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, 1999
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, 2000 was 14,237,868.
CONSOLIDATED GRAPHICS, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1999
INDEX
PAGE
Part I -- Financial Information
Item 1 -- Financial Statements
Consolidated Balance Sheets at December 31, 1999 and March 31, 1999.....3
Consolidated Income Statements for the Three and Nine Months Ended
December 31, 1999 and 1998............................................4
Consolidated Statements of Cash Flows for the Nine Months Ended
December 31, 1999 and 1998............................................5
Notes to Consolidated Financial Statements..............................6
Item 2 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................8
Item 3 -- Quantitative and Qualitative Disclosure About Market Risk.......15
Part II -- Other Information
Item 1 -- Legal Proceedings...............................................16
Item 2 -- Changes in Securities and Use of Proceeds.......................16
Item 3 -- Defaults upon Senior Securities.................................16
Item 4 -- Submission of Matters to a Vote of Security Holders.............16
Item 5 -- Other Information...............................................17
Item 6 -- Exhibits and Reports on Form 8-K................................17
Signatures...................................................................18
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED GRAPHICS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, MARCH 31,
1999 1999
------------ ------------
ASSETS (UNAUDITED) (AUDITED)
CURRENT ASSETS:
Cash and cash equivalents .......................... $ 7,978 $ 6,538
Accounts receivable, net ........................... 108,451 92,653
Inventories ........................................ 29,690 27,345
Prepaid expenses ................................... 5,153 3,983
------------ ------------
Total current assets ........................... 151,272 130,519
PROPERTY AND EQUIPMENT, net ............................ 316,643 230,733
GOODWILL, net .......................................... 193,193 121,744
OTHER ASSETS ........................................... 6,862 6,658
------------ ------------
$ 667,970 $ 489,654
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt .................. $ 3,755 $ 2,869
Accounts payable ................................... 57,937 36,920
Accrued liabilities ................................ 37,355 38,028
Income taxes payable ............................... 790 2,941
------------ ------------
Total current liabilities ...................... 99,837 80,758
LONG-TERM DEBT, net of current portion ................. 245,088 170,574
DEFERRED INCOME TAXES .................................. 36,540 23,868
COMMITMENTS AND CONTINGENCIES .......................... -- --
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 100,000,000 shares
authorized;
15,223,268 and 14,649,885 issued and
outstanding ............................................ 152 146
Additional paid-in capital ......................... 179,873 136,488
Retained earnings .................................. 106,480 77,820
------------ ------------
Total shareholders' equity ..................... 286,505 214,454
------------ ------------
$ 667,970 $ 489,654
============ ============
See accompanying notes to consolidated financial statements.
3
CONSOLIDATED GRAPHICS, INC.
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
SALES ............................. $158,408 $118,278 $457,123 $306,648
COST OF SALES ..................... 112,195 81,128 317,641 210,011
-------- -------- -------- --------
Gross profit ............... 46,213 37,150 139,482 96,637
SELLING EXPENSES .................. 15,516 11,676 44,427 30,139
GENERAL AND ADMINISTRATIVE EXPENSES 12,450 9,155 35,367 23,697
-------- -------- -------- --------
Operating income ........... 18,247 16,319 59,688 42,801
INTEREST EXPENSE .................. 3,486 2,142 9,168 5,615
-------- -------- -------- --------
Income before income taxes . 14,761 14,177 50,520 37,186
PROVISION FOR INCOME TAXES ........ 5,906 5,526 20,208 14,502
-------- -------- -------- --------
NET INCOME ........................ $ 8,855 $ 8,651 $ 30,312 $ 22,684
======== ======== ======== ========
BASIC EARNINGS PER SHARE .......... $ .56 $ .61 $ 1.96 $ 1.68
======== ======== ======== ========
DILUTED EARNINGS PER SHARE ........ $ .56 $ .60 $ 1.93 $ 1.63
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
4
CONSOLIDATED GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
DECEMBER 31,
--------- ---------
1999 1998
--------- ---------
OPERATING ACTIVITIES:
Net income ......................................... $ 30,312 $ 22,684
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and amortization ................... 23,700 14,292
Deferred tax provision .......................... 8,598 2,325
Changes in assets and liabilities, net of effects
of acquisitions-
Accounts receivable ........................... 1,051 7,794
Inventories ................................... 1,449 2,944
Prepaid expenses .............................. (293) (305)
Other assets .................................. 510 (2,650)
Accounts payable and accrued liabilities ...... (16,998) (14,749)
Income taxes payable .......................... (1,895) 2,087
--------- ---------
Net cash provided by operating activities .. 46,434 34,422
--------- ---------
INVESTING ACTIVITIES:
Acquisitions of businesses, net of cash acquired ... (69,601) (82,962)
Purchases of property and equipment ................ (18,057) (14,822)
Proceeds from disposition of assets ................ 1,343 890
--------- ---------
Net cash used in investing activities ...... (86,315) (96,894)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from revolving credit facilities .......... 574,491 230,068
Payments on revolving credit facilities ............ (526,460) (158,749)
Payments on other long-term debt ................... (3,555) (2,956)
Payments to retire common stock .................... (3,991) --
Proceeds from exercise of stock options and other .. 836 206
--------- ---------
Net cash provided by financing activities .. 41,321 68,569
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS .............. 1,440 6,097
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ....... 6,538 5,268
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............. $ 7,978 $ 11,365
========= =========
See accompanying notes to consolidated financial statements.
