SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended June 30, 1998
Commission File Number 000-24021
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
New Jersey 22-3561164
(State of incorporation) (I.R.S. Employer
Identification Number)
629 Grove Street
Jersey City, NJ
(Address of principal executive offices)
07310
(Zip Code)
201-217-1990
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether 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, no par value, of the Registrant
outstanding at August 6, 1998 was 5,295,000
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
INDEX
Page
----
Part I -- Financial Information
Item 1 -- Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of December 31, 1997
and June 30, 1998 ............................................. 1
Condensed Consolidated Statements of Income for the Three Months
and Six Months Ended June 30, 1997 and 1998 ................... 2
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1997 and 1998 .................................. 3
Notes to Condensed Consolidated Financial Statements ............. 4
Item 2 -- Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................ 7
Part II -- Other Information
Item 2 -- Changes in Securities and Use of Proceeds .................. 14
Item 6 -- Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.17 - Credit and Security Agreement dated July 9, 1998
between Summit Bank and Cunningham Graphics International, Inc.
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
Part I. FINANCIAL INFORMATION
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
December 31, June 30,
1997 1998
------- -------
(Note) (Unaudited)
Assets
Current assets:
Cash and cash equivalents ........................................... $ 67 $13,737
Accounts receivable (net of allowance for doubtful accounts
of $50 in 1997 and $214 in 1998) .................................. 5,673 8,589
Inventories ......................................................... 940 1,313
Prepaid expenses and other current assets ........................... 78 728
Notes and advances receivable -- stockholder/officers ............... 136 --
Deferred income taxes ............................................... 47 282
------- -------
Total current assets ................................................... 6,941 24,649
Property and equipment -- net .......................................... 3,579 7,119
Excess of cost over net assets acquired, net of accumluated amortization -- 10,908
Other assets ........................................................... 418 147
------- -------
$10,938 $42,823
======= =======
Liabilities and stockholders' equity
Current liabilities:
Current portion of long-term debt ................................... $ 407 $ 756
Revolving lines of credit ........................................... 300 703
Current portion of obligations under capital leases ................. 178 630
Accounts payable .................................................... 3,854 3,838
Accrued expenses .................................................... 1,474 3,558
------- -------
Total current liabilities .............................................. 6,213 9,485
Long-term debt -- net of current portion ............................... 1,185 1,024
Obligations under capital leases -- net of current portion ............. 332 1,359
Deferred income taxes .................................................. 57 612
Other liabilities ...................................................... -- 115
Commitments and contingencies
Stockholders' equity:
Preferred stock, no par value, 10,000,000 authorized,
none issued ...................................................... -- --
Common stock, no par value, 30,000,000 authorized,
5,295,000 issued and outstanding ................................. 6 29,432
Additional paid-in capital .......................................... 734 --
Cummulative foreign currency translation adjustment ................. -- 12
Retained earnings ................................................... 2,411 784
------- -------
3,151 30,228
------- -------
$10,938 $42,823
======= =======
The accompanying notes are an integral part of the condensed financial
statements.
