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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
DATE OF REPORT: JANUARY 28, 1999
CONSOLIDATED GRAPHICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
<S> <C> <C>
TEXAS 0-24068 76-0190827
(STATE OR OTHER JURISDICTION OF
INCORPORATION) (COMMISSION FILE NUMBER) (I.R.S. EMPLOYER IDENTIFICATION NO.)
5858 WESTHEIMER, SUITE 200
HOUSTON, TEXAS 77057
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 787-0977
================================================================================
<PAGE>
ITEM 5. OTHER EVENTS
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 PRIMARY GROWTH STRATEGY OF ACQUIRING
ADDITIONAL PRINTING BUSINESSES. ALTHOUGH THE COMPANY BELIEVES THAT THE
ASSUMPTIONS UNDERLYING THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, ANY OF THE
ASSUMPTIONS COULD BE INACCURATE, AND THERE CAN THEREFORE BE NO ASSURANCE THAT
THE FORWARD-LOOKING STATEMENTS INCLUDED HEREIN WILL PROVE TO BE ACCURATE. THE
INCLUSION OF SUCH INFORMATION SHOULD NOT BE REGARDED AS A REPRESENTATION BY THE
COMPANY OR ANY OTHER PERSON THAT THE OBJECTIVES AND PLANS OF THE COMPANY WILL BE
ACHIEVED.
RISK FACTORS
IF CGX IS UNABLE TO IMPLEMENT ITS ACQUISITION STRATEGY, CGX MAY NOT SUCCEED OR
MAY BE LESS SUCCESSFUL IN THE FUTURE.
A key component of CGX's growth strategy is accomplished by acquiring
printing companies located throughout the United States. While there are many
such companies, CGX may not always be able to identify and acquire printing
companies meeting its acquisition criteria on terms acceptable to CGX.
Additionally, various competitors have developed growth strategies similar to
that of CGX and thus the competition for acquisition candidates is constantly
increasing within the printing industry. Moreover, financing to complete
significant acquisitions may not always be available on satisfactory terms.
Further, the acquisition strategy of CGX, of which the merger is a part,
presents a number of special risks to CGX that it would not otherwise
experience, including possible adverse effects on the earnings of CGX, diversion
of management's attention from the core business of CGX due to special attention
to the businesses acquired, failure to retain key acquired personnel and risks
associated with unanticipated events or liabilities arising after the merger and
other acquisitions concluded at or near the same time, some or all of which
could have a material adverse effect on the business, financial condition and
results of operations of CGX.
IF CGX EXPERIENCES DIFFICULTY IN INTEGRATING ACQUIRED BUSINESSES, ACQUIRED
ENTITIES MAY NOT CONTINUE TO BE PROFITABLE.
Even if CGX is able to continue to identify and acquire suitable businesses
in furtherance of its acquisition strategy, CGX may at some point in the future
experience difficulty in profitably managing all of the acquired businesses or
successfully integrating the acquired businesses as a whole without substantial
costs, delays or other operational or financial problems that CGX has not
previously experienced. An acquisition may also initially have an adverse effect
upon the operating results of CGX while the acquired business is adopting the
management practices of CGX. Finally, although CGX has so far been generally
successful in integrating its acquisitions, CGX may not in all circumstances be
able to establish, maintain or increase profitability of an acquired entity.
IF CGX DOES NOT RETAIN KEY PERSONNEL, CGX MAY NOT SUCCEED.
CGX believes that its continued success will depend to a significant extent
upon its senior management, particularly Joe R. Davis, the founder, Chairman of
the Board, President and Chief Executive Officer of CGX. If for any reason Mr.
Davis were unable to continue with his duties as President and Chief Executive
Officer, the continued success of CGX would likely depend upon its ability to
quickly identify and promote or hire a qualified individual with the same or
substantially similar visionary outlook, philosophies, experience and standing
within the printing industry to replace Mr. Davis. Furthermore, because Mr.
Davis places substantial emphasis on identifying and retaining senior management
who he believes will adopt his philosophy about the manner in which the core
business of CGX should be operated, if existing management becomes unavailable,
the inability to quickly identify and hire or promote individuals into senior
management positions could also have a significant adverse effect on the success
of CGX. Accordingly, the loss of the services of Mr. Davis
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or such other key personnel in senior management could have a direct material
adverse effect on the business and prospects of CGX in the future.
TWO PARTIES OWN OR CONTROL A SUBSTANTIAL AMOUNT OF CGX STOCK AND MAY THEREFORE
INFLUENCE THE AFFAIRS OF CGX.
Based upon the latest information available to CGX, Joe R. Davis
beneficially owns approximately 10.2% and Jeffrey N. Vinik, et al. ("Vinik")
beneficially own approximately 9.3%, of the outstanding CGX common stock. As a
result, although Mr. Davis and Vinik have never acted together in the past, if
they acted together, they would have the ability to substantially influence the
election of persons to the Board of Directors of CGX and the outcome of other
matters requiring shareholder approval.
CGX WILL NOT DECLARE DIVIDENDS FOR THE FORESEEABLE FUTURE AND THEREFORE THE
RETURN ON CGX STOCK HELD BY YOU WILL BE LIMITED TO THE GROWTH IN ITS PRICE, IF
ANY.
CGX currently intends to retain all future earnings to finance the
continuing development of its business and does not anticipate paying cash
dividends on its common stock in the foreseeable future.
THE FAILURE OF CGX OR ITS KEY SUPPLIERS AND CUSTOMERS TO BE YEAR 2000 COMPLIANT
COULD NEGATIVELY IMPACT THE BUSINESS OF CGX.
CGX has undertaken a Year 2000 compliance program to ensure that it will be
Year 2000 compliant by December 31, 1999 and is continuing to review its
business risks associated with the Year 2000 issue. Based on communications with
vendors, CGX believes that substantially all of the equipment used in its
printing operations, including its pre-press and press equipment and its
equipment used to finish and deliver its products, will not be materially
affected by the Year 2000 issue. Certain of CGX's management information systems
and associated computer equipment are not currently Year 2000 compliant. The
software for the majority of these management information systems was
specifically designed for the printing industry and is perpetually supported by
its manufacturer. Substantially all of these manufacturers have either recently
released software versions which are Year 2000 compliant or have announced a
timetable for doing so. CGX has installed certain upgrades and is scheduling
remaining upgrades of software together with such replacement of hardware as
necessary to be Year 2000 compliant and presently anticipates that substantially
all of its current management information systems will be Year 2000 compliant as
early as Summer 1999, but in any event no later than December 31, 1999. While
the upgrades may be implemented at an accelerated pace as a result of the Year
2000 issue, the cost of implementing these software upgrades is not expected to
be materially in excess of CGX's recurring investment in management information
systems.
In addition, CGX is in the process of assessing its exposure to business
disruptions as a result of the Year 2000 issues of its suppliers and customers.
Like many manufacturing companies, CGX's operations depend upon the operation of
many other businesses, the disruption of any one or even a number of which as a
result of the Year 2000 issue would not have a material effect on the business
of CGX. However, in a "worst case" Year 2000 scenario, a significant number of
such businesses could suffer disruptions as a result of the Year 2000 issue and
CGX's operations could be adversely affected. In the case of a systemic failure,
such as prolonged telecommunications or electrical failures, or a general
disruption in United States or global business activities that could result in a
significant economic downturn, the primary business risks of CGX would include,
but not be limited to, loss of customers or orders, increased operating costs,
inability to obtain supplies and inventory on a timely basis, disruptions in
product shipments or other business interruptions of a material nature, as well
as possible claims of mismanagement, misrepresentation or breach of contract,
any of which could have a material, adverse effect on CGX's business, results of
operations and financial condition. Because of its many locations, if certain
printing facilities were adversely affected, CGX would use other operable
printing facilities among its subsidiaries in other locations in order to avoid,
to the extent possible,
2
<PAGE>
loss of customer goodwill. CGX is continuing to evaluate the facts and
circumstances involved in such a worst-case scenario to develop alternative
contingency plans, to the extent feasible. A prolonged industry-wide decline in
printing orders as affected businesses focus on operational requirements more
essential to their survival than printing needs would have a significant adverse
effect on CGX.
There are many suppliers of paper, ink and other materials used in printing
operations. Thus, CGX believes that it is not materially dependent on any one
supplier. CGX has orally communicated with, and in some cases has received
written communication from, many of its more significant suppliers regarding
such supplier's Year 2000 readiness and is evaluating the need for written
confirmation, solicitation or other action with respect to such information.
However, based on communications made or received to date, CGX believes that it
will be able to obtain materials necessary to continue its operations without
significant disruption due to Year 2000 issues.
CGX has a large and diversified customer base comprised of thousands of
customers in locations throughout the United States and is not dependent on any
one customer or group of customers for its revenues. As such, CGX does not
anticipate that the demand for its commercial printing services would be
materially adversely affected as a result of Year 2000 issues unless such issues
had a widespread, catastrophic effect on its customer base.
As part of its ongoing review of the Year 2000 issue, CGX evaluates and
addresses Year 2000 issues for its planned acquisitions and develops appropriate
remedial action and a timetable for such action following completion of such
acquisitions.
FINANCIAL INFORMATION
From April 1, 1998 to January 28, 1999, Consolidated Graphics, Inc.
("CGX" or "the Company") acquired 15 commercial printing companies (the
"Purchased Companies") and has reached a stage in the acquisition process with
another company (the "Probable Acquisition") which requires this transaction
to be deemed probable. The aggregated assets of the Purchased Companies and the
Probable Acquisition exceed 50% of CGX's assets as of March 31, 1998, the date
of CGX's most recent audited balance sheet. Audited financial statements for a
substantial majority of the Purchased Companies and the Probable Acquisition
(the "Audited Companies") and unaudited pro forma combined financial
information for CGX and the Audited Companies are included in this Form 8-K.
All of the Purchased Companies were accounted for using the purchase method
of accounting. The allocation of purchase price to the assets and liabilities
acquired is based on estimates of fair market values and may be prospectively
revised when additional information that the Company is awaiting concerning
certain liability valuations, other than contingent transaction consideration,
is obtained, provided that such information is received no later than one year
after the date of acquisition. The Company expects that such additional
information will not result in a material adjustment, in the aggregate, to the
balances reflected in the accompanying financial statements pursuant to the
preliminary purchase price allocations. Contingent transaction consideration is
accrued and reflected as an additional cost of the transaction when payment
thereof is deemed to be probable by the Company.
3
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of businesses acquired.
INDEX TO FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED
PAGE
----
Tursack Inc. and Related Company
Audited Historical Combined
Financial Statements
Report of Independent Public
Accountants.................... 6
Combined Balance Sheet.......... 7
Combined Statement of
Operations..................... 8
Combined Statement of
Shareholders' Equity........... 9
Combined Statement of Cash
Flows.......................... 10
Notes to Combined Financial
Statements..................... 11
Image Systems, Inc. Audited
Historical Financial Statements
Independent Auditors' Report.... 18
Balance Sheet................... 19
Income Statement................ 20
Statement of Shareholder's
Equity......................... 21
Statement of Cash Flows......... 22
Notes to Financial Statements... 23
Woodman Printing Enterprises Audited
and Unaudited Historical Financial
Statements
Report of Independent Certified
Public Accountants............. 27
Combined Balance Sheets......... 28
Combined Statements of
Earnings....................... 30
Combined Statement of Owners'
Equity......................... 31
Combined Statements of Cash
Flows.......................... 32
Notes to Combined Financial
Statements..................... 33
Printing Corporation of America
Audited Historical Financial
Statements
Independent Auditors' Report.... 40
Balance Sheet................... 41
Income Statement................ 42
Statement of Shareholders'
Equity......................... 43
Statement of Cash Flows......... 44
Notes to Financial Statements... 45
4
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PAGE
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Graphic Technology of Maryland, Inc.
Audited and Unaudited Combined
Historical
Financial Statements
Independent Auditors' Report.... 49
Combined Balance Sheets......... 50
Combined Income Statements...... 51
Combined Statement of
Shareholders' Equity........... 52
Combined Statements of Cash
Flows.......................... 53
Notes to Combined Financial
Statements..................... 54
The McKay Press, Inc. Audited and
Unaudited Historical Financial
Statements
Independent Auditors' Report.... 60
Balance Sheets.................. 61
Income Statements............... 62
Statement of Shareholder's
Equity......................... 63
Statements of Cash Flows........ 64
Notes to Financial Statements... 65
Carty Enterprises, Inc. T/A Mount
Vernon Printing Company Audited and
Unaudited
Historical Financial Statements
Report of Independent
Auditors....................... 70
Balance Sheets.................. 71
Statements of Operations........ 73
Statement of Retained
Earnings....................... 74
Statements of Cash Flows........ 75
Notes to Financial Statements... 77
Automated Graphic Systems, Inc.
Audited and Unaudited Consolidated
Financial Statements
Report of Independent Public
Accountants.................... 83
Consolidated Balance Sheets..... 84
Consolidated Statements of
Income......................... 86
Consolidated Statement of
Shareholders' Equity........... 87
Consolidated Statements of Cash
Flows.......................... 88
Notes to Consolidated Financial
Statements..................... 89
5
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholder of Tursack Inc.
and Related Company:
We have audited the accompanying combined balance sheet of Tursack Inc. (a
Pennsylvania corporation) and Related Company as of December 31, 1997, and the
related combined statements of operations, shareholder's equity and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Tursack Inc. and
related company as of December 31, 1997, and the combined results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Houston, Texas
March 13, 1998
6
<PAGE>
TURSACK INC. AND RELATED COMPANY
COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1997
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 579,820
Accounts receivable, net........ 5,827,529
Inventories..................... 965,477
Prepaids and other current
assets.......................... 978,190
--------------
Total current assets....... 8,351,016
PROPERTY AND EQUIPMENT, net.......... 6,454,473
OTHER ASSETS......................... 240,552
--------------
$ 15,046,041
==============
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Borrowings under lines of
credit.......................... $ 2,205,059
Current portion of long-term
debt............................ 3,372,147
Note payable to shareholder..... 52,192
Accounts payable................ 3,498,899
Accrued liabilities............. 1,267,293
--------------
Total current
liabilities.................. 10,395,590
LONG-TERM DEBT, net of current
portion.............................. 2,135,125
DEFERRED INCOME TAXES................ 474,059
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock, no stated and $1
par value, 1,000 and 50,000
shares authorized,
10 and 10,000 shares issued
and outstanding for Tursack
Inc. and Digital Direct, Inc.,
respectively................... 10,010
Additional paid-in capital...... 103,196
Retained earnings............... 1,928,061
--------------
Total shareholder's
equity....................... 2,041,267
--------------
$ 15,046,041
==============
The accompanying notes are an integral part of these combined financial
statements.
7
<PAGE>
TURSACK INC. AND RELATED COMPANY
COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
SALES................................ $ 33,074,486
COST OF SALES........................ 25,528,665
--------------
Gross profit............... 7,545,821
SELLING EXPENSES..................... 3,352,748
GENERAL AND ADMINISTRATIVE
EXPENSES............................. 3,388,318
--------------
Operating income........... 804,755
OTHER INCOME (EXPENSE):
Interest expense, net........... (650,097)
Other income, net............... 484,773
--------------
(165,324)
--------------
INCOME BEFORE INCOME TAXES........... 639,431
PROVISION FOR INCOME TAXES........... 392,345
--------------
NET INCOME........................... $ 247,086
==============
The accompanying notes are an integral part of these combined financial
statements.
8
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TURSACK INC. AND RELATED COMPANY
COMBINED STATEMENT OF SHAREHOLDER'S EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
----------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996.............. 10 $ 10 $ 38,000 $ 1,756,171 $ 1,794,181
Spin-off of Digital Direct, Inc.... 10,000 10,000 65,196 -- 75,196
Net income......................... -- -- -- 247,086 247,086
Distribution to shareholder........ -- -- -- (75,196) (75,196)
------ ------- ---------- ------------ ------------
BALANCE, December 31, 1997.............. 10,010 $10,010 $ 103,196 $ 1,928,061 $ 2,041,267
====== ======= ========== ============ ============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
9
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TURSACK INC. AND RELATED COMPANY
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................... $ 247,086
Adjustments to reconcile net
income to net cash used in
operating activities --
Depreciation and
amortization.............. 740,738
Deferred income taxes...... 163,390
Gain on sale of property
and equipment, net........ (36,826)
Changes in assets and
liabilities
Accounts receivable... (1,638,685)
Inventories........... 474,219
Prepaids and other
current assets....... (388,936)
Other noncurrent
assets............... (47,757)
Accounts payable and
accrued
liabilities.......... 466,789
--------------
Net cash used in
operating
activities....... (19,982)
--------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and
equipment...................... (3,380,443)
Proceeds from disposition of
assets......................... 40,000
--------------
Net cash used in
investing
activities....... (3,340,443)
--------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on lines of credit,
net............................ 1,591,552
Payments on long-term debt...... (1,948,170)
Borrowings on long-term debt.... 1,687,644
Decrease in receivable from
shareholder.................... 56,109
Proceeds from cash restricted
for the purchase of capital
assets......................... 2,100,000
--------------
Net cash
provided by
financing
activities....... 3,487,135
--------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS........................ 126,710
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR.................. 453,110
--------------
CASH AND CASH EQUIVALENTS AT END OF
YEAR............................... $ 579,820
==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest.......... $ 668,984
Cash paid for income taxes...... 322,640
The accompanying notes are an integral part of these combined financial
statements.
10
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TURSACK INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. BUSINESS AND ORGANIZATION:
Tursack Inc. and its wholly owned subsidiary, Mangos Graphics, Inc.
(collectively, Tursack), both Pennsylvania corporations, operate in the
northeast United States. Tursack Inc. is primarily engaged in providing general
commercial printing services relating to the production of such documents as
annual reports, training manuals, product and capability brochures, catalogs,
direct mail pieces and other promotional material, all of which tend to be
recurring in nature. Mangos Graphics, Inc., is primarily engaged in providing
marketing and advertising services to a wide range of customers. All significant
intercompany balances and transactions between this subsidiary and Tursack Inc.
have been eliminated in consolidation.
Digital Direct, Inc. (Digital Direct), a Pennsylvania corporation and a
related company of Tursack, operates in the northeast United States and is
primarily engaged in providing fulfillment services (sorting bulk items, bulk
mail-outs, etc.) to a wide range of customers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The accompanying combined financial statements include the accounts of
Tursack and related company, which are under the common control and management
of one individual. All significant intercompany balances and transactions have
been eliminated in combination.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid temporary investments including
those with an original maturity of three months or less to be cash equivalents.
Cash and cash equivalents consist primarily of interest-bearing accounts, the
balances of which at times may exceed federally insured limits.
ACCOUNTS RECEIVABLE
The Company maintains an allowance for doubtful accounts based upon the
expected collectibility of trade accounts receivable. Accounts receivable in the
accompanying combined balance sheet are reflected net of allowance for doubtful
accounts of $73,500 at December 31, 1997.
INVENTORIES
Inventories are valued at the lower of cost or market utilizing the
first-in, first-out method for raw materials and the specific identification
method for work in progress. The carrying values of inventories as of December
31, 1997, consist of the following:
Raw materials........................... $ 141,629
Work in progress........................ 823,848
----------
$ 965,477
==========
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
11
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TURSACK INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statement of operations.
INTANGIBLE ASSETS AND AMORTIZATION
The Company's intangible assets are comprised of a customer list,
mechanicals and a covenant not to compete. These intangible assets are amortized
on a straight-line basis over five years. Amortization expense for these
intangible assets was $54,000 for 1997. These assets are fully amortized as of
December 31, 1997.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109. SFAS No. 109 requires that
deferred income taxes be recorded based upon differences between the book and
tax bases of assets and liabilities and are measured using the presently enacted
tax rates.
One company in the combined group has elected S Corporation status as
defined by the Internal Revenue Code, whereby this company is not subject to
taxation for federal purposes. Under S Corporation status, the shareholder
reports his share of the company's taxable earnings or losses in his personal
tax returns.
REVENUE RECOGNITION
The Company recognizes revenue upon delivery of each job. Losses, if any,
on jobs are recognized at the earliest date such amount is determinable.
USE OF ESTIMATES
The preparation of the accompanying combined financial statements requires
the use of certain estimates by management in determining the Company's assets
and liabilities at the date of the combined financial statements and the
reported amount of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
SUPPLEMENTAL CASH FLOW INFORMATION
The combined statement of cash flows provides information about changes in
cash and excludes the effect of noncash transactions. For purposes of the
combined statement of cash flows, the Company considers all highly liquid
investments purchased with original maturities of three months or less to be
cash equivalents. Significant noncash transactions during fiscal 1997 include a
transfer of the net assets of the fulfillment division of Tursack to Digital
Direct for stock valued at the net book value of the assets, $75,196, and the
subsequent distribution of all Digital Direct stock to the sole shareholder.
CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily cash and cash equivalents and trade
receivables. It is the Company's practice to place its cash and cash equivalents
in high-quality financial institutions. SFAS No. 107, "Disclosures About Fair
Values of Financial Instruments," and SFAS No. 119, "Disclosure About
Derivative Financial Instruments and Fair Value of Financial Instruments,"
require the disclosure of the fair value of financial instruments, both assets
and liabilities recognized and not recognized on the balance sheet, for which it
is practicable to estimate fair value. The Company's debt includes floating rate
line-of-credit agreements and long-term notes and capital leases with floating
and fixed interest rates;
12
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TURSACK INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
accordingly, the Company believes the fair value of its liabilities is the same
as the notional value in all material respects.
