- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997
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, SUITE 200
HOUSTON, TEXAS 77057
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (713) 787-0977
2210 WEST DALLAS STREET, HOUSTON, TEXAS 77019 -- (713) 529-4200
(FORMER ADDRESS AND TELEPHONE NUMBER)
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, 1998 was 12,720,873.
================================================================================
CONSOLIDATED GRAPHICS, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997
INDEX
PAGE
---------
Part I -- Financial Information
Item 1 -- Financial Statements
Consolidated Balance Sheets
at December 31, 1997 and
March 31, 1997............. 1
Consolidated Income
Statements for the three
and nine months ended
December 31, 1997 and
1996....................... 2
Consolidated Statements of
Cash Flows for the nine
months ended December 31,
1997 and 1996.............. 3
Notes to Consolidated
Financial Statements....... 4
Item 2 -- Management's
Discussion and Analysis of
Financial Condition and Results
of Operations.............. 6
Part II -- Other Information
Item 1 -- Legal Proceedings..... 11
Item 6 -- Exhibits and Reports
on Form 8-K.................... 11
Signatures........................... 12
(i)
CONSOLIDATED GRAPHICS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, MARCH 31,
1997 1997
------------ ----------
(UNAUDITED) (AUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 2,818 $ 3,636
Accounts receivable, net........ 40,974 29,347
Inventories..................... 9,985 8,679
Prepaid expenses................ 1,884 1,434
------------ ----------
Total current assets....... 55,661 43,096
PROPERTY AND EQUIPMENT, net.......... 116,321 85,643
GOODWILL, net........................ 20,415 6,085
OTHER ASSETS......................... 2,176 896
------------ ----------
$194,573 $135,720
============ ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term
debt........................... $ 2,398 $ 2,623
Accounts payable................ 10,288 8,399
Accrued liabilities............. 21,662 9,927
Income taxes payable............ 66 67
------------ ----------
Total current
liabilities............. 34,414 21,016
LONG-TERM DEBT, net of current
portion............................ 60,469 39,321
DEFERRED INCOME TAXES................ 12,289 8,936
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value;
20,000,000 shares authorized,
12,716,273 and 12,450,430
issued and outstanding,
respectively................... 127 124
Additional paid-in capital...... 47,116 39,168
Retained earnings............... 40,158 27,155
------------ ----------
Total shareholders'
equity.................. 87,401 66,447
------------ ----------
$194,573 $135,720
============ ==========
See accompanying notes to consolidated financial statements.
1
CONSOLIDATED GRAPHICS, INC.
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- ----------------------
1997 1996 1997 1996
--------- --------- ---------- ----------
SALES................................ $ 60,977 $ 38,186 $ 165,015 $ 100,895
COST OF SALES........................ 41,626 26,391 112,856 70,421
--------- --------- ---------- ----------
Gross profit.................... 19,351 11,795 52,159 30,474
SELLING EXPENSES..................... 5,881 3,754 15,972 10,012
GENERAL AND ADMINISTRATIVE
EXPENSES........................... 4,622 2,966 12,568 7,980
--------- --------- ---------- ----------
Operating income................ 8,848 5,075 23,619 12,482
INTEREST EXPENSE..................... 996 643 2,644 1,577
--------- --------- ---------- ----------
Income before provision for
income taxes.................. 7,852 4,432 20,975 10,905
INCOME TAXES......................... 2,984 1,640 7,972 4,008
--------- --------- ---------- ----------
NET INCOME........................... $ 4,868 $ 2,792 $ 13,003 $ 6,897
========= ========= ========== ==========
BASIC EARNINGS PER SHARE............. $.38 $.23 $1.04 $.57
========= ========= ========== ==========
DILUTED EARNINGS PER SHARE........... $.37 $.22 $1.00 $.56
========= ========= ========== ==========
See accompanying notes to consolidated financial statements.