Note: The balance sheet as of December 31, 1997 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
1
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except shares and per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1997 1998 1997 1998
----------- ----------- ----------- -----------
Net sales ........................................ $ 8,506 $ 13,080 $ 17,175 $ 23,930
Operating expenses:
Costs of production .......................... 6,227 9,349 12,766 17,473
Selling, general and administration .......... 1,562 1,890 2,925 3,491
Depreciation and amortization ................ 187 283 326 466
----------- ----------- ----------- -----------
7,976 11,522 16,017 21,430
Income from operations ........................... 530 1,558 1,158 2,500
Interest income (expense) .................... (60) 18 (137) (42)
Other income (expense) ....................... (21) 12 19 19
----------- ----------- ----------- -----------
Income before income taxes ....................... 449 1,588 1,040 2,477
Provision for income taxes ................... 27 724 62 797
----------- ----------- ----------- -----------
Net income ....................................... $ 422 $ 864 $ 978 $ 1,680
=========== =========== =========== ===========
Pro Forma Data (unaudited)
Income before income taxes ....................... $ 449 $ 1,588 $ 1,040 $ 2,477
Pro forma provision for income taxes ......... 184 753 426 1,117
----------- ----------- ----------- -----------
Pro forma net income ............................. $ 265 $ 835 $ 614 $ 1,360
=========== =========== =========== ===========
Pro forma earnings per common share:
Basic ........................................ $ 0.17 $ 0.35
=========== ===========
Diluted ...................................... $ 0.17 $ 0.35
=========== ===========
Proforma weighted average number of common shares:
Basic ........................................ 4,757,190 3,865,793
=========== ===========
Diluted ...................................... 4,822,418 3,898,587
=========== ===========
The accompanying notes are an integral part of the condensed financial
statements.
2
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
Six Months Ended June 30, 1997 and 1998
(in thousands)
(Unaudited)
1997 1998
-------- --------
Cash flows from operating activities
Net income ................................................. $ 978 $ 1,680
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization .......................... 325 466
Deferred income taxes .................................. (11) 154
Changes in operating assets and liabilities:
Decrease (Increase) in accounts receivable ............. 69 (1,334)
Increase in inventory .................................. (371) (176)
Decrease (Increase) in prepaid expenses and other assets 42 (501)
(Increase) decrease in other assets .................... (3) 271
Decrease in advance to officers ........................ 158 136
Decrease in accounts payable ........................... (381) (905)
Increase in accrued expenses ........................... 699 1,275
-------- --------
Net cash provided by operating activities .................. 1,505 1,066
Cash flows from investing activities
Proceeds from the disposition of equipment ............. 1,325 --
Acquisition of property and equipment .................. (1,458) (1,532)
Acquisition of Roda Limited, net of cash acquired ...... -- (6,127)
-------- --------
Net cash used in investing activities ...................... (133) (7,659)
Cash flows from financing activities
Net proceeds from sale of common stock ................. -- 29,426
Net principal payments on revolving lines of credit .... (1,050) (70)
Proceeds from long-term borrowings, third party ........ 38 --
Principal payments on long-term borrowings, third-party (49) (2,716)
Principal payments on obligations under capital lease .. (90) (188)
Principal payments on notes payable - related parties .. (227) --
Distrubuted to stockholders ............................ (211) (6,189)
Net cash (used in) provided by financing activities ........ (1,589) 20,263
-------- --------
Net (decrease) increase in cash and cash equivalent ........ (217) 13,670
Cash and cash equivalents, beginning of year ............... 543 67
-------- --------
Cash and cash equivalents, end of second quarter ........... $ 326 $ 13,737
======== ========
Supplemental disclosure of noncash investing and
financing activities
Acquisition of equipment under capital leases .............. $ -- $ 967
======== ========
The accompanying notes are an integral part of the condensed financial
statements.
3
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
1. Organization and Basis of Presentation
Cunningham Graphics International, Inc. (the "Company") was incorporated in New
Jersey on January 12, 1998 with an authorized capital of 30,000,000 shares of
Common Stock, no par value (the "Common Stock") and 10,000,000 shares of
Preferred Stock, no par value. The Company provides a wide range of graphic
communication services to financial institutions and corporations, focusing on
producing and distributing time-sensitive analytical research and marketing
materials and on providing on-demand printing.
On April 22, 1998 Cunningham Graphics, Inc. (the "Predecessor") reorganized (the
"Reorganization") such that all the stockholders of the Predecessor contributed
all of the outstanding shares of common stock of the Predecessor to Cunningham
Graphics International, Inc., in exchange for a total of 2,595,260 shares of
common stock, no par value (the "Common Stock") and promissory notes (the
"Exchange Notes") in the aggregate principal amount of $2.6 million. In the
Reorganization, the Company also assumed the Predecessor's obligations under
promissory notes in the aggregate principal amount of $2.2 million, representing
undistributed S corporation taxable income (the "Distribution Notes").