3. PROPERTY AND EQUIPMENT:
The following is a summary of the Company's property and equipment and
their estimated useful lives as of December 31, 1997:
ESTIMATED
DESCRIPTION LIFE IN YEARS
- ------------------------------------- -------------
Leasehold improvements............... 5-40 $ 621,113
Printing presses and equipment....... 5-12 9,972,548
Computer equipment and software...... 5 570,956
Furniture, fixtures and other........ 5-10 575,415
Vehicles............................. 5 93,278
--------------
11,833,310
Less -- Accumulated depreciation..... (5,378,837)
--------------
$ 6,454,473
==============
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consists of the
following:
Balance, beginning of year........... $ 12,800
Additions............................ 60,700
Deductions........................... --
------------
Balance, end of year................. $ 73,500
============
Accrued liabilities consist of the following:
Accrued compensation and benefits.... $ 966,196
Other accrued expenses............... 301,097
------------
$ 1,267,293
============
5. DEBT:
LINE-OF-CREDIT AGREEMENTS
The combined companies have open line-of-credit agreements with maximum
credit limits of $3,500,000, $500,000 and $500,000, respectively, with a bank
expiring in May 1998. The line-of-credit agreements bear interest based upon the
bank's variable prime lending rate plus 1 percent, which was 9.5 percent at
December 31, 1997. The credit limits vary at different times based upon 80
percent of the Company's trade accounts receivable balance, and borrowings under
such line-of-credit agreements are due on demand. Combined borrowings of
$2,205,059 were outstanding under these line-of-credit agreements at December
31, 1997.
These agreements contain certain covenants which include, among other
things, maintenance of certain financial ratios, minimum equity balances and
keyman life insurance on the shareholder and restrictions on future borrowings.
13
<PAGE>
TURSACK INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTES PAYABLE AND CAPITAL LEASES PAYABLE
The following is a summary of the Company's long-term debt instruments as
of December 31, 1997:
Notes payable to a financial
institution, secured by a printing
press and corporate assets,
maturing in July 1998 and March
2005, payable in fixed monthly
principal and interest installments
of $38,038 and $28,205, bearing
interest rates of 10.5% and 6.5%,
respectively....................... $ 3,629,661
Notes payable to a financial
institution, secured by various
corporate assets and the surety of
the shareholder, maturing at
varying dates between February 1999
and July 2000, payable in fixed
monthly principal and interest
installments totaling $55,598,
bearing interest at rates ranging
from 8.25% to 10.5%................ 1,059,788
Note payable upon demand to a leasing
company providing for up to
$1,200,000 of borrowings for
purchases of machinery and
equipment, secured by the purchased
equipment, maturing in May 1998,
bearing interest at a floating base
rate plus 1%, which was 9.5% at
December 31, 1997. This note has a
conversion feature whereupon the
outstanding balance can be
converted to a long-term master
lease arrangement at the Company's
option............................. 734,214
Capital leases payable to a leasing
company, secured by a computer
system and other equipment,
maturing at varying dates between
May 1999 and June 2000, payable in
fixed monthly principal and
interest installments totaling
$1,288, bearing interest at rates
ranging from 10.5% to 12.89%....... 83,609
--------------
5,507,272
Less --Current maturities............ (3,372,147)
--------------
$ 2,135,125
==============
The principal payment requirements by fiscal year under the Company's debt
agreements are $3,372,147 in 1998, $736,124 in 1999, $374,042 in 2000, $307,487
in 2001, $307,487 in 2002 and $409,985 thereafter.
In addition to the covenants under the credit agreements, the Company's
debt agreements contain certain covenants, the most significant of which places
certain restrictions on future borrowings. The Company is also required to
maintain certain financial ratios, minimum equity balances and keyman life
insurance on the shareholder.
14
<PAGE>
TURSACK INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. LEASE COMMITMENTS:
The Company is obligated under various leases for office and manufacturing
facilities and certain machinery, equipment and fixtures. Certain leases have
renewal or escalation clauses or both. The following is a schedule of minimum
rental commitments under all noncancelable leases which expire at various dates:
Year ending December 31 --
1998............................... $ 1,251,458
1999............................... 1,261,895
2000............................... 1,238,606
2001............................... 1,164,470
2002............................... 1,079,876
Thereafter......................... 4,098,739
--------------
$ 10,095,044
==============
Rent expense under operating leases was $1,194,757 for the year ended
December 31, 1997.
The lease commitments schedule above includes certain facilities leased by
the Company from its sole shareholder under an operating lease requiring monthly
payments of approximately $36,000 expiring June 30, 2010. The Company is
responsible for all taxes, insurance and maintenance.
7. INCOME TAXES:
One company in the affiliated group has elected S Corporation status and
therefore does not record any tax provision or any related tax assets or
liabilities. The two companies which have elected C Corporation status are
subject to taxation in Pennsylvania based upon the applicable statutory rates in
this jurisdiction. Federal and state income taxes for the year ended December
31, 1997, are as follows:
Federal --
Current............................ $ 172,628
Deferred........................... 123,161
State --
Current............................ 56,353
Deferred........................... 40,203
----------
$ 392,345
==========
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34 percent to income
before income taxes for the year ended December 31, 1997, as follows:
Provision at the statutory rate......... $ 217,407
Increase resulting from --
S Corporation loss, net of tax
effect........................... 101,048
State income tax, net of benefit
for federal deduction............ 63,727
Other.............................. 10,163
----------
$ 392,345
==========
15
<PAGE>
TURSACK INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities as of December 31, 1997, result principally from the
following:
Accumulated depreciation
difference........................... $ (474,059)
Accumulated amortization
difference......................... 112,006
Other................................ 184,629
------------
Net deferred income tax
liabilities................... $ (177,424)
============
The net deferred tax assets and liability as of December 31, 1997, are
comprised of the following:
Deferred tax assets --
Current......................... $ 184,629
Long-term....................... 112,006
------------
Total...................... 296,635
Deferred tax liability --
Long-term....................... 474,059
------------
Net deferred income tax
liability............... $ 177,424
============
8. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in disputes or legal actions arising in the
ordinary course of business. Management does not believe the outcome of such
legal actions will have a material adverse effect on the Company's financial
position or results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including business
auto liability, property, general liability, workers' compensation and a general
umbrella policy. The Company has not incurred significant uninsured losses on
any of these items.
The Company is self-insured for medical claims up to $35,000 or $25,000 per
employee per year for all covered employees. Claims in excess of these amounts
are covered by a stop-loss policy. The Company has recorded reserves for its
portion of self-insured claims based on estimated claims incurred through
December 31, 1997.
CONSULTING AGREEMENTS
The Company has consulting agreements with two individuals, with a
remaining total commitment of $960,322 at December 31, 1997. The agreements
specify payments of $20,833 per month until October 2000 and $10,000 per month
plus a $500 per month auto allowance until December 31, 1999, respectively. One
of the agreements also contains an agreement not to compete for the duration of
the agreement.
GUARANTEES
The Company guarantees personal debt of the sole shareholder totaling
$1,067,160 as of December 31, 1997. The debt matures on November 1, 2010, and is
collateralized by the building purchased with the debt proceeds. This building
is leased by the Company for use in its operations.
16
<PAGE>
TURSACK INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
9. MAJOR CUSTOMERS AND RISK CONCENTRATION:
The Company had sales of approximately 23 percent and 12 percent of total
sales to two major customers during the year ended December 31, 1997.
In addition, the Company grants credit, generally without collateral, to
its customers. Consequently, the Company is subject to potential credit risk
related to changes in business and economic factors. However, management
believes that its contract acceptance, billing and collection policies are
adequate to minimize the potential credit risk.
During 1997, the Company entered into sales with customers in the marketing
and advertising industries. The Company had not entered into transactions with
these customers in the prior year. Receivables from these customers tend to be
collected over a longer term. The Company had receivables from these customers
at December 31, 1997, in the amount of approximately $475,000, which remain
outstanding as of March 13, 1997. Management has evaluated all outstanding
balances and believes that all balances, other than $60,700 specifically
reserved for, are collectible.
10. RELATED-PARTY TRANSACTIONS:
As of December 31, 1997, the Company had an unsecured note receivable,
payable upon demand from the sole shareholder of the Company, in the amount of
$235,257. Also at December 31, 1997, the Company had a note payable to the sole
shareholder in the amount of $52,192.
11. EMPLOYEE BENEFIT PLAN:
The Company has adopted a 401(k) profit-sharing plan for all nonunion
employees which provides for a 50 percent matching contribution by the Company,
up to a maximum liability of 6 percent of each participating employee's annual
compensation. The Company has the right to make additional discretionary
contributions. Total contributions by the Company under this plan to provide
contributions and pay expenses was $433,838 in 1997. The amount due to this plan
was approximately $242,288 for the year ended December 31, 1997.
12. SUBSEQUENT EVENT (UNAUDITED):
Subsequent to December 31, 1997, Consolidated Graphics, Inc., a
consolidator in the highly fragmented commercial printing industry, acquired
Tursack and its Related Company (collectively, the Company) pursuant to a Stock
Purchase Agreement dated April 1998.
17
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Image Systems, Inc.:
We have audited the accompanying balance sheet of Image Systems, Inc. as of
December 31, 1997, and the related statements of income, shareholder's equity
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Image Systems, Inc. as of
December 31, 1997, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/ KPMG LLP
KPMG LLP
Houston, Texas
April 14, 1998
18
<PAGE>
IMAGE SYSTEMS, INC.
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
Current assets:
Cash and cash equivalents....... $ 2,150
Accounts receivable, net........ 792,694
Inventories..................... 158,563
Prepaid expenses................ 22,715
------------
Total current assets....... 976,122
Property and equipment, net.......... 5,909,877
Other assets......................... 21,693
------------
$ 6,907,692
============
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Current portion of long-term
debt............................ $ 1,005,830
Line of credit.................. 303,000
Accounts payable................ 379,637
Accrued liabilities............. 216,115
------------
Total current
liabilities.................. 1,904,582
Long-term debt, net of current
portion.............................. 4,151,074
Commitments and contingencies
Shareholder's equity:
Common stock, no par value;
2,800 shares authorized; 85
issued and outstanding......... 76,736
Retained earnings............... 775,300
------------
Total shareholder's
equity....................... 852,036
------------
$ 6,907,692
============
See accompanying notes to financial statements.
19
<PAGE>
IMAGE SYSTEMS, INC.
INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1997
Sales................................ $ 7,710,897
Cost of sales........................ 5,810,460
------------
Gross profit............... 1,900,437
Selling expenses..................... 179,751
General and administrative
expenses............................. 1,077,446
------------
Operating income........... 643,240
Loss on disposal of property and
equipment, net....................... (121,690)
Interest expense..................... (424,152)
Interest income...................... 66,414
------------
Net income................. $ 163,812
============
See accompanying notes to financial statements.
20
<PAGE>
IMAGE SYSTEMS, INC.
STATEMENT OF SHAREHOLDER'S EQUITY
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK
----------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------- --------- ---------
<S> <C> <C> <C> <C>
Balance, December 31, 1996.............. 85 $76,736 622,988 699,724
Dividends............................... -- -- (11,500) (11,500)
Net income.............................. -- -- 163,812 163,812
------ ------- --------- ---------
Balance, December 31, 1997.............. 85 $76,736 775,300 852,036
====== ======= ========= =========
</TABLE>
See accompanying notes to financial statements.
21
<PAGE>
IMAGE SYSTEMS, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
Operating activities:
Net income...................... $ 163,812
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and
amortization.............. 641,558
Net loss on disposal of
property and equipment.... 121,690
Changes in assets and
liabilities:
Accounts receivable... (21,443)
Inventories........... 34,665
Prepaid expenses...... 26,638
Other assets.......... (17,768)
Accounts payable and
accrued
liabilities.......... 14,278
--------------
Net cash
provided by
operating
activities....... 963,430
--------------
Investing activities:
Purchases of property and
equipment...................... (2,648,468)
Proceeds from disposition of
property and equipment......... 285,591
--------------
Net cash used in
investing
activities....... (2,362,877)
--------------
Financing activities:
Payments on long-term debt and
capital lease obligations...... (1,062,278)
Proceeds from long-term debt and
capital lease obligations...... 2,430,775
Proceeds from line of credit.... 44,000
Dividends paid.................. (11,500)
--------------
Net cash
provided by
financing
activities....... 1,400,997
--------------
Net increase in cash and cash
equivalents........................ 1,550
Cash and cash equivalents at
beginning of year.................. 600
--------------
Cash and cash equivalents at end of
year............................... $ 2,150
==============
See accompanying notes to financial statements.
22
<PAGE>
IMAGE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(1) BUSINESS
Image Systems, Inc. (the Company), a Wisconsin corporation, provides
general commercial printing services relating to the production of such
documents as annual reports, training manuals, product and capability brochures,
catalogs, direct mail pieces and other promotional material, all of which tend
to be recurring in nature. The Company has one plant located in Menomonee Falls,
Wisconsin.
(2) SIGNIFICANT ACCOUNTING POLICIES AND OTHER INFORMATION
The accounting policies of the Company reflect industry practices and
conform to generally accepted accounting principles. The more significant of
such accounting policies are described below.
USE OF ESTIMATES
The preparation of the accompanying financial statements requires the use
of certain estimates by management in determining the Company's assets and
liabilities at the date of the financial statements and the reported amount of
revenues and expenses during the reporting period. Actual results could differ
from these estimates.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE
The Company recognizes revenue upon delivery of each job. Losses, if any,
on jobs are recognized at the earliest date such amount is determinable. The
Company derives the majority of its revenues from sales and services to a broad
and diverse group of customers. However, during the year ended December 31,
1997, the Company had sales to its top ten customers totaling 69% of total
sales. The Company maintains an allowance for doubtful accounts based upon the
expected collectibility of trade accounts receivable. Accounts receivable in the
accompanying balance sheet are reflected net of allowance for doubtful accounts
of $31,800 at December 31, 1997. Accounts receivable are generally not
collateralized.
INVENTORIES
Inventories are valued at the lower of cost or market value utilizing the
first-in, first-out method for raw materials and the specific identification
method for work in progress and finished goods. The carrying values of
inventories are set forth below:
DECEMBER 31,
1997
------------
Raw materials........................... $ 96,563
Work in progress........................ 62,000
------------
$158,563
============
FEDERAL INCOME TAXES
The Company has elected to file its Federal income tax returns under the S
Corporation provisions of the Internal Revenue Code and was granted S
Corporation status for Wisconsin state tax purposes. In accordance with the
Federal provisions, corporate earnings flow through and are taxed solely at the
shareholder level.
SUPPLEMENTAL CASH FLOW INFORMATION
The statement of cash flows provide information about changes in cash and
exclude the effect of noncash transactions. For purposes of the statement of
cash flows, the Company considers all highly liquid investments purchased with
original maturities of three months or less to be cash equivalents.
23
<PAGE>
IMAGE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Interest paid during the year ended December 31, 1997 was $419,302. The only
significant noncash transaction during 1997 was a capital lease obligation
incurred to acquire equipment of $212,018.
LINE OF CREDIT
The Company has a $750,000 line of credit agreement with a commercial bank
to support short-term cash requirements. This line of credit matures on April
30, 1998. The terms of the agreement do not require the Company to maintain a
compensating balance.
ACCRUED LIABILITIES
The significant components of accrued liabilities were $86,191 of accrued
wages and related expenses and $74,417 of other accruals as of December 31,
1997.
RELATED PARTY TRANSACTIONS
The Company leases its offices and plant from Stammtisch AG, a related
party partnership. The lease expires January 2005. Rent expense for 1997 was
$267,000. The president of the Company and his wife are the partners of
Stammtisch AG.
(3) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The cost of major renewals and
betterments is capitalized; repairs and maintenance costs are expensed when
incurred. Upon retirement or sale, the cost of the assets disposed of and the
related accumulated depreciation are removed from the accounts, with any
resultant gain or loss being reflected in income. Depreciation of property and
equipment is computed using the straight-line method over the estimated useful
lives of the assets.
The following is a summary of the Company's property and equipment and
their estimated useful lives:
DECEMBER 31, ESTIMATED
1997 LIFE IN YEARS
------------ -------------
Buildings and leasehold
improvements....................... $ 180,310 15-40
Printing presses and equipment....... 7,080,244 7-20
Computer equipment and software...... 808,347 2-5
Furniture, fixtures and other........ 280,147 5-7
------------
8,349,048
Less accumulated depreciation and
amortization....................... (2,439,171)
------------
$ 5,909,877
============
Amortization expense of the equipment recorded under capital leases is
included in the depreciation and amortization expense. The accumulated
amortization of the equipment recorded under capital leases amounted to $924,829
for 1997.
24
<PAGE>
IMAGE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) LONG-TERM DEBT
The following is a summary of the Company's long-term debt instruments as
of:
DECEMBER 31,
1997
------------
8.25% loan, requiring monthly
installments of $2,677 including
interest, due in 1999, secured by
equipment............................. $ 58,122
9.12% note, requiring monthly
installments of $10,003 including
interest, due in 2000, secured by a
general business security agreement... 343,188
10.5% note, requiring monthly
installments of $21,524 including
interest, due in 2002, secured by
equipment and personal guarantee of
stockholder........................... 1,001,383
10.5% note, requiring monthly
installments of $31,583 including
interest, due in 2005, secured by
equipment............................. 2,045,500
Prime rate note (8.5% at December 31,
1997), requiring semi-annual
installments of $5,813 plus interest
(not to exceed 9%), due 2004
unsecured............................. 52,319
10.75% note, requiring monthly
installments of $1,354 including
interest, due 2001, secured by
equipment............................. 52,653
10.5% note, requiring monthly
installments of $15,168 including
interest, due in 2003, secured by
equipment............................. 749,234
8.5%-9.25% notes, requiring monthly
installments of $2,335 including
interest, due in 1998-2000, secured by
equipment............................. 39,126
9.86% loan, requiring monthly
installments of $1,385 including
interest, due 2001, unsecured......... 44,125
8.26%-10.5% obligations under capital
leases, secured by equipment with a
depreciated cost of $1,120,555 at
December 31, 1997 (note 5)............ 771,254
------------
5,156,904
Less current portion............... (1,005,830)
------------
$ 4,151,074
============
The principal payment requirements by fiscal year under the Company's debt
agreements are $1,005,830 in 1998, $919,887 in 1999, $850,137 in 2000, $688,441
in 2001, $726,125 in 2002 and $966,484 thereafter.
The Company's debt agreements contain certain covenants, the most
significant of which places certain restrictions on future borrowings and
acquisitions above specified levels. The Company is also required to maintain
certain financial ratios, minimum equity balances and key man life insurance on
the majority shareholder. The Company was in compliance with all financial tests
and other covenants set forth in the debt agreements.
25
<PAGE>
IMAGE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(5) LEASE COMMITMENTS
A summary of noncancelable long-term lease commitments is summarized as
follows:
CAPITALIZED OPERATING
FISCAL YEAR LEASES LEASES
- ------------------------------------- ----------- ------------
1998............................... $ 471,807 $ 357,323
1999............................... 280,215 336,662
2000............................... 147,686 325,393
2001............................... 85,716 312,000
2002............................... 81,341 312,000
2003 and thereafter................ 2,768 --
----------- ------------
Total commitment.............. 1,069,533 $ 1,643,378
============
Less amount representing unamortized
interest........................... 298,279
-----------
Present value of minimum capital
lease payments..................... $ 771,254
===========
There are no executory costs included in the capital lease payments. Such
costs are paid directly by the Company.
(6) INCENTIVE PLAN
All employees are eligible to participate in a 401(k) plan. The Company
made a contribution of $23,592 during the year ended December 31, 1997. The
Company is required to contribute 12% of employee contributions to the plan in
matching contributions.
(7) SUBSEQUENT EVENT (UNAUDITED)
Subsequent to December 31, 1997, Consolidated Graphics, Inc., a
consolidator in the highly fragmented commercial printing industry, acquired
certain assets and assumed certain liabilities of Image Systems, Inc. pursuant
to an Asset Purchase Agreement dated May 1998.
26
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Boards of Directors
Woodman Printing Enterprises:
We have audited the accompanying combined balance sheet of Woodman Printing
Enterprises as of December 31, 1997, and the related combined statements of
earnings, owners' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Woodman
Printing Enterprises as of December 31, 1997, and the combined results of their
operations and their combined cash flows for the year then ended in conformity
with generally accepted accounting principles.
/s/ GRANT THORNTON LLP
GRANT THORNTON LLP
Wichita, Kansas
March 14, 1998
27
<PAGE>
WOODMAN PRINTING ENTERPRISES
COMBINED BALANCE SHEETS
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED) (AUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents....... $ -- $ 1,801,125
Accounts receivable, less
allowance for doubtful accounts
of $228,494 and $231,735 at
March 31, 1998, and December
31, 1997,
respectively.................. 5,676,019 4,759,767
Inventories..................... 3,258,706 2,829,633
Deposits........................ 119,837 135,957
Prepaid expenses and other...... 126,746 130,344
----------- ------------
Total current assets....... 9,181,308 9,656,826
PROPERTY, PLANT AND EQUIPMENT
Land............................ 568,798 568,798
Buildings and improvements...... 3,398,072 3,377,387
Machinery and equipment......... 21,871,844 21,788,678
----------- ------------
25,838,714 25,734,863
Less accumulated depreciation
and amortization............... 11,731,235 11,285,704
----------- ------------
14,107,479 14,449,159
OTHER ASSETS
Notes receivable from
employees...................... 19,285 25,516
Cash surrender value of life
insurance, net of loans of
$45,538 and $45,538 at March
31, 1998, and December 31,
1997, respectively............. 162,972 162,972
Goodwill, net of accumulated
amortization of $84,063 and
$71,828 at March 31, 1998, and
December 31,1997,
respectively................... 564,265 576,500
Other........................... 111,245 96,401
----------- ------------
857,767 861,389
----------- ------------
$24,146,554 $ 24,967,374
=========== ============
The accompanying notes are an integral part of these statements.
28
<PAGE>
WOODMAN PRINTING ENTERPRISES
COMBINED BALANCE SHEETS
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED) (AUDITED)
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES
Revolving line of credit........ $ 4,397,053 $ 5,527,165
Current maturities of long-term
debt............................ 1,744,911 4,504,903
Current maturities of capital
lease obligations.............. 729,303 729,303
Accounts payable................ 2,321,841 1,245,949
Customer deposits............... 322,852 239,336
Accrued liabilities
Salaries, wages and
commissions.................. 619,068 400,496
Vacation pay............... 445,764 445,764
Other...................... 217,014 332,483
----------- ------------
Total current
liabilities.......... 10,797,806 13,425,399
LONG-TERM LIABILITIES, less current
maturities
Revolving line of credit........ -- --
Long-term debt.................. 4,179,883 1,961,884
Capital lease obligations....... 4,881,302 5,059,428
----------- ------------
Total long-term
liabilities.......... 9,061,185 7,021,312
OWNERS' EQUITY
Printing, Inc.