2
CONSOLIDATED GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
DECEMBER 31,
----------------------
1997 1996
---------- ----------
OPERATING ACTIVITIES:
Net income...................... $ 13,003 $ 6,897
Adjustments to reconcile net
income to net cash provided
by operating activities --
Depreciation and
amortization............ 7,247 4,272
Deferred tax provision..... 2,371 562
Changes in current assets
and current liabilities,
net of effects of
acquisitions --
Accounts receivable..... (2,737) (946)
Inventories............. 2,942 1,878
Prepaid expenses........ (280) (250)
Other assets............ (1,078) (598)
Accounts payable and
accrued liabilities... (1,552) (2,052)
Income taxes payable.... 332 1,706
---------- ----------
Net cash provided
by operating
activities...... 20,248 11,469
---------- ----------
INVESTING ACTIVITIES:
Acquisitions of businesses...... (28,265) (12,808)
Purchases of property and
equipment...................... (7,483) (8,097)
Proceeds from disposition of
assets......................... 915 630
---------- ----------
Net cash used in
investing
activities...... (34,833) (20,275)
---------- ----------
FINANCING ACTIVITIES:
Proceeds from revolving credit
agreement...................... 150,021 49,595
Payments on revolving credit
agreement...................... (132,343) (40,588)
Payments on long-term debt...... (4,766) (2,040)
Proceeds from exercise of stock
options and other.............. 855 928
---------- ----------
Net cash provided
by financing
activities...... 13,767 7,895
---------- ----------
NET DECREASE IN CASH AND CASH
EQUIVALENTS........................ (818) (911)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD................ 3,636 3,086
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD............................. $ 2,818 $ 2,175
========== ==========
See accompanying notes to consolidated financial statements.
3
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 balances and transactions have been eliminated.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and the
Securities and Exchange Commission's rules and regulations for reporting interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation of
the accompanying unaudited consolidated financial statements have been included.
Operating results for the three and nine months ended December 31, 1997 are not
necessarily indicative of future operating results. Balance sheet information as
of March 31, 1997 has been derived from the 1997 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
1997.
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, 1997 and 1996, the basic weighted average shares outstanding were
12,681,971 and 12,272,847. For the nine months ended December 31, 1997 and 1996,
the basic weighted average shares outstanding were 12,552,523 and 12,081,953.
Diluted earnings per share reflect net income divided by the weighted average
number of shares outstanding, including the dilutive effect of outstanding stock
options. For the three months ended December 31, 1997 and 1996, the diluted
weighted average shares outstanding were 13,204,046 and 12,730,040. For the nine
months ended December 31, 1997 and 1996, the diluted weighted average shares
outstanding were 13,031,675 and 12,234,351.
The consolidated statements of cash flows provide information about changes
in cash and exclude the effects of noncash transactions. For purposes of the
consolidated statements of cash flows, the Company considers all highly liquid
investments purchased with original maturities of three months or less to be
cash equivalents. Interest paid during the nine months ended December 31, 1997
and 1996 was $2,619 and $1,590. Income tax payments during the nine months ended
December 31, 1997 and 1996 were $5,668 and $1,687. Significant non-cash
transactions during the nine months ended December 31, 1997 include the issuance
of common stock and assumption of debt in connection with certain of the
Company's acquisitions (see Note 3. Acquisitions). Additionally, the effect of
an accrual totaling $7,350 reflected in the consolidated balance sheet as of
December 31, 1997, related to the purchase of certain printing presses, has been
eliminated from the presentation of the accompanying consolidated statements of
cash flows.
4
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,
1997 1997
------------ ---------
Revolving credit agreements.......... $ 46,378 $28,700
Equipment notes...................... 9,921 9,060
Industrial revenue bond.............. 3,205 --
Real estate notes.................... 339 1,976
Acquisition notes.................... 3,024 2,188
Other................................ -- 20
------------ ---------
62,867 41,944
Less current portion............ (2,398) (2,623)
------------ ---------
$ 60,469 $39,321
============ =========
On June 5, 1997, the Company entered into a $100 million revolving credit
agreement (the "Credit Agreement") with a six-member banking group. The Credit
Agreement, which matures on May 31, 2000, replaced the Company's existing $50
million revolving credit arrangement (the "Terminated Agreement"). On June 10,
1997, all balances due under the Terminated Agreement were repaid in full from
borrowings under the Credit Agreement. Loans outstanding under the Credit
Agreement are unsecured and accrue interest at a variable rate (an average of
6.57% per annum on December 31, 1997).
