UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________
COMMISSION FILE NUMBER 0-24068
-------------------
CONSOLIDATED GRAPHICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 76-0190827
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
5858 WESTHEIMER ROAD, SUITE 200
HOUSTON, TEXAS 77057
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (713) 787-0977
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of Common Stock, par value $.01 per share, of the
Registrant outstanding at January 31, 1999 was 14,339,026.
<PAGE>
CONSOLIDATED GRAPHICS, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998
INDEX
PAGE
Part I -- Financial Information
Item 1 -- Financial Statements
Consolidated Balance Sheets at December 31, 1998 and March 31, 1998... 1
Consolidated Income Statements for the Three and Nine Months Ended
December 31, 1998 and 1997.......................................... 2
Consolidated Statements of Cash Flows for the Nine Months Ended
December 31, 1998 and 1997.......................................... 3
Notes to Consolidated Financial Statements............................ 4
Item 2 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 6
Part II -- Other Information
Item 1 -- Legal Proceedings.............................................. 13
Item 2 -- Changes in Securities and Use of Proceeds...................... 13
Item 3 -- Defaults upon Senior Securities................................ 13
Item 4 -- Submission of Matters to a Vote of Security Holders............ 13
Item 5 -- Other Information.............................................. 13
Item 6 -- Exhibits and Reports on Form 8-K............................... 13
Signatures.................................................................. 15
i
<PAGE>
CONSOLIDATED GRAPHICS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, MARCH 31,
1998 1998
--------- --------
ASSETS (UNAUDITED) (AUDITED)
CURRENT ASSETS:
Cash and cash equivalents .................... $ 11,365 $ 5,268
Accounts receivable, net ..................... 76,952 51,008
Inventories .................................. 22,251 13,074
Prepaid expenses ............................. 4,137 2,129
-------- --------
Total current assets ..................... 114,705 71,479
PROPERTY AND EQUIPMENT, net ...................... 216,490 135,892
GOODWILL, net .................................... 93,436 28,157
OTHER ASSETS ..................................... 5,990 2,117
======== ========
$430,621 $237,645
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ............ $ 2,854 $ 2,438
Accounts payable ............................. 40,468 22,276
Accrued liabilities .......................... 31,016 18,863
Income taxes payable ......................... 1,558 33
-------- --------
Total current liabilities ................ 75,896 43,610
LONG-TERM DEBT, net of current portion ........... 143,215 73,030
DEFERRED INCOME TAXES ............................ 23,437 15,673
COMMITMENTS AND CONTINGENCIES .................... -- --
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 100,000,000 shares
authorized;
14,318,672 and 12,959,932 issued and
outstanding .............................. 143 129
Additional paid-in capital ................... 119,701 59,658
Retained earnings ............................ 68,229 45,545
-------- --------
Total shareholders' equity ............... 188,073 105,332
======== ========
$430,621 $237,645
======== ========
See accompanying notes to consolidated financial statements.
1
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CONSOLIDATED GRAPHICS, INC.