Common stock, $1 par value per
share
Authorized -- 1,000,000
shares.................
Issued 515,200 shares at March
31, 1998 and December 31,
1997, of which 414,741 shares
are held as treasury stock at
March 31, 1998, and December
31, 1997..................... 515,200 515,200
Mercury Web Printing, Inc.
Common stock, $1 par value per
share
Authorized -- 1,000,000
shares
Issued and
outstanding -- 10,000
shares at March 31,
1998, and December 31,
1997................... 10,000 10,000
Web Graphics, Inc.
Common stock, $1 par value per
share
Authorized -- 100,000
shares
Issued and
outstanding -- 1,000
shares at March 31,
1998, and December 31,
1997................... 1,000 1,000
Gilprin, LLC -- member's
deficit......................... (716,816) (613,652)
Serco Forms LLC -- member's
deficit......................... (228,642) (97,227)
Additional paid-in capital...... 738,999 738,999
Retained earnings -- C
corporation..................... 4,914,610 4,914,610
Retained earnings -- S
corporations.................... 2,890,230 2,888,751
Loans receivable from owner..... (1,063,313) (1,063,313)
Treasury stock, at cost......... (2,773,705) (2,773,705)
----------- ------------
Total owners'
equity............... 4,287,563 4,520,663
----------- ------------
$24,146,554 $ 24,967,374
=========== ============
29
<PAGE>
WOODMAN PRINTING ENTERPRISES
COMBINED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED
-------------------------- DECEMBER 31,
1998 1997 1997
----------- ----------- ------------
(UNAUDITED) (AUDITED)
<S> <C> <C> <C>
Net sales............................... $ 9,213,255 $ 8,574,431 $ 37,970,127
Cost of sales........................... 7,013,768 6,213,422 28,514,116
----------- ----------- ------------
Gross profit............................ 2,199,487 2,361,009 9,456,011
Operating expenses
Selling............................ 825,170 619,005 2,737,961
General and administrative......... 1,230,005 1,019,515 4,703,409
----------- ----------- ------------
2,055,175 1,638,520 7,441,370
----------- ----------- ------------
Earnings from operations................ 144,312 722,489 2,014,641
Other income (expense)
Interest expense................... (374,587) (363,961) (1,397,900)
Gain on sale of equipment.......... -- -- 188,418
Miscellaneous...................... 53,265 173,303 171,810
----------- ----------- ------------
(321,322) (190,658) (1,037,672)
----------- ----------- ------------
NET EARNINGS (LOSS)........... $ (177,010) $ 531,831 $ 976,969
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
30
<PAGE>
WOODMAN PRINTING ENTERPRISES
COMBINED STATEMENT OF OWNERS' EQUITY
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------------- MEMBER
MERCURY MEMBER EQUITY RETAINED
WEB WEB EQUITY SERCO ADDITIONAL EARNINGS
PRINTING, PRINTING, GRAPHICS, GILPRIN, FORMS PAID-IN C
INC. INC. INC. LLC LLC CAPITAL CORPORATION
--------- --------- -------- --------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996......... $ 515,200 $10,000 $1,000 $(146,050) $ -- $738,999 $4,914,610
Capital contribution upon formation
of Serco Forms LLC................. -- -- -- -- 1,000 -- --
Net earnings (loss).................. -- -- -- (227,806) (98,227) -- --
Distributions........................ -- -- -- (239,796) -- -- --
Net decrease in loans receivable from
owner.............................. -- -- -- -- -- -- --
--------- --------- -------- --------- -------- ---------- -----------
Balance at December 31, 1997......... $ 515,200 $10,000 $1,000 $(613,652) $(97,227) $738,999 $4,914,610
========= ========= ======== ========= ======== ========== ===========
RETAINED LOANS
EARNINGS RECEIVABLE
S FROM TREASURY
CORPORATIONS OWNER STOCK TOTAL
------------ ---------- ------------ -----------
Balance at December 31, 1996......... $2,232,839 $(1,093,313) $ (2,773,705) $ 4,399,580
Capital contribution upon formation
of Serco Forms LLC................. -- -- -- 1,000
Net earnings (loss).................. 1,303,002 -- -- 976,969
Distributions........................ (647,090) -- -- (886,886)
Net decrease in loans receivable from
owner.............................. -- 30,000 -- 30,000
------------ ---------- ------------ -----------
Balance at December 31, 1997......... $2,888,751 $(1,063,313) $ (2,773,705) $ 4,520,663
============ ========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
31
<PAGE>
WOODMAN PRINTING ENTERPRISES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
YEAR ENDED
---------------------------- DECEMBER 31,
1998 1997 1997
-------------- ------------ -------------
(UNAUDITED) (AUDITED)
<S> <C> <C> <C>
Cash flows from operating activities
Net earnings (loss)................ $ (177,010) $ 531,831 $ 976,969
Adjustments to reconcile net
earnings to net cash provided by
operating activities............
Depreciation and
amortization............... 472,206 431,303 2,029,078
Provision for losses on
accounts receivable........ 3,241 -- 10,764
(Gain) loss on sale of
equipment.................. (6,650) 7,802 (188,418)
Change in assets and
liabilities net of effect of
acquisition of a business...
Increase in trade
receivables............. (919,493) (306,322) (127,447)
(Increase) decrease in
inventories............. (429,073) 187,324 1,152,542
(Increase) decrease in
other assets............ 85,153 273,678 (94,148)
Increase in accounts
payable................. 1,075,892 280,902 76,948
Increase in accrued
liabilities............. 103,103 56,594 4,770
Increase (decrease) in
customer deposits....... 83,516 (119,931) (43,863)
-------------- ------------ -------------
Net cash provided by
operating activities.... 290,885 1,343,181 3,797,195
Cash flows from investing
activities.........................
Proceeds from sale of equipment.... 24,813 -- 381,500
Purchase of property, plant and
equipment....................... (210,502) (316,653) (3,337,691)
Decrease in funds held by
trustee......................... -- -- 71,743
-------------- ------------ -------------
Net cash used in investing
activities................. (185,689) (316,653) (2,884,448)
Cash flows from financing
activities.........................
Net payments on loans receivable
from owner...................... -- 262,000 30,000
Net (payments) proceeds from
revolving line of credit........ (1,130,112) (423,159) 802,458
Proceeds from long-term debt....... -- -- 3,906,999
Payments on long-term debt......... (541,993) (356,255) (2,504,769)
Distributions to owners............ (56,090) (137,424) (886,886)
Capital contribution by owner...... -- -- 1,000
Payments on capital lease
obligations..................... (178,126) (164,021) (668,583)
-------------- ------------ -------------
Net cash provided by (used
in) financing
activities.............. (1,906,321) (818,859) 680,219
-------------- ------------ -------------
Net increase (decrease) in cash and
cash equivalents................... (1,801,125) 207,669 1,592,966
Cash and cash equivalents at
beginning of period................ 1,801,125 208,159 208,159
-------------- ------------ -------------
Cash and cash equivalents at end of
period............................. $ -- $ 415,828 $ 1,801,125
============== ============ =============
</TABLE>
The accompanying notes are an integral part of these statements.
32
<PAGE>
WOODMAN PRINTING ENTERPRISES
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
NOTE A -- SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying combined financial statements follows.
1. PRINCIPLES OF COMBINATION
The combined financial statements include the accounts of Printing, Inc.,
Mercury Web Printing, Inc., Web Graphics, Inc., Gilprin, LLC and Serco Forms LLC
(the Companies). Serco Forms LLC was formed during 1997 and acquired certain
assets of Service Business Forms Company, Ltd. on September 8, 1997. Gilprin,
LLC was formed during 1996 and acquired the operating assets of Gilliland
Printing, Inc. on May 15, 1996. The Companies have a common controlling owner
and shared management. At December 31, 1997, Printing, Inc., Mercury Web
Printing, Inc. and Web Graphics, Inc. were wholly owned by one individual, who
also owned 98% of Gilprin, LLC and 50% of Serco Forms LLC. The other 2% of
Gilprin, LLC is owned by Printing, Inc. and the other 50% of Serco Forms LLC is
owned by Web Graphics, Inc. Significant intercompany accounts and transactions
have been eliminated.
2. BUSINESS ACTIVITY
The five entities which encompass "Woodman Printing Enterprises" cover a
broad spectrum of the graphic arts industry.
Printing, Inc. is a regional company in the general/commercial printing
market while the other companies offer complimentary, niche products and
services. Product categories include direct mail, catalog/brochure P.O.S., label
and packaging, art litho reproduction, technical literature, response vehicles,
business forms and perfect bound books. Woodman Printing Enterprises serves a
diverse client base located primarily in the midwest. Three customers in 1997
comprised 20.6% of combined sales.
3. INVENTORIES
Inventories of Printing, Inc., Mercury Web Printing, Inc., Gilprin, LLC and
Serco Forms LLC are stated at the lower of cost (average cost method) or market.
Inventories at Web Graphics, Inc. are stated at the lower of cost (last-in,
first-out (LIFO) method for paper inventory and first-in, first-out (FIFO)
method for other raw materials) or market. Work in process and finished goods at
all Companies are costed using a form of standard costing.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost. Depreciation is computed
using the straight-line method applied to the cost of the asset less estimated
salvage or residual value (if any) over the following estimated lives:
Buildings and improvements.............. 5 - 40 years
Machinery and equipment................. 3 - 15 years
The Companies have established book residual values on certain major pieces
of equipment and buildings of $3,968,545 at December 31, 1997. When assets are
retired or otherwise disposed of, the cost and related accumulated depreciation
are removed from the accounts and any resulting gain or loss is recognized in
operations for the period. The cost of maintenance and repairs is charged to
operations as incurred; significant renewals and betterments are capitalized.
33
<PAGE>
WOODMAN PRINTING ENTERPRISES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. GOODWILL
Goodwill relates to Gilprin, LLC's acquisition of Gilliland Printing,
Inc.'s operating assets and represents the cost of the acquisition in excess of
the fair value of its net assets at the date of acquisition. The Company
amortizes goodwill on the straight-line method over fifteen years.
6. INCOME TAXES
Printing, Inc. and Web Graphics, Inc. elected effective October 1, 1992 and
Mercury Web Printing, Inc. elected at incorporation to be taxed under the S
corporation provisions of the Internal Revenue Code. Gilprin, LLC and Serco
Forms LLC were formed as limited liability companies. S corporations and limited
liability companies are taxed at the individual stockholder or member level on
their respective share of the Companies' taxable income. Therefore, no provision
for income tax expense has been provided for on the Companies' taxable income.
Printing, Inc. and Web Graphics are subject to corporate income taxes on
built-in gains representing asset appreciation that occurred before October 1,
1992 if those assets are sold during the following ten years.
7. CASH EQUIVALENTS
The Companies consider all highly liquid investments with a maturity of
three months or less to be cash equivalents.
8. USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE B -- INVENTORIES
Inventories at December 31, 1997, consisted of:
Raw materials........................... $ 1,660,444
Work in process......................... 701,554
Finished goods.......................... 477,437
Less LIFO reserve....................... (9,802)
------------
$ 2,829,633
============
NOTE C -- REVOLVING LINE OF CREDIT
The Companies have revolving line of credit agreements with combined
maximum borrowings of $8,000,000. Combined borrowings under the agreements at
December 31, 1997 were $5,527,165. The amounts available under the agreements
are limited based on a percentage of acceptable receivable and inventory
collateral. The agreements mature on April 30, 1998. Interest is payable monthly
at .75% over the bank's prime rate. The effective interest rate at December 31,
1997 was 9.25%. The agreements are collateralized by accounts receivable,
inventory and unencumbered equipment and are guaranteed by the Companies' owner.
The agreements require maintenance of certain financial loan covenants relating
to minimum tangible net worth, debt service coverage, debt to tangible net worth
and working capital on a combined company basis which is tested quarterly.
At December 31, 1997, the Companies were not in compliance with the debt to
tangible net worth and working capital convenants. Subsequent to year-end, the
Companies obtained a waiver from
34
<PAGE>
WOODMAN PRINTING ENTERPRISES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the bank, which waives both covenant violations at December 31, 1997, and the
working capital covenant violations through April 30, 1998.
The Companies have an interest rate swap agreement to manage the impact of
changes in interest rates on its floating rate revolving note. The agreement
provides for the exchange of a floating rate for a fixed rate without the
exchange of the underlying notional amount. The adjustment amount is calculated
monthly for the difference between the fixed rate (9.125%) and a specified
floating prime rate (8.5% at December 31, 1997) applied to the notional amount
of $2,500,000. The swap agreement expires in July 2000 and may be terminated
earlier by the Companies. The estimated value of the swap agreement at December
31, 1997, based on the current market rate, approximates a net payable of
$36,975. The counter-party to this agreement is a major bank with which the
Companies have other financial relationships and management believes there is
minimal credit risk.
NOTE D -- LONG-TERM DEBT
Long-term debt at December 31, 1997, consists of the following:
8.1% note payable, due in monthly
installments of $31,272 including
interest, due in June
2000 -- collateralized by a
Heidelberg Web Offset Press with a
net book value of $1,150,476 and
guaranteed by the Companies'
owner.............................. $ 819,466
8.45% note payable, due in monthly
payments of $10,697 with the
remaining principal and interest
due August 2000 -- collateralized
by a building and guaranteed by the
Companies' owner................... 835,722
10% note payable to former
stockholders, due in annual
principal installments of $100,000,
which commenced on February 1,
1996 -- collateralized by a portion
of the stock of Printing, Inc. .... 500,000
9.71% note payable to bank, due in
monthly installments of $44,320
including interest, due June
2002(a)............................ 1,986,354
9.65% note payable to bank, due in
monthly installments of $42,831
including interest, due June
2001(a)............................ 1,522,768
7.78%-9% notes payable, due in
monthly installments (currently
$20,838 per month) including
interest, with maturity dates
ranging from December 1998 through
January 2000 -- collateralized by
equipment. Several of the notes are
guaranteed by the Companies'
owner.............................. 352,667
9% note payable to an individual, due
in monthly installments of $5,087
including interest, due in May
1999 -- guaranteed by the
Companies' owner................... 80,924
10% note payable to Gilliland
Printing, Inc., payable in monthly
installments of $7,384 through May
1, 1997 and then $13,284 through
May 1, 1999 -- guaranteed by the
Companies' owner................... 209,751
8.50% note payable to bank, due in
monthly installments of $2,645
including interest, due July
2001 -- collateralized by certain
vehicles and guaranteed by the
Companies' owner................... 97,270
Other................................ 61,865
------------
6,466,787
Less current maturities.............. 4,504,903
------------
$ 1,961,884
============
35
<PAGE>
WOODMAN PRINTING ENTERPRISES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Maturities of long-term debt at December 31, 1997 are as follows:
1998................................. $ 4,504,903
1999................................. 749,841
2000................................. 994,641
2001................................. 117,402
2002................................. 100,000
------------
$ 6,466,787
============
(a) The notes are subject to the same loan agreement as discussed in Note C.
Accordingly, if the revolving note in Note C is not renewed, these notes are
callable under the loan agreement on April 30, 1998. As such, the notes have
been reflected in their entirety in the current portion of long-term debt on
the balance sheet at December 31, 1997.
NOTE E -- RELATED PARTY TRANSACTIONS
The Companies have loans receivable from their owner of $1,063,313 at
December 31, 1997. The loans bear interest at the annual short-term applicable
federal rate. Interest income recognized on these loans was $73,011 in 1997. As
the Companies' owner effectively controls when these loans will be repaid they
have been reflected in the financial statements as a reduction of owners'
equity.
The Companies paid their owner a fee for guaranteeing the long-term debt of
the Companies. This fee amounted to $150,000 in 1997.
NOTE F -- LEASES
On December 31, 1995, Printing, Inc. entered into an agreement with the
City of Wichita, Kansas to issue $2,511,724 in industrial revenue bonds. The
proceeds of the bonds were used to acquire land, improvements and equipment
titled to the City of Wichita but leased by the company for use in operations.
Property acquired through this financing arrangement is exempt from property
taxes for a period of up to ten years. At the end of the ten-year period, the
title transfers to the Company in exchange for a nominal transfer fee paid to
the City of Wichita.
The lease for the property and equipment acquired with the proceeds of the
1995 Series A Industrial Revenue Bonds is classified as a capital lease and
provides, among other things, for monthly rental payments to the Trustee for
payment of underlying bond principal and interest at a rate of 8% on the
principal balance beginning January 20, 1996 through December 20, 2000 at which
time the interest shall be 2.35% above the two-year United States Treasury Note
until maturity at December 20, 2002.
On March 1, 1996, Printing, Inc. entered into an agreement with the City of
Wichita, Kansas to issue $4,148,700 in industrial revenue bonds. The proceeds
were used to acquire building improvements and equipment titled to the City of
Wichita but leased by the Company for use in operations. Property acquired
through this financing arrangement may be exempted from property taxes for a
period of up to ten years. At the end of the ten-year period, the title
transfers to the Company in exchange for a nominal transfer fee paid to the City
of Wichita.
The lease for the property and equipment acquired with the proceeds of the
1996 Series A Industrial Revenue Bonds is classified as a capital lease and
provides, among other things, for monthly rental payments to the Trustee for
payment of underlying bond principal and interest at a rate of 8.35% on the
principal balance beginning April 20, 1996 through March 20, 2003.
36
<PAGE>
WOODMAN PRINTING ENTERPRISES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
During 1996, as a part of the acquisition of the operating assets of
Gilliland Printing, Inc., Gilprin, LLC assumed various capital equipment leases.
Property, plant and equipment includes the following leased property under
capital leases at December 31, 1997:
Property, plant and equipment........... $ 7,298,947
Less accumulated amortization........... (1,425,624)
--------------
$ 5,873,323
==============
The Companies lease certain other equipment and buildings under long-term
leases which are classified as operating leases and expire in various years
through the year ending December 31, 2000. The leases generally provide that
insurance and maintenance expenses are obligations of the Companies. Management
expects that, in the normal course of business, leases that expire will be
renewed or replaced by other leases.
The following is a schedule of future minimum lease payments for capital
leases and operating leases with initial or remaining terms in excess of one
year:
OPERATING CAPITAL
LEASES LEASES
--------- ------------
Year ending December 31
1998............................ $ 377,300 $ 1,184,799
1999............................ 172,798 1,161,467
2000............................ 110,023 1,138,259
2001............................ -- 1,085,136
2002............................ -- 1,069,171
Thereafter...................... -- 1,800,428
--------- ------------
Total minimum lease payments......... $ 660,121 7,439,260
=========
Less amount representing interest.... 1,650,529
------------
Present value of net minimum lease
payments........................... 5,788,731
Less current portion of lease
obligations........................ 729,303
------------
$ 5,059,428
============
Rental expense for all operating leases was $365,806 for the year ended
December 31, 1997.
NOTE G -- EMPLOYEE BENEFIT PLANS
Printing, Inc. participates in the GCIU pension plan, a multi-employer
defined benefit pension plan for lithographic union employees covered under the
collective bargaining agreement. The Company's union contract requires the
Company to pay a percentage of participating employees hourly wages to the
pension plan. The Company's contributions which are expensed when paid were
$126,742 in 1997. Management believes, in general, that this contractual payment
arrangement is the extent of the Company's obligation. However, this plan is a
multi-employer, union-sponsored, defined benefit plan, and governmental
regulations impose certain requirements on employers relative to unfunded
pension obligations of defined benefit multi-employer plans. In the event of a
plan termination or employer withdrawal, an employer may be liable for a portion
of the plan's unfunded vested benefits. As of April 30, 1997, there was no
withdrawal liability on the GCIU plan. The
37
<PAGE>
WOODMAN PRINTING ENTERPRISES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Company has not received information from the plan administrators to determine
its share of unfunded vested benefits, if any.
The Companies participate in 401(k) plans covering all eligible employees.
Contributions by the Companies and the participants are based on the
compensation of participants. The Companies contributed $102,492 to these plans
during the year ended December 31, 1997.
NOTE H -- DISTRIBUTIONS
The Companies make distributions to their owners for the purpose of paying
federal and state income taxes, including required estimated tax payments
associated with the Companies' taxable income which must be reported on the
individual owners' income tax returns. The Companies also make distributions
unrelated to the owners' federal and state income taxes.
NOTE I -- SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for
interest............................. $ 1,442,176
NOTE J -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments at December 31, 1997.
CASH AND CASH EQUIVALENTS: The balance sheet carrying amounts for cash and
cash equivalents approximate the estimated fair values of such assets.
LOANS RECEIVABLE FROM OWNER: The carrying amount approximates fair value
as the notes have floating interest rates.
REVOLVING LINE OF CREDIT: The carrying amount approximates fair value due
to the floating interest rate.
LONG-TERM DEBT: The fair value of the Companies' long-term debt is
estimated based upon borrowing rates available for bank loans with similar terms
using discounted cash flow calculations.
CAPITAL LEASE OBLIGATIONS: The fair value of the Companies' capital lease
obligations is based on rates available for obligations with similar terms using
discounted cash flow calculations.
INTEREST RATE SWAP AGREEMENT: The fair value is the estimated cost to
terminate the agreement based on the current market rate of interest.
38
<PAGE>
WOODMAN PRINTING ENTERPRISES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following table provides summary information on the fair value of
financial instruments. Such information does not purport to represent the
aggregate net fair value of the Companies. Further, the fair value estimates are
based on various assumptions, methodologies and subjective considerations, which
are subject to change. The carrying amounts are the amounts at which the
financial instruments are reported in the combined financial statements.
CARRYING ESTIMATED
AMOUNT OF FAIR VALUE OF
ASSETS AND ASSETS AND
(LIABILITIES) (LIABILITIES)
----------- -------------
Cash and cash equivalents............... $ 1,801,125 $ 1,801,125
Loans receivable from owner............. 1,063,313 1,063,313
Revolving line of credit................ (5,527,165) (5,527,165)
Long-term debt.......................... (6,466,787) (6,424,966)
Capital lease obligations............... (5,788,731) (5,794,693)
Interest rate swap agreement............ -- (36,975)
NOTE K -- INTERIM FINANCIAL STATEMENTS (UNAUDITED)
The accompanying interim financial statements as of March 31, 1998 and
1997, and for the three month periods then ended, have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with Article 10 of Regulation S-X. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation of interim results have been included. Results of
operations for interim periods are not necessarily indicative of the results
that might be expected in any future period.