Collectively the Exchange Notes and Distribution Notes are known as the
"Reorganization Notes." The Company's Registration Statement on Form S-1 (File
No. 333-46541) was declared effective by the Securities and Exchange Commission
on April 21, 1998. The Company's Registration Statement on Form S-1 (File No.
333-50713), filed pursuant to Rule 462(b) under the Securities Act of 1933, as
amended, became effective on April 22, 1998. Pursuant to the foregoing
Registration Statements, the Company's initial public offering (the "Offering")
of 2,530,000 shares of Common Stock, no par value per share, began on April 22,
1998 (See Note 4). Accordingly, the financial statements in this Quarterly
Report on Form 10-Q reflect the results of operations of the Predecessor through
April 22, 1998 (the effective date of the Offering) and the combined results of
the Company from April 23,1998 through June 30, 1998.
On April 27, 1998, the Company closed the acquisition (the "Acquisition") of the
outstanding ordinary share capital of Roda Limited, an English corporation
("Roda") for consideration consisting of cash in the amount of $4.1 million and
169,739 shares of Common Stock, valued at the Offering price of $13.00 per
share. In addition, the Company placed into custody of its lawyers in London
$1.8 million, to be utilized to acquire the outstanding preference share capital
of Roda on or before June 30, 1998. The outstanding preference share capital of
Roda was acquired on June 4, 1998 for $1.8 million. The excess of the purchase
price over the net assets acquired totaled approximately $11.0 million and was
recorded as goodwill. The goodwill is being amortized over a 40-year period.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and
4
with the instructions to Form 10-Q and Article 10 of Regulation S-X of the
Securities and Exchange Commission (the "SEC"). Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. The condensed unaudited financial
statements should be read in conjunction with the final prospectus of Cunningham
Graphics International, Inc. dated April 22, 1998. Operating results for the
three month and six month periods ended June 30, 1998 are not necessarily
indicative of the results that may be expected for the entire year ending
December 31, 1998.
2. Pro forma Income Taxes
The Company elected to be taxed as an S corporation pursuant to the Internal
Revenue Code and certain state and local tax regulations. Therefore, with
regards to the Company's actual results through June 30, 1998, no provision has
been made in the accompanying financial statements for federal and certain state
and local income taxes up to April 22, 1998, since such income taxes are the
liability of the Predecessor's stockholders.
As a result of the Reorganization, the Company's S corporation election
terminated on April 22, 1998. Accordingly, in the quarter ended June 30, 1998
the Company recorded additional deferred tax assets of $235,000 and additional
deferred tax liabilities of $329,000 and a corresponding net tax charge of
$94,000 in the statement of income in accordance with the provisions of
Financial Accountings Standards Board issued Statement No. 109.
The accompanying condensed consolidated statement of operations for the three
months and six months ended June 30, 1998 and 1997 include a provision for
income taxes on an unaudited pro forma basis as if the Company had been a C
corporation subject to applicable federal and state income taxes.
3. Pro Forma Earnings Per Share
Pro forma earnings per share is computed using pro forma net income and pro
forma shares outstanding and has been determined based on the methodology
outlined immediately below. However, after April 22, 1998, the number of shares
utilized in determining earnings per share exclude the number of common shares
that the Predecessor would have needed to issue in order to settle the
Reorganization Notes.
The pro forma shares used is based on the weighted average of (i) the initial
Cunningham Graphics International, Inc. founding share, (ii) 2,595,260 shares
issued to stockholders of the Predecessor in the Reorganization, (iii) 369,231
shares, representing the value of the $4.8 million principal amount of the
Reorganization Notes at the Offering price of $13.00 per share, (iv) 169,739
shares issued in connection with the Acquisition, and (v) the 2,530,000 shares
issued in connection with the Offering, inclusive of 330,000 shares subject to
an over-allotment option.