3. ACQUISITIONS
The Company has completed the following acquisitions during the nine months
ended December 31, 1997:
COMPANY LOCATION DATE
- ------- -------- ----
Tucker Printers Rochester, New York April 1997
The Etheridge Company Grand Rapids, Michigan July 1997
Georges and Shapiro Lithograph Sacramento, California August 1997
Austin Printing Atlanta, Georgia September 1997
Geyer Printing Pittsburgh, Pennsylvania October 1997
Superior Colour Graphics Kalamazoo, Michigan October 1997
The Otto Companies Springfield, Massachusetts October 1997
Walnut Circle Press Greensboro, North Carolina November 1997
To complete the aforementioned acquisitions, the Company issued 136,442
shares of its common stock, paid cash of $28,265 and assumed debt of $5,600.
Subsequent to December 31, 1997, the Company completed the following
acquisitions: Columbia Lithograph in Los Angeles, California; Heath Printers in
Seattle, Washington; StorterChilds Printing in Gainesville, Florida; and Fittje
Bros. Printing in Colorado Springs, Colorado. The Company also announced the
signing of two nonbinding letters of intent to acquire Courier Printing in
Nashville, Tennessee and Tursack Incorporated in Philadelphia, Pennsylvania.
5
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 KNOWN AND UNKNOWN RISKS AND
UNCERTAINTIES, INCLUDING THOSE CREATED BY GENERAL MARKET CONDITIONS, COMPETITION
AND THE POSSIBILITY THAT EVENTS MAY OCCUR WHICH LIMIT THE ABILITY OF THE COMPANY
TO MAINTAIN OR IMPROVE ITS OPERATING RESULTS OR EXECUTE ITS GROWTH STRATEGY OF
ACQUIRING ADDITIONAL 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
Consolidated Graphics, Inc. ("CGX" or the "Company") headquartered in
Houston, Texas, is one of the fastest growing printing companies in the United
States. It is the leading consolidator in a fragmented industry, adding value to
its acquisitions through managerial and operational expertise, financial
strength and economics of scale. The Company currently has 30 printing companies
nationwide, each with an established operating history (ranging from 10-119
years), experienced management, solid customer relationships and a reputation
for quality service and responsiveness.
The Company's sales 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. In addition, one of the Houston companies also provides
transaction-oriented financial printing services. Each printing business has its
own sales, estimating, customer service, prepress, production, postpress 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 cash management, finance, investor
relations and consolidated financial reporting activities.
The Company's strategy 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 the Company's other businesses, typically improve
as the Company's operational strategies are fully implemented.
The Company's consolidated financial results in a given period may be
affected by the timing and magnitude of acquisitions. The Company's consolidated
operating income margins in the periods 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 take advantage of the Company's operational strategies to improve its
financial performance.
6
RESULTS OF OPERATIONS
The following tables set forth the Company's historical income statements
for the periods indicated:
THREE MONTHS NINE MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(IN MILLIONS) (IN MILLIONS)
Sales.............................. $ 61.0 $ 38.2 $ 165.0 $ 100.9
Cost of sales...................... 41.6 26.4 112.9 70.4
--------- --------- --------- ---------
Gross profit.................. 19.4 11.8 52.1 30.5
Selling expenses................... 5.9 3.8 16.0 10.0
General and administrative
expenses......................... 4.6 3.0 12.5 8.0
--------- --------- --------- ---------
Operating income.............. 8.9 5.0 23.6 12.5
Interest expense................... 1.0 .6 2.6 1.6
--------- --------- --------- ---------
Pretax income................. 7.9 4.4 21.0 10.9
Income taxes....................... 3.0 1.6 8.0 4.0
--------- --------- --------- ---------
Net income.................... $ 4.9 $ 2.8 $ 13.0 $ 6.9
========= ========= ========= =========
The following tables set forth the components of income expressed as a
percentage of sales for the periods indicated:
THREE MONTHS NINE MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
Sales.............................. 100.0% 100.0% 100.0% 100.0%
Cost of sales...................... 68.3 69.1 68.4 69.8
--------- --------- --------- ---------
Gross profit.................. 31.7 30.9 31.6 30.2
Selling expenses................... 9.6 9.8 9.7 9.9
General and administrative
expenses......................... 7.6 7.8 7.6 7.9
--------- --------- --------- ---------
Operating income.............. 14.5 13.3 14.3 12.4
Interest expense................... 1.6 1.7 1.6 1.6
--------- --------- --------- ---------
Pretax income................. 12.9 11.6 12.7 10.8
Income taxes....................... 4.9 4.3 4.8 4.0
--------- --------- --------- ---------
Net income.................... 8.0% 7.3% 7.9% 6.8%
========= ========= ========= =========
Acquisitions in fiscal 1997 and 1998 are the primary causes of the absolute
increases in revenues and expenses in the current periods when compared to the
corresponding periods of the prior year. Each of the Company's acquisitions in
fiscal 1997 and 1998 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
The following table sets forth the Company's 1997 and 1998 acquisitions
(collectively, the "1997/98 Acquired Businesses") and indicates the period in
which each business was acquired.
FISCAL 1997 ACQUISITIONS:
Bridgetown Printing................ June 1996
Garner Printing.................... July 1996
Eagle Press........................ July 1996
Mobility........................... October 1996
Theo Davis Sons.................... January 1997
Direct Color....................... January 1997
FISCAL 1998 ACQUISITIONS:
Tucker Printers.................... April 1997
The Etheridge Company.............. July 1997
Georges and Shapiro Lithograph..... August 1997
Austin Printing.................... September 1997
Geyer Printing Company............. October 1997
Superior Colour Graphics........... October 1997
The Otto Companies................. October 1997
Walnut Circle Press................ November 1997
For more information regarding the Fiscal 1997 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, 1997. For more
information regarding the Fiscal 1998 Acquisitions, refer to the accompanying
"Notes to Consolidated Financial Statements" included elsewhere herein.
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED WITH THREE MONTHS ENDED DECEMBER
31, 1996.
Sales increased 60% to $61.0 million for the three months ended December
31, 1997, from $38.2 million for the prior year comparable period. This increase
is due to the addition of the 1997/98 Acquired Businesses and internal growth at
the Company's other businesses. The internal growth resulted primarily from
investments in equipment and technology, which increased production capacity at
certain locations, combined with successful marketing efforts by all locations
to increase market share.
Gross profit increased 64% to $19.4 million for the three months ended
December 31, 1997, from $11.8 million for the prior year comparable period,
primarily due to the addition of the 1997/98 Acquired Businesses. Gross profit
as a percentage of sales increased to 31.7% for the three months ended December
31, 1997, from 30.9% in the corresponding period of the prior year. This
improvement generally reflects increased operating efficiencies from investments
in equipment and technology and cost savings generated by the Company's greater
purchasing power.
Selling expenses increased 57% to $5.9 million for the three months ended
December 31, 1997, from $3.8 million for the prior year comparable period, due
to increased sales levels as discussed above. Selling expenses as a percentage
of sales improved to 9.6% for the three months ended December 31, 1997, from
9.8% in the corresponding period of the prior year. This improvement reflects an
average lower commission percentage generated by the 1997/98 Acquired Businesses
as compared to the Company's historical percentage.
General and administrative expenses increased 56% to $4.6 million for the
three months ended December 31, 1997, from $3.0 million for the prior year
comparable period. Substantially all of the increase was attributable to the
1997/98 Acquired Businesses. General and administrative expenses as a percentage
of sales improved to 7.6% for the three months ended December 31, 1997, from
7.8% in the corresponding period of the prior year, primarily because increased
sales contributed by the 1997/98 Acquired Businesses and internal growth was
greater than the corresponding increase in the amount of overhead expenses.
8
Interest expense increased to $1.0 million for the three months ended
December 31, 1997, from $.6 million for the prior year comparable period,
primarily due to increased borrowings under the Company's revolving credit
facility to finance the cash portions of the purchase price of the 1997/98
Acquired Businesses.
Effective income tax rates reflect an increase to 38% for the three months
ended December 31, 1997, from 37% in the corresponding period of the prior year,
due to the Company's growth by acquisition into states with higher income tax
rates than those states in which the Company previously operated.
NINE MONTHS ENDED DECEMBER 31, 1997 COMPARED WITH NINE MONTHS ENDED DECEMBER 31,
1996.
Sales increased 64% to $165.0 million for the nine months ended December
31, 1997, from $100.9 million for the prior year comparable period. This
increase is due to the addition of the 1997/98 Acquired Businesses and internal
growth at the Company's other businesses. The internal growth resulted from the
Company's previously mentioned capital investments and marketing efforts.
Gross profit increased 71% to $52.1 million for the nine months ended
December 31, 1997, from $30.5 million for the prior year comparable period,
primarily due to the addition of the 1997/98 Acquired Businesses. Gross profit
as a percentage of sales increased to 31.6% for the nine months ended December
31, 1997, from 30.2% in the corresponding period of the prior year. This
improvement generally reflects increased operating efficiencies from the
Company's capital investments and cost benefits resulting from the Company's
greater purchasing power.
Selling expenses increased 60% to $16.0 million for the nine months ended
December 31, 1997, from $10.0 million for the prior year comparable period, due
to the aforementioned increased sales levels. Selling expenses as a percentage
of sales improved to 9.7% for the nine months ended December 31, 1997, from 9.9%
in the corresponding period of the prior year. This improvement reflects an
average lower commission percentage generated by the 1997/98 Acquired Businesses
as compared to the Company's historical percentage and an increase in
non-commissioned "house" sales at certain locations.
General and administrative expenses increased 57% to $12.5 million for the
nine months ended December 31, 1997, from $8.0 million for the prior year
comparable period, due to the addition of the 1997/98 Acquired Businesses.
General and administrative expenses as a percentage of sales improved to 7.6%
for the nine months ended December 31, 1997, from 7.9% in the corresponding
period of the prior year, primarily because the previously mentioned increase in
sales was greater than the corresponding increase in the amount of overhead
expenses.
Interest expense increased to $2.6 million for the nine months ended
December 31, 1997, from $1.6 million for the prior year comparable period due to
increased borrowings under the Company's revolving credit facility to finance
the cash portions of the purchase price of the 1997/98 Acquired Businesses.
Effective income tax rates reflect an increase to 38% for the nine months
ended December 31, 1997, from 36.8% in the corresponding period of the prior
year, due to the Company's growth by acquisition into states with higher income
tax rates than those states in which the Company previously operated.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are for capital expenditures and
acquisitions. Cash generated from operations was $20.2 million for the nine
months ended December 31, 1997, while cash expended for purchases of property
and equipment was $7.5 million for the same period. The remaining $12.7 million
of operating cash flow and net borrowings of $17.7 million under the Company's
revolving credit facility were the primary sources of funds used to complete the
Fiscal 1998 Acquisitions.
On June 5, 1997, the Company entered into a $100 million revolving credit
agreement (the "Credit Agreement") with a six-member banking group. The Credit
Agreement, which matures on May 31, 2000, replaced the Company's previous $50
million revolving credit arrangement.
Loans outstanding under the Credit Agreement are unsecured and accrue
interest, at the Company's option, at (1) the London Interbank Offered Rate
(LIBOR) plus .50% to 1.50% based upon the Company's
9
Debt to Pro Forma EBITDA ratio as defined, redetermined quarterly, or (2) an
alternate base rate based upon the 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. On December
31, 1997, outstanding borrowings under the Credit Agreement were $46.4 million
and were subject to an average interest rate of 6.57% per annum. Additionally,
the Company is subject to certain covenants and restrictions and must meet
certain financial tests as defined in the Credit Agreement. The Company believes
that these restrictions do not adversely affect its acquisition strategy and is
currently in compliance with such financial tests and other covenants as of
December 31, 1997.
Pursuant to an agreement between the Company and Komori America Corporation
(the "Komori Agreement"), the Company has purchased four new printing presses
(three in fiscal 1997 and one thus far in fiscal 1998) for approximately $10
million. The Komori Agreement provides certain volume purchase incentives and
financing options under which the Company may, but is not obligated to, purchase
up to $50 million of printing presses over its term. The Company has exercised
the financing option in connection with the purchase of the first four presses,
which provide for monthly principal and interest payments through 2006 at an
average interest rate of 8.1%. Payment of the Company's obligations under the
Komori Agreement is secured by the purchased presses. The Company is subject to
no significant financial covenants or restrictions in connection with these
obligations.
The Company's remaining debt obligations generally consist of mortgages,
equipment notes, promissory notes, an industrial revenue bond and two $5 million
auxiliary revolving credit agreements, some of which contain financial covenants
and restrictions. The most significant of these place certain restrictions on
future borrowings and acquisitions above specified levels. The Company believes
these restrictions do not adversely affect its acquisition strategy.
Significant uses of capital by the Company since December 31, 1997, along
with the Company's expectations for future capital expenditures and
acquisitions, are as follows:
Subsequent to December 31, 1997, the Company completed the following
acquisitions: Columbia Lithograph in Los Angeles, California; Heath Printers in
Seattle, Washington; StorterChilds Printing in Gainesville, Florida; and Fittje
Bros. Printing in Colorado Springs, Colorado. To complete these acquisitions,
the Company paid cash totaling approximately $10.6 million. The cash portion of
these transactions were financed with borrowings under the Credit Agreement.
The Company expects to make additional capital expenditures and
acquisitions in fiscal 1998 using cash flow from operations and borrowings under
the Credit Agreement. The Company currently has two nonbinding letters of intent
to acquire Courier Printing in Nashville, Tennessee and Tursack Incorporated in
Philadelphia, Pennsylvania.
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.
10
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 which it believes to be adequate.
All other litigation in which the Company is currently involved is not believed
by management to be significant to the Company's financial position or results
of operations. While the outcome of lawsuits or other proceedings against the
Company cannot be predicted with certainty, the Company does not believe the
ultimate outcome of any of these matters will have a material adverse effect on
its business or financial position.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS.
In October 1997 the Company issued 80,556 shares of its common stock to
several persons in connection with the acquisition of Geyer Printing and
Superior Colour Graphics. 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 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 3, 1997, in connection with the press
releases announcing the Company's four new executive vice
president positions and the completion of the acquisition of
Geyer Printing.
(2) Form 8-K, filed October 27, 1997, in connection with the
press release announcing the completion of the acquisition
of Superior Colour Graphics.
(3) Form 8-K, filed November 3, 1997, in connection with the
press releases announcing the Company's fiscal 1998 second
quarter results and the completion of the acquisition of
The Otto Companies.
(4) Form 8-K, filed November 17, 1997, in connection with the
press release announcing the completion of the acquisition
of Walnut Circle Press.
(5) Form 8-K, filed December 8, 1997, in connection with the
press release announcing the signing of a nonbinding
letter of intent to acquire ShorterChilds Printing.
(6) Form 8-K, filed December 11, 1997, in connection with the
press release announcing the signing of a nonbinding
letter of intent to acquire Fittje Bros. Printing.
(7) Form 8-K, filed December 22, 1997, in connection with the
press release announcing the signing of a nonbinding
letter of intent to acquire Courier Printing.
(8) Form 8-K, filed January 15, 1998, in connection with the
press releases announcing the signing of nonbinding
letters of intent to acquire Heath Printers and the
completion of the purchase of Columbia Lithograph.
(9) Form 8-K, filed January 28, 1998, in connection with the
press releases announcing the Company's fiscal 1998 third
quarter results and the completion of the acquisitions of
Storter Childs Printing and Heath Printers.
(10) Form 8-K, filed February 2, 1998, in connection with the
press release announcing the signing of a nonbinding
letter of intent to acquire Tursack Incorporated.
(11) Form 8-K, filed February 4, 1998, in connection with the
press release announcing the completion of the acquisition
of Fittje Bros. Printing.
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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.
(Registrant)
Dated: February 11, 1998 By: /s/ HAROLD GAUBERT, JR.
HAROLD GAUBERT, JR.
EXECUTIVE VICE PRESIDENT --
FINANCE AND ADMINISTRATION,
CHIEF FINANCIAL AND ACCOUNTING
OFFICER
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