graphics, Inc. is one of the fastest growing printing
companies in the United States. It is a consolidator in a fragmented industry,
adding value to its acquisitions by providing the financial and operational
strengths, management support and technological advantages associated with a
larger organization. The Company has 18 printing companies operating in 14 U.S.
markets.
The Company's sales are derived from the production and sale of printed
materials. The materials are sold and manufactured by each of the operating
subsidiaries, and each product is customized depending on the needs of the
customer. All of the operating subsidiaries provide general commercial printing
services relating to the production of annual reports, training manuals, product
and capability brochures, direct mail pieces, catalogs and other promotional
material, all of which tend to be recurring in nature. In addition, one of the
subsidiaries also provides transaction-oriented financial printing services,
including the printing of registration and information statements filed with the
Securities and Exchange Commission and official statements for municipal
securities. Each printing company has its own separate operations which include
sales, estimating, customer service, prepress, production and postpress
operations, and accounting. The Company's corporate office, located in Houston,
provides centralized cash management, financial reporting and certain
administrative services to all of the operating subsidiaries.
The Company's strategy is to generate sales and profits through
acquisitions and internal growth. The Company provides acquired companies cost
savings through master purchasing arrangements, access to technology and
capital, strategic counsel and a commitment to training through a unique,
comprehensive management development program. As a result, operating income
margins and efficiencies at acquired companies, which may be lower than those of
the Company at the date of acquisition, typically improve as the Company's
operational strategies are fully implemented.
The Company's consolidated financial results in a given period may be
affected by the timing and magnitude of acquisitions. The Company's consolidated
operating income margins in the periods immediately following a significant
acquisition or series of acquisitions may be lower than historically reported
consolidated margins depending upon the timing and extent to which an acquired
company is able to adapt to and implement the Company's management practices.
The Company competes in the general commercial and financial printing
sectors, which are characterized by individual orders from customers for
specific printing projects rather than long-term contracts, with continued
engagement for successive jobs dependent upon the customer's satisfaction with
the services provided. As such, the Company is unable to predict, for more than
a few weeks in advance, the number, size and profitability of printing jobs in a
given period. Consequently, the timing of projects in any quarter could have a
significant impact on financial results in that quarter.
6
<PAGE>
RESULTS OF OPERATIONS
The following tables set forth the Company's historical income statements
for the periods indicated:
THREE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
-------------------- --------------------
1996 1995 1996 1995
--------- --------- --------- ---------
Sales........................... $ 38.2 $ 22.2 $ 100.9 $ 61.0
Cost of sales................... 26.4 16.1 70.4 43.8
--------- --------- --------- ---------
Gross profit............... 11.8 6.1 30.5 17.2
Selling expenses................ 3.8 2.1 10.0 6.0
General and administrative
expenses...................... 3.0 1.8 8.0 4.8
Restructuring charge............ -- 1.5 -- 1.5
--------- --------- --------- ---------
Operating income........... 5.0 .7 12.5 4.9
Interest expense................ .6 .2 1.6 .6
--------- --------- --------- ---------
Income before provision for
income taxes............. 4.4 .5 10.9 4.3
Provison for income taxes....... 1.6 .2 4.0 1.5
--------- --------- --------- ---------
Net income................. $ 2.8 $ .3 $ 6.9 $ 2.8
========= ========= ========= =========
The following tables set forth the components of income expressed as a
percentage of sales for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
--------------------------- --------------------
1996 1995 1996 1995
--------- ------------- --------- ---------
<S> <C> <C> <C> <C>
Sales................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales........................ 69.1 72.4 69.8 71.7
--------- ------------- --------- ---------
Gross profit.................... 30.9 27.6 30.2 28.3
Selling expenses..................... 9.8 9.6 9.9 9.9
General and administrative
expenses........................... 7.8 8.1 7.9 7.9
Restructuring charge................. -- 6.8 -- 2.5
--------- ------------- --------- ---------
Operating income................ 13.3 3.1 12.4 8.0
Interest expense..................... 1.7 1.1 1.6 .9
--------- ------------- --------- ---------
Income before provision for
income taxes.................. 11.6 2.0 10.8 7.1
Provision for income taxes........... 4.3 .7 4.0 2.5
--------- ------------- --------- ---------
Net income...................... 7.3% 1.3% 6.8% 4.6%
========= ============= ========= =========
</TABLE>
Acquisitions in fiscal 1996 and fiscal 1997 are the primary causes of the
absolute increases in revenues and expenses since the three-month and nine-month
periods ended December 31, 1995. In fiscal 1996, the Company acquired Clear
Visions (August 1995), Heritage Graphics (September 1995), Emerald City Graphics
(February 1996), Precision Litho (February 1996) and Tulsa Litho Company (March
1996)(collectively, the "1996 Acquisitions"). In the first nine months of
fiscal 1997, the Company acquired Bridgetown Printing (June 1996), Garner
Printing (July 1996), Eagle Press (July 1996) and Mobility (October 1996)
(collectively, the "1997 Acquisitions"). Each of the 1996 Acquisitions and the
1997 Acquisitions (together, the "Acquired Companies") were accounted for
under the purchase method of accounting; accordingly, the Company's consolidated
income statements reflect their revenues and expenses only for the post
acquisition periods.