5
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 subsidiaries (collectively with its
subsidiaries referred to as "the Company"). All intercompany accounts and
transactions have been eliminated. Such 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, 1999 are not
necessarily indicative of future operating results. Balance sheet information as
of March 31, 1999 has been derived from the 1999 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
1999. Certain reclassifications have been made to fiscal 1999 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, 1999 and 1998, the basic weighted average shares outstanding were
15,690,554 and 14,154,400. For the nine months ended December 31, 1999 and 1998,
the basic weighted average shares outstanding were 15,473,024 and 13,535,290.
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, 1999 and 1998, the weighted average number of common
shares and dilutive stock options outstanding were 15,836,188 and 14,519,647.
For the nine months ended December 31, 1999 and 1998, the weighted average
number of common shares and dilutive stock options outstanding were 15,675,177
and 13,912,099.
The consolidated statements of cash flows provide information about the
Company's sources and uses of cash and exclude the effects of non-cash
transactions. Significant non-cash transactions during the nine months ended
December 31, 1999 include the issuance of common stock and the assumption of
debt in connection with the acquisition of certain printing businesses (see Note
3. Acquisitions) and an accrual totaling $28,779 related to the purchase of
printing presses. Additionally, the Company issued term equipment notes totaling
$19,337 (see Note 2. Long-Term Debt) during the nine months ended December 31,
1999 to satisfy certain accrued liabilities totaling $10,716 as of March 31,
1999 related to the purchase of printing presses and to acquire additional
printing presses for $8,621. The following is a summary of total cash paid for
interest and income taxes (net of refunds).
NINE MONTHS ENDED
DECEMBER 31,
-----------------
1999 1998
------- -------
CASH PAID FOR:
Interest........................... $ 9,373 $ 4,900
Taxes.............................. 13,508 8,652
6
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,
1999 1999
--------- ---------
Revolving credit facilities .................... $ 196,428 $ 148,397
Term equipment notes ........................... 44,574 19,966
Other .......................................... 7,841 5,080
--------- ---------
248,843 173,443
Less current portion ........................... (3,755) (2,869)
--------- ---------
$ 245,088 $ 170,574
========= =========
The Company's primary revolving credit facility (the "Credit Agreement")
was obtained from a syndicate of commercial banks and, as amended in September
1999, has a maximum borrowing capacity of $245,000, of which $186,535 was
outstanding at December 31, 1999. The Credit Agreement will mature July 31,
2001, at which time all amounts outstanding thereunder will be due. Borrowings
outstanding under the Credit Agreement are unsecured and accrue interest at a
variable rate (a weighted average of 6.81% on December 31, 1999). In addition,
the Company maintains an auxiliary revolving credit facility (the "Auxiliary
Facility") with a commercial bank which provides for a maximum borrowing
capacity of $10,000, of which $9,893 was outstanding at December 31, 1999. The
interest rate applicable to all borrowings under the Auxiliary Facility at
December 31, 1999 was 7.23%.
The Company's term equipment notes primarily consist of notes payable
pursuant to printing press purchasing and financing agreements with two major
manufacturers. As of December 31, 1999, the Company was obligated on term notes
related to such agreements totaling $37,097. These term notes are secured by the
purchased presses and provide for fixed monthly principal and interest payments
over ten years. The weighted average interest rate on such notes at December 31,
1999 was 7.15%.