5
4. Initial Public Offering
On April 27, 1998, the Company closed the Offering of 2,530,000 shares of Common
Stock inclusive of 330,000 shares subject to an over-allotment option, at a
price of $13.00 per share. The Reorganization Notes were paid from the net
proceeds of the Offering.
5. Pro Forma Consolidated Results of Operations
The following table presents the unaudited pro forma consolidated results of
operations for the year ended December 31, 1997 and the three months and six
month periods ended June 30, 1998, as if the Acquisition had occurred on January
1, 1997: (in thousands, except earnings per share)
Ended June 30, 1998
-------------------
December 31, Three Six
1997 months months
---- ------ ------
Sales $42,705 $13,747 $26,669
Pro forma net income $ 1,576 $ 677 $ 1,329
Pro forma earnings per share common share $ .44 $ .12 $ .30
The pro forma net income amounts reflect (i) the elimination of Roda's goodwill
amortization of $90,000 for the full year 1997, $8,000 for the three months and
$31,000 for the six months ended June 30, 1998 related to the 1996 management
buyout of Roda, (ii) the Company's recognition of amortization of goodwill from
the Acquisition of $272,000 for full year 1997 and $23,000 for the period April
1 through April 26 (the Acquisition date) and $92,000 for the period January 1
through April 26, (iii) the elimination of $106,000 for full year 1997 of
minority interest in the earnings of Roda and (iv) a pro forma provision for
income taxes for the Company and Roda on a combined basis computed utilizing
effective tax rates of 41% for United States income taxes and 31% for United
Kingdom income taxes for both the full year 1997 and the three months and six
month period ended June 30, 1998. The pro forma results are not necessarily
indicative of the results of operations that would have occurred had the
acquisition taken place at the beginning of the periods presented nor are they
intended to be indicative of results that may occur in the future.
The pro forma shares used for both the full year 1997 and for the three months
and six months periods ended June 30, 1998 has been determined based on the
methodology outlined immediately below. However, after April 22, 1998, the
number of shares utilized in determining earnings per share exclude the number
of common shares that the Predecessor would have needed to issue in order to
settle the Reorganization Notes and after April 27, 1998 the number of shares
exclude the number of common shares corresponding to the $5.9 million cash paid
to Roda stockholders in connection with the Acquisition.
Pro forma shares used is based on the weighted average of (i) the initial
Cunningham Graphics International, Inc. founding share, (ii) 2,595,260 shares to
be issued in the Reorganization, (iii) 369,231 shares representing the number of
shares having a value, at the initial public offer price
6
of $13.00, corresponding to the principal amount of the Reorganization Notes,
(iv) 169,739 shares issuable in connection with the Acquisition, and (v) 456,992
shares, representing the number of shares having a value at the offering price
of $13.00 per share, corresponding to the $5.9 million liability for cash
payable to the Roda stockholders in connection with the Acquisition and (vi) the
2,530,000 shares issued in connection with the Offering, inclusive of 330,000
shares subject to an over-allotment option.
6. Reporting Comprehensive Income:
The Company adopted Statement of Financial Standards (SFAS) No. 130, "Reporting
Comprehensive Income" in April 1998. SFAS No. 130 establishes standards for
reporting and display of comprehensive income (all changes in equity during a
period except those resulting from investments by owners and distributions to
owners) and its components in the financial statements. This new standard is
effective for the Company for 1998 and it is currently anticipated to only
impact the Company's financial statements related to the reporting of exchange
rate translation gains and losses of Roda. For the three and six months ended
June 30, 1998 the Company reported comprehensive income totaling $871,000, and
$1,687,000 respectively, consisting of net income plus equity adjustments from
foreign currency translations on an after-tax basis. There were no non-owner
investments and distributions changes in equity for all of 1997, therefore
comprehensive income equaled net income for the three and six month periods
ended June 30, 1997.