Additionally, operating results for the three months and nine months ended
December 31, 1996, as compared to the same periods in 1995, were affected by the
merger in late fiscal 1996 of the operations of two of the Company's
Houston-based subsidiaries, which has had the effect of reducing sales,
primarily lower-margin web printing sales, and improving profit margins through
reduced administrative costs and improved utilization of printing capacity.
7
<PAGE>
For more information regarding the 1996 Acquisitions and the consolidation
of certain of the Company's Houston operations in fiscal 1996, refer to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 1996.
THREE MONTHS ENDED DECEMBER 31, 1996 COMPARED WITH THREE MONTHS ENDED DECEMBER
31, 1995
Sales increased 71.6% from $22.2 million for the three months ended
December 31, 1995 to $38.2 million for the three months ended December 31, 1996.
The increase primarily resulted from sales contributed by the Acquired
Companies, net of a decrease in web printing sales pursuant to the consolidation
of certain operations as discussed above. A net increase in sales from internal
growth at the Company's other operating subsidiaries also contributed to the
increase in sales for the current period.
Gross profit increased 92.2% from $6.1 million for the three months ended
December 31, 1995 to $11.8 million for the three months ended December 31, 1996,
primarily due to the addition of the Acquired Companies. Gross profit as a
percentage of sales increased from 27.6% for the three months ended December 31,
1995 to 30.9% for the three months ended December 31, 1996, reflecting the
effect of operating efficiencies the Company is gaining through economies of
scale, including its master purchasing arrangements, and a reduction in
lower-margin web printing sales.
Selling expenses increased 75.6% from $2.1 million for the three months
ended December 31, 1995 to $3.8 million for the three months ended December 31,
1996 due to increased sales levels as discussed above. Selling expenses as a
percentage of sales increased from 9.6% for the three months ended
December 31, 1995 to 9.8% for the three months ended December 31, 1996,
reflecting primarily the effect of certain sales in the prior period for which
lower sales commissions were paid.
General and administrative expenses increased 63.9% from $1.8 million for
the three months ended December 31, 1995 to $3.0 million for the three months
ended December 31, 1996 due to the addition of the Acquired Companies. General
and administrative expenses as a percentage of sales decreased from 8.1% in the
three months ended December 31, 1995 to 7.8% for the three months ended December
31, 1996 due to sales increases from acquisitions and internal growth which
exceeded increases in the amount of corporate and operating subsidiaries'
overhead required to manage such growth.
The Company recorded a $1.5 million restructuring charge during the quarter
ended December 31, 1995 to provide for the costs associated with the previously
mentioned consolidation of certain Houston operations.
Interest expense increased from $.2 million for the three months ended
December 31, 1995 to $.6 million for the three months ended December 31, 1996.
The increase is primarily due to additional borrowings under the Company's
revolving credit facility to finance the cash portions of the purchase price of
the Acquired Companies, debt assumed in connection therewith, and debt incurred
to purchase certain printing presses. See "Liquidity and Capital Resources"
below.
Effective income tax rates increased from 35.2% for the three months ended
December 31, 1995 to 37.0% for the three months ended December 31, 1996, due
primarily to the Company's growth by acquisition into states with higher income
tax rates than those states in which the Company previously had operations.
NINE MONTHS ENDED DECEMBER 31, 1996 COMPARED WITH NINE MONTHS ENDED DECEMBER 31,
1995.