3. ACQUISITIONS
The Company completed the following acquisitions during the nine months
ended December 31, 1999:
COMPANY PRIMARY MARKET DATE
------- -------------- ----
Wentworth Printing Columbia, South Carolina April 1999
The Printery Milwaukee, Wisconsin April 1999
The Graphics Group Dallas, Texas June 1999
Westland Printers Baltimore, Maryland June 1999
H&N Printing Baltimore, Maryland June 1999
T/O Printing Los Angeles, California June 1999
Multiple Images Chicago, Illinois August 1999
Apple Graphics Los Angeles, California August 1999
Maryland Composition.com Baltimore, Maryland September 1999
Piccari Press Philadelphia, Pennsylvania October 1999
Keys Printing Greenville, South Carolina November 1999
Woodridge Press Los Angeles, California November 1999
Byrum Litho Columbus, Ohio December 1999
To complete the aforementioned acquisitions, in the aggregate, the Company
paid cash of $41,307, issued 1,032,407 shares of its common stock, and
discharged debt and paid other liabilities of the acquired businesses totaling
$28,294. Additionally, debt of the acquired businesses totaling $11,145 remained
outstanding following the acquisitions.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING INFORMATION. READERS ARE
CAUTIONED THAT SUCH INFORMATION INVOLVES RISKS AND UNCERTAINTIES, INCLUDING
THOSE CREATED BY GENERAL MARKET CONDITIONS, COMPETITION AND THE POSSIBILITY THAT
EVENTS MAY OCCUR WHICH LIMIT THE ABILITY OF THE COMPANY TO MAINTAIN OR IMPROVE
ITS OPERATING RESULTS AND ACQUIRE 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 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.
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND PERFORMANCE OF THE
COMPANY SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS
INCLUDED HEREIN AND THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES AND
OTHER DETAILED INFORMATION REGARDING THE COMPANY INCLUDED IN THE COMPANY'S
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED MARCH 31, 1999 AND OTHER
REPORTS FILED BY THE COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION.
OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 1999 ARE NOT
NECESSARILY INDICATIVE OF THE RESULTS TO BE EXPECTED FOR THE ENTIRE FISCAL YEAR
ENDING MARCH 31, 2000 OR ANY PERIODS THEREAFTER.
OUR COMPANY
Consolidated Graphics is the largest sheet-fed commercial printing company
in the United States. Our Company is headquartered in Houston, Texas and has
locally managed printing operations in 25 states as of December 31, 1999. Our
printing operations provide a full range of traditional printing services, as
well as e-business and fulfillment services.
Our primary business strategy is to generate growth in sales and profits
based upon the following principles:
o create internal growth and operational improvements through the
implementation of best practices to improve customer service, a
strategic capital investment program and cost savings generated by our
national purchasing programs;
o increase market share through a highly disciplined acquisition program
to purchase profitable, well-managed companies at attractive prices;
o develop highly trained sales and management professionals through our
unique, comprehensive Management Development Program;
o aggressively pursue e-business initiatives to enhance customer
service, increase sales to existing customers and attract new
customers.
PRINTING SERVICES
The majority of our sales are derived from traditional printing services,
which include the production of high-quality, color, printed materials requested
by our customers and produced to their specifications. Our Company continually
makes strategic investments in capital equipment to increase capacity and
generate operating efficiencies at our printing operations. By utilizing the
latest electronic prepress, press and finishing technology, our printing
operations can rapidly respond to the needs of customers and consistently
provide the highest level of service at competitive prices.
Our printing operations are capable of producing a wide range of products,
such as high-quality marketing brochures, shareholder communications, training
manuals, catalogs, trading cards, reference materials and direct mail pieces.
Most of the products we produce are generated by individual orders through
commissioned sales personnel or, to a lesser extent, via the Internet or
pursuant to long-term contracts. As a result, continued engagement of our
Company by our customers for successive jobs primarily depends upon, among other
things, the customers' satisfaction with the quality of services that were
provided. As such, we are unable to accurately predict, for more than a few
weeks in advance, the number, size and profitability of printing projects that
our operations expect to produce.
8
e-BUSINESS SERVICES
We have developed a multi-faceted e-business strategy to take advantage of
the benefits and opportunities that new technology brings to the printing
industry and capitalize on the expertise of our printing operations in digital
processes. Currently we are installing a Wide Area Network ("WAN") that will
link our geographically diverse printing operations to each other and to their
customers with state-of-the-art connectivity using a highly secure frame relay
network and facilitate the launch of our e-business strategy. The installation
of the WAN is expected to be complete during the quarter ended June 30, 2000.