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-----------------------------------------
1998 1997 1998 1997
-------- -------- -------- --------
SALES .............................. $118,278 $ 60,977 $306,648 $165,015
COST OF SALES ...................... 81,128 41,626 210,011 112,856
-------- -------- -------- --------
Gross profit ................... 37,150 19,351 96,637 52,159
SELLING EXPENSES ................... 11,676 5,881 30,139 15,972
GENERAL AND ADMINISTRATIVE EXPENSES 9,155 4,622 23,697 12,568
-------- -------- -------- --------
Operating income ............... 16,319 8,848 42,801 23,619
INTEREST EXPENSE, net .............. 2,142 996 5,615 2,644
-------- -------- -------- --------
Pretax income .................. 14,177 7,852 37,186 20,975
INCOME TAXES ....................... 5,526 2,984 14,502 7,972
-------- -------- -------- --------
NET INCOME ......................... $ 8,651 $ 4,868 $ 22,684 $ 13,003
======== ======== ======== ========
BASIC EARNINGS PER SHARE ........... $ .61 $ .38 $ 1.68 $ 1.04
======== ======== ======== ========
DILUTED EARNINGS PER SHARE ......... $ .60 $ .37 $ 1.63 $ 1.00
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
2
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CONSOLIDATED GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
DECEMBER 31,
-------------------
1998 1997
--------- ---------
OPERATING ACTIVITIES:
Net income ...................................... $ 22,684 $ 13,003
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and amortization ................ 14,292 7,247
Deferred tax provision ....................... 2,325 2,371
Changes in assets and liabilities, net of
effects of acquisitions--
Accounts receivable ........................ 7,794 (2,737)
Inventories ................................ 2,944 2,942
Prepaid expenses ........................... (305) (280)
Other assets ............................... (2,650) (1,078)
Accounts payable and accrued liabilities ... (15,806) (1,552)
Income taxes payable ....................... 2,087 332
--------- ---------
Net cash provided by operating activities 33,365 20,248
--------- ---------
INVESTING ACTIVITIES:
Acquisitions of businesses, net of cash acquired (81,905) (28,265)
Purchases of property and equipment ............. (14,822) (7,483)
Proceeds from disposition of assets ............. 890 915
--------- ---------
Net cash used in investing activities ... (95,837) (34,833)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from revolving credit agreement ........ 230,068 150,021
Payments on revolving credit agreement .......... (158,749) (132,343)
Payments on long-term debt ...................... (2,956) (4,766)
Proceeds from exercise of stock options and other 206 855
--------- ---------
Net cash provided by financing activities 68,569 13,767
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,097 (818)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .... 5,268 3,636
========= =========
CASH AND CASH EQUIVALENTS AT END OF PERIOD .......... $ 11,365 $ 2,818
========= =========
See accompanying notes to consolidated financial statements.
3
<PAGE>
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements include the
accounts of Consolidated Graphics, Inc. and its wholly owned subsidiaries (the
"Company"). All intercompany accounts and transactions have been eliminated.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and the
Securities and Exchange Commission's rules and regulations for reporting interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation of
the accompanying unaudited consolidated financial statements have been included.
Operating results for the three and nine months ended December 31, 1998 are not
necessarily indicative of future operating results. Balance sheet information as
of March 31, 1998 has been derived from the 1998 annual audited consolidated
financial statements of the Company. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Form 10-K filed with the Securities and Exchange Commission in June
1998. Certain reclassifications have been made to fiscal 1998 amounts to conform
to the current year presentation.
Basic earnings per share are calculated by dividing net income by the
weighted average number of common shares outstanding. For the three months ended
December 31, 1998 and 1997, the basic weighted average shares outstanding were
14,154,400 and 12,681,971. For the nine months ended December 31, 1998 and 1997,
the basic weighted average shares outstanding were 13,535,290 and 12,552,523.
Diluted earnings per share reflect net income divided by the weighted average
number of common shares and dilutive stock options outstanding. For the three
months ended December 31, 1998 and 1997, the weighted average number of common
shares and dilutive stock options outstanding were 14,519,647 and 13,204,046.
For the nine months ended December 31, 1998 and 1997, the weighted average
number of common shares and dilutive stock options outstanding were 13,912,099
and 13,031,675.
The consolidated statements of cash flows provide information about the
sources and uses of cash and exclude the effects of non-cash transactions.
Significant non-cash transactions primarily include the issuance of common stock
and the issuance or assumption of debt in connection with the acquisition of
certain printing businesses (see Note 3. Acquisitions). Additionally, equipment
capital expenditures financed by the Company, totaling $3,614 for the nine
months ended December 31, 1998, and the effect of an accrual totaling $15,826 as
of December 31, 1998, related to the purchase of printing presses, are not
reflected in the accompanying consolidated statements of cash flows. The
following is a summary of cash paid for interest and income taxes (net of
refunds).