NOTE L -- SUBSEQUENT EVENT (UNAUDITED)
Subsequent to December 31, 1997, Consolidated Graphics, Inc., a
consolidator in the highly fragmented commercial printing industry, acquired
Woodman Printing Enterprises pursuant to an Agreement and Plan of Reorganization
dated June 1998.
39
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Printing Corporation of America:
We have audited the accompanying balance sheet of Printing Corporation of
America as of July 31, 1998, and the related statements of income, shareholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Printing Corporation of
America as of July 31, 1998, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
KPMG LLP
Houston, Texas
September 8, 1998
40
<PAGE>
PRINTING CORPORATION OF AMERICA
BALANCE SHEET
JULY 31, 1998
ASSETS
Current assets:
Cash............................ $ 3,500
Accounts receivable, net of an
allowance for doubtful accounts
of $13,220..................... 2,630,754
Income taxes receivable......... 41,157
Inventories..................... 402,900
Prepaid expenses and other
current assets................. 189,767
Due from shareholders and
employees (note 4)............. 6,136
Deferred tax asset (note 8)..... 34,459
------------
Total current assets....... 3,308,673
Property and equipment, net (note
3)................................. 1,717,126
Other assets......................... 55,007
------------
$ 5,080,806
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term
debt and obligation under
capital lease (note 6)......... $ 381,330
Accounts payable................ 661,086
Accrued liabilities (note 2).... 521,150
------------
Total current
liabilities............... 1,563,566
Line of credit (note 5).............. 1,179,341
Long-term debt and obligation under
capital lease, net of current
portion (note 6)................... 1,131,368
Commitments and contingencies
(note 7)
Shareholders' equity:
Common stock, no par value;
5,000 shares authorized; 1,200
issued and
outstanding................... 101,200
Retained earnings............... 1,105,331
------------
Total shareholders'
equity.................... 1,206,531
------------
$ 5,080,806
============
See accompanying notes to financial statements.
41
<PAGE>
PRINTING CORPORATION OF AMERICA
INCOME STATEMENT
YEAR ENDED JULY 31, 1998
Sales................................ $ 20,358,276
Cost of sales........................ 12,951,885
--------------
Gross profit.................... 7,406,391
General and administrative
expenses........................... 6,915,749
--------------
Operating income................ 490,642
Interest expense..................... 258,346
Other expenses....................... 47,205
--------------
Income before income taxes...... 185,091
Income tax expense (note 8).......... 60,284
--------------
Net income...................... $ 124,807
==============
See accompanying notes to financial statements.
42
<PAGE>
PRINTING CORPORATION OF AMERICA
STATEMENT OF SHAREHOLDERS' EQUITY
YEAR ENDED JULY 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK
--------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
--------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, July 31, 1997............... 1,200 $ 101,200 980,524 1,081,724
Net income........................... -- -- 124,807 124,807
--------- ---------- ----------- -----------
Balance, July 31, 1998............... 1,200 $ 101,200 1,105,331 1,206,531
========= ========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
43
<PAGE>
PRINTING CORPORATION OF AMERICA
STATEMENT OF CASH FLOWS
YEAR ENDED JULY 31, 1998
Operating activities:
Net income...................... $ 124,807
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and
amortization.............. 632,114
Net gain on disposal of
equipment................. (14,752)
Bad debt expense........... 70,097
Deferred taxes............. 4,320
Changes in assets and
liabilities:
Accounts receivable... (53,667)
Inventories........... 32,631
Prepaid expenses and
other assets......... (34,459)
Due from officers and
employers............ 284
Accounts payable and
accrued
liabilities.......... 292,556
------------
Net cash
provided by
operating
activities....... 1,053,931
------------
Investing activities:
Purchases of equipment.......... (412,377)
Proceeds from disposition of
equipment...................... 48,631
------------
Net cash used in
investing
activities....... (363,746)
------------
Financing activities:
Payments on long-term debt...... (495,340)
Payments on line of credit,
net............................ (164,659)
Payments on obligation under
capital lease.................. (31,240)
------------
Net cash used in
financing
activities....... (691,239)
Net decrease in cash................. (1,054)
Cash at beginning of year............ 4,554
------------
Cash at end of year.................. $ 3,500
============
Supplemental cash flow information:
Interest paid during the year... $ 258,346
Income taxes paid during the
year........................... 101,024
============
See accompanying notes to financial statements.
44
<PAGE>
PRINTING CORPORATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of the Company reflect industry practices and
conform to generally accepted accounting principles. The more significant of
such accounting policies are described below.
(A) DESCRIPTION OF BUSINESS
Printing Corporation of America (the Company), a corporation located in
Timonium, Maryland, provides general commercial printing services relating to
the production of such documents as training manuals, product and capability
brochures, catalogs, direct mail pieces and other promotional material, all of
which tend to be recurring in nature. The Company was founded in July 1973 and
is incorporated in the State of Maryland.
(B) REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE
The Company recognizes revenue upon delivery of each job. Losses, if any,
on jobs are recognized at the earliest date such amount is determinable. The
Company derives the majority of its revenues from sales and services to a broad
and diverse group of customers.
(C) INVENTORIES
Inventories are valued at the lower of cost or market value utilizing the
first-in, first-out method for raw materials and the specific identification
method for work in progress and finished goods. The carrying values of
inventories at July 31, 1998 are set forth below:
Raw materials........................... $ 204,165
Work in progress........................ 198,735
----------
$ 402,900
==========
(D) FEDERAL INCOME TAXES
The Company is applying the provisions of Statement of Financial Accounting
Standards No. 109, ACCOUNTING FOR INCOME TAXES. Under the asset and liability
method of Statement 109, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under Statement 109, the effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
(E) USE OF ESTIMATES
The preparation of the accompanying financial statements requires the use
of certain estimates by management in determining the Company's assets and
liabilities at the date of the financial statements and the reported amount of
revenues and expenses during the reporting period. Actual results could differ
from these estimates.
(F) PLANT AND EQUIPMENT
Property and equipment are stated at cost. Equipment under capital leases
is stated at the present value of minimum lease payments. The cost of major
renewals and betterments is capitalized; repairs and maintenance costs are
expensed when incurred. Depreciation is provided by use of the straight-line and
declining-balance methods. These methods amortize the cost of the various
classes of assets within
45
<PAGE>
PRINTING CORPORATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the periods of expected use. Depreciation and amortization expense for the year
ended July 31, 1998 was $632,114.
(2) ACCRUED LIABILITIES
The significant components of accrued liabilities at July 31, 1998 consist
of the following:
Payroll and related costs............... $ 304,727
Vacation accrual........................ 132,196
Other................................... 84,227
----------
$ 521,150
==========
(3) PROPERTY AND EQUIPMENT
The following is a summary of the Company's property and equipment and
their estimated useful lives:
JULY 31, ESTIMATED
1998 LIFE IN YEARS
------------- --------------
Buildings and leasehold improvements.... $ 436,438 39
Printing presses and equipment,
including computers................... 3,725,955 5-7
Autos and trucks........................ 355,867 5
Furniture and fixtures.................. 317,886 5-7
-------------
4,836,146
Less accumulated depreciation and
amortization.......................... (3,119,020)
-------------
$ 1,717,126
=============
Equipment under a capital lease at July 31, 1998 is $164,955.
(4) RELATED PARTY TRANSACTIONS
At July 31, 1998, the Company had outstanding receivables from shareholders
totaling $5,565.
(5) LINE OF CREDIT
The Company has a $2,000,000 line of credit with a bank of which $1,179,341
is outstanding at July 31, 1998. The line is secured by substantially all assets
of the Company. The outstanding balance accrues interest at the Eurodollar rate
plus 2.5% per annum and is payable monthly. The loan matures November 1, 1999.
The line of credit is personally guaranteed by the shareholders.
(6) LONG-TERM DEBT AND OBLIGATION UNDER CAPITAL LEASE
Long-term debt and obligation under capital lease at July 31, 1998 consist
of the following:
Note payable at the Eurodollar rate
plus 2.5 % per annum, payable in
monthly installments of $27,491,
plus accrued interest, commencing
January 1, 1998; principal due
December 1, 2002; secured by
substantially all assets of the
Company; personally guaranteed by
the shareholders................... $ 1,425,513
Obligation under capital lease (note
7)................................. 87,185
------------
Total long-term debt and
obligation under capital
lease.......................... 1,512,698
Less current portion............ 381,330
------------
Long-term debt and obligation
under capital lease, excluding
current portion................ $ 1,131,368
============
46
<PAGE>
PRINTING CORPORATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company's debt agreements contain certain covenants, the most
significant of which places certain restrictions on future borrowings and
acquisitions above specified levels. The Company is also required to maintain
certain financial ratios. At July 31, 1998, the Company was in compliance with
all financial and other covenants set forth in the debt agreements.
The aggregate maturities of long-term debt and future minimum capital lease
payments for each of the five years subsequent to July 31, 1998 are as follows:
YEAR ENDING
JULY 31,
------------
1999............................... $ 383,804
2000............................... 370,325
2001............................... 329,892
2002............................... 329,892
2003............................... 105,945
------------
1,519,858
Less portion representing interest on
capital lease obligation........... 7,160
------------
Total long-term debt and
obligation under capital
lease.......................... $ 1,512,698
============
(7) LEASE COMMITMENTS
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) at July 31, 1998 are:
OPERATING LEASES
YEAR ENDING ------------------------
JULY 31, LAND EQUIPMENT
------------ ------------ ---------
1999............................... $ 243,087 328,872
2000............................... 247,530 313,237
2001............................... 256,418 308,683
2002............................... 256,318 308,683
2003............................... 256,318 130,311
------------ ---------
Total commitments.................. $ 1,259,671 1,389,786
============ =========
Rent expense under operating leases was $677,808 for the year ended July
31, 1998.
(8) INCOME TAXES
Income tax expense for the year ended July 31, 1998 consists of the
following:
CURRENT DEFERRED TOTAL
--------- -------- ---------
U.S. federal......................... $ 43,569 4,320 47,889
State................................ 12,395 -- 12,395
--------- -------- ---------
$ 55,964 4,320 60,284
========= ======== =========
47
<PAGE>
PRINTING CORPORATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income tax expense for the year ended July 31, 1998 differed from the
amounts computed by applying the U.S. federal income tax rate of 34 percent to
pretax income from continuing operations as a result of the following:
Computed "expected" tax............ $ 62,931
State income taxes, net of federal
income tax benefit................. 8,181
Effect of graduated tax rates........ (11,527)
Other, net........................... 699
----------
$ 60,284
==========
The tax effect of the temporary difference that gives rise to the deferred
tax asset at July 31, 1998 is primarily attributable to the portion of the
Company's vacation accrual not deductible for tax purposes in the current year.
Management believes that it is more likely than not that the Company will
realize the deferred tax asset through future taxable income.
(9) 401(K) PLAN
The Company maintains a 401(k) plan for eligible employees. According to
plan terms, participants may contribute up to a certain percentage of their
compensation. At the discretion of its board of directors, the Company may
contribute a matching as well as an additional profit-sharing contribution.
During the year ended July 31, 1998, the Company made no such contributions.
(10) CONCENTRATION OF RISK
During the year ended July 31, 1998, the Company acquired 66% of its raw
materials from one vendor.
(11) SUBSEQUENT EVENT (UNAUDITED)
Subsequent to July 31, 1998, Consolidated Graphics, Inc., a consolidator in
the highly fragmented commercial printing industry, accquired Printing
Corporation of America pursuant to an Agreement and Plan of Reorganization dated
September 1998.
48
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Graphic Technology of Maryland, Inc.:
We have audited the accompanying combined balance sheets of Graphic
Technology of Maryland, Inc. as of December 31, 1997, and the related combined
statements of income, shareholders' equity and cash flows for the year ended
December 31, 1997. These combined financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
mistatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Graphic Technology
of Maryland, Inc. as of December 31, 1997, and the results of its operations and
its cash flows for the year ended December 31, 1997 in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
KPMG LLP
Houston, Texas
August 28, 1998
49
<PAGE>
GRAPHIC TECHNOLOGY OF MARYLAND, INC.
COMBINED BALANCE SHEETS
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED) (AUDITED)
ASSETS
Current assets:
Cash and cash equivalents.......... $ 1,400 $ 188,153
Accounts receivable, net........... 2,622,932 2,805,859
Due from affiliates................ -- 215,049
Income taxes receivable............ 107,007 258,007
Inventories........................ 634,849 437,779
Deferred tax assets................ 44,580 44,580
Prepaid expenses and other current
assets............................. 185,221 514,295
------------ ------------
Total current assets....... 3,595,989 4,463,722
Property and equipment, net.......... 3,114,293 3,604,567
Other assets......................... 71,684 77,120
------------ ------------
$ 6,781,966 $8,145,409
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt
and obligations under capital
leases.......................... $ 1,462,466 $1,506,132
Accounts payable................... 2,031,375 2,042,772
Accrued liabilities................ 443,258 617,490
Due to affiliates.................. 206,881 516,711
------------ ------------
Total current
liabilities.................. 4,143,980 4,683,105
Long-term debt and obligations under
capital leases, net of current
portion............................ 892,033 1,258,420
Deferred tax liability, net.......... 99,790 297,790
Commitments and contingencies........ -- --
Shareholders' equity:
Common stock, $1 par value; 2,000
shares authorized; 1,000 issued
and outstanding................. 1,000 1,000
Additional paid-in capital......... 1,099,942 1,099,942
Retained earnings.................. 545,221 805,152
------------ ------------
Total shareholders'
equity....................... 1,646,163 1,906,094
------------ ------------
$ 6,781,966 $8,145,409
============ ============
See accompanying notes to combined financial statements.
50
<PAGE>
GRAPHIC TECHNOLOGY OF MARYLAND, INC.
COMBINED INCOME STATEMENTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------- YEAR ENDED
1998 1997 DECEMBER 31, 1997
------------ ------------ -----------------
(UNAUDITED) (AUDITED)
<S> <C> <C> <C>
Sales................................ $ 8,261,086 $ 9,170,754 $18,203,045
Cost of sales........................ 6,730,725 7,250,247 14,186,326
------------ ------------ -----------------
Gross profit.................... 1,530,361 1,920,507 4,016,719
Selling, general and administrative
expenses........................... 2,048,964 2,324,888 4,454,027
------------ ------------ -----------------
Operating loss.................. (518,603) (404,381) (437,308)
Interest expense..................... (122,986) (162,286) (315,858)
Other, net........................... 183,658 202,600 119,548
------------ ------------ -----------------
Loss before income taxes........ (457,931) (364,067) (633,618)
Income tax benefit................... (198,000) (132,204) (247,700)
------------ ------------ -----------------
Net loss........................ $ (259,931) $ (231,863) $ (385,918)
============ ============ =================
</TABLE>
See accompanying notes to combined financial statements.
51
<PAGE>
GRAPHIC TECHNOLOGY OF MARYLAND, INC.
COMBINED STATEMENT OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996........... 1,000 $1,000 $1,099,942 $1,191,070 $ 2,292,012
Net loss............................. -- -- -- (385,918) (385,918)
------ ------ ---------- ---------- ------------
Balance, December 31, 1997........... 1,000 $1,000 $1,099,942 $ 805,152 $ 1,906,094
====== ====== ========== ========== ============
</TABLE>
See accompanying notes to combined financial statements.
52
<PAGE>
GRAPHIC TECHNOLOGY OF MARYLAND, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED
-------------------------- DECEMBER 31,
1998 1997 1997
------------ ------------ ------------
(UNAUDITED) (AUDITED)
<S> <C> <C> <C>
Net loss............................. $ (259,931) $ (231,863) $ (385,918)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Depreciation and amortization... 547,290 551,887 1,149,036
Loss on disposal of assets...... -- -- 127,612
Deferred income taxes........... (198,000) (76,894) (153,780)
Other........................... (20,473) (21,654) --
Changes in assets and
liabilities:
Accounts receivable........... 182,927 (343,620) (126,611)
Income taxes receivable....... 151,000 (55,310) (204,002)
Inventories................... (197,070) 28,000 94,277
Prepaid expenses and other
current assets................ 329,074 (148,174) 282,433
Other assets.................. 5,436 16,673 104,319
Accounts payable and accrued
liabilities................ (185,629) 483,179 (264,758)
Due to/from affiliates, net... (94,781) -- 479,757
------------ ------------ ------------
Net cash provided by
operating activities.... 259,823 202,224 1,102,365
------------ ------------ ------------
Investing activities:
Purchases of property and
equipment.......................... (36,523) (22,621) (463,267)
Proceeds from sale of property and
equipment.......................... -- -- 8,601
------------ ------------ ------------
Net cash used in investing
activities................. (36,523) (22,621) (454,666)
------------ ------------ ------------
Financing activities:
Payments on long-term debt and
capital lease obligations....... (410,053) (353,130) (982,368)
Proceeds from long-term debt....... -- -- 250,000
Proceeds from line of credit,
net................................ -- -- 99,295
------------ ------------ ------------
Net cash used in financing
activities................. (410,053) (353,130) (633,073)
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents..................... (186,753) (173,527) 14,626
Cash and cash equivalents at
beginning of period.................. 188,153 173,527 173,527
------------ ------------ ------------
Cash and cash equivalents at end of
period............................. $ 1,400 $ -- $ 188,153
============ ============ ============
</TABLE>
See accompanying notes to combined financial statements.
53
<PAGE>
GRAPHIC TECHNOLOGY OF MARYLAND, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(1) BUSINESS DESCRIPTION AND PRINCIPLES OF COMBINATION
Graphic Technology of Maryland, Inc. (the Company), a Maryland corporation,
provides general commercial printing services relating to the production of such
documents as annual reports, training manuals, product and capability brochures,
catalogs, direct mail pieces and other promotional material, all of which tend
to be recurring in nature. The Company is a 70% owned subsidiary of The Lincoln
Group, Inc. The remaining 30% is owned by two employees. The Company has one
plant located in Annapolis Junction, Maryland.
The combined financial statements of the Company include the financial
statements of Graphic Technology of Maryland, Inc. and Flexographic Technology,
Inc., an affiliate of the Company through common control. All significant
intercompany balances and transactions have been eliminated in combination.
During the year ended December 31, 1997, the Company incurred a pretax loss
which is primarily attributable to the Company's management fees paid to The
Lincoln Group. The management fees were determined by The Lincoln Group to cover
(a) payroll and related costs of certain members of the Company's management and
(b) to establish cash reserves at the parent level. Management has represented
that The Lincoln Group will fund working capital requirements not met by the
Company's own operating cash flows in the future, as necessary.
(2) SIGNIFICANT ACCOUNTING POLICIES AND OTHER INFORMATION
The accounting policies of the Company reflect industry practices and
conform to generally accepted accounting principles. The more significant of
such accounting policies are described below.
USE OF ESTIMATES
The preparation of the accompanying financial statements requires the use
of certain estimates by management in determining the Company's assets and
liabilities at the date of the financial statements and the reported amount of
revenues and expenses during the reporting period. Actual results could differ
from these estimates.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE
The Company recognizes revenue upon delivery of each job. Losses, if any,
on jobs are recognized at the earliest date such amount is determinable. The
Company derives the majority of its revenues from sales and services to a broad
and diverse group of customers. The Company maintains an allowance for doubtful
accounts based upon the expected collectibility of trade accounts receivable.
Accounts receivable in the accompanying balance sheets are reflected net of
allowance for doubtful accounts of $15,000 at December 31, 1997. Accounts
receivable are generally not collateralized.
54
<PAGE>
GRAPHIC TECHNOLOGY OF MARYLAND, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
INVENTORIES
Inventories are valued at the lower of cost or market value utilizing the
first-in, first-out method for raw materials and the specific identification
method for work in progress and finished goods. The carrying values of
inventories are set forth below:
DECEMBER 31,
1997
------------
Raw materials........................ $242,073
Work in progress..................... 195,706
Finished goods....................... --
------------
$437,779
============
FEDERAL INCOME TAXES
Graphic Technology of Maryland, Inc. files a federal income tax return on a
stand alone basis. Flexographic Technology, Inc. files its federal income tax
return as a member of The Lincoln Group, Inc. consolidated federal income tax
return. Net operating loss carryforwards and alternative minimum tax credit
carryforwards are allocated to the individual members of The Lincoln Group, Inc.
consolidated group based on the pro rata share of items generated. Flexographic
Technology, Inc. has recognized a receivable for its portion of the consolidated
loss of The Lincoln Group, Inc. which was carried back to recover federal income
taxes paid in prior years.
The Company is applying the provisions of Statement of Financial Accounting
Standards No. 109, ACCOUNTING FOR INCOME TAXES. Under the asset and liability
method of Statement 109, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under Statement 109, the effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The cost of major renewals and
betterments is capitalized; repairs and maintenance costs are expensed when
incurred. Upon retirement or sale, the cost of the assets disposed of and the
related accumulated depreciation are removed from the accounts, with any
resultant gain or loss being reflected in income. Depreciation of property and
equipment is computed using the straight-line method over the estimated useful
lives of the assets. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of the assets to future net cash flows
expected to be generated by the assets. If such assets are considered to be
impaired, the impairment recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets.
SUPPLEMENTAL CASH FLOW INFORMATION
The combined statement of cash flows provides information about changes in
cash and excludes the effect of noncash transactions. For purposes of the
statement 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 year ended December 31, 1997 was $315,360.
During the year ended December 31, 1997, the Company collected approximately
$347,000 of income taxes
55
<PAGE>
GRAPHIC TECHNOLOGY OF MARYLAND, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
receivable resulting from carrybacks of net operating losses. Noncash
transactions during 1997 were purchases of equipment in exchange for a note
payable of $112,500 and capital lease obligations incurred to acquire equipment
at a cost of $74,151.