Sales increased 65.3% from $61.0 million for the nine months ended December
31, 1995 to $100.9 million for the nine months ended December 31, 1996. The
increase primarily resulted from sales contributed by the Acquired Companies,
net of a decrease in web printing sales pursuant to the consolidation of certain
operations as discussed above. A net increase in sales from internal growth at
the Company's other operating subsidiaries also contributed to the increase in
sales for the current period.
Gross profit increased 76.7% from $17.2 million for the nine months ended
December 31, 1995 to $30.5 million for the nine months ended December 31, 1996,
primarily due to the profit contribution from the Acquired Companies. Gross
profit increased as a percentage of sales from 28.3% for the nine months ended
December 31, 1995 to 30.2% for the nine months ended December 31, 1996. This
increase was
8
<PAGE>
attributable to operating efficiencies the Company is gaining through economies
of scale, including its master purchasing arrangements, and a reduction in
lower-margin web printing sales.
Selling expenses increased 66.3% from $6.0 million for the nine months
ended December 31, 1995 to $10.0 million for the nine months ended December 31,
1996 due to increased sales levels as discussed
above. Selling expenses as a percentage of sales remained constant at 9.9% for
the nine months ended December 31, 1996.
General and administrative expenses increased 65.8% from $4.8 million
for the nine months ended December 31, 1995 to $8.0 million for the nine months
ended December 31, 1996, primarily due to the addition of the Acquired Companies
and an increase in the Company's corporate staffing. In the current fiscal year,
the Company has increased its corporate staff in order to focus the resources
necessary to quickly implement the benefits of its master purchasing
arrangements and other operating efficiencies at its acquired companies. As a
percentage of sales, general and administrative expenses remained constant at
7.9% for the nine months ended December 31, 1996 as the increase in sales due to
acquisitions and internal growth in the current period offset the increased
costs.
Interest expense increased from $.6 million for the nine months ended
December 31, 1995 to $1.6 million for the nine months ended December 31, 1996.
The increase is due to additional borrowings under the Company's revolving
credit facility to finance the cash portions of the purchase price of the
Acquired Companies, debt assumed in connection therewith, and debt incurred to
purchase certain printing presses. See "Liquidity and Capital Resources"
below.
Effective income tax rates reflect an increase to 36.8% for the nine months
ended December 31, 1996 as compared to 35.0% during the same period in the prior
year due primarily to the Company's growth by acquisition into states with
higher income tax rates than those states in which the Company previously had
operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital requirements are for working capital, capital
expenditures and acquisitions. The Company has generated cash from operations
(net income plus depreciation and amortization expense and deferred tax
provision) since its inception. Cash generated from operations, as defined, was
$11.7 million for the nine months ended December 31, 1996, while cash expended
on purchases of property and equipment was $8.1 million. The net increase in the
Company's debt since March 31, 1996 reflects (1) an increase of $9.0 million
outstanding under the Company's revolving credit facility with a bank which was
used to partially finance $12.8 million expended in connection with the
acquisitions of Bridgetown Printing, Eagle Press, and Mobility and the
reorganization of Tulsa Litho, (2) debt of $6.8 million attributable to the
purchase of three printing presses from Komori America Corporation ("Komori"),
(3) assumption of debt totalling $2.6 million in connection with the acquisition
of Garner Printing and (4) debt retirements of $2.0 million.
In October 1996, the Company amended its revolving credit agreement (the
"Agreement") with a bank which expires October 31, 1998, increasing its loan
availability to $35 million. Loans outstanding under the Agreement accrue
interest at the London Interbank Offered Rate (LIBOR) plus .625% to 1.75% based
on the Company's Funded Debt to EBITDA ratio as defined in the Agreement,
generally redetermined quarterly. Additionally, a commitment fee of .10% to .50%
accrues on any unused portion of the available line of credit. On December 31,
1996, loans outstanding under the Agreement were $25.3 million and were subject
to an interest rate of 6.63% per annum. On January 31, 1996, loans outstanding
under the Agreement were $28.0 million and were subject to an interest rate of
6.70% per annum. The Company's operating subsidiaries have guaranteed the
Company's indebtedness under the Agreement. The covenants in the Agreement,
among other things, restrict the Company's ability to (i) merge, consolidate
with or acquire other companies where the total consideration paid is above
certain levels, (ii) engage in hostile acquisitions, (iii) change its primary
business, (iv) pay dividends and (v) incur other borrowed debt or pledge assets
as collateral in excess of certain levels. Although there can be no assurances
made, the Company believes that the covenants in the Agreement pertaining to
restrictions on acquisitions of other companies do not adversely affect its
acquisition strategy and that, if necessary, the Company would likely be able to
obtain the appropriate waivers. The Company must also meet certain financial
tests defined by
9
<PAGE>
the Agreement, including achieving specific ratios of Funded Debt to EBITDA, net
worth and coverage of fixed charges. The indebtedness is unsecured; however, the
bank could require inventories and receivables as collateral for the payment of
indebtedness in the event of default. The Company is in compliance with all
financial tests and other covenants set forth in the Agreement.