NINE MONTHS
ENDED
DECEMBER 31,
-----------------
CASH PAID FOR: 1998 1997
------- -------
Interest..................... $4,900 $2,619
Taxes ....................... $8,652 $5,668
4
<PAGE>
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
2. LONG-TERM DEBT
The following is a summary of the Company's long-term debt as of:
DECEMBER 31, MARCH 31
1998 1998
----------- --------
Revolving credit agreement $ 116,200 $ 44,881
Term equipment notes ..... 14,572 12,997
Other .................... 15,297 17,590
--------- ---------
146,069 75,468
Less current portion ..... (2,854) (2,438)
--------- ---------
$ 143,215 $ 73,030
========= =========
In August 1998, the Company amended its credit facility to increase the
borrowing capacity available under its $100 million revolving credit facility to
$200 million and extended the maturity date from May 31, 2000 to July 31, 2001.
Borrowings outstanding under the credit facility are unsecured and accrue
interest at a variable rate (an average of 6.23% per annum on December 31,
1998).
3. ACQUISITIONS
The Company completed the following acquisitions during the nine months
ended December 31, 1998:
COMPANY PRIMARY MARKET DATE
------- -------------- ----
Tursack, Inc. Philadelphia, Pennsylvania April 1998
Image Systems Milwaukee, Wisconsin May 1998
Printing, Inc. Wichita, Kansas June 1998
Graphic Communications San Diego, California June 1998
Wetzel Brothers Milwaukee, Wisconsin June 1998
Paragraphics San Francisco, California July 1998
Pride Printers Boston, Massachusetts July 1998
Lincoln Printing Fort Wayne, Indiana August 1998
Ironwood Litho Phoenix, Arizona August 1998
Rush Press/Arts &
Crafts Press San Diego, California September 1998
Printing Corporation of
America Baltimore, Maryland September 1998
Metropolitan Printing Bloomington, Indiana October 1998
Graphic Technology of
Maryland Annapolis Junction, Maryland November 1998
McKay Press Midland, Michigan November 1998
Mount Vernon Printing Landover, Maryland December 1998
To complete the aforementioned acquisitions, in the aggregate, the Company
paid cash of $33,752, issued 1,211,319 shares of its common stock and discharged
debt of the acquired businesses totaling $48,153.
5
<PAGE>
CONSOLIDATED GRAPHICS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSIONS CONTAIN FORWARD-LOOKING INFORMATION. READERS ARE
CAUTIONED THAT SUCH INFORMATION INVOLVES RISKS AND UNCERTAINTIES, INCLUDING
THOSE CREATED BY GENERAL MARKET CONDITIONS, COMPETITION AND THE POSSIBILITY THAT
EVENTS MAY OCCUR WHICH LIMIT THE ABILITY OF CONSOLIDATED GRAPHICS, INC. (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.
GENERAL
The Company, headquartered in Houston, Texas, is one of the fastest
growing commercial printing companies in the United States. As a leading
printing industry consolidator and the largest sheetfed commercial printer in
the United States, the Company has expanded its operations to include 46
printing companies nationwide as of January 31, 1999. Each printing business has
an established operating history (ranging from 11-120 years), experienced
management, solid customer relationships and a reputation for providing quality
products and service to its customers. The Company's printing businesses sell to
a broadly diversified customer base, including many major corporations.
The sales of the Company are derived from the production and sale of
customized printed materials by its printing businesses. All of the printing
businesses provide general commercial printing services relating to the
production of annual reports, training manuals, product and capability
brochures, direct mail pieces, catalogs and other promotional material, all of
which tend to be recurring in nature. Each printing business has its own sales,
estimating, customer service, pre-press, production, post-press and accounting
departments. The Company's headquarters provides its printing businesses with
certain administrative services, such as purchasing and human resources support,
and maintains centralized risk management, treasury, investor relations and
consolidated financial reporting activities.
The strategy of the Company is to generate growth in sales and profits
through an aggressive acquisition program, coupled with internal growth and
operational improvements at its existing businesses. The Company provides its
acquired businesses cost savings through master purchasing arrangements, access
to technology and capital, strategic counsel and a commitment to training
through a unique, comprehensive management development program. As a result,
operating income margins and efficiencies of newly acquired businesses, which
may be lower than those being achieved by other businesses of the Company,
typically improve as the operating strategies of the Company are fully
implemented.
The consolidated financial results of the Company in a given period may be
affected by the timing and magnitude of acquisitions. The consolidated operating
income margins of the Company in the periods following a significant acquisition
(or series of acquisitions) may be lower than historically reported consolidated
margins, depending upon the timing and extent to which an acquired business is
able to adapt to and implement the management practices of the Company.
The printing businesses of the Company primarily compete in the general
commercial printing sectors, which are characterized by individual orders from
customers for specific printing projects rather than long-term contracts.
Continued engagement for successive jobs is dependent upon, among other things,
the customer's satisfaction with the services provided. As such, the Company is
unable to predict, for more than a few weeks in advance, the number, size and
profitability of printing jobs its expects to produce.
6
<PAGE>
RESULTS OF OPERATIONS
The following tables set forth the Company's historical income statements
for the periods indicated:
THREE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
--------------- ---------------
1998 1997 1998 1997
------ ------ ------ ------
(in millions) (in millions)
Sales ................................. $118.3 $ 61.0 $306.6 $165.0
Cost of sales ......................... 81.1 41.6 210.0 112.9
------ ------ ------ ------
Gross profit ....................... 37.2 19.4 96.6 52.1
Selling expenses ...................... 11.7 5.9 30.1 16.0
General and administrative expenses ... 9.2 4.6 23.7 12.5
------ ------ ------ ------
Operating income ................... 16.3 8.9 42.8 23.6
Interest expense ...................... 2.1 1.0 5.6 2.6
------ ------ ------ ------
Pretax income ...................... 14.2 7.9 37.2 21.0
Income taxes .......................... 5.5 3.0 14.5 8.0
====== ====== ====== ======
Net income ......................... $ 8.7 $ 4.9 $ 22.7 $ 13.0
====== ====== ====== ======
The following tables set forth the components of income expressed as a
percentage of sales for the periods indicated:
THREE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
-------------- --------------
1998 1997 1998 1997
----- ----- ----- -----
Sales ................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales ......................... 68.6 68.3 68.5 68.4
----- ----- ----- -----
Gross profit ....................... 31.4 31.7 31.5 31.6
Selling expenses ...................... 9.9 9.6 9.8 9.7
General and administrative expenses ... 7.7 7.6 7.7 7.6
----- ----- ----- -----
Operating income ................... 13.8 14.5 14.0 14.3
Interest expense ...................... 1.8 1.6 1.8 1.6
----- ----- ----- -----
Pretax income ...................... 12.0 12.9 12.2 12.7
Income taxes .......................... 4.7 4.9 4.7 4.8
===== ===== ===== =====
Net income ......................... 7.3% 8.0% 7.5% 7.9%
===== ===== ===== =====
Acquisitions in fiscal 1998 and 1999 are the primary causes of the
increases in revenues and expenses for the fiscal 1999 periods compared to the
fiscal 1998 periods. Each of the Company's acquisitions in fiscal 1998 and 1999
have been accounted for under the purchase method of accounting; accordingly,
the Company's consolidated income statements reflect revenues and expenses of
acquired businesses only for post-acquisition periods.
7
<PAGE>
The following table sets forth the Company's 1998 and 1999 acquisitions
(collectively the "1998/99 Acquired Businesses") and indicates the period in
which each business was acquired.
FISCAL 1998 ACQUISITIONS:
Tucker Printers............................... April 1997
The Etheridge Company......................... July 1997
Georges and Shapiro........................... August 1997
Austin Printing............................... September 1997
Geyer Printing................................ October 1997
Superior Color Graphics....................... October 1997
The Otto Companies............................ October 1997
Walnut Circle Press........................... November 1997
Columbia Color................................ January 1998
StorterChilds Printing........................ January 1998
Heath Printers................................ January 1998
Fittje Bros. Printing......................... February 1998
Courier Printing.............................. March 1998
FISCAL 1999 ACQUISITIONS:
Tursack, Inc...................................April 1998
Image Systems..................................May 1998
Printing, Inc..................................June 1998
Graphic Communications.........................June 1998
Wetzel Brothers................................June 1998
Paragraphics...................................July 1998
Pride Printers.................................July 1998
Lincoln Printing...............................August 1998
Ironwood Litho.................................August 1998
Rush Press/Arts & Crafts Press.................September 1998
Printing Corporation of America................September 1998
Metropolitan Printing .........................October 1998
Graphic Technology of Maryland.................November 1998
McKay Press....................................November 1998
Mount Vernon Printing .........................December 1998
For more information regarding the fiscal 1998 acquisitions, refer to
"Notes to Consolidated Financial Statements" included in the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1998. For more
information regarding the fiscal 1999 acquisitions, refer to the accompanying
"Notes to Consolidated Financial Statements" included elsewhere herein.
8
<PAGE>
THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED WITH THREE MONTHS ENDED DECEMBER
31, 1997.
Sales increased 94% to $118.3 million for the three months ended December
31, 1998, from $61.0 million for the three months ended December 31, 1997. Sales
attributable to the 1998/99 Acquired Businesses accounted for this increase.
Gross profit increased 92% to $37.2 million for the three months ended
December 31, 1998, from $19.4 million for the three months ended December 31,
1997, due to the addition of the 1998/99 Acquired Businesses. Gross profit
margins at recently acquired businesses tend to be lower than the Company's
historical average, then improve as they begin to take full advantage of the
Company's operating strategies and national purchasing programs. Consequently,
gross profit as a percentage of sales decreased to 31.4% in the current quarter
from 31.7% in the corresponding period of the prior year because a larger
percentage of revenues during the period were generated by companies owned less
than one year.
Selling expenses increased 99% to $11.7 million for the three months ended
December 31, 1998, from $5.9 million for the three months ended December 31,
1997, due to the increased sales levels noted above. Selling expenses as a
percentage of sales increased to 9.9% in the current quarter from 9.6% in the
corresponding period of the prior year due to higher selling costs incurred at
newly acquired businesses.
General and administrative expenses increased 98% to $9.2 million for the
three months ended December 31, 1998, from $4.6 million for the three months
ended December 31, 1997. This increase is due to the addition of the 1998/99
Acquired Businesses and, to a lesser extent, an increase in headquarters
staffing in order to maintain a high level of service to the Company's acquired
businesses. General and administrative expenses as a percentage of sales
increased slightly to 7.7% in the current quarter as compared to 7.6% a year
ago.
Interest expense increased to $2.1 million for the three months ended
December 31, 1998, from $1.0 million for the three months ended December 31,
1997, primarily due to a net increase in borrowings under the Company's
revolving credit facility to finance, in part, the cash portions of the purchase
price of the 1998/99 Acquired Businesses.
Effective income tax rates reflect an increase to 39% in the current
quarter from 38% a year ago, reflecting a combination of factors, including
growth by acquisition in states with proportionately higher income tax rates,
the effect of nondeductible goodwill incurred in connection with certain
acquisitions and an increase in the Company's effective marginal federal income
tax rate.
NINE MONTHS ENDED DECEMBER 31, 1998 COMPARED WITH NINE MONTHS ENDED DECEMBER
31, 1997
Sales increased 86% to $306.6 million for the nine months ended December
31, 1998, from $165.0 million for the nine months ended December 31, 1997. Sales
attributable to the 1998/99 Acquired Businesses accounted for this increase.
Gross profit increased 85% to $96.6 million for the nine months ended
December 31, 1998, from $52.1 million for the nine months ended December 31,
1997, due to the addition of the 1998/99 Acquired Businesses. Gross profit as a
percentage of sales decreased slightly to 31.5% in the current year as compared
to 31.6% in the prior year due primarily to the effect of newly acquired
businesses as noted above.
Selling expenses increased 89% to $30.1 million for the nine months ended
December 31, 1998, from $16.0 million for the nine months ended December 31,
1997, due to the increased sales levels noted above. Selling expenses as a
percentage of sales increased slightly to 9.8% in the current year from 9.7% in
the prior year.