(3) ACCRUED LIABILITIES
As of December 31, 1997, the significant components of accrued liabilities
were $185,961 of accrued wages, commissions, vacation pay and related expenses
and $431,529 of other accruals.
(4) PROPERTY AND EQUIPMENT
The following is a summary of the Company's property and equipment and
their estimated useful lives:
ESTIMATED
USEFUL
DECEMBER 31, LIFE
1997 IN YEARS
------------ ----------
Leasehold improvements............... $ 623,903 8 - 39
Machinery and equipment.............. 7,261,251 5 - 10
Furniture, fixtures and other........ 126,186 5
Construction in progress............. 114,305 --
------------
8,125,645
Less accumulated depreciation and
amortization....................... (4,521,078)
------------
$ 3,604,567
============
(5) RELATED PARTY TRANSACTIONS
During the year ended December 31, 1997, the Company incurred management
fees totaling $645,948 with The Lincoln Group, Inc. At December 31, 1997, the
Company had a payable to The Lincoln Group, Inc. of $516,711. In addition, at
December 31, 1997, the Company had a receivable of $215,049 from an entity
affiliated through common control.
56
<PAGE>
GRAPHIC TECHNOLOGY OF MARYLAND, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(6) LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES
The following is a summary of the Company's long-term debt and obligations
under capital leases as of:
DECEMBER 31,
1997
------------
Prime rate plus 0.5% line of credit
(9.0% at June 30, 1998), maximum
borrowing capacity of $1,500,000,
requiring monthly interest payments,
due on demand; unsecured.............. $ 735,167
Prime rate plus 0.5% note (9.0% at June
30, 1998) requiring monthly
installments of $9,208 plus interest,
due in December 2000; unsecured....... 322,292
Prime rate plus 0.5% note (9.0% at June
30, 1998), requiring monthly payments
of interest only, due on demand;
unsecured............................. 250,000
10.2% note, requiring monthly
installments of $6,250 including
interest, due in February 2001;
unsecured............................. 200,389
8.7% note, requiring monthly
installments of $25,147 including
interest, due in September 2001;
secured by equipment.................. 961,708
10.2% note, requiring monthly
installments of $3,700 including
interest, due in December 2000;
secured by equipment.................. 109,193
Prime rate plus 0.5% note (9.0% at June
30, 1998), requiring monthly
installments of $3,472 plus interest,
due in December 2000; secured by
equipment............................. 79,861
7.0% note, requiring monthly
installments of $1,149 including
interest, due in February 2000;
secured by equipment.................. 24,658
Prime rate note (8.50% at June 30,
1998), requiring monthly installments
of $3,667 including interest, due in
February 1998; secured by equipment... 6,906
6.9% note, requiring monthly
installments of $13,083 plus interest,
due in February 1998; secured by
equipment............................. 13,083
12.0% obligations under capital leases;
secured by equipment with a
depreciated cost of $59,065 at June
30, 1998 (note 7)..................... 61,295
------------
2,764,552
Less current portion............... (1,506,132)
------------
$ 1,258,420
============
The principal payment requirements by years ending December 31 under the
Company's debt agreements are $1,505,896 in 1998, $524,254 in 1999, $491,921 in
2000 and $242,481 in 2001.
The Company's debt agreements contain certain covenants, the most
significant of which places certain restrictions on future borrowings and
acquisitions above specified levels. The Company is also required to maintain
certain financial ratios. At December 31, 1997, the Company was not in
compliance with all financial covenants set forth in the debt agreements.
However, subsequent to December 31, 1997, the Company obtained waivers of the
requirement to comply with the applicable financial covenants through July 1,
1999.
57
<PAGE>
GRAPHIC TECHNOLOGY OF MARYLAND, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(7) LEASE COMMITMENTS
A summary of noncancelable long-term lease commitments is summarized as
follows:
YEAR ENDING CAPITALIZED OPERATING
DECEMBER 31, LEASES LEASES
--------------- ----------- ----------
1998............................... $ 21,975 $ 919,913
1999............................... 21,975 455,835
2000............................... 15,831 423,049
2001............................... 15,831 433,626
2002............................... 879 444,466
Thereafter............................ -- 1,401,187
----------- ----------
Total commitments............. 76,491 $4,078,076
==========
Less amount representing interest....... (15,196)
-----------
Present value of minimum capital lease
payments.............................. $ 61,295
===========
Rent expense under operating leases was $571,000 for the year ended
December 31, 1997.
(8) INCOME TAXES
Income tax benefit for the year ended December 31, 1997 consists of the
following:
CURRENT DEFERRED TOTAL
-------- -------- ----------
U.S. federal............................ $ 78,000 $153,780 $ 231,780
State................................... 15,920 -- 15,920
-------- -------- ----------
$ 93,920 $153,780 $ 247,700
======== ======== ==========
Income tax benefit for the year ended December 31, 1997 differed from the
amounts computed by applying the U.S. federal income tax rate of 34% to pretax
income from continuing operations as a result of the following:
Computed "expected" tax............ $ 215,430
State income taxes, net of federal
income tax benefit................. 10,507
Other, net........................... 21,763
----------
$ 247,700
==========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred liabilities at December 31,
1997 are as follows:
DECEMBER 31,
1997
------------
Deferred tax assets:
Accounts receivable, principally
due to allowance for doubtful
accounts........................ $ 15,000
Vacation accrual not deductible for
tax purposes in the current
year............................ 14,700
Net operating loss carryforwards..... 14,880
Alternative minimum tax credit
carryforwards...................... 103,610
------------
Deferred tax assets........ 148,190
Deferred
liability -- principally
due to differences in
depreciation............ (401,400)
------------
Net deferred tax
liability.................... $ (253,210)
============
58
<PAGE>
GRAPHIC TECHNOLOGY OF MARYLAND, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The valuation allowance for deferred tax assets as of December 31, 1997 was
$-0-. In assessing the reliability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. Based upon the projections for future taxable
income over the periods which the deferred tax assets are deductible, management
believes it is more likely than not the Company will realize the benefits of
these deductible differences. The amount of the deferred tax assets considered
realizable, however, could be reduced in the future if estimates of future
taxable income during the carryforward period are reduced.
At December 31, 1997, the Company has net operating loss carryforwards for
federal income tax purposes of $43,765, which are available to offset future
federal taxable income, if any, through 2018. In addition, the Company has
alternative minimum tax credit carryforwards of $103,610, which are available to
reduce future federal regular income taxes, if any, over an indefinite period.
(9) 401(K) PLAN
The Company maintains a 401(k) plan for eligible employees. According to
plan terms, participants may contribute up to a certain percentage of their
compensation. The Company is required to make matching contributions of 33% of
employee contributions up to $520 per employee per year. The Company made
contributions of $31,000 during the year ended December 31, 1997.
(10) CONCENTRATION OF RISK
During the year ended December 31, 1997, the Company acquired 20% of its
inventory from one vendor.
(11) CONTINGENCIES
The Company is a co-defendant in a legal matter filed by a bankruptcy
trustee on behalf of a customer of the Company. The plaintiff alleges that the
Company received preferential payments in settlement of outstanding receivables
totaling approximately $35,000. The Company is vigorously defending its position
that the collections did not represent preferential payments and believes the
lawsuit is without merit. The outcome of this legal matter cannot be reasonably
determined at this time. Management believes that a potential loss is possible,
but cannot be reasonably estimated at this time.
(12) INTERIM FINANCIAL STATEMENTS (UNAUDITED)
The accompanying interim financial statements as of June 30, 1998 and 1997
and for the six month periods then ended have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with Article 10 of Regulation S-X. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation of interim results have been included. Results of operations for
interim periods are not necessarily indicative of the results that might be
expected in any future period.
(13) SUBSEQUENT EVENT (UNAUDITED)
Subsequent to December 31, 1997, Consolidated Graphics, Inc., a
consolidator in the highly fragmented commercial printing industry, acquired
Graphic Technology of Maryland, Inc. pursuant to an Agreement and Plan of
Reorganization dated October 1998.
59
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
The McKay Press, Inc.:
We have audited the accompanying balance sheets of The McKay Press, Inc. as
of December 31, 1997, and the related statements of income, shareholder's equity
and cash flows for the year ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The McKay Press, Inc. as of
December 31, 1997, and the results of its operations and its cash flows for the
year ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
KPMG LLP
Houston, Texas
August 28, 1998
60
<PAGE>
THE MCKAY PRESS, INC.
BALANCE SHEETS
JUNE 30, DECEMBER 31,
1998 1997
------------ -------------
(UNAUDITED) (AUDITED)
ASSETS
Current assets:
Cash and cash equivalents.......... $ 645,897 $ 295,880
Accounts receivable, net........... 2,715,347 2,953,921
Inventories........................ 504,021 499,324
Deferred tax assets................ 72,754 66,445
Prepaid expenses................... 93,305 38,633
------------ -------------
Total current assets....... 4,031,324 3,854,203
Property and equipment, net.......... 3,191,333 2,973,250
Deferred tax assets, net............. 129,490 224,256
Other assets......................... 4,532 8,984
------------ -------------
Total assets............... $ 7,356,679 $ 7,060,693
============ =============
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Current portion of long-term
debt............................... $ 186,969 $ 109,884
Accounts payable................... 802,964 702,036
Accrued liabilities................ 704,054 729,414
Dividends payable to Parent........ 165,000 150,000
------------ -------------
Total current
liabilities............. 1,858,987 1,691,334
Long-term debt, net of current
portion.............................. 445,402 154,311
Commitments and contingencies
Shareholder's equity:
Common stock, no par value; 60,000
shares authorized; 40,000 issued
and outstanding................. 7,961,173 7,961,173
Accumulated deficit.................. (2,908,883) (2,746,125)
------------ -------------
Total shareholder's
equity..................... 5,052,290 5,215,048
------------ -------------
Total liabilities and
shareholder's equity.... $ 7,356,679 $ 7,060,693
============ =============
See accompanying notes to financial statements.
61
<PAGE>
THE MCKAY PRESS, INC.
INCOME STATEMENTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------- YEAR ENDED
1998 1997 DECEMBER 31, 1997
------------ ------------ -----------------
(UNAUDITED) (AUDITED)
<S> <C> <C> <C>
Sales................................... $ 7,772,476 $ 9,179,082 $17,876,389
Cost of sales........................... 6,384,714 6,956,701 13,926,754
------------ ------------ -----------------
Gross profit....................... 1,387,762 2,222,381 3,949,635
Selling expenses........................ 825,769 974,128 1,887,127
General and administrative expenses..... 650,175 976,534 1,587,236
------------ ------------ -----------------
Operating income................... (88,182) 271,719 475,272
Other (income) expense.................. (360,852) (48,765) 193,425
Interest expense........................ 21,579 21,963 35,730
Interest income......................... (4,608) (4,353) (9,811)
------------ ------------ -----------------
Income before income taxes......... 255,699 302,874 255,928
Income taxes............................ 88,457 104,003 93,052
------------ ------------ -----------------
Net income......................... $ 167,242 $ 198,871 $ 162,876
============ ============ =================
</TABLE>
See accompanying notes to financial statements.
62
<PAGE>
THE MCKAY PRESS, INC.
STATEMENT OF SHAREHOLDER'S EQUITY
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK
----------------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
--------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
December 31, 1996.................... 40,000 $ 7,961,173 $ (2,294,001) $ 5,667,172
Dividends............................ -- -- (615,000) (615,000)
Net income........................... -- -- 162,876 162,876
--------- ------------ -------------- ------------
December 31, 1997.................... 40,000 $ 7,961,173 $ (2,746,125) $ 5,215,048
========= ============ ============== ============
</TABLE>
See accompanying notes to financial statements.
63
<PAGE>
THE MCKAY PRESS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------- YEAR ENDED
1998 1997 DECEMBER 31, 1997
------------ ------------ -----------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
Operating activities:
Net income......................... $ 167,242 $ 198,871 $ 162,876
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and
amortization............ 339,308 572,686 852,060
(Gain) loss on disposal of
assets, net............. (308,957) 13,204 105,958
Deferred tax provision..... 88,457 46,527 93,052
Bad debt expense........... 18,555 -- 51,000
Changes in assets and
liabilities, net of
acquisition:
Accounts receivable... 220,019 (607,698) (631,531)
Inventories........... (4,697) 141,473 379,532
Prepaid expenses...... (54,672) (374,877) (7,004)
Other assets.......... 4,452 817 6,833
Accounts payable and
accrued
liabilities........ 90,568 (656,525) (217,200)
------------ ------------ -----------------
Net cash
provided by
operating
activities.... 545,275 (665,522) 795,576
------------ ------------ -----------------
Investing activities:
Purchases of property and
equipment..................... (648,434) (442,621) (317,581)
Proceeds from disposition of
plant and equipment........... 400,000 43,010 95,425
------------ ------------ -----------------
Net cash used in
investing
activities.... (248,434) (389,611) (222,156)
------------ ------------ -----------------
Financing activities:
Payments on line of credit,
net........................... -- 345,696 (178,400)
Proceeds (payments) on long-term
debt, net..................... 368,176 (49,560) (126,552)
Dividends paid to parent........ (330,000) 315,000 (615,000)
------------ ------------ -----------------
Net cash
provided by
(used in)
financing
activities.... 38,176 611,136 (919,952)
------------ ------------ -----------------
Net increase (decrease) in cash and
cash equivalents................... 335,017 (453,997) (346,532)
Cash and cash equivalents at
beginning of period................ 295,880 642,412 642,412
------------ ------------ -----------------
Cash and cash equivalents at end of
period............................. $ 630,897 $ 188,415 $ 295,880
============ ============ =================
Supplemental cash flow
information -- cash paid for
interest during the period......... $ -- $ 21,900 $ 35,730
------------ ------------ -----------------
Noncash financing and investing
activities -- purchase of equipment
in exchange for note payable....... $ -- $ -- $ 275,000
============ ============ =================
</TABLE>
See accompanying notes to financial statements.
64
<PAGE>
THE MCKAY PRESS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
(1) BUSINESS
The McKay Press, Inc. (the Company), a wholly-owned subsidiary of McKay
Communications, Inc. (the Parent), provides general commercial printing services
relating to the production of such documents as annual reports, training
manuals, product and capability brochures, catalogs, direct mail pieces and
other promotional material, all of which tend to be recurring in nature. The
Company has one plant located in Midland, Michigan. The Company started its
operations in April 1908, in the State of Michigan. In April 1995, the Company
and its Parent were formed in a tax-free reorganization.
In August 1997, the Company acquired New Media Strategies, Inc., an
affiliate through common ownership by the Parent. The acquisition was accounted
for as an "as-if-pooling" of interests. Accordingly, the financial statements
have been restated to include the results of the operations of New Media
Strategies, Inc. for the year ended December 31, 1997.
(2) SIGNIFICANT ACCOUNTING POLICIES AND OTHER INFORMATION
The accounting policies of the Company reflect industry practices and
conform to generally accepted accounting principles. The more significant of
such accounting policies are described below.
USE OF ESTIMATES
The preparation of the accompanying financial statements requires the use
of certain estimates by management in determining the Company's assets and
liabilities at the date of the financial statements and the reported amount of
revenues and expenses during the reporting period. Actual results could differ
from these estimates.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE
The Company recognizes revenue upon delivery of each job. Losses, if any,
on jobs are recognized at the earliest date such amount is determinable. The
Company derives the majority of its revenues from sales and services to a broad
and diverse group of customers. The Company maintains an allowance for doubtful
accounts based upon the expected collectibility of trade accounts receivable.
Accounts receivable in the accompanying balance sheets are reflected net of
allowance for doubtful accounts of $21,624 at December 31, 1997. Accounts
receivable are generally not collateralized.
INVENTORIES
Inventories are valued at the lower of cost or market value utilizing the
first-in, first-out method for raw materials and the specific identification
method for work in progress and finished goods. The carrying values of
inventories are set forth below:
DECEMBER 31,
1997
------------
Raw materials........................... $271,392
Work in progress........................ 227,932
------------
$499,324
============
FEDERAL INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected
65
<PAGE>
THE MCKAY PRESS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
to be recovered or settled. Under SFAS 109 the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
included the enactment date.
The Company is included in a consolidated federal income tax return filed
by the Parent. The provision for income taxes in the accompanying financial
statements has been computed as if the Company filed a separate income tax
return.
CASH FLOW INFORMATION
The statement of cash flows provides information about changes in cash and
excludes the effect of noncash transactions. For purposes of the statement of
cash flows, the Company considers all highly liquid investments purchased with
original maturities of three months or less to be cash equivalents.
ACCRUED LIABILITIES
As of December 31, 1997, the significant components of accrued liabilities
were $509,037 of accrued wages/employee benefits and related expenses and
$220,377 of other accruals.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The cost of major renewals and
betterments is capitalized; repairs and maintenance costs are expensed when
incurred. Upon retirement or sale, the cost of the assets disposed of and the
related accumulated depreciation are removed from the accounts, with any
resultant gain or loss being reflected in income. Depreciation of property and
equipment is computed using straight-line and double-declining methods over the
estimated useful lives of the assets.
(3) PROPERTY AND EQUIPMENT
The following is a summary of plant and equipment and their estimated
useful lives:
DECEMBER 31, ESTIMATED
1997 LIFE IN YEARS
--------------- -------------
Leasehold improvements............... $ 902,197 5-39
Printing presses and equipment....... 12,042,895 7-20
Computer equipment and software...... 82,570 2-5
Furniture, fixtures and other........ 1,453,446 5-7
---------------
14,481,108
Less accumulated depreciation and
amortization....................... (11,507,858)
---------------
$ 2,973,250
===============
66
<PAGE>
THE MCKAY PRESS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) LONG-TERM DEBT
The following is a summary of long-term debt:
DECEMBER 31,
1997
------------
Note payable to a bank, payable in
monthly installments of principal and
interest of $10,271, bearing interest
at 9%, matures on April 13, 2000,
secured by certain equipment.......... $258,522
Note payable to a finance company,
payable in monthly Installments of
principal and interest of $543,
bearing interest at 10.25%, matures on
November 15, 1998, secured by a
vehicle............................... 5,673
------------
264,195
Less current portion.................... 109,884
------------
Long-term debt, net of current
portion........................... $154,311
============
The Company has an unsecured line of credit with a bank and may borrow up
to $675,000 under this facility. Outstanding borrowings accrue interest at prime
plus 0.5% payable quarterly. The final maturity date for outstanding borrowings
quarterly. The final maturity date for outstanding borrowings is March 11, 1999.
The line of credit is guaranteed by the Parent. At December 31, 1997, the
Company had no outstanding amounts under the line of credit.
The aggregate maturities of long-term debt subsequent to December 31, 1997
are as follows:
YEAR ENDING
DECEMBER 31,
-------------
1998.................................. $ 109,884
1999.................................. 113,987
2000.................................. 40,324
----------
$ 264,195
==========
(5) LEASE COMMITMENTS
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) at December 31, 1997
are:
YEAR ENDING
DECEMBER 31,
- -------------------------------------
1998............................... $ 353,671
1999............................... 353,671
2000............................... 352,635
2001............................... 347,172
2002............................... 347,172
Thereafter........................... 781,137
------------
Total........................... $ 2,535,458
============
Rent expense under operating leases was $462,773 for the year ended
December 31, 1997.
67
<PAGE>
THE MCKAY PRESS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(6) INCOME TAXES
Income tax expense for the year ended December 31, 1997 consists of
deferred federal income taxes of $93,052. Income tax expense for the year ended
December 31, 1997 differed from the amounts computed by applying the U.S.
federal income tax rate of 34 percent to pretax income from continuing
operations as a result of the following:
Computed "expected" tax............ $ 87,016
Amount not deductible for tax
purposes -- 50% of meals and
entertainment...................... 6,036
---------
$ 93,052
=========
The tax effects of temporary differences that give rise to the deferred tax
assets and the deferred tax liability as of December 31, 1997, are set forth
below:
Deferred tax assets:
Compensated absences, due to
accrual for financial
reporting purposes............ $ 59,093
Net operating loss
carryforwards................. 261,261
Allowance for doubtful
accounts...................... 7,352
----------
Total deferred tax
assets.................. 327,706
Deferred tax liability -- plant and
equipment, due to differences in
depreciation....................... (37,005)
----------
Deferred tax assets, net... $ 290,701
==========
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Based upon the level of
historical taxable income (losses) and projections for future taxable income
over the periods in which the deferred tax assets are deductible, management
believes it is more likely than not that the Company will realize the benefits
of these deductible differences, and therefore, a valuation allowance for
deferred tax assets was not considered necessary as of December 31, 1997. At
December 31, 1997, the Company has net operating loss carryforwards for federal
income tax purposes of $768,416 which are available to offset future taxable
income, if any, through the years 2010-2012.
(7) 401(K) PLAN
The Company maintains a 401(k) plan for eligible employees. According to
plan terms, participants may contribute up to a certain percentage of their
compensation. The Company matches 25% of up to 2% of employee compensation
contributed. During the year ended December 31, 1997, the Company contributed
$26,867.
(8) CONCENTRATION OF RISKS
During the year ended December 31, 1997, three customers accounted for
approximately 44% of the Company's sales. In addition, the Company acquired
approximately 60% of its inventory from two suppliers during the year ended
December 31, 1997.
(9) INTERIM FINANCIAL STATEMENTS (UNAUDITED)
The accompanying interim financial statements as of June 30, 1998 and 1997
and for the six month periods then ended have been prepared in accordance with
generally accepted accounting
68
<PAGE>
THE MCKAY PRESS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
principles for interim financial information and with Article 10 of Regulation
S-X. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation of interim
results have been included. Results of operations for interim periods are not
necessarily indicative of the results that might be expected in any future
period.
(10) SUBSEQUENT EVENT (UNAUDITED)
Subsequent to December 31, 1997, Consolidated Graphics, Inc., a
consolidator in the highly fragmented commercial printing industry, acquired The
McKay Press, Inc. pursuant to an Agreement and Plan of Reorganization dated
November 1998.
69
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Carty Enterprises, Inc.
T/A Mount Vernon Printing Company
Landover, Maryland:
We have audited the accompanying balance sheet of Carty Enterprises, Inc.