Item 2. Management's Discussion and Analysis and Analysis of Financial
Conditions of Operations.
Overview
Unless otherwise indicated or the context otherwise requires, all references
herein to the "Company" mean Cunningham Graphics International, Inc. and its
subsidiaries collectively subsequent to its initial public offering and the
acquisition (the "Acquisition") of Roda Limited, English company ("Roda"), and
Cunningham Graphics, Inc. (the "Predecessor") alone, with respect to periods
prior thereto.
The Company provides a wide range of graphic communications services to
financial institutions and corporations, focusing on producing and distributing
time-sensitive analytical research and marketing materials and providing
on-demand printing services.
The Company commenced its domestic operations in 1989 when it opened a printing
facility in New Jersey to provide overnight printing and delivery of
time-sensitive analytical research and marketing reports for its financial
institution customers in the New York City area. To date, the Company has
experienced significant domestic growth through the (i) expansion of its
existing customer base, (ii) addition of products and services, (iii)
assimilation of in-house printing operations, (iv) acquisition of selected
assets and (v) establishment of strategic alliances which, in the case of Roda,
led to the Acquisition on April 27, 1998.
7
On April 22, 1998 the Predecessor reorganized (the "Reorganization") such that
it became a wholly owned subsidiary of the Company. On April 27, 1998, the
Company completed an initial public offering of 2,530,000 shares of its Common
Stock (the "Offering") at a price of $13.00 per share. The net proceeds of the
Offering to the Company after deducting underwriting discounts and commissions
and other expenses were $29.4 million.
Until the Reorganization, the Predecessor was taxed as an S corporation. The
Reorganization caused a termination of the S corporation status. As a result,
the Company became subject to additional federal and state income taxes. The
Company recorded additional deferred tax assets of approximately $235,000 and
additional deferred tax liabilities of approximately $329,000 and a
corresponding net tax charge of approximately $94,000 in its statement of
income. This special tax expense is reflected in the Company's provision for
income taxes on the Condensed Statement of Income for the three and six months
ended June 30, 1998.
The Company's five largest customers, all of which are financial institutions,
accounted for approximately 61% of its net sales for the six months ended June
30, 1998 and 68% for the same period in 1997. The Company's largest customer,
Goldman, Sachs & Co. accounted for approximately 24% of the Company's net sales
for the six months ended June 30, 1998 and 20% for the same period in 1997.
Although the Company has had long-term relationships with its significant
customers, the Company's customers may terminate their relationships upon
minimal, if any, advance notice and there can be no assurance that these
relationships will continue. In addition, given the concentration of customers
in the financial services industry, the Company's results will be particularly
sensitive to fluctuations in the economy or financial markets affecting this
industry.
The Company's net sales are derived primarily from providing printing and
distribution services for customers in the financial services, insurance and
publishing industries, a substantial component of which is the printing and
distribution of financial and analytical research and marketing materials for
the financial services industry. The Company also derives part of its net sales
from providing fulfillment services, including labeling, mailing, inserting, kit
assembly, and inventory management for its customers. Finally the Company
provides computer and data output services and other document related services
for customers.
The Company's operating expenses consist of the following: (i) costs of
production, (ii) selling, general and administrative expenses and (iii)
depreciation and amortization. Costs of production consist primarily of the cost
of paper and other production materials, labor, outside services, insurance and
other production expenses including repairs and maintenance and rent. Selling,
general and administrative expenses consist primarily of management,
administrative and marketing expenses, salaries for officers, salaries and
commissions earned by sales persons and professional fees.
The Company's quarterly operating results have been and will continue to be
subject to variation, depending upon factors such as the mix of business among
the Company's services, the cost of materials, labor and technology,
particularly in connection with the delivery of business services, the costs
associated with initiating new outsourcing contracts or opening new
8
offices, the economic condition of the Company's target markets, seasonal
concerns and the cost of acquiring and integrating new businesses.