9
<PAGE>
General and administrative expenses increased 89% to $23.7 million for the
nine months ended December 31, 1998, from $12.5 million for the nine months
ended December 31, 1997. This increase is due to the addition of the 1998/99
Acquired Businesses and an increase in corporate staffing as discussed above.
General and administrative expenses as a percentage of sales increased slightly
to 7.7% in the current year from 7.6% in the prior year.
Interest expense increased to $5.6 million for the nine months ended
December 31, 1998, from $2.6 million for the nine months ended December 31,
1997, primarily due to a net increase in borrowings under the Company's
revolving credit facility to finance, in part, the cash portions of the purchase
price of the 1998/99 Acquired Businesses.
Effective income tax rates reflect an increase to 39% in the current year
from 38% in the prior year, due to the same combination of factors discussed
above.
LIQUIDITY AND CAPITAL RESOURCES
The primary cash uses of the Company are for acquisitions, capital
expenditures and payments on long-term debt incurred to finance certain
equipment purchases or assumed in connection with certain acquisitions. Cash
utilized to complete acquisitions totaled $81.9 million in the nine months ended
December 31, 1998. Cash utilized for capital expenditures, which relate
primarily to the purchase of new equipment, was $14.8 million in the nine months
ended December 31, 1998. Payments on long-term debt totaled $3.0 million in the
nine months ended December 31, 1998. In total, cash requirements for
acquisitions, capital expenditures and debt service was $99.7 million in the
nine months ended December 31, 1998.
The Company financed its cash requirements through internally generated
funds and borrowings under its revolving credit facility. Cash flow generated
from operations (net income plus depreciation, amortization and deferred tax
provision) was $39.3 million in the nine months ended December 31, 1998. Net
incremental borrowings under its revolving credit facility were $71.3 million in
the nine months ended December 31, 1998. Debt incurred directly to finance
equipment purchases was $3.6 million in the nine months ended December 31, 1998.
In June 1997, the Company entered into a $100 million revolving credit
agreement, which was amended in August 1998 to increase the facility to $200
million (as amended, the "Credit Agreement"), with a nine-member banking group
(following the amendment). Loans outstanding under the Credit Agreement are
unsecured and accrue interest, at the option of the Company, at (1) the London
Interbank Offered Rate (LIBOR) plus .50% to 1.50% based upon the Debt to Pro
Forma EBITDA ratio as defined, redetermined quarterly, or (2) an alternate base
rate based upon the agent bank's prime lending rate or Federal Funds effective
rate. The Credit Agreement also provides for a commitment fee on available but
unused amounts ranging from .10% to .35% per annum. The Credit Agreement matures
on July 31, 2001, at which time all amounts outstanding thereunder are due. At
December 31, 1998, the outstanding borrowings under the Credit Agreement were
$116.2 million and were subject to an average interest rate of 6.23% per annum.
The Company is subject to certain covenants and restrictions and must meet
certain financial tests pursuant to and as defined in the Credit Agreement. The
Company believes that these restrictions do not adversely affect its
acquisitions or operating strategies, and that it was in compliance with such
financial tests and other covenants at December 31, 1998.
10
<PAGE>
The Company has an agreement with Komori America Corporation (the "Komori
Agreement"), pursuant to which the Company receives certain volume purchase
incentives and long-term financing options with respect to the purchase of
printing presses. As of December 31, 1998, the Company was obligated on term
notes related to the Komori Agreement totaling $12.9 million. These term notes
provide for fixed monthly principal and interest payments through 2008 at an
average interest rate of 7.70%, and are secured by the purchased presses. The
Company is not subject to any significant financial covenants or restrictions in
connection with these obligations. As of December 31,1998, the Company had
accepted delivery of printing presses with a total purchase price of $15.8
million which amount is included in accounts payable in the accompanying
unaudited consolidated financial statements and is expected to be financed under
the Komori Agreement.
The Company expects to make additional equipment capital expenditures in
fiscal 1999 using cash flow from operations and borrowings under the Credit
Agreement and/or the Komori Agreement.