T/A Mount Vernon Printing Company as of June 30, 1998 and the related statements
of operations, retained earnings and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Carty Enterprises, Inc. T/A
Mount Vernon Printing Company as of June 30, 1998 and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ KAUFMAN DAVIS, PC
KAUFMAN DAVIS, PC
Certified Public Accountants
August 13, 1998
70
<PAGE>
CARTY ENTERPRISES, INC.
T/A MOUNT VERNON PRINTING COMPANY
BALANCE SHEETS
SEPTEMBER 30, JUNE 30,
1998 1998
-------------- ----------
(UNAUDITED) (AUDITED)
ASSETS
Current assets:
Cash............................ $ 105,326 $ 251,792
Accounts receivable, trade...... 2,635,777 2,605,809
Inventory and work-in-process... 1,257,804 1,083,872
Prepaid corporate income
taxes.......................... 43,219 71,002
Prepaid expenses................ 33,954 12,670
-------------- ----------
Total current assets....... 4,076,080 4,025,145
-------------- ----------
Property and equipment, at cost:
Equipment, furniture and
fixtures....................... 4,603,587 4,602,079
Leasehold improvements.......... 250,614 250,614
Vehicles........................ 84,967 84,967
Capitalized leased equipment.... 2,562,427 2,420,979
-------------- ----------
7,501,595 7,358,639
Accumulated depreciation........ (4,403,562) (4,224,354)
-------------- ----------
Net property and equipment.... 3,098,033 3,134,285
-------------- ----------
Other assets:
Investment, at cost............. 200,000 200,000
Goodwill, less accumulated
amortization of $15,751 and
$15,532 at September 30, 1998,
and June 30, 1998,
respectively................... 19,249 19,468
Equipment and other deposits.... 117,769 112,107
-------------- ----------
Total other assets......... 337,018 331,575
-------------- ----------
Total assets............... $7,511,131 $7,491,005
============== ==========
See accompanying notes to financial statements.
71
<PAGE>
CARTY ENTERPRISES, INC.
T/A MOUNT VERNON PRINTING COMPANY
BALANCE SHEETS
SEPTEMBER 30, JUNE 30,
1998 1998
------------- ------------
(UNAUDITED) (AUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit..................... $ 1,706,144 $ 1,774,075
Accounts payable, trade............ 1,533,933 1,375,346
Accrued taxes payable.............. 107,339 95,425
Accrued payroll, vacation and sick
leave............................. 329,289 376,290
Accrued other expenses............. 119,713 121,822
Current maturities of long-term
debt.............................. 836,376 896,263
------------- ------------
Total current
liabilities.......... 4,632,794 4,639,221
------------- ------------
Long-term debt:
Installment notes payable.......... 733,901 653,732
Note payable, related party........ 414,085 511,373
Capital lease obligations.......... 778,887 899,736
------------- ------------
1,926,873 2,064,841
Current maturities................. 836,376 896,263
------------- ------------
Total long-term debt..... 1,090,497 1,168,578
------------- ------------
Deferred income taxes................... 178,009 169,956
------------- ------------
Commitments and contingencies........... -- --
Stockholders' equity:
Common stock:
Class A, voting, 10,000 shares
authorized $1.00 par
value, 4,887 shares
issued, 4,871 shares
outstanding............... 4,887 4,887
Additional paid-in capital......... 343,558 343,558
Retained earnings.................. 1,322,986 1,207,805
------------- ------------
1,671,431 1,556,250
Less: treasury stock, 31 and 16
shares, at cost................... 61,600 43,000
------------- ------------
Total stockholders'
equity............... 1,609,831 1,513,250
------------- ------------
Total liabilities and
stockholders'
equity............... $ 7,511,131 $ 7,491,005
============= ============
See accompanying notes to financial statements.
72
<PAGE>
CARTY ENTERPRISES, INC.
T/A MOUNT VERNON PRINTING COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------- YEAR ENDED
1998 1997 JUNE 30, 1998
------------ ------------ --------------
(UNAUDITED) (AUDITED)
<S> <C> <C> <C>
Billings............................. $ 4,707,296 $ 5,616,005 $ 21,849,204
Work-in-process adjustment...... 163,674 (44,586) (3,586)
------------ ------------ --------------
Value of production.................. 4,870,970 5,571,419 21,845,618
Less: paper, chargeable materials and
outside services................... 2,044,049 3,061,018 11,029,261
------------ ------------ --------------
Value added by manufacture........... 2,826,921 2,510,401 10,816,357
------------ ------------ --------------
Direct labor.................... 1,311,853 1,242,493 5,016,664
Factory costs................... 425,075 404,858 1,626,448
------------ ------------ --------------
Total factory cost of
product................. 1,736,928 1,647,351 6,643,112
------------ ------------ --------------
Gross profit......................... 1,089,993 863,050 4,173,245
Administrative and selling
expenses...................... 808,870 754,890 3,104,355
------------ ------------ --------------
Income from operations............... 281,123 108,160 1,068,890
------------ ------------ --------------
Other income and (expense):
Interest income................. -- 2,160 1,322
Discounts earned and other
income........................ 17,230 18,705 114,185
Gain on disposition of property
and equipment................. -- -- 7,231
Interest expense................ (99,780) (118,763) (500,626)
Bad debt expense................ 7,406 1,500 (646,917)
------------ ------------ --------------
(75,144) (96,398) (1,024,805)
------------ ------------ --------------
Income before income taxes........... 205,979 11,762 44,085
Provision for income taxes...... 90,798 9,708 18,854
------------ ------------ --------------
Net income........................... $ 115,181 $ 2,054 $ 25,231
============ ============ ==============
</TABLE>
See accompanying notes to financial statements.
73
<PAGE>
CARTY ENTERPRISES, INC.
T/A MOUNT VERNON PRINTING COMPANY
STATEMENT OF RETAINED EARNINGS
YEAR ENDED JUNE 30, 1998
Retained earnings, beginning of
year................................. $ 1,182,574
Net income........................... 25,231
------------
Retained earnings, end of year....... $ 1,207,805
============
See accompanying notes to financial statements.
74
<PAGE>
CARTY ENTERPRISES, INC.
T/A MOUNT VERNON PRINTING COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED
------------------------------ JUNE 30,
1998 1997 1998
-------------- -------------- -----------
(UNAUDITED) (AUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................... $ 115,181 $ 2,054 $ 25,231
Adjustments to reconcile net income
to
Cash provided by operating
activities:
Depreciation and
amortization................ 179,428 164,267 709,763
Increase in deferred taxes.... 8,053 2,055 32,214
Gain on disposal of assets.... -- -- (7,231)
Bad debt expense.............. 15,000 12,000 646,917
Changes in assets and
liabilities:
(Increase) decrease in
accounts and notes
receivable................ (44,968) (350,876) 121,280
(Increase) decrease in
inventory and work-in-
process................... (173,932) 36,040 33,347
(Increase) decrease in
prepaid income taxes...... 27,783 -- (13,360)
(Increase) decrease in
prepaid expenses.......... (21,284) -- 12,771
Increase (decrease) in
accounts payable, trade... 158,587 200,852 (506,643)
Increase (decrease) in
accrued payroll, vacation
and sick leave............ (47,001) 56,923 28,115
Increase (decrease) in
accrued taxes and other
accrued expenses.......... 9,805 (82,878) 1,079
-------------- -------------- -----------
Net cash provided by
operating activities... 226,652 40,437 1,083,483
-------------- -------------- -----------
Cash flows from investing activities:
Proceeds from sale of assets....... -- -- 20,500
Purchases of property and
equipment......................... (142,957) (1,163) (131,453)
Increase in equipment and other
deposits.......................... (5,662) (15,972) (2,285)
Purchase of Treasury Stock......... (18,600) -- --
-------------- -------------- -----------
Net cash used in
investing activities... (167,219) (17,135) (113,238)
-------------- -------------- -----------
Cash flows from financing activities:
Net (curtailments) advances under
bank line of credit............... (67,931) 12,222 (740,916)
Proceeds from long-term debt....... 141,448 -- 463,777
Repayment of principal on notes
payable........................... (61,280) (64,693) (420,176)
Repayment of Related Party Notes
Payable........................... (97,288) (15,495) --
Repayment of capital lease
obligations....................... (120,848) (99,035) (435,605)
Proceeds from issuance of common
stock............................. -- -- 63,520
-------------- -------------- -----------
Net cash used in
financing activities... (205,899) (167,001) (1,069,400)
-------------- -------------- -----------
Net decrease in cash................. $ (146,466) $ (143,699) $ (99,155)
============== ============== ===========
</TABLE>
See accompanying notes to financial statements.
75
<PAGE>
CARTY ENTERPRISES, INC.
T/A MOUNT VERNON PRINTING COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------- YEAR ENDED
1998 1997 JUNE 30, 1998
------------ ------------ -------------
(UNAUDITED) (AUDITED)
<S> <C> <C> <C>
Net decrease in cash................. $ (146,466) $ (143,699) $ (99,155)
Cash at beginning of period.......... 251,792 350,947 350,947
------------ ------------ -------------
Cash at end of period................ $ 105,326 $ 207,248 $ 251,792
============ ============ =============
SUPPLEMENTAL INFORMATION TO STATEMENTS OF CASH FLOWS
Additional information to the statements of cash flows with regard to
certain cash payments and noncash investing and financing activities are as
follows:
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------- YEAR ENDED
1998 1997 JUNE 30, 1998
---------- ---------- -------------
(UNAUDITED) (AUDITED)
Cash paid during the year for:
Interest........................ $ 118,763 $ 100,903 $ 494,035
</TABLE>
During the year ended June 30, 1998 the Company entered into installment
notes and capital lease obligations totalling $652,309 for the purchase of
equipment. Corresponding assets were recorded for the same amount.
See accompanying notes to financial statements.
76
<PAGE>
CARTY ENTERPRISES, INC.
T/A MOUNT VERNON PRINTING COMPANY
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 1998
NOTE 1. ORGANIZATION
Carty Enterprises, Inc., T/A Mount Vernon Printing Company is a
full-service graphic communications company. Substantially all of the
Corporation's business activity is with customers located within the Washington,
D.C. metropolitan area.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTS RECEIVABLE, BAD DEBTS -- The Company provides an allowance for
accounts receivable that are deemed uncollectible. In management's opinion all
accounts receivable are considered collectible at the balance sheet dates.
Included in other income and expense are bad debts of $646,917 related to a
write-off of a trade note receivable and other accounts receivable with The
Direct Approach Company.
INVENTORY AND WORK-IN-PROCESS VALUATION -- Inventory and work-in-process
are valued at the lower of cost (determined on a first-in, first-out basis) or
market.
Raw materials inventory:
Paper........................... $ 277,616
Ink............................. 7,977
Other factory supplies.......... 66,339
------------
351,932
Work-in-process................. 731,940
------------
$ 1,083,872
============
PROPERTY, EQUIPMENT AND DEPRECIATION -- For financial statement reporting
purposes the Company computes depreciation expense over the economic useful
lives of property and equipment. Depreciation expense for the year ended June
30, 1998 is $708,888. Expenditures for repairs and maintenance are charged to
income as incurred.
GOODWILL -- Goodwill (the excess of the cost of investment over the fair
value of net assets acquired) is amortized on the straight-line method over a
period of forty years. Amortization expense is $875 in 1998.
LEASES -- Leases which meet the criteria of Financial Accounting Standards
Board Statement No. 13 are classified as capital leases (Note 5). The capital
lease assets and related obligations are recorded at amounts equal to the lesser
of the present value of minimum lease payments or the fair value of the leased
asset at the inception of the lease. Amortization is calculated using the
straight-line method over the useful life of the asset. Leases which do not meet
the aforementioned criteria are classified as operating leases and the related
rentals are charged to expense as incurred. Included in depreciation expense is
amortization expense related to capital lease assets for the year ended June 30,
1998 of $278,491.
INCOME TAXES -- The Company accounts for income taxes using an asset and
liability approach. This method requires recognition of deferred tax liabilities
and assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
The deferred tax liability as of June 30, 1998 is $169,956.
77
<PAGE>
CARTY ENTERPRISES, INC.
T/A MOUNT VERNON PRINTING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTING ESTIMATES -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS -- For the purpose of the statements of cash
flows, the Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
NOTE 3. LINE OF CREDIT
On April 3, 1998 the Company amended its existing revolving line of credit
with Fremont Financial Corporation. The line has a $4,000,000 limit with an
annual interest rate of 2% over prime, payable monthly. The aggregate
outstanding balance on the line is limited to 80% of billed eligible accounts
receivable plus 50% of eligible raw materials inventory. The inventory advance
may not exceed $400,000. The agreement extends through September 1999 with
annual renewal options thereafter.
The obligations under the line of credit are secured by a first priority
lien on all the Company assets. At June 30, 1998, the Company had borrowed
$1,774,075 against its available line limit. The loan agreement contains certain
restrictions and covenants, for which the Company was in compliance as of the
balance sheet dates.
NOTE 4. INSTALLMENT NOTES PAYABLE
Installment notes payable consist of the following:
MONTHLY INTEREST
PAYMENT RATE BALANCE
-------- --------- ------------
(A) UJB Leasing.......................... 5,659 11% 125,990
Hubbard Investment Partnership, a
(B) related party........................ 6,548 11% 91,373
(C) Summit Leasing Corporation........... 7,287 10% 169,912
Metropolitan Travel, a related
(D) party................................ 20,000 11% 120,000
Metropolitan Travel, a related
(E) party................................ 2,625 11% 300,000
(F) Phoenixcor........................... 9,943 9% 357,830
------------
1,165,105
Current maturity..................... 414,106
------------
Long-term portion of debt............ $ 750,999
============
(A) The UJB Leasing obligation dated July 14, 1995 is an original five year
$260,600 obligation for the purchase of a printing press. The final payment
is due July 2000. The obligation is secured by the equipment.
(B) The note payable to Hubbard Investment Partnership, a related partnership,
represents an original $200,000 obligation advanced to the Company for a
minority interest investment. The final payment is due in September, 1999.
The obligation is secured by all assets of the Company.
(C) The Summit Leasing obligation dated September 23, 1996 is an original four
year $287,776 obligation for the purchase of a printing press. The final
payment is due in August 2000. The obligation is secured by the equipment.
78
<PAGE>
CARTY ENTERPRISES, INC.
T/A MOUNT VERNON PRINTING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(D) The note payable to Metropolitan Travel, a related company, dated March 12,
1998 represents an original $163,602 obligation advanced to the Company.
The final payment is due in December 1998. The obligation is secured by all
assets of the Company.
(E) The note payable to Metropolitan Travel, a related company, dated April 1,
1998 represents an original $300,000 obligation advanced to the Company.
The final payment is due in December 1999. The obligation is secured by all
assets of the Company.
(F) The Phoenixcor obligation dated November 25, 1997 is an original four year
$400,000 obligation for the purchases of a printing press. The final
payment is due in December 2001. The obligation is secured by the
equipment.
Future maturities of all installment notes payable are as follows:
YEAR ENDED
JUNE 30,
- -------------------------------------
1999............................... $ 414,106
2000............................... 563,964
2001............................... 128,851
2002............................... 58,184
------------
$ 1,165,105
============
Based on the borrowing rates currently available to the Company, the fair
value of long-term debt approximates the carrying values shown on the financial
statements.
NOTE 5. CAPITALIZED LEASED EQUIPMENT, OBLIGATIONS UNDER CAPITAL LEASE
The Company leases equipment under lease agreements which have been
classified as capital leases. The cost of the leased equipment is $2,420,979.
(A) The Company is obligated to Mitsubishi Acceptance Corporation to lease a
printing press. The lease is for an original term of 84 months, beginning
August 1992, and is payable in monthly installments of $18,111. The lease
is reflected net of imputed interest at a rate of 7%.
(B) The Company is obligated to Advanta Leasing Corporation to lease a computer
system. The lease is for an original term of 60 months, beginning April
1994, and is payable in monthly installments of $2,019. The lease
obligation is reflected net of imputed interest of 12.5%.
(C) The Company is obligated to G.E. Capital to lease pre-press equipment. The
lease is for an original term of 60 months, beginning April 1995 and, is
payable in monthly installments of $14,689. The lease obligation is
reflected net of imputed interest of 10%.
(D) The Company is obligated to Colonial Pacific to lease collating equipment.
The lease is for an original term of 36 months, beginning February 1996,
and is payable in monthly installments of $2,935. The lease obligation is
reflected net of imputed interest of 12%.
(E) The Company is obligated to Dana Credit to lease a computer system. The
lease is for an original term of 36 months, beginning March 1997, and is
payable in monthly installments of $2,622. The lease obligation is
reflected net of imputed interest of 10.7%.
(F) The Company is obligated to Fujifilm Financial Services to lease a scanner.
The lease is for an original term of 48 months, beginning November 1997,
and is payable in quarterly installments of $7,431. The lease obligation is
reflected net of imputed interest of 12.4%.
79
<PAGE>
CARTY ENTERPRISES, INC.
T/A MOUNT VERNON PRINTING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(G) The Company is obligated to Champion Credit Corporation to lease electronic
pre-press equipment. The lease is for an original term of 48 months,
beginning January 1998, and is payable in monthly installments of $4,076.
The lease obligation is reflected net of imputed interest of 10.4%
The following is a schedule of future minimum lease payments required under
capital leases at June 30, 1998:
YEAR ENDED
JUNE 30,
------------
1999............................... $ 545,359
2000............................... 337,063
2001............................... 78,637
2002............................... 35,964
----------
Net minimum lease payments........... 997,023
Amount representing interest......... 97,287
----------
Present value of net minimum lease
payments........................... 899,736
Current portion...................... 482,157
----------
Long-term portion.................... $ 417,579
==========
NOTE 6. PROVISION FOR INCOME TAXES
The components of taxable (loss) income are as follows:
Income before taxes.................. $ 44,085
Add (subtract):
Permanent differences...... 54,252
Temporary differences
attributable to the
recognition of:
Leases................ (107,937)
Depreciation.......... (58,549)
Vacation pay.......... 15,020
------------
Taxable (loss) income...... $ (53,129)
============
The (benefit from) provision for income taxes consists of the following:
Current taxes on income:
Federal......................... $ (18,064)
State........................... (3,719)
Prior year adjustment........... 8,423
----------
Total current income
taxes.................... (13,360)
Deferred income taxes...... 32,214
----------
Total provision for income
taxes.................... $ 18,854
==========
80
<PAGE>
CARTY ENTERPRISES, INC.
T/A MOUNT VERNON PRINTING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. ACCRUED OTHER EXPENSES
Accrued other expenses consists of:
Accrued health and welfare........... $ 39,026
Accrued pension...................... 10,902
Accrued interest payable............. 16,518
Accrued profit-sharing (Note 8)...... 55,376
----------
$ 121,822
==========
NOTE 8. PROFIT-SHARING PLAN
The Company maintains a qualified profit-sharing plan which has been
approved by the Internal Revenue Service under Sections 401(a) and 401(k) of the
Internal Revenue Code. Eligible participants may contribute from 1% to 15% of
their compensation.
The Company will make matching contributions up to 100% of the first 3% of
each participant's compensation actually contributed by such employees to the
plan. For the year ended June 30, 1998 the Company made a discretionary
contribution to the plan of $36,995. The total profit sharing contribution for
the year ended June 30, 1998 is $91,711.
NOTE 9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES -- The Company leases plant and administrative facilities
under lease agreements expiring by July 31, 2002. The current minimum annual
rental is $440,436, payable in monthly installments of $36,703. The Company also
pays its proportionate share of building operating costs and real estate taxes.
Rent expense for the year ending June 30, 1998 is $523,302.
The future minimum base rental commitments for all operating leases are as
follows:
YEAR ENDED
JUNE 30,
------------
1999............................... $ 452,168
2000............................... 468,813
2001............................... 486,395
2002............................... 504,634
2003............................... 42,180
------------
$ 1,954,190
============
NOTE 10. CONCENTRATION OF CREDIT RISK AND FINANCIAL INSTRUMENTS
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments.
The Company places its temporary cash investments with high credit quality
financial institutions and believes there is no significant concentration of
credit risk.
NOTE 11. INTERIM FINANCIAL STATEMENTS (UNAUDITED)
The accompanying interim financial statements as of September 30, 1998 and
1997, and for the three month periods then ended, have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with Article 10 of Regulation S-X. In the opinion of
81
<PAGE>
CARTY ENTERPRISES, INC.
T/A MOUNT VERNON PRINTING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation of interim results have been included. Results
of operations for interim periods are not necessarily indicative of the results
that might be expected in any future period.
NOTE 12. SUBSEQUENT EVENT (UNAUDITED)
Subsequent to June 30, 1998 Consolidated Graphics, Inc., a consolidator in
the highly fragmented commercial printing industry, acquired Carty Enterprises,
Inc. T/A Mount Vernon Printing Company pursuant to an Agreement and Plan of
Reorganization dated December 1998.
82
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Automated Graphic Systems, Inc.
White Plains, Maryland:
We have audited the accompanying consolidated balance sheet of Automated
Graphic Systems, Inc. and its subsidiaries as of October 31, 1997, and the
related consolidated statements of income, shareholders' equity, and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly in all material respects, the consolidated financial position of
Automated Graphic Systems, Inc. and its subsidiaries as of October 31, 1997, and
the consolidated results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles.
/s/ WATKINS, MEEGAN, DRURY & COMPANY, L.L.C.
WATKINS, MEEGAN, DRURY & COMPANY, L.L.C.