The primary components of our e-business strategy are as follows:
"BUSINESS-TO-BUSINESS" COLLABORATIVE TOOLS - Our Company has entered into
a collaborative marketing alliance with Noosh, Inc. which recently developed a
proprietary, web-based, scalable solution to automate project management by
print buyers and facilitate their communication with printers. This alliance
provides a unique opportunity for our Company to attract prospective major
customers that desire to utilize the features of the Noosh technology and to
strengthen existing customer relationships through the introduction of the Noosh
technology.
e-OUTSOURCING SOLUTIONS - We provide non-print digital and electronic
media services that can be separate from, or complementary to, our printing
services. We have developed a proprietary, digital asset management system that
is presently being introduced to each of our printing operations for
presentation to their existing and prospective customers. CGX-OPAL (on-line
private asset library) archives customers' digital images and provides secure
24/7 access to the images from any web browser worldwide, enabling customers to
download high resolution images for multi-purpose uses. In addition to the
CGX-OPAL system, we develop, and in some cases maintain and host,
"business-to-business" Internet applications or e-procurement websites for our
customers with respect to books, other printed materials or data offered for
sale or as a service to their membership. We also offer "sole source" electronic
services that include re-purposing of digital data into multiple media formats
for our customers who have multi-channel distribution needs for such data.
ON-LINE PROCUREMENT OF PRINTING - Using recently developed proprietary
software, we now offer on-line ordering of business cards, letterhead and other
stationery-type products; a market segment that we previously had not
aggressively pursued. By offering this service, we are able to strengthen
relationships with existing customers, as well as attract new customers. In
addition, we expect that our expertise in developing on-line solutions for our
printing customers will enable us to gain market share through "sole source"
relationships and national contracts with major companies.
We are also exploring opportunities in the emerging on-line vertical
marketplace to improve other aspects of our business, such as e-procurement
opportunities to improve our purchasing advantages. Our Company has made a
substantial commitment to these e-business initiatives, which we believe will
streamline management of the print process, provide improved product quality and
faster turnaround times and expand our customer service capabilities.
FULFILLMENT SERVICES
We also serve our customers by providing fulfillment services. Fulfillment
services primarily include assembling, packaging, storing, and distributing
promotional, educational and training documents on behalf of our customers. Many
corporations utilize these fulfillment services to manage their inventory of
printed products and various assembly materials (such as binders and product
samples), as well as provide "just in time" assembly and delivery of customized
materials to end users. Orders for fulfillment services are frequently received
via the Internet or through proprietary on-line procurement and inventory
management systems developed and/or maintained by our printing operations.
9
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,
---------------- ----------------
1999 1998 1999 1998
------ ------ ------ ------
(IN MILLIONS) (IN MILLIONS)
Sales .................................. $158.4 $118.3 $457.1 $306.6
Cost of sales .......................... 112.2 81.1 317.6 210.0
------ ------ ------ ------
Gross profit ........................ 46.2 37.2 139.5 96.6
Selling expenses ....................... 15.5 11.7 44.4 30.1
General and administrative expenses .... 12.5 9.2 35.4 23.7
------ ------ ------ ------
Operating income .................... 18.2 16.3 59.7 42.8
Interest expense ....................... 3.4 2.1 9.2 5.6
------ ------ ------ ------
Income before income taxes .......... 14.8 14.2 50.5 37.2
Provision for income taxes ............. 5.9 5.5 20.2 14.5
------ ------ ------ ------
Net income .......................... $ 8.9 $ 8.7 $ 30.3 $ 22.7
====== ====== ====== ======
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,
---------------- ----------------
1999 1998 1999 1998
------ ------ ------ ------
Sales .................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales .......................... 70.8 68.6 69.5 68.5
------ ------ ------ ------
Gross profit ........................ 29.2 31.4 30.5 31.5
Selling expenses ....................... 9.8 9.9 9.7 9.8
General and administrative expenses .... 7.9 7.7 7.7 7.7
------ ------ ------ ------
Operating income .................... 11.5 13.8 13.1 14.0
Interest expense ....................... 2.2 1.8 2.0 1.8
------ ------ ------ ------
Income before income taxes .......... 9.3 12.0 11.1 12.2
Provision for income taxes ............. 3.7 4.7 4.4 4.7
------ ------ ------ ------
Net income .......................... 5.6% 7.3% 6.7% 7.5%
====== ====== ====== ======
Acquisitions in fiscal 1999 and 2000 are the primary causes of the
absolute increases in our revenues and expenses since December 31, 1998. Each of
the acquisitions in fiscal 1999 and 2000 were accounted for under the purchase
method of accounting; accordingly, our consolidated income statements reflect
revenues and expenses of those acquired businesses only for post-acquisition
periods.
The following table sets forth our fiscal 1999 and 2000 acquisitions
(collectively the "1999/2000 Acquired Businesses") and indicates the period in
which each business was acquired.
10
FISCAL 1999 ACQUISITIONS
Tursack, Inc..................................April 1998
Image Systems................................ May 1998
Printing, Inc................................ June 1998
Wetzel Brothers.............................. June 1998
Graphic Communications....................... June 1998
Paragraphics................................. July 1998
Pride Printers............................... July 1998
Lincoln Printing............................. August 1998
Ironwood Litho.............................. August 1998
Rush Press................................... September 1998
Printing Corp. of America.................... September 1998
Metropolitan Printing........................ October 1998
Graphic Technology of Maryland............... November 1998
McKay Press.................................. November 1998
Mount Vernon Printing........................ December 1998
Automated Graphics.......................... February 1999
Mercury Printing ............................ March 1999
CMI......................................... March 1999
Maxwell Graphic Arts......................... March 1999
FISCAL 2000 ACQUISITIONS
Wentworth Printing........................... April 1999
The Printery................................. April 1999
The Graphics Group.......................... June 1999
Westland Printers............................ June 1999
H&N Printing................................. June 1999
T/O Printing................................. June 1999
Multiple Images.............................. August 1999
Apple Graphics............................... August 1999
Maryland Composition.com..................... September 1999
Piccari Press................................ October 1999
Keys Printing................................ November 1999
Woodridge Press.............................. November 1999
Byrum Litho............................... December 1999
For more information regarding our fiscal 1999 acquisitions, refer to
"Notes to Consolidated Financial Statements" included in our Annual Report on
Form 10-K for the fiscal year ended March 31, 1999. For more information
regarding our fiscal 2000 acquisitions, refer to the accompanying "Notes to
Consolidated Financial Statements" included elsewhere herein.
QUARTER ENDED DECEMBER 31, 1999 COMPARED WITH QUARTER ENDED DECEMBER 31, 1998
Sales increased 33.9% to $158.4 million for the quarter ended December 31,
1999, from $118.3 million for the same period last year. The incremental revenue
contribution of the 1999/2000 Acquired Businesses substantially accounted for
this increase.
Gross profit increased 24.4% to $46.2 million for quarter ended December
31, 1999, from $37.2 million for the same period last year, primarily due to the
incremental profit contribution of the 1999/2000 Acquired Businesses. Gross
profit as a percentage of sales decreased to 29.2% during the quarter from 31.4%
for the same period a year ago. This decrease resulted partially from the effect
of the overall lower operating margins of the 1999/2000 Acquired Businesses
(consistent with our expectation that gross profit margins at recently acquired
businesses will be lower than our historical margins, then are likely to improve
as the full benefit of our Company's operating strengths and strategies takes
effect). Other factors contributing to the decline in gross profit margins were
pricing pressures on jobs during this quarter due to industry conditions and a
higher level of depreciation expense attributable to our capital expenditures
since the same period a year ago.
11
Selling expenses increased 32.9% to $15.5 million for the quarter, from
$11.7 million for the same period last year, primarily due to the increased
sales levels noted above. Selling expenses as a percentage of sales decreased
slightly to 9.8% in the current quarter from 9.9% for the same period a year
ago.
General and administrative expenses increased 36.0% to $12.5 million for
the quarter ended December 31, 1999, from $9.2 million for the same period last
year. This increase is due primarily to the addition of the 1999/2000 Acquired
Businesses. General and administrative expenses as a percentage of sales
increased to 7.9% in the current quarter from 7.7% for the same period a year
ago, due to the proportionately higher level of general and administrative
expense, including amortization of goodwill, incurred by the 1999/2000 Acquired
Businesses.
Interest expense increased to $3.4 million for the quarter ended December
31, 1999, from $2.1 million for the same period last year, due to a net increase
in borrowings under our revolving credit facilities used to finance the purchase
of the 1999/2000 Acquired Businesses and the addition of term equipment notes
related to the purchase of printing presses.
Effective income tax rates reflect an increase to 40% for the quarter
ended December 31, 1999, from 39% a year ago, due primarily to the effect of
nondeductible goodwill incurred in connection with certain acquisitions
completed since the prior period.
NINE MONTHS ENDED DECEMBER 31, 1999 COMPARED WITH NINE MONTHS ENDED DECEMBER 31,
1998
Sales increased 49.1% to $457.1 million for the nine months ended December
31, 1999, from $306.6 million for the same period last year, due to the
incremental revenue contribution of the 1999/2000 Acquired Businesses.
Gross profit increased 44.3% to $139.5 million for the nine months ended
December 31, 1999, from $96.6 million for the same period last year, primarily
due to the incremental profit contribution of the 1999/2000 Acquired Businesses.
Gross profit as a percentage of sales decreased to 30.5% for the nine months
ended December 31, 1999, from 31.5% for the same period a year ago. This
decrease resulted from the effect of the overall lower operating margins of the
1999/2000 Acquired Businesses and higher depreciation expense attributable to
capital expenditures since the same period a year ago, together with losses
incurred at three historically profitable facilities in the quarter ended
September 30, 1999 and pricing pressures due to industry conditions in the
quarter ended December 31, 1999.
Selling expenses increased 47.4% to $44.4 million for the nine months
ended December 31, 1999, from $30.1 million for the same period last year,
primarily due to the increased sales levels noted above. Selling expenses as a
percentage of sales decreased slightly to 9.7% for the nine months ended
December 31, 1999, from 9.8% for the same period a year ago.
General and administrative expenses increased 49.2% to $35.4 million for
the nine months ended December 31, 1999, from $23.7 million for the same period
last year. This increase is due primarily to the addition of the 1999/2000
Acquired Businesses. General and administrative expenses as a percentage of
sales remained constant at 7.7% as proportionately higher general and
administrative expenses, including amortization of goodwill, incurred by the
1999/2000 Acquired Companies, was largely offset by the effect of leveraging
corporate general and administrative expenses over a larger revenue base.
Interest expense increased to $9.2 million for the nine months ended
December 31, 1999, from $5.6 million for the same period last year, due to a net
increase in borrowings under our revolving credit facilities used to finance the
purchase of the 1999/2000 Acquired Businesses, the addition of term equipment
notes related to the purchase of printing presses and debt assumed in connection
with certain acquisitions.
12
Effective income tax rates reflect an increase to 40% for the nine months
ended December 31, 1999, from 39% a year ago, due to the effect of nondeductible
goodwill incurred in connection with certain acquisitions completed since the
prior period and, to a lesser extent, the Company's expansion into certain
states with proportionately higher income tax rates.
LIQUIDITY AND CAPITAL RESOURCES
Our Company's primary cash uses are for acquisitions, capital
expenditures, payments on long-term debt and the purchase of our common stock.
Cash utilized to complete acquisitions and purchase our common stock totaled
$73.6 million in the nine months ended December 31, 1999. Cash utilized for
capital expenditures, which relate primarily to the purchase of new electronic
prepress and bindery equipment, was $18.1 million in the nine months ended
December 31, 1999. Principal payments on long-term debt totaled $3.6 million in
the nine months ended December 31, 1999. Our cash requirements for the above
items in total were $95.3 million in the nine months ended December 31, 1999.
We financed our cash requirements through internally generated funds and
borrowings under our revolving credit facilities (see below). Cash flow
generated from operations (net income plus depreciation, amortization and
deferred tax provision) was $62.6 million in the nine months ended December 31,
1999.
Our primary revolving credit facility (the "Credit Agreement") was
obtained from a syndicate of commercial banks and, as amended in September 1999,
has a maximum borrowing capacity of $245.0 million, of which $186.5 million was
outstanding at December 31, 1999. Borrowings outstanding under the Credit
Agreement are unsecured and accrue interest, at our option, at either (1) the
London Interbank Offered Rate (LIBOR) plus .50% to 1.50% based upon our 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. We are also required to pay a commitment fee on available but
unused amounts ranging from .10% to .35% per annum. The Credit Agreement will
mature July 31, 2001, and we must repay all amounts outstanding as of that date.
Borrowings outstanding under the Credit Agreement were subject to a weighted
average interest rate of 6.81% at December 31, 1999. In addition, we have an
auxiliary revolving credit facility with a commercial bank which has a maximum
borrowing capacity of $10.0 million. Borrowings outstanding under this facility
were $9.9 million at December 31, 1999, subject to an average annual interest
rate of 7.23%.
Our Company is subject to certain covenants and restrictions and must meet
certain financial tests pursuant to and as defined in the Credit Agreement. We
believe that these restrictions do not adversely affect our acquisition or
operating strategies, and that we are in compliance with these covenants and
financial tests at December 31, 1999.
We also have agreements with certain printing press manufacturers
(collectively, the "Press Purchase Agreements") pursuant to which our Company
receives certain volume purchase incentives and long-term financing options with
respect to the purchase of printing presses. As of December 31, 1999, we were
obligated on term notes related to the Press Purchase Agreements totaling $37.1
million. These term notes are secured by the purchased presses and provide for
fixed monthly principal and interest payments over ten years. The weighted
average interest rate on such notes at December 31, 1999 was 7.15%. Our Company
is not subject to any significant financial covenants or restrictions in
connection with these obligations. As of December 31, 1999, we had accepted
delivery of additional printing presses for a total purchase price of $28.8
million, which amount is included in accounts payable in the accompanying
consolidated financial statements and is expected to be financed under terms of
the Press Purchase Agreements. Debt incurred directly to finance printing press
purchases was $19.3 million in the nine months ended December 31, 1999.
13
We expect to continue making equipment capital expenditures this year
using cash flow from operations and borrowings under our revolving credit
facilities and/or the Press Purchase Agreements.
During the nine months ended December 31, 1999, we purchased 553,800
shares of our common stock pursuant to a share repurchase program approved by
our Board of Directors on November 12, 1999. To repurchase our shares, we paid
$4.0 million and accrued a liability of $4.2 million as of December 31, 1999.
During January 2000, we purchased an additional 986,000 shares pursuant to this
program.
During the nine months ended December 31, 1999, we acquired thirteen
printing businesses. To complete these acquisitions, in the aggregate, we paid
cash of $41.3 million, issued 1,032,407 shares of our common stock, and
discharged debt and paid other liabilities of the acquired businesses totaling
$28.3 million. Additionally, debt of the acquired businesses totaling $11.1
million remained outstanding following the acquisitions.
Pursuant to earnout agreements entered into in connection with certain
acquisitions, as of December 31, 1999, we were contingently obligated at certain
times and under certain circumstances through 2005 to issue up to 368,200 shares
of our common stock and to make additional cash payments of up to $25.7 million
for all periods in the aggregate.
We intend to continue pursuing acquisition opportunities at prices we
believe are reasonable based upon current market conditions and at returns
relative to alternative opportunities to invest our available capital, including
investment in our own equity through our share repurchase program. To finance
our acquisitions, we intend to use cash flow from operations and borrowings
under the Credit Agreement. We may also issue shares of our common stock from
time to time in connection with acquisitions. There can be no assurance that we
will be able to acquire additional businesses on acceptable terms in the future.
In addition, there can be no assurance that we will be able to establish,
maintain or increase the profitability of any acquired business.
YEAR 2000 COMPLIANCE
The Year 2000 issue resulted from the historical use in certain computer
hardware and software programs of a two-digit abbreviation in date fields to
represent the year, thus causing such programs (or equipment containing such
programs) not to function properly when confronted with dates which contain the
two-digit year "00". These processing errors could have caused system failures
or disrupted normal operations.
Prior to January 1, 2000 our Company completed its Year 2000 Readiness
Program, which consisted of evaluating our information technology assets,
conducting risk reviews of our non-information technology assets and operational
practices and developing contingency plans to adequately minimize our exposure
to potential business disruptions caused by the Year 2000 issue. Further,
through our Year 2000 Readiness Program, we completed all upgrades, conversions
or replacements of our information technology assets as necessary to versions
that were Year 2000 compliant. Because the majority of our management
information systems operate on broadly available hardware platforms and employ
software specifically designed for the printing industry and perpetually
supported by its developers, the Year 2000 Readiness Program did not result in
costs being incurred materially in excess of our recurring investment in our
management information systems.
We did not suffer any material disruptions to our operations as a result
of the Year 2000 issue and we are not aware of any contingencies associated with
the Year 2000 issue which could have a material adverse effect on our business,
results of operations or financial condition.
RECENT ACCOUNTING PRONOUNCEMENTS
None.
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk generally means the risk that losses may occur in the value of
certain financial instruments as a result of movements in interest rates,
foreign currency exchange rates and commodity prices. We do not hold or utilize
derivative financial instruments which could expose our Company to significant
market risk. However, our Company is exposed to market risk for changes in
interest rates pursuant to our long-term debt obligations. As of December 31,
1999, there were no material changes in our market risk or the estimated fair
value of our long-term debt obligations as reported in our Annual Report on Form
10-K for the fiscal year ended March 31, 1999.
15
CONSOLIDATED GRAPHICS, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time our Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. Our Company
maintains insurance coverage against potential claims in an amount which we
believe to be adequate. Currently, we are not aware of any legal proceedings or
claims pending against our Company that we believe will have a material adverse
effect on our consolidated financial position or consolidated results of
operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
During the nine months ended December 31, 1999, our Company issued
1,032,407 shares of its common stock valued at approximately $48.2 million in
connection with the acquisition of certain printing businesses and also issued
13,332 shares pursuant to an earnout agreement entered into in connection with a
prior year acquisition. 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.
On December 15, 1999 the Board of Directors adopted a Shareholder Rights
Plan (the "Plan") designed to assure that all of our shareholders receive fair
treatment in the event of any takeover attempt. The key provision of the Plan is
a mechanism that will distribute one Right for each outstanding share of our
common stock that becomes exercisable upon certain triggering events. Each Right
entitles the holder to buy 1/100th of a share of the Company's Series A Junior
Participating Preferred Stock, for an exercise price of $160.00. The Rights were
distributed to shareholders of record on December 28, 1999.
The Rights will trade with our common stock until exercisable. The Rights
are not exercisable until ten business days following a public announcement that
a person or group has acquired 15 percent of our common stock or until ten
business days after a person or group begins a tender offer that would result in
ownership of 15 percent of our common stock, subject to certain extensions by
the Board. If an acquiror becomes a 15 percent holder of our common stock, the
Rights "flip in" and become Rights to buy our common stock at a 50 percent
discount to the Current Market Price, as defined, and Rights owned by that
acquiror become void. If, after an acquiror becomes a 15 percent holder of our
common stock, we merge and our common stock is exchanged or converted, or if 50
percent or more of our assets or earning power is sold or transferred, the
Rights "flip over" and entitle the holders to buy shares of the acquiror's
common stock at a 50 percent discount. A tender or exchange offer for all
outstanding shares of our common stock at a price and on terms determined to be
fair and otherwise in the best interests of our Company and our shareholders by
a majority of our continuing directors will not trigger either the flip-in or
flip-over provisions.
We may redeem the Rights at any time for $.01 per Right until ten business
days following the first public announcement that an acquiror has acquired the
level of ownership that "triggers" the Rights Plan. The Rights extend for ten
years and will expire on December 15, 2009.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
16
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS:
* 3.1 Restated Articles of Incorporation of the Company filed with the
Secretary of State of the State of Texas on July 27, 1994 (Consolidated
Graphics, Inc. Form 10-Q (June 30, 1994) SEC File No. 0-24068, Exhibit
4(a)).
* 3.2 Articles of Amendment to the Restated Articles of Incorporation of the
Company dated as of July 29, 1998 (Consolidated Graphics, Inc. Form 10-Q
(June 30, 1998) SEC File No. 0-24068, Exhibit 3.1).
* 3.3 Restated By-Laws of the Company as amended on June 23, 1999
(Consolidated Graphics, Inc. Form 10-Q (June 30, 1999) SEC File No.
0-24068, Exhibit 3.4).
* 3.4 Amendments to the By-Laws of the Company on December 15, 1999
(Consolidated Graphics, Inc Form 8-K (December 15, 1999) SEC File No.
0-24068, Exhibit 3.2).
* 4 Specimen Common Stock Certificate (Consolidated Graphics, Inc. Form 10-K
(March 31, 1998) SEC File No. 0-24068, Exhibit 4.1).
* 4.1 Rights Agreement dated as of December 15, 1999 between Consolidated
Graphics, Inc and American Stock Transfer and Trust Company, as Rights
Agent, which includes as Exhibit A the Certificate of Designations of
Series A Preferred Stock, as Exhibit B the form of Right Certificate and
as Exhibit C the form of summary of Rights to Purchase Shares
(Consolidated Graphics, Inc Form 8-K (December 15, 1999) SEC File No.
0-24068, Exhibit 4.1).
10.1 Amendment to the Revolving Credit Agreement among the Company and Chase
Bank of Texas N.A., as Agent, BankOne, Texas N.A., as Co-Agent, CoAmerica
Bank-Texas as Co-Agent, and First Union National Bank as Co-Agent, dated
November 12, 1999.
27 EDGAR financial data schedule.
* Incorporated by reference
(B) REPORTS ON FORM 8-K:
1) Form 8-K, filed October 15, 1999 in connection with the press release
announcing the acquisition of Maryland Composition.com.
2) Form 8-K, filed October 15, 1999 in connection with the press release
announcing our preliminary fiscal 2000 second quarter results.
3) Form 8-K, filed October 27, 1999 in connection with the press release
announcing our fiscal 2000 second quarter results.
4) Form 8-K, filed November 16, 1999 in connection with the press releases
announcing the acquisition of Picarri Press and Keys Printing, the signing
of a letter of intent to acquire Woodridge Press and the approval of a
share repurchase program by the Board of Directors
5) Form 8-K, filed December 16, 1999 in connection with the press releases
announcing the acquisition of Woodridge Press and Byrum Litho and approval
of a shareholder rights plan by the Board of Directors.
6) Form 8-K, filed December 22, 1999 describing our previously announced
shareholder rights plan.
7) Form 8-K, filed December 22, 1999 in connection with the press release
announcing our preliminary fiscal 2000 third quarter results.
8) Form 8-K, filed January 14, 2000 in connection with the press release
announcing the appointment of an executive vice president and chief
administrative officer and commenting on the status of our share
repurchase program.
9) Form 8-K, filed January 26, 2000 in connection with the press release
announcing our fiscal 2000 third quarter results.
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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 14, 2000 By: /S/ G. CHRISTOPHER COLVILLE
-----------------------------
G. Christopher Colville
Executive Vice President -
Mergers and Acquisitions,
Chief Financial and Accounting
Officer and Secretary
18