The remaining debt obligations of the Company generally consist of
mortgages, capital leases, promissory notes, industrial revenue bonds and a
$10.0 million auxiliary revolving credit agreement, some of which contain
financial covenants and restrictions. The most significant of these place
certain restrictions on future borrowings and acquisitions above specified
levels. The Company believes these restrictions do not adversely affect its
acquisition or operating strategies.
Pursuant to earnout agreements entered into in connection with certain
acquisitions, as of December 31, 1998, the Company was contingently obligated at
certain times and under certain circumstances through 2004 to issue up to
179,472 shares of its common stock and to make additional cash payments of up to
$20.4 million for all periods in the aggregate.
During the nine months ended December 31, 1998, the Company acquired
fifteen printing businesses. To complete these acquisitions, in the aggregate,
the Company paid cash of $33.8 million, issued 1,211,319 shares of its common
stock, and discharged debt of the acquired businesses totaling $48.2 million. As
of January 31, 1999, the Company had signed one binding merger agreement and
announced the signing of six non-binding letters of intent to acquire seven
printing businesses.
The Company intends to actively continue to pursue acquisition
opportunities, utilizing cash flow from operations, borrowings under the
Credit Agreement or the issuance of its common stock. There can be no
assurance that the Company will be able to acquire additional businesses on
acceptable terms in the future. In addition, there can be no assurance that
the Company will be able to establish, maintain or increase the profitability
of any acquired business.
YEAR 2000 COMPLIANCE
The Year 2000 issue results from the historical use in computer software
programs of a two-digit abbreviation in date fields to represent the year.
Certain computer programs, including programs imbedded in various equipment, may
fail to properly function when confronted with dates which contain the two-digit
year "00". These processing errors have the potential to cause system failures
or disrupt normal operations.
The Company has reviewed and is continuing to review its business risks
associated with the Year 2000 issue. Based on communications with vendors, the
Company believes that substantially all of its 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 the Company'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 that are Year 2000 compliant or have announced a
timetable for doing so. The Company has installed certain upgrades and is
scheduling remaining upgrades of software together with replacement of such
hardware as necessary to be Year 2000 compliant and presently anticipates that
substantially all of its current information systems will be Year 2000 compliant
as early as Summer 1999, but in any event no later than December 31, 1999.
11
<PAGE>
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 the Company's recurring investment in
management information systems.
In addition, the Company 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, the Company'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 the Company. 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 the Company's operations could be adversely
affected. In the case of a systematic 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 the Company 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 the Company's business,
results of operations and financial condition. Because of its many locations, if
certain printing facilities were adversely affected, the Company would use other
operable printing facilities among its subsidiaries in other locations in order
to avoid, to the extent possible, loss of customer goodwill. The Company 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 the Company.
There are many suppliers of paper, ink and other materials used in
printing operations. Thus, the Company believes that it is not materially
dependent on any one supplier. The Company has orally communicated with, and in
some cases 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, the
Company believes that it will be able to obtain materials necessary to continue
its operations without significant disruption due to Year 2000 issues.
The Company 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,
the Company 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 have a widespread, catastrophic effect on its customer base.
As part of its ongoing review of the Year 2000 issue, the Company
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.
RECENT ACCOUNTING PRONOUNCEMENTS
During the first quarter of fiscal 1999, the Company was required to adopt
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income", which requires that all changes in the Company's equity
during the reporting period, including all net income and charges directly to
equity that are excluded from net income, be presented in the Company's
consolidated financial statements. SFAS No. 130 does not have a material effect
on the Company's consolidated financial position or consolidated results of
operations.
12
<PAGE>
CONSOLIDATED GRAPHICS, INC.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time the Company is involved in litigation relating to claims
arising in the normal course of business. The Company maintains insurance
coverage against potential claims in an amount that it believes to be adequate.
Currently, the Company is not aware of any legal proceedings or claims pending
against the Company that management believes will have a material adverse effect
on its consolidated financial position or consolidated results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
During the nine months ended December 31, 1998, the Company issued
1,211,319 shares of its common stock valued at approximately $58.8 million in
connection with the acquisition of certain printing businesses and also issued
23,861 shares pursuant to certain earnout agreements entered into in connection
with two prior year acquisitions. The issuance of such common stock was exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933 as a
transaction by the issuer not involving a public offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(b) None
ITEM 5. OTHER INFORMATION.
A Registration Statement on Form S-4 was filed by the Company in
connection with its contemplated acquisition of Automated Graphic Systems, Inc.,
that was declared effective on January 22, 1999. The Registration Statement
registers $16 million of common stock of the Company to be issued upon
completion of this acquisition. The Company has also filed several other
registration statements pursuant to which shares of common stock of the Company
that were issued as restricted securities in connection with certain
acquisitions may be resold.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS
27 Edgar financial data schedules.
(B) REPORTS ON FORM 8-K:
1) Form 8-K, filed October 8, 1998 in connection with the press release
announcing the signing of a letter of intent to acquire Mount Vernon Printing
Company.
2) Form 8-K, filed October 13, 1998 in connection with the amendment of Article
II, Section 16, subsection (m) of the By-laws of the Company.
3) Form 8-K, filed October 23, 1998 in connection with the press release
announcing the signing of a letter of intent to acquire Maxwell Graphics
Arts.
4) Form 8-K, filed October 28, 1998 in connection with the press release
announcing the Company's fiscal 1999 second quarter results.
5) Form 8-K, filed November 4, 1998 in connection with the press release
announcing the completion of the acquisition of Metropolitan Printing
Service, Inc.
13
<PAGE>
6) Form 8-K, filed November 17, 1998 in connection with the press releases
announcing the completion of the acquisitions of Graphic Technology of
Maryland, Inc. and McKay Press Inc.
7) Form 8-K, filed December 21, 1998 in connection with the press release
announcing the completion of the acquisition of Mount Vernon Printing
Company.
8) Form 8-K, filed January 11, 1999 in connection with the press release
announcing the signing of a letter of intent to acquire Mercury Printing.
9) Form 8-K, filed January 21, 1999 in connection with the press release
announcing the signing of a letter of intent to acquire Wentworth Printing
Corp.
10)Form 8-K, filed January 27, 1999 in connection with the press releases
announcing the Company's fiscal 1999 third quarter results.
11)Form 8-K, filed January 28, 1999 including audited financial statements for
certain printing businesses acquired or probable of being acquired by the
Company in fiscal 1999.
12)Form 8-K, filed January 29, 1999 in connection with the press release
announcing the signing of a letter of intent to acquire CMI.
14
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT, CONSOLIDATED GRAPHICS, INC., HAS DULY CAUSED THIS REPORT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
CONSOLIDATED GRAPHICS, INC.
Dated: February 12, 1999 By: /s/ G. CHRISTOPHER COLVILLE
-----------------------------
G. Christopher Colville
Executive Vice President -
Mergers and Acquisitions,
Chief Financial and Accounting Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTERLY PERIOD ENDED
DECEMBER 31, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> DEC-31-1998
<CASH> 11,365
<SECURITIES> 0
<RECEIVABLES> 80,713
<ALLOWANCES> (3,761)
<INVENTORY> 22,251
<CURRENT-ASSETS> 114,705
<PP&E> 253,265
<DEPRECIATION> (36,775)
<TOTAL-ASSETS> 430,621
<CURRENT-LIABILITIES> 75,896
<BONDS> 0
0
0
<COMMON> 143
<OTHER-SE> 187,930
<TOTAL-LIABILITY-AND-EQUITY> 430,621
<SALES> 306,648
<TOTAL-REVENUES> 306,648
<CGS> 210,011
<TOTAL-COSTS> 210,011
<OTHER-EXPENSES> 53,836
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,615
<INCOME-PRETAX> 37,186
<INCOME-TAX> 14,502
<INCOME-CONTINUING> 22,684
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,684
<EPS-PRIMARY> 1.68
<EPS-DILUTED> 1.63
</TABLE>