Bethesda, Maryland
August 24, 1998
83
<PAGE>
AUTOMATED GRAPHIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
JULY 31, OCTOBER 31,
1998 1997
----------- -----------
(UNAUDITED) (AUDITED)
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents.......... $ 584 $ 2,042
Receivables........................ 7,913 8,403
Inventory.......................... 1,653 1,393
Prepaid Expenses................... 80 175
Deferred Income Taxes.............. 88 88
----------- -----------
Total Current Assets.......... 10,318 12,101
PROPERTY AND EQUIPMENT
Machinery and Equipment............ 15,225 14,246
Leasehold Improvements............. 748 779
Furniture and Fixtures............. 173 162
Property Held Under Capital
Leases.......................... 310 310
----------- -----------
16,456 15,497
Less Accumulated Depreciation...... (9,178) (7,925)
----------- -----------
Total Property and Equipment,
Net.......................... 7,278 7,572
OTHER ASSETS
Investments in Securities.......... 2,957 3,092
Deposits........................... 71 192
Cash Surrender Value of Life
Insurance....................... 70 70
Other Receivables.................. 187 36
Organization Costs, Start-Up Costs,
and Loan Fees, Net of $47 and
$41 Amortization,
Respectively.................... 6 13
----------- -----------
Total Other Assets.............. 3,291 3,403
----------- -----------
TOTAL ASSETS......................... $20,887 $23,076
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements
84
<PAGE>
AUTOMATED GRAPHIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
JULY 31, OCTOBER 31,
1998 1997
----------- -----------
(UNAUDITED) (AUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Cash Overdraft..................... $-- $ 174
Notes Payable, Current Portion..... 3,952 657
Capital Lease Obligations, Current
Portion......................... 84 56
Accounts Payable................... 1,781 2,200
Accrued Liabilities................ 1,330 2,549
Income Taxes Payable............... (41) 230
Unearned Income.................... 64 299
----------- -----------
Total Current Liabilities..... 7,170 6,165
LONG-TERM DEBT
Notes Payable, Less Current
Portion......................... 1,128 4,810
Capital Lease Obligations,
Less Current Portion............ 145 213
----------- -----------
Total Long-Term Debt.......... 1,273 5,023
DEFERRED INCOME TAXES................ 438 438
----------- -----------
Total Liabilities............. 8,881 11,626
COMMITMENTS AND CONTINGENCIES........ -- --
SHAREHOLDERS' EQUITY
Common Stock -- No Par Value;
20,000 Shares Authorized, 11,705
and 12,442
Shares Issued and Outstanding,
Respectively.................... 604 534
Retained Earnings.................. 11,400 10,915
Unrealized Holding Gains on
Investments..................... 2 1
----------- -----------
Total Shareholders' Equity.... 12,006 11,450
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY............................. $20,887 $23,076
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements
85
<PAGE>
AUTOMATED GRAPHIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NINE MONTHS ENDED YEAR ENDED
JULY 31, OCTOBER
-------------------- 31,
1998 1997 1997
--------- --------- ----------
(UNAUDITED) (AUDITED)
Net Sales............................ $ 27,212 $ 25,550 $ 34,698
Cost of Sales........................ 16,274 15,136 21,033
--------- --------- ----------
Gross Profit on Sales................ 10,938 10,414 13,665
Operating Expenses
Administrative and General...... 3,177 4,161 5,300
Selling......................... 2,803 2,582 3,561
Production Planning............. 1,030 926 1,433
Delivery........................ 824 808 1,090
Moving.......................... -- -- 414
--------- --------- ----------
7,834 8,477 11,798
--------- --------- ----------
Operating Income..................... 3,104 1,937 1,867
Other Income (Expense)............... (44) 1,534 1,762
Interest Expense..................... 351 368 453
--------- --------- ----------
Income Before Income Taxes........... 2,709 3,103 3,176
Provision for Income Taxes........... 1,025 1,114 1,234
--------- --------- ----------
NET INCOME........................... $ 1,684 $ 1,989 $ 1,942
========= ========= ==========
The accompanying notes are an integral part of these consolidated financial
statements
86
<PAGE>
AUTOMATED GRAPHIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK UNREALIZED
------------------ RETAINED HOLDING GAINS SHAREHOLDERS'
SHARES AMOUNT EARNINGS ON INVESTMENTS EQUITY
------- ------- --------- -------------- --------------
<S> <C> <C> <C> <C>
Balance, October 31, 1996............ 12,416 $ 502 $ 8,973 --$ $ 9,475
Net Income........................... -- -- 1,942 -- 1,942
Sale of Stock........................ 26 32 -- -- 32
Net Change in Unrealized Holding
Gains.............................. -- -- -- 1 1
------- ------- --------- -------------- --------------
Balance, October 31, 1997............ 12,442 $ 534 $ 10,915 $ 1 $ 11,460
======= ======= ========= ============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated finacial
statements
87
<PAGE>
AUTOMATED GRAPHIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
NINE MONTHS ENDED
JULY 31, YEAR ENDED
-------------------- OCTOBER 31,
1998 1997 1997
--------- --------- -----------
(UNAUDITED) (AUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income....................... $ 1,684 $ 1,989 $ 1,942
Adjustment to Reconcile Net
Income to Net Cash Provided by
Operating Activities
Depreciation and
Amortization.............. 1,260 1,248 1,682
Bad Debt Expense............ -- -- 175
Gain on Sale of Property and
Equipment................. -- (1,310) (1,336)
Noncash Employee Benefit.... -- -- 8
Deferred Income Taxes....... -- -- 208
Change in
Receivables................. 339 (212) (1,031)
Inventory................... (261) 189 183
Prepaid Expenses............ 95 314 239
Deposits.................... 122 (1) (152)
Cash Surrender Value of Life
Insurance................. -- -- --
Accounts Payable............ (420) (45) 813
Accrued Liabilities......... (1,218) 113 960
Income Taxes Payable........ (271) 475 208
Unearned Income............. (235) 371 109
--------- --------- -----------
Net Cash Provided by Operating
Activities..................... 1,095 3,131 4,008
CASH FLOWS FROM INVESTING ACTIVITIES
Net Proceeds from Sale of
Property and Equipment......... -- 3,330 3,187
Purchase of Property and
Equipment...................... (959) (1,333) (2,147)
Purchase of Securities........... 135 (3,327) (3,090)
Payment of Selling Expenses...... -- (174) --
--------- --------- -----------
Net Cash Used In Investing
Activities..................... (824) (1,504) (2,050)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Cash Overdraft..... (174) -- 174
Proceeds from Issuance of Notes
Payable........................ -- -- --
Payments on Note Payable......... (386) (493) (635)
Loan Fees Paid................... -- -- (17)
Principal Payments Under Capital
Lease Obligations.............. (40) (1) (40)
Proceeds from Issuance of Common
Stock.......................... 70 31 32
Purchase of Treasury Stock....... (1,199) -- --
--------- --------- -----------
Net Cash Provided by (Used in)
Financing Activities............... (1,729) (463) (486)
--------- --------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... (1,458) 1,164 1,472
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR............................ 2,042 570 570
--------- --------- -----------
CASH AND CASH EQUIVALENTS, END OF
YEAR............................... $ 584 $ 1,734 $ 2,042
========= ========= ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOWS
Cash Paid For Interest........... $ 351 $ 368 $ (455)
Cash Paid For Income Taxes....... 1,025 1,114 (574)
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Purchased Equipment Through
Issuance Of Capital Lease
Obligations.................... -- -- $ 309
===========
The accompanying notes are an integral part of these consolidated financial
statements
88
<PAGE>
AUTOMATED GRAPHIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED OCTOBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Automated Graphic Systems, Inc. (the Company), is a printing company that
provides a complete range of services to its customers including: design,
database management, consulting, typesetting, desktop publishing, CD-ROM
production, electronic, and conventional prepress, printing, quick copying,
binding, and mailing. With locations in Macedonia, Ohio, White Plains, Maryland,
and Washington, D.C., the Company serves Ohio and the Washington, D.C.
metropolitan areas.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Automated
Graphic Systems, Inc., and its wholly owned subsidiaries Automated Graphic
Imaging, Inc., and Automated Graphic Systems -- Ohio, Inc. Intercompany
transactions and balances have been eliminated in the consolidation.
RECOGNITION OF INCOME
Income from jobs in process at year end is recorded using the
percentage-of-completion method of accounting based upon standard billing rates
for costs incurred. This amount may be further adjusted for any known
write-ups/write-downs on specific jobs. Unearned income represents cash received
from customers in advance for work not yet performed.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
initial maturity of three months or less to be cash equivalents. These may
include cash, money market funds, and short-term investments in commercial
paper.
INVENTORY
Inventories of materials and supplies are valued at the lower of cost or
market, determined by the "first-in, first-out" basis.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is provided based
on the estimated average useful lives of the assets. Accelerated methods have
been adopted to compute depreciation on certain shop machinery, and the
straight-line method of depreciation is used for all other assets. Improvements
to leased premises are amortized over the estimated useful life of the
improvements. Assets held under capital lease obligations are amortized over
their estimated useful lives and included in total depreciation expense
annually.
If the Company were to determine, based on the facts and circumstances,
that the value of long-lived assets may be impaired, it would perform an
evaluation of recoverability. In such an evaluation, the estimated future
undiscounted cash flows associated with the asset are compared to the asset's
carrying amount. If the carrying amount were to exceed the estimated future cash
flows, the Company would perform a discounted cash flow analysis to determine
the amount of the write-down.
Maintenance and repairs are charged to earnings as incurred. Depreciation
expense for the year ended October 31, 1997 was $1,678.
89
<PAGE>
AUTOMATED GRAPHIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
INVESTMENTS IN SECURITIES
Management determines an appropriate classification of securities at the
time of purchase. If management has the intent and ability at the time of
purchase to hold debt securities until maturity or on a long-term basis, they
are classified as long-term investments and carried at amortized historical
cost.
Securities to be held for indefinite periods of time and not intended to be
held to maturity or on a long-term basis are classified as available for sale
and carried at fair value. Securities held for indefinite periods of time
include securities that management intends to use as part of its asset and
liability management strategy. They may be sold in response to changes in
interest rates, resultant prepayment risk and other factors related to interest
rate and resultant prepayment risk changes.
Realized gains and losses on dispositions are based on the net proceeds and
the adjusted book value of the securities sold, using the specific
identification method. Unrealized gains and losses on marketable securities
available for sale are based on the difference between book value and fair value
of each security. These gains and losses are credited or charged to retained
earnings whereas realized gains and losses flow through the Company's
operations.
ORGANIZATION COSTS AND START-UP COSTS
Organization costs and start-up costs are amortized using the straight-line
method over a period of five years.
INCOME TAXES
Income taxes on pretax accounting income are provided at rates in effect
under existing tax law. The provision for income taxes charged against earnings
relates to all items of revenue and expense recognized for financial accounting
purposes. The actual current tax liability may be different from the charge
against earnings due to the effect of timing differences between financial and
tax accounting, resulting in deferred income taxes.
The principal sources of deferred income taxes represent differences in
depreciation due to different depreciation methods for financial and tax
purposes and timing differences of accrued vacation, differing methods for
recording bad debt expense, and net operating loss carryforwards of
subsidiaries.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense was $157 in
1997.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Unless otherwise indicated, the fair values of all reported assets and
liabilities which represent financial instruments (none of which are held for
trading purposes) approximate the carrying values of such amounts.
90
<PAGE>
AUTOMATED GRAPHIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The fair value of the Company's long-term debt is estimated based on the
quoted market prices and interest rates for comparable instruments or on the
current rate available to the Company for debt with the same remaining security.
CONSIDERATION OF CREDIT RISK
The Company maintains cash in bank deposit accounts at local financial
institutions. Cash and cash equivalents are invested in short-term liquid
investments. The balances, at times, may exceed federally insured limits. At
October 31, 1997, the Company's balances exceeded insured limits by
approximately $1,202. Credit risk associated with receivables is limited due to
the large number of customers comprising the Company's customer base.
NOTE 2 -- RECEIVABLES
Receivables consist of:
Trade:
Billed.......................... $ 6,600
Unbilled........................ 1,846
Other................................ 189
---------
8,635
Less: Allowance for Doubtful
Accounts....................... 232
---------
$ 8,403
=========
Bad debt expense was $175 in 1997.
NOTE 3 -- INVENTORY
Inventory consists of:
Materials............................ $ 1,102
Supplies............................. 291
---------
$ 1,393
=========
91
<PAGE>
AUTOMATED GRAPHIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 4 -- INVESTMENTS IN SECURITIES
Following are the market values and original cost of securities classified
as available for sale at October 31, 1997:
UNREALIZED
HOLDING
MARKET COST GAIN (LOSS)
--------- --------- ------------
Equity Securities.................... $ 140 $ 138 $ 2
U.S. Treasury Bills:
Maturing Within One Year........ 502 502 --
Maturing After One Year Through
Five Years.................... 476 476 --
State and Municipal Obligations:
Maturing Within One Year........ 81 81 --
Maturing After One Year Through
Five Years.................... 1,687 1,688 (1)
Maturing After Five Years
Through Ten Years............. 159 159 --
Maturing After Ten Years........ 47 47 --
--------- --------- ---
$ 3,092 $ 3,091 $ 1
========= ========= ===
Debt securities are grouped together by years to maturity. All have been
classified by management as available for sale. At October 31, 1997, money
market and mutual funds of $679 are considered to be cash and cash equivalents.
NOTE 5 -- LONG-TERM DEBT
NOTES PAYABLE
Mellon Bank, $2,000 note dated March
24, 1996, requires monthly
principal payments of $21 plus
interest at a floating and
fluctuating rate equal to the
overnight Money Market rate plus
2.0% per annum, due March 1, 2000,
secured by Company assets.......... $ 1,354
Mellon Bank, monthly principal
payments are pursuant to a
specified schedule plus interest at
7.15%, due March, 1999. Secured by
virtually all of the Company's
assets, subject to certain
restricted covenants............... 3,898
First Virginia Bank, 36 monthly
payments of $.6, interest at 8.74%
per annum, due February, 1998,
secured by equipment............... 2
Former stockholder, repurchase of
stock at $169, paid in five annual
installments of $34 each plus
interest at 6.0% per annum. First
installment was due November 1,
1996, and each November 1
thereafter......................... 104
Former stockholder, repurchase of
stock at $132 paid in five annual
installments of $34 which includes
interest at 8.25% per annum. First
installment was due July 1, 1997
and each July 1 thereafter......... 109
---------
Total........................... 5,467
Less: Current portion of
long-term debt................. 657
---------
Long-Term Debt.................. $ 4,810
=========
CAPITAL LEASE OBLIGATIONS
Equipment lease, interest rate of
7.6%, $6 due per month beginning
February 1997...................... $ 316
Less: Amount representing
interest....................... 47
---------
Present value of net minimum lease
payments........................... $ 269
=========
92
<PAGE>
AUTOMATED GRAPHIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The total amount of interest cost related to all long-term debt incurred
for 1997 was $453, all of which was charged to operations.
The combined aggregate amounts of maturities for each of the next five
years are as follows:
YEAR ENDED NOTES CAPITAL
OCTOBER 31, PAYABLE LEASES
------------ ------- -------
1998............................... $ 657 $ 74
1999............................... 3,861 74
2000............................... 919 74
2001............................... 30 75
2002............................... -- 19
------- -------
$ 5,467 $ 316
======= =======
NOTE 6 -- ACCRUED LIABILITIES
Accrued liabilities consist of:
Payroll, Commissions, and Earned
Vacation........................... $ 1,597
Payroll Taxes........................ 112
Sales and Use Taxes.................. 121
Interest Payable..................... 14
Profit Sharing Contribution.......... 686
Other................................ 19
---------
$ 2,549
=========
NOTE 7 -- LEASE COMMITMENTS
AUTOMATED GRAPHIC SYSTEMS, INC.
The Company is obligated under a 15-year related party non-cancelable
operating lease dated August 20, 1990, for the premises and land referred to as
the Automated Graphic Systems, Inc., located at DeMarr Road in White Plains,
Maryland. The building is owned by DeMarr Partnership which is a partnership
between John F. Green and Mark A. Edgar. Mr. Green is an officer and principal
owner of Automated Graphic Systems, Inc. The lease calls for minimum monthly
rental payments of $52. The monthly rental payments are increased on an annual
basis by the percentage increase in the Consumer Price Index from the preceding
year.
The Company also leases delivery trucks and vans under various operating
leases with Ryder Truck Rental, Inc.
AUTOMATED GRAPHIC SYSTEMS -- OHIO, INC.
The Company leases delivery trucks under various operating leases. The
Company entered into an operating lease for its office/warehouse facility
effective August 1997 for a period of ten years and three months with an option
to renew another five years. The lease calls for a monthly fixed rent of $23
with scheduled increases in the years 2000 and 2003. The Company is responsible
for repairs and maintenance, real estate taxes, and special assessments during
the term of the lease.
93
<PAGE>
AUTOMATED GRAPHIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
AUTOMATED GRAPHIC IMAGING, INC.
The Company was obligated under a lease dated August 1992 for equipment
that required 60 monthly payments of $4. Rental expense for this equipment in
1997 was $40. During the year ended October 31, 1997, this lease was paid in
full and the equipment was purchased.
The Company entered into a contract subsequent to year end to lease
equipment. The lease term is 60 months and payments will be $3 per month with a
purchase option of $16 at the end of the lease term. Deposits in the amount of
$24 were paid on this lease at October 31, 1997.
The Company was obligated under a non-cancellable five-year operating lease
dated April 1, 1992, for 1,600 square feet of space located in Washington, D.C.
The lease called for monthly payments of $5 plus a pro rata share of operating
and real estate tax expenses and 2.5 percent increases in the base rent
annually. Effective April 1, 1997, this lease was extended for one year. The
lease term calls for monthly payments of $5.
Aggregate minimum rentals as of October 31, 1997, for each of the next five
years for all operating leases are as follows:
OCTOBER 31, TOTAL
------------ ---------
1998............................... $ 1,035
1999............................... 1,012
2000............................... 986
2001............................... 984
2002............................... 970
---------
$ 4,987
=========
Rental expense for the year ended October 31, 1997, was $696.
NOTE 8 -- SALE OF PROPERTY AND EQUIPMENT
The Company sold land and building with a combined cost of $2,123 on July
1, 1997, and realized a gain of $1,336 which is included in other income in the
consolidated statement of income.
NOTE 9 -- INCOME TAXES
The provision for income taxes consists of the following:
Current Expense
Federal......................... $ 922
State........................... 123
---------
1,045
---------
Deferred Tax Expense
Federal......................... 165
State........................... 25
---------
190
---------
Provision for Income Taxes........... $ 1,235
=========
94
<PAGE>
AUTOMATED GRAPHIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Automated Graphic Imaging, Inc. has a state net operating loss carryforward
of approximately $9 at October 31, 1997. This carryforward expires on October
31, 2011.
In addition, the Company has a state manufacturing tax credit of $430 from
1996 that may be carried forward and will expire on October 31, 1999. At October
31, 1997, the state manufacturing tax credit carryforward has been reduced by
valuation allowance against the deferred tax asset. The valuation allowance has
also been reduced at October 31, 1997, by the current year tax benefit of $86.
Total Deferred Tax Assets,
Noncurrent......................... $ 45
Total Deferred Tax Liability,
Noncurrent......................... (483)
---------
(438)
Total Deferred Tax Assets, Current... 482
Total Valuation Allowance............ (394)
---------
88
---------
Net Deferred Tax Asset (Liability)... $ (350)
=========
NOTE 10 -- EMPLOYEES STOCK OWNERSHIP PLAN
In 1984, the Board of Directors of Automated Graphic Systems, Inc., adopted
an Employee Stock Ownership Plan. The Company contributes in cash or stock an
amount determined by an appropriate resolution of the Board of Directors. In
1993, the Board of Directors of Automated Graphic Imaging, Inc., and Automated
Graphic Systems-Ohio, Inc., adopted participation in the Automated Graphic
Systems, Inc. Employee Stock Ownership Plan (ESOP). Participants are not
permitted to make contributions. The contributions for the year ended October
31, 1997 was $906. All employees who have completed one year of service are
eligible to participate.
NOTE 11 -- TRANSACTIONS WITH RELATED PARTIES
Automated Graphic Systems, Inc., is located in White Plains, Maryland. The
building is owned by a partnership in which an officer of the Company is a
partner. The lease calls for minimum monthly rental payments of $52, with annual
increases based on the increase in the Consumer Price Index over the preceding
year. Rent expense totalled $537 in 1997.
NOTE 12 -- LINE OF CREDIT
The Company has a $3,000 unused line of credit with Mellon Bank bearing
interest at 2 percent above the overnight money market rate. This line of credit
expires June 1999.
NOTE 13 -- SELF-INSURED MEDICAL BENEFITS PLAN
Automated Graphic Systems, Inc. and Automated Graphic Imaging, Inc., are
self-insured for their medical benefits plan, which covers all full-time
employees who have completed 30 days of employment. Participants pay a monthly
charge for individual or family coverage. The Company maintains reinsurance
coverage with individual stop-loss limits of $20 per participant, and an
aggregate stop-loss limit based on the total number of participants in a
calendar year. Medical benefit expenses incurred for the year ended October 31,
1997, was $601.
NOTE 14 -- 401(K) PROFIT SHARING PLAN
The Company has a 401(k) profit sharing plan offered to employees with more
than one year of service. Employees who are eligible may elect to withhold
between 1.0 percent and 15.0 percent of
95
<PAGE>
AUTOMATED GRAPHIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
compensation. The plan allows for employer matching contributions on a
discretionary basis. The Company made no contributions to this plan in 1997.
NOTE 15 -- COMMITMENTS
Pursuant to agreements between the Company and certain
shareholder/employees, the Company is obligated to purchase all shares of
Automated Graphic Systems, Inc. common stock owned by these
shareholder/employees upon termination of employment. The Company has issued
options, which have not been exercised, covering a total of 156 shares. If these
options were exercised and shares issued, such shares would be subject to
repurchase under these agreements.
NOTE 16 -- INTERIM FINANCIAL STATEMENTS (UNAUDITED)
The accompanying interim financial statements as of July 31, 1998 and 1997
and for the nine month periods then ended have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with Article 10 of Regulation S-X. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation of interim results have been included. Results of operations for
interim periods are not necessarily indicative of the results that might be
expected in any future period.
NOTE 17 -- SUBSEQUENT EVENTS (UNAUDITED)
On September 28, 1998, the Company, the Employee Stock Ownership Plan, and
the individual AGS stockholders signed an Aggrement and Plan of Reorganization
to be acquired by Consolidated Graphics, Inc., a Texas corporation. Consummation
of the transaction is subject, among other things, to approval by the
stockholders of the Company.
96
<PAGE>
(b) Pro forma financial information.
The following unaudited pro forma combined financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
of CGX and the Audited Companies.