Pursuant to an agreement between the Company and Komori (the "Komori
Agreement"), the Company installed three new printing presses in the second
quarter of fiscal 1996. The Komori Agreement requires that the Company take
delivery of at least one additional press, resulting in a total capital
commitment of approximately $10 million for the purchase of the four presses.
The Komori Agreement further provides certain volume purchase incentives and
financing options under which the Company may, but is not obligated to, purchase
up to $50 million of printing presses over its term. The Company has exercised
the financing option in connection with the purchase of the first three presses,
resulting in a long-term obligation of $6.7 million at December 31, 1996. The
terms of the financing provide for monthly principal and interest payments
through 2006 at a fixed interest rate of 8.25%. Payment of the Company's
obligations is secured by the purchased presses. The Company is subject to no
significant financial covenants or restrictions in connection with these
obligations. The Company expects to install the fourth press to be purchased
under the Komori Agreement in the first quarter of fiscal 1998.
The Company's remaining debt obligations generally consist of mortgages,
capital leases and promissory notes, some of which contain financial covenants
and restrictions. The most significant of these place certain restrictions on
future borrowings and acquisitions above specified levels. The Company believes
these restrictions do not adversely affect its acquisition strategy.
Significant immediate and future uses of cash by the Company are expected
to consist of additional acquisitions of businesses and purchases of property
and equipment.
Subsequent to December 31, 1996, the Company completed the acquisitions of
Direct Color in Long Beach, California and Theo Davis Sons near Raleigh-Durham,
North Carolina. Borrowings under the Agreement were used to finance the cash
portions of the two acquisitions. Additionally, the Company issued a $1.5
million, five-year note payable bearing interest at 6% annually in connection
with one of the acquisitions. The Company expects to continue making
acquisitions, including the acquisition of Tucker Printers in Rochester, New
York, for which a non-binding letter of intent was signed in February, 1997. The
Company expects to finance the acquisition of Tucker Printers with borrowings
under the Agreement. In the absence of issuing common stock or notes payable in
connection with other future acquisitions, the Company will likely require
additional financing to fund such acquisitions. The Company is currently
considering, among other options, requesting an increase of the borrowing limit
under the Agreement or obtaining a replacement agreement which provides for an
increased borrowing limit. Although no assurances can be made, the Company
believes such additional financing can be obtained based on preliminary
discussions with various lending institutions.
In addition to one or more printing press purchases under the Komori
Agreement (which the Company will likely finance thereunder), the Company will
make other purchases of property and equipment in the remainder of fiscal 1997
and expects to use primarily cash flow from operations as financing.
There can be no assurances that the Company will be able to acquire
additional companies on acceptable terms in the future. In addition, there can
be no assurance that the Company will be able to establish, maintain or increase
profitability of an entity once it has been acquired, or that the diversion of
its management and financial resources away from existing operations will not
have a material adverse impact on the Company or its ability to meet its
existing obligations and commitments.
Further, there can be no assurances that additional financing to make
acquisitions, purchase property and equipment or meet operating requirements
will be obtained if needed, or that the proposed terms of such financing, in the
opinion of management, will be acceptable.
10
<PAGE>
CONSOLIDATED GRAPHICS, INC.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. The Company
maintains insurance coverage against potential claims in an amount which it
believes to be adequate. In 1996, the Company received a summary judgment in its
favor from the presiding court in a case styled ALEJANDRO ROBLES V. CONSOLIDATED
GRAPHICS, INC. ET AL. involving a material claim by the plaintiff pertaining to
a sales commission contract. The plaintiff appealed the ruling. The Company
believes the decision of the presiding court should be upheld; however, there
can be no assurance that the appellate court will rule in favor of the Company.
All other disputes in which the Company is currently involved are not believed
by management to be significant to the Company's financial position or results
of operations. While the outcome of lawsuits or other proceedings against the
Company cannot be predicted with certainty, the Company does not believe the
ultimate outcome of any of these matters will have a material adverse effect on
its business or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On August 5, 1996, the Company's annual meeting of shareholders was held.
At such time the following items were submitted to a vote of shareholders
through the solicitation of proxies:
(a) Election of Directors
The following persons were elected to serve on the Board of Directors
until the 1997 Annual Meeting of Shareholders or until their
successors have been duly elected and qualified. The Directors
received the votes set forth opposite their respective names:
NAME FOR AGAINST ABSTENTIONS
- ------------------------------------- --------- ------- -----------
Joe R. Davis......................... 4,912,960 61,307 0
Larry J. Alexander................... 4,912,960 61,307 0
Brady F. Carruth..................... 4,912,960 61,307 0
Clarence C. Comer.................... 4,912,960 61,307 0
Gary L. Forbes....................... 4,912,960 61,307 0
W. D. Hawkins........................ 4,912,360 61,907 0
James L. Limmer...................... 4,912,960 61,307 0
Thomas E. Smith...................... 4,912,860 61,407 0
Hugh N. West......................... 4,912,760 61,507 0
(b) The shareholders of the Company were requested to approve the First
Amendment to the Consolidated Graphics, Inc. Long-Term Incentive Plan
(the "Incentive Plan") and the related reservation of an additional
600,000 shares of the Company's common stock to be available for
issuance as provided for under the Incentive Plan. Such amendment was
approved by the shareholders, who voted 3,464,984 in favor and 220,192
against, with 1,289,091 who abstained or withheld authority to vote.
ITEM 5. OTHER INFORMATION.
On December 18, 1996, the Company declared a two-for-one stock split of the
Company's common stock which was effected in the form of a stock dividend on
January 10, 1997 to the stockholders of record on December 31, 1996.
On January 29, 1997, the Company listed its common stock for trading on the
New York Stock Exchange under the symbol "CGX.".
11
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
(27) Edgar financial data schedules
(b) Reports on Form 8-K:
(1) Form 8-K, filed October 31, 1996 in connection with the
press release issued on October 30, 1996 regarding the
announcement of the Company's second quarter results.
(2) Form 8-K, filed November 4, 1996 in connection with the
press release issued on November 4, 1996 regarding the
completion of the acquisition of Mobility.
(3) Form 8-K, filed November 6, 1996 in connection
with the press release issued on November 6, 1996
regarding the letter of intent to acquire Direct
Color of Long Beach, California and Theo Davis
Sons near Raleigh-Durham, North Carolina.
(4) Form 8-K, filed December 24, 1996 in
connection with the press release issued on
December 18, 1996 regarding the announcement
of a two-for-one stock split.
(5) Form 8-K, filed January 8, 1997 in
connection with the press release issued
on January 8, 1997 regarding the
Company's filing of an application to
list its common stock on the New York
Stock Exchange.
(6) Form 8-K, filed January 16, 1997 in
connection with the press release
issued on January 14, 1997
regarding the completion of the
acquisitions of Direct Color and
Theo Davis Sons.
(7) Form 8-K, filed January 29,
1997 in connection with the
press release issued on
January 29, 1997 regarding the
announcement of the Company's
third quarter results.
(8) Form 8-K, filed February
13, 1997 in connection
with the press release
issued on February 13,
1997 regarding the letter
of intent to acquire
Tucker Printers of
Rochester, New York.
12
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT, CONSOLIDATED GRAPHICS, INC., HAS DULY CAUSED THIS REPORT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
CONSOLIDATED GRAPHICS, INC.
(Registrant)
Dated: February 14, 1997 By: G. CHRISTOPHER COLVILLE
G. CHRISTOPHER COLVILLE
VICE PRESIDENT -- MERGERS AND
ACQUISITIONS,
CHIEF FINANCIAL AND ACCOUNTING
OFFICER
13
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<PERIOD-END> DEC-31-1997
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