Results of Operations
The following tables set forth certain items from the Company's Statements of
Income as a percentage of net sales for the periods indicated:
Three Months ended June 30, 1998 compared to three months ended June 30, 1997
For Three Months Ended June 30,
-------------------------------
1997 1998
------ ------
Net sales 100.0% 100.0%
Costs of production 73.2 71.5
Selling, general and administrative 18.4 14.4
Depreciation and amortization 2.2 2.2
------ ------
Income from operations 6.2 11.9
Interest income (expense) (0.7) 0.1
Other income (expense) (0.2) 0.1
------ ------
Income before income taxes 5.3 12.1
Provision for income taxes 0.3 5.5
------ ------
Net Income 5.0% 6.6%
====== ======
Pro Forma Data:
Income before income taxes 5.3% 12.1%
Pro forma provision for income taxes 2.2 5.8
------ ------
Pro forma net income 3.1% 6.4%
====== ======
Net sales. The Company reported net sales of $13.1 million for the three months
ended June 30, 1998 compared to $8.5 million for the same period in 1997, an
increase of $4.6 million or 54.1%. The increase was attributable to the
inclusion of $1.9 million of Roda's net sales after the Acquisition, together
with an increase of $2.7 million in net sales from domestic operations. Domestic
sales increased in same customer base sales and value-added revenue.
Impressions, which is the Company's unit of measure and equates to total pages
printed, increased domestically by 17.5% for the three months ended June 30,
1998 over the same period in 1997.
Costs of production. Costs of production were $9.3 million for the three months
ended June 30, 1998, as compared to $6.2 million for the same period in 1997, an
increase of $3.2 million or 50.0%. Costs of production were approximately 71.5%
of net sales for the three months ended June 30, 1998, compared to 73.2% for the
same period in 1997. The reduction of costs of production as a percentage of net
sales was attributable to the inclusion of Roda's lower percentage costs of
production for the period subsequent to the Acquisition.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $1.9 million for the three months ended June 30,
1998, as compared to $1.6 million for the same period in 1997, an increase of
approximately $0.3 million or 18.8%. Selling, general and
9
administrative expenses were 14.4 % of net sales for the three months ended June
30, 1998 compared to 18.4% for the same period in 1997. The increase was
attributable to the inclusion of Roda's selling, general and administration
expenses after the Acquisition. The 4.0% decrease of selling, general and
administrative expenses, as a percentage of net sales was attributable to both
improved operational efficiencies in domestic operations and the inclusion of
Roda's lower selling, general and administrative expenses as a percentage of its
net sales.
Depreciation and amortization: Depreciation and amortization expenses were
$283,000 for the three months ended June 30, 1998, as compared to $187,000 for
the same period in 1997, an increase of $96,000, or 51.3% as compared to the
same period in 1997. The increase was the result of the inclusion of Roda's
expenses after the Acquisition, goodwill amortization associated with the
Acquisition and the purchase of new equipment for use in domestic operations.
Pro forma provision for income taxes. On April 22, 1998 the Company converted
from an S corporation to a C corporation for tax purposes (the "Conversion") in
conjunction with the Reorganization. For comparative purposes pro forma
provision for income taxes was calculated as if the Conversion had occurred on
January 1, 1997. The pro forma provision for income taxes was $753,000 for the
three months ended June 30, 1998, as compared to $184,000 for the same period in
1997. As a percentage of profits before taxes the tax rate was 47.4% for the
three months ended June 30, 1998 and 41.0% for the same period in 1997. The
increase in pro forma provision of income taxes as a percentage of profit before
taxes was due to a special one time $94,000 charge attributable to Conversion,
partially offset by the inclusion of Roda's operations with a tax rate of 31%.