The unaudited pro forma combined financial statements give effect to the
acquisitions of the Audited Companies (included as "Individually Insignificant
Acquisitions" in the unaudited combined financial statements). All of the
acquisitions were or will be accounted for under the purchase method of
accounting. These unaudited pro forma combined financial statements are based on
the historical financial statements of the Audited Companies and estimates and
assumptions set forth below and in the notes to the unaudited pro forma combined
financial statements.
The unaudited pro forma combined balance sheet as of September 30, 1998
combines the historical consolidated balance sheet of CGX on September 30, 1998
(including those Audited Companies acquired prior to September 30, 1998) and the
historical combined balance sheets of the four Audited Companies acquired or
deemed probable to be acquired subsequent to September 30, 1998, as if such
subsequent acquisitions had occurred on September 30, 1998.
The accompanying unaudited pro forma statement of operations for the year
ended March 31, 1998 combines the historical consolidated results of operations
of CGX and the historical combined results of operations of the eight Audited
Companies for the most recent fiscal year-end (with such fiscal year-ends
adjusted to be within 93 days of March 31, 1998, when necessary), as if such
acquisitions had occurred on April 1, 1997. The accompanying unaudited pro forma
statement of operations for the six months ended September 30, 1998 combines the
historical consolidated results of operations of CGX and the historical combined
results of operations of the four Audited Companies acquired or deemed probable
to be required subsequent to September 30, 1998 for the six months ended
September 30, 1998, and the preacquisition historical combined results of
operations of the four Audited Companies acquired prior to September 30, 1998,
as if the acquisitions of all eight Audited Companies had occurred on April 1,
1998.
The use of the non-conforming historical year-ends of the Audited Companies
in the unaudited pro forma statements of operations for the year ended March 31,
1998 and the six months ended September 30, 1998 resulted in several periods
which were excluded from or included more than once in these unaudited pro forma
statements of operations. The following table details the Audited Companies and
the periods which were excluded from or included more than once in the unaudited
pro forma statements of operations:
<TABLE>
<CAPTION>
PERIODS INCLUDED IN PRO FORMA
STATEMENTS
-----------------------------
6 MONTHS PERIODS
YEAR ENDED ENDED EXCLUDED
AUDIT ACQUISITION MARCH 31, SEPTEMBER 30, FROM
AUDITED COMPANY PERIOD DATE 1998 1998 PRO FORMAS
- ------------------------------------- ----------- -------------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tursack Inc.......................... YE 12/31/97 April 1998 YE 12/31/97 N/A 1/1/98-3/31/98
Image System, Inc.................... YE 12/31/97 May 1998 YE 12/31/97 4/1/98-4/30/98 1/1/98-3/31/98
Woodman Printing Enterprises......... YE 12/31/97 June 1998 YE 12/31/97 4/1/98-5/31/98 1/1/98-3/31/98
Printing Corporation of America...... YE 7/31/98 September 1998 YE 6/30/98 4/1/98-8/31/98 N/A
Graphic Technology of
Maryland, Inc...................... YE 12/31/97 November 1998 YE 12/31/97 4/1/98-9/30/98 1/1/98-3/31/98
The McKay Press, Inc................. YE 12/31/97 November 1998 YE 12/31/97 4/1/98-9/30/98 1/1/98-3/31/98
Mount Vernon Printing Company........ YE 6/30/98 December 1998 YE 6/30/98 4/1/98-9/30/98 N/A
Automated Graphic Systems, Inc. ..... YE 10/31/97 Probable YE 3/31/98 4/1/98-9/30/98 N/A
</TABLE>
PERIODS
INCLUDED
IN BOTH
AUDITED COMPANY PRO FORMAS
- ------------------------------------- ---------------
Tursack Inc.......................... N/A
Image System, Inc.................... N/A
Woodman Printing Enterprises......... N/A
Printing Corporation of America...... 4/1/98-6/30-98
Graphic Technology of
Maryland, Inc...................... N/A
The McKay Press, Inc................. N/A
Mount Vernon Printing Company........ 4/1/98-6/30/98
Automated Graphic Systems, Inc. ..... N/A
The historical sales and pretax income excluded from the unaudited pro
forma statements of operations totaled 25,855,119 and 347,940. The historical
sales and pretax income included in both the unaudited pro forma statements of
operations for the year ended March 31, 1998 and the six months ended September
30, 1998 totaled 9,584,071 and (273,114).
CGX has preliminarily analyzed the savings that it expects to realize from
the reductions in salaries, bonuses, benefits and interest expense and through
CGX reduced purchase costs of paper, ink
97
<PAGE>
and pre-press supplies. To the extent that owners of the Purchased Companies
have contractually agreed to prospective reductions in salaries, bonuses,
benefits and lease payments and to the extent that differences in interest and
purchase costs can be calculated, these differences have been reflected in the
unaudited pro forma combined statements of operations. With respect to other
potential cost savings, CGX has not quantified these savings.
The pro forma adjustments are based on preliminary estimates, available
information and certain assumptions that CGX management deems appropriate and
may be revised as additional information becomes available. The pro forma
financial data does not purport to represent what CGX's financial position or
results of operations would actually have been if such transactions in fact had
occurred on those dates and are not necessarily representative of CGX's
financial position or results of operations for any future period. Since the
Audited Companies were not under common control or management during the entire
period covered by the pro forma combined financial statements, these results may
not be comparable to, or indicative of, future performance.
98
<PAGE>
CONSOLIDATED GRAPHICS, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
---------------------------
INDIVIDUALLY
INSIGNIFICANT PRO FORMA PRO FORMA
CGX ACQUISITIONS ADJUSTMENTS COMBINED
---------- -------------- ----------- ----------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 5,869 $ 986 $-- $ 6,855
Accounts receivable, net........ 70,865 18,499 -- 89,364
Inventories..................... 21,127 4,354 -- 25,841
Prepaid expenses................ 2,662 956 -- 3,618
Deferred income taxes........... -- 162 -- 162
---------- -------------- ----------- ----------
Total current assets....... 100,523 24,957 -- 125,480
PROPERTY AND EQUIPMENT, net.......... 203,244 16,063 8,628(c) 227,935
GOODWILL, net........................ 71,421 19 25,508(d) 96,948
INVESTMENT IN SECURITIES............. -- 3,193 -- 3,193
OTHER ASSETS......................... 3,150 313 -- 3,463
---------- -------------- ----------- ----------
$ 378,338 $ 44,545 $34,136 $457,019
========== ============== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term
debt.......................... $ 2,875 $ 6,984 $-- $ 9,859
Capital lease
obligations -- current........ -- 85 -- 85
Accounts payable................ 20,928 7,484 -- 28,412
Accrued liabilities............. 29,758 2,833 -- 32,591
Income taxes payable............ 1,558 317 -- 1,875
Other current liabilities....... -- 507 -- 507
---------- -------------- ----------- ----------
Total current
liabilities............. 55,119 18,210 -- 73,329
LONG-TERM DEBT, net of current
portion............................ 136,104 3,551 20,265(b) 159,920
CAPITAL LEASE OBLIGATIONS............ -- 1,040 -- 1,040
DEFERRED INCOME TAXES................ 22,099 914 3,451(c) 26,464
COMMITMENTS AND CONTINGENCIES........ -- -- -- --
SHAREHOLDERS' EQUITY:
Unrealized gains on
investments................... -- 1 (1)(e) --
Common stock.................... 140 4,950 5(a) 145
(4,950)(e)
Additional paid-in capital...... 105,297 2,046 31,245(a) 136,542
(2,046)(e)
Treasury stock.................. -- (62) 62(e) --
Retained earnings............... 59,579 13,895 (13,895)(e) 59,579
---------- -------------- ----------- ----------
Total shareholders'
equity.................. 165,016 20,830 10,420 196,266
---------- -------------- ----------- ----------
$ 378,338 $ 44,545 $34,136 $457,019
========== ============== =========== ==========
</TABLE>
The accompanying notes are an integral part of these pro forma combined
financial statements.
99
<PAGE>
CONSOLIDATED GRAPHICS, INC.
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
FOR THE YEAR ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
---------------------------
INDIVIDUALLY
INSIGNIFICANT PRO FORMA PRO FORMA
CGX ACQUISITIONS ADJUSTMENTS COMBINED
---------- -------------- ----------- ---------
<S> <C> <C> <C> <C>
SALES................................ $ 231,282 $192,106 $(6,151)(i) $ 417,237
COST OF SALES........................ 157,906 142,421 1,484(a) 294,080
(3,372)(d)
(314)(e)
(4,045)(i)
---------- -------------- ----------- ---------
Gross profit.................... 73,376 49,685 96 123,157
SELLING EXPENSES..................... 22,365 18,851 (157)(e) 39,334
(1,319)(f)
(406)(i)
GENERAL AND ADMINISTRATIVE
EXPENSES........................... 17,628 22,870 371(a) 39,958
1,515(b)
(157)(e)
(914)(f)
(126)(g)
(333)(h)
(896)(i)
---------- -------------- ----------- ---------
Operating Income................ 33,383 7,964 2,518 43,865
INTEREST EXPENSE..................... 3,844 4,035 613(c) 8,492
INTEREST INCOME...................... (124) (562) (48)(i) (734)
OTHER EXPENSE (INCOME)............... -- 23 (4)(i) 19
---------- -------------- ----------- ---------
Income before income taxes...... 29,663 4,468 1,957 36,088
INCOME TAXES......................... 11,273 1,572 1,601(j) 14,445
---------- -------------- ----------- ---------
NET INCOME........................... $ 18,390 $ 2,896 $ 368 $ 21,643
========== ============== =========== =========
BASIC EARNINGS PER SHARE(k).......... $ 1.46 $ 1.59
========== =========
DILUTED EARNINGS PER SHARE(k)........ $ 1.40 $ 1.53
========== =========
</TABLE>
The accompanying notes are an integral part of these pro forma financial
statements.
100
<PAGE>
CONSOLIDATED GRAPHICS, INC.
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
--------------------------
INDIVIDUALLY
INSIGNIFICANT PRO FORMA PRO FORMA
CGX ACQUISITIONS ADJUSTMENTS COMBINED
---------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
SALES................................ $ 188,370 $59,235 $-- $ 247,605
COST OF SALES........................ 128,883 42,774 445(a) 170,988
(1,082)(d)
(32)(e)
---------- ------------- ----------- ---------
Gross profit.................... 59,487 16,461 669 76,617
SELLING EXPENSES..................... 18,463 6,455 (16)(e) 24,297
(605)(f)
GENERAL AND ADMINISTRATIVE EXPENSES.. 14,542 7,615 111(a) 22,384
574(b)
(16)(e)
(442)(f)
---------- ------------- ----------- ---------
Operating income................ 26,482 2,391 1,063 29,936
INTEREST EXPENSE..................... 3,509 836 384(c) 4,729
INTEREST INCOME...................... (36) (22) -- (58)
OTHER (INCOME)/EXPENSE............... -- (136) -- (136)
---------- ------------- ----------- ---------
Income before income taxes...... 23,009 1,713 679 25,401
INCOME TAXES......................... 8,975 483 703(g) 10,161
---------- ------------- ----------- ---------
NET INCOME........................... $ 14,034 $ 1,230 $ (24) $ 15,240
========== ============= =========== =========
BASIC EARNINGS PER SHARE(h).......... $ 1.06 $ 1.08
========== =========
DILUTED EARNINGS PER SHARE(h)........ $ 1.03 $ 1.05
========== =========
</TABLE>
The accompanying notes are an integral part of these pro forma financial
statements.
101
<PAGE>
CONSOLIDATED GRAPHICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. ACQUISITION OF COMPANIES:
During the period April 1, 1998 and through September 30, 1998, CGX
acquired eleven businesses for approximately $28.7 million of cash and 934,854
shares of Common Stock. Subsequent to September 30, 1998, and through January
28, 1999, CGX has acquired four businesses for approximately $73 million of cash
(funded through borrowings under the Company's credit facility) and 280,636
shares of Common Stock. All of these acquisitions were accounted for using the
purchase method of accounting. The accompanying balance sheets include
allocations of the respective purchase prices initially assigned to the assets
acquired and liabilities assumed based on preliminary estimates of fair value
and may be revised as additional information concerning the valuation of such
assets and liabilities becomes available.
2. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:
Pro forma adjustments to the accompanying unaudited pro forma combined
balance sheet reflect the estimated purchase price allocation of the
acquisitions completed subsequent to September 30, 1998 as if they had occurred
on September 30, 1998, under the purchase method of accounting, including:
(a) The issuance of an estimated 532,704 shares of CGX common stock, par
value $.01 per share, for total consideration of $31,250 (based upon
the closing price of CGX common stock on the applicable acquisition
dates).
(b) Borrowings of $20,265 to finance the cash portion of the aggregate
purchase price and to pay estimated transaction costs.
(c) Adjustments to record the estimated fair value of property and
equipment and the related deferred income tax liability.
(d) Goodwill based on the excess of the total consideration paid over the
fair value of assets and liabilities acquired.
(e) The elimination of the historical common stock, additional paid-in
capital, treasury stock and retained earnings of the acquired
companies.
3. UNAUDITED PRO FORMA COMBINED INCOME STATEMENT ADJUSTMENTS:
YEAR ENDED MARCH 31, 1998
Pro forma adjustments to the accompanying unaudited pro forma combined
income statement for the year ended March 31, 1998 reflect the income statement
effects of the estimated purchase price allocation of the acquisitions as if
they had occurred on April 1, 1997, under the purchase method of accounting,
including:
(a) Additional depreciation expense based on the fair value of the
property and equipment acquired.
(b) Amortization of additional goodwill based on a forty-year amortization
period.
(c) Additional interest expense on incremental borrowings, less cash and
marketable securities acquired, based on an average interest rate of
6.25% per annum, net of interest savings achieved by refinancing
certain assumed debt with borrowings on CGX revolving line of credit.
(d) Reduced purchase cost of paper, ink and pre-press supplies based on
contractual pricing from CGX vendors versus the Audited Companies
historical costs.
102
<PAGE>
CONSOLIDATED GRAPHICS, INC.
NOTES TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(e) Reduced costs associated with differences between CGX and the Audited
Companies 401k and other retirement savings plans.
(f) Reductions in salaries and benefits contractually agreed to by
certain former owners of the Audited Companies.
(g) Discontinuation of a consulting agreement historically maintained by
one of the Audited Companies.
(h) Difference between the depreciation expense of a building purchased
and the rent payments made to the previous owner.
(i) Records the elimination of the operating results of a subsidiary of
one of the Audited Companies which was sold to a third party
concurrent with the acquisition of the company by CGX.
(j) Net incremental income tax expense adjustment reflecting tax
provision for the Audited Companies which previously held
S-corporation tax status, CGX's higher marginal federal income tax
rate and the tax effect of the above adjustments, excluding any
goodwill amortization which will not be deductible for income tax
purposes.
(k) The weighted average number of common shares outstanding used in the
calculation of basic and diluted earnings per share reflect the
historical share amounts for CGX of 12,597,510 and 13,112,023 shares,
respectively plus, in each case, 1,048,748 shares which were issued in
the acquisitions (based on the closing price of CGX common stock on
the applicable acquisition dates).
103
<PAGE>
CONSOLIDATED GRAPHICS, INC.
NOTES TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SIX MONTHS ENDED SEPTEMBER 30, 1998
Pro forma adjustments to the accompanying unaudited pro forma combined
income statement for the six-month period ended September 30, 1998 reflect the
income statement effects of the estimated purchase price allocation of the
acquisitions as if they had occurred on April 1, 1997, under the purchase method
of accounting, including:
(a) Additional depreciation expense based on the fair value of the
property and equipment acquired.
(b) Amortization of additional goodwill based on a forty-year amortization
period.
(c) Additional interest expense on incremental borrowings, less cash and
marketable securities acquired, based on an average interest rate of
6.25% per annum, net of interest savings achieved by refinancing
certain assumed debt with borrowings on CGX revolving line of credit.
(d) Reduced purchase cost of paper, ink and pre-press supplies based on
contractual pricing from CGX vendors versus the Audited Companies
historical costs.
(e) Reduced costs associated with differences between the CGX and the
Audited Companies 401k and other retirement plans.
(f) Reduction in salaries and benefits contractually agreed to by certain
former owners of the Audited Companies.
(g) Net incremental income tax expense adjustment reflecting tax
provision for the Audited Companies which previously held
S-corporation tax status, CGX's higher marginal federal income tax
rate and the tax effect of the above adjustments, excluding goodwill
amortization which will not be deductible for income tax purposes.
(h) The weighted average number of common shares outstanding used in the
calculation of basic and diluted earnings per share reflect the
historical share amounts for CGX of 13,226,510 and 13,637,272 shares,
respectively, plus, in each case, 892,612 shares which are estimated
to be issued in the acquisitions (based on the closing price of CGX
common stock on the applicable acquisition dates).
104
<PAGE>
(c) Exhibits
The following exhibits are filed with this report:
EXHIBIT
NO. DESCRIPTION OF THE EXHIBIT
- ------------------------ ------------------------------------------------------
23.1 -- Consent of Arthur Andersen LLP
23.2 -- Consent of KPMG LLP
23.3 -- Consent of Grant Thornton LLP
23.4 -- Consent of Kaufman Davis PC
23.5 -- Consent of Watkins, Meegan, Drury & Company L.L.C.
105
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
CONSOLIDATED GRAPHICS
REGISTRANTHHHHH
By: _________________________________
G. CHRISTOPHER COLVILLE
EXECUTIVE VICE PRESIDENT --
MERGERS AND ACQUISITIONS,
CHIEF FINANCIAL AND ACCOUNTING
OFFICER
AND SECRETARY
Date: January 28, 1999
106
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference into Consolidated Graphics, Inc. previously filed Registration
Statement Files No. 333-42881 on Form S-3, No. 333-57927 on Form S-3, No.
333-63455 on Form S-3, No. 333-65677 on Form S-3, No. 333-62317 on Form S-4, No.
33-87192 on Form S-8, No. 333-13737 on Form S-8, No. 333-18435 on Form S-8 and
No. 333-66019 on Form S-8 of our report dated March 13, 1998, with respect to
the financial statements of Tursack Inc. and related company as of December 31,
1997, and for the year then ended, which appears in the Form 8-K of Consolidated
Graphics, Inc. dated January 28, 1999.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Houston, Texas
January 28, 1999
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference into Consolidated Graphics,
Inc. previously filed Registration Statement Files No. 333-42881 on Form S-3,
No. 333-57927 on Form S-3, No. 333-63455 on Form S-3, No. 333-65677 on Form S-3,
No. 333-62317 on Form S-4, No. 33-87192 on Form S-8, No. 333-13737 on Form S-8,
No. 333-18435 on Form S-8 and No. 333-66019 on Form S-8 of our report dated
April 14, 1998, with respect to the balance sheet of Image Systems, Inc. as of
December 31, 1997, and the related statements of income, shareholders equity and
cash flows for the year then ended, our report dated September 8, 1998, with
respect to the balance sheet of Printing Corporation of America as of July 31,
1998, and the related statements of income, shareholders' equity and cash flows
for the year then ended, our report dated August 28, 1998, with respect to the
balance sheet of Graphic Technology of Maryland, Inc. as of December 31, 1997,
and the related statements of income, shareholders' equity and cash flows for
the year then ended and our report dated August 28, 1998 with respect to the
balance sheet of The McKay Press, Inc. as of December 31, 1997, and the related
statements of income, stockholder's equity and cash flows for the year then
ended, which reports appear in the Form 8-K of Consolidated Graphics, Inc. dated
January 28, 1999.
/s/ KPMG LLP
Houston, Texas
January 28, 1999
EXHIBIT 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation by reference into Consolidated Graphics, Inc. previously filed
Registration Statement Files No. 333-42881 on Form S-3, No. 333-57927 on Form
S-3, No. 333-63455 on Form S-3, No. 333-65677 on Form S-3, No. 333-62317 on Form
S-4, No. 33-87192 on Form S-8, No. 333-13737 on Form S-8, No. 333-18435 on Form
S-8 and No. 333-66019 on Form S-8 of our report dated March 14, 1998, with
respect to the financial statements of Woodman Printing Enterprises as of
December 31, 1997, and for the year then ended, which appears in the Form 8-K of
Consolidated Graphics, Inc. dated January 28, 1999.
/s/ GRANT THORNTON LLP
GRANT THORNTON LLP
Houston, Texas
January 28, 1999
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITORS
As independent auditors, we hereby consent to the incorporation by
reference into Consolidated Graphics, Inc. previously filed Registration
Statement Files No. 333-42881 on Form S-3, No. 333-
57927 on Form S-3, No. 333-63455 on Form S-3, No. 333-65677 on Form S-3, No.
333-62317 on Form S-4, No. 33-87192 on Form S-8, No. 333-13737 on Form S-8, No.
333-18435 on Form S-8 and No. 333-66019 on Form S-8 of our report dated August
13, 1998, with respect to the financial statements of Carty Enterprises, Inc.
T/A Mount Vernon Printing Company as of June 30, 1998, and for the year then
ended, which appears in the Form 8-K of Consolidated Graphics, Inc. dated
January 28, 1999.
/s/ KAUFMAN DAVIS PC
KAUFMAN DAVIS PC
Houston, Texas
January 28, 1999
EXHIBIT 23.5
CONSENT OF INDEPENDENT AUDITORS
As independent auditors, we hereby consent to the incorporation by
reference into Consolidated Graphics, Inc. previously filed Registration
Statement Files No. 333-42881 on Form S-3, No. 333-
57927 on Form S-3, No. 333-63455 on Form S-3, No. 333-65677 on Form S-3, No.
333-62317 on Form S-4, No. 33-87192 on Form S-8, No. 333-13737 on Form S-8, No.
333-18435 on Form S-8 and No. 333-66019 on Form S-8 of our report dated August
24, 1998, with respect to the financial statements of Automated Graphic Systems,
Inc. as of October 31, 1997, and for the year then ended, which appears in the
Form 8-K of Consolidated Graphics, Inc. dated January 28, 1999.
/s/ WATKINS, MEEGAN, DRURY & COMPANY, L.L.C.
WATKINS, MEEGAN, DRURY & COMPANY, L.L.C.
Houston, Texas
January 28, 1999