Pro forma net income. As a result of the foregoing, pro forma net income
decreased to $835,000 from actual net income of $864,000 for the three months
ended June 30 1998 and for the same period in 1997 pro forma net income
decreased to $265,000 from actual net income of $422,000. As a percentage of net
sales, pro forma net income decreased to 6.4% from actual net income of 6.6% for
the three months ended June 30, 1998 and for the same period in 1997 pro forma
net income decreased to 3.1% from actual net income of 5.3%.
10
Six Months ended June 30, 1998 compared to six months ended June 30, 1997
For Six Months Ended June 30,
-----------------------------
1997 1998
------ ------
Net sales 100.0% 100.0%
Costs of production 74.3 73.0
Selling, general and administrative 17.0 14.6
Depreciation and amortization 1.9 1.9
------ ------
Income from operations 6.7 10.4
Interest income (expense) (0.8) (0.2)
Other income (expense) 0.1 0.1
------ ------
Income before income taxes 6.1 10.4
Provision for income taxes 0.4 3.3
------ ------
Net income 5.7% 7.0%
====== ======
Pro Forma Data:
Income before income taxes 6.1% 10.4%
Pro forma provision for income taxes 2.5 4.7
------ ------
Pro forma net income 3.6% 5.7%
====== ======
Net sales. The Company reported net sales of $23.9 million for the six months
ended June 30, 1998 compared to $17.2 million for the same period in 1997, an
increase of $6.7 million or 39.0%. The increase was attributable to, the
inclusion of $1.9 million of Roda's net sales after the Acquisition together
with an increase of $4.8 million in net sales from domestic operations. Domestic
sales increased in same customer base sales and value-added revenue.
Impressions, which is the Company's unit of measure and equates to total pages
printed, increased domestically by 12.5% for the six months ended June 30, 1998
compared to same period in 1997.
Costs of production. Costs of production were $17.5 million for the six months
ended June 30, 1998, as compared to $12.8 million for the same period in 1997,
an increase of $4.7 million or 36.7%. Costs of production were approximately
73.0% of net sales for the six months ended compared to 74.3% for the same
period in 1997. The reduction of costs of production as a percentage of net
sales was attributable to the inclusion of Roda's lower percentage costs of
production for the period subsequent to the Acquisition.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $3.5 million for the six months ended June 30,
1998, as compared to $2.9 million for the same period in 1997, an increase of
approximately $0.6 million or 20.7%. Selling, general and administrative
expenses were 14.6 % of net sales for the six months ended June 30, 1998
compared to 17.0% for the same period in 1997. The increase in expenses was
attributable to the inclusion of Roda's selling, general and administration
expenses after the Acquisition and the hiring of additional personnel in
domestic operations to support growth. The 2.4% decrease in selling, general and
administrative expenses, as a percentage of net sales, was the result of lower
11
domestic selling expenses as a percentage of net sales, and the inclusion after
the Acquisition of Roda's lower selling, general and administrative expenses as
a percentage of net sales.
Depreciation and amortization: Depreciation and amortization expenses were
$466,000 for the six months ended June 30, 1998, as compared to $326,000 for the
same period 1997, an increase of $140,000, or 42.9%. The increase was the result
of, the inclusion of Roda's expenses after the Acquisition, goodwill
amortization associated with the Acquisition and the purchase of new equipment
for use in the Company's domestic operations.
Pro forma provision for income taxes. On April 22, 1998 the Company converted
from an S corporation to a C corporation for tax purposes (the "Conversion") in
conjunction with the Reorganization. For comparative purposes pro forma
provision for income taxes was calculated as if the Conversion occurred on
January 1, 1997. The pro forma provision for income taxes was $1.1 million for
the six months ended June 30, 1998, as compared to $426,000 for the same period
in 1997. As a percentage of profit before taxes the tax rate was 45.1% for the
six month period ended June 30, 1998, as compared to 41% for same period in
1997. The increase in pro forma provision for income taxes, as a percentage of
profit before taxes, was due to a special one time charge of $94,000 charge
attributable to the Conversion, partially offset by inclusion of Roda's
operations at a 31% tax rate after the Acquisition.
Pro forma net income. As a result of the foregoing, pro forma net income
decreased to $1.4 from actual net income of $1.7 million for the six months
ended June 30 1998 and pro forma net income decreased to $614,000 from actual
net income of $978,000 for the same period in 1997. As a percentage of net
sales, pro forma net income decreased 5.7% of net sales from actual net income
of 7.0% for the six months ended June 30, 1998 and pro forma net income
decreased to 3.6% from actual net income of 6.1% for the same period in 1997.
Liquidity and Capital Resources
As a result of the Offering, the Company received approximately $29.4 million
net proceeds, after deducting underwriting discounts and commissions and other
offering expenses. The Company used $6.1 million to pay for the acquisition of
Roda, $4.8 million to pay notes to stockholders of the Predecessor, $3.6 million
to repay indebtedness of the Company and Roda, $2.2 million for payment to trade
creditors to take advantage of discounts, and $1.3 million for equipment
purchases. See "Part II, Item 2, Changes in Securities and Use of Proceeds." The
Company expects to use the remaining net proceeds from the Offering to fund its
growth strategy.
Until the closing of the Offering, the Company financed its operations,
including working capital and equipment acquisitions, using bank borrowing,
vendor financing, financing lease transactions, as well as from cash flow
generated from operating activities, and stockholder debt and equity
contributions.
Net cash provided by operating activities was $1.1 million for the six months
ended June 30, 1998 and $1.5 for the same period in 1997.
12
Net cash used in investing activities was $7.7 million for the six months ended
June 30, 1998 and $ 1.5 million for the same period in 1997. Net cash of $1.3
million was provided by investing activities for the six month period ended June
30, 1997. Net cash provided by investing activities for the six months ended
June 30, 1997 was attributable to cash generated from the sale and leaseback of
certain equipment for $1.3 million.
Net cash provided by financing activities was $20.3 million for the six months
ended June 30, 1998, as compared to a net cash used in financing activities of
$1.6 million for the same period in 1997. Net cash provided by financing
activities is attributable to the $29.4 million net proceeds of the Offering,
reduced by, $2.2 million to repay the Summit Bank indebtedness, $1.4 million to
repay certain indebtedness of Roda and $4.8 million to repay indebtedness to the
stockholders of the Predecessor incurred in the Reorganization.
On July 9, 1998 the Company entered into a $30.0 million revolving line of
credit facility with Summit Bank. The revolving line of credit may be used for
acquisitions and includes sub-limits of $5.0 million for purchase of equipment
and $7.5 million for working capital. The facility is for three years, maturing
July 9, 2001 and has annual extension options. The covenants of the revolving
line of credit include, among other things, limitations on the disposition of
material amounts of assets and the incurrence of additional indebtedness. In
addition certain financial covenants, as to minimum net worth, maximum leverage
and debt coverage ratios must be maintained. Complying with the net worth
covenant could restrict the ability of the Company to pay dividends on Common
Stock, although the Company does not have the intention of paying dividends for
the foreseeable future. As at August 10, 1998, $27.9 million remained available
for borrowing under the line of credit.
At June 30, 1998 the Company had a $2.0 million revolving credit facility with
Summit Bank that would have expired on July 31, 1998. At June 30, 1998, there
are no outstanding borrowings under such facility. This $2.0 million credit
facility terminated upon the parties entering into the new credit facility.
Roda has a credit facility with the Bank of Scotland (the "Roda Facility")
consisting of a $2.0 million ((pound)1.2 million) term loan and a $750,000
((pound)450,000) revolving line of credit. The line of credit is reviewed by the
bank annually for renewal, but is payable on demand. The debt is collateralized
by substantially all of Roda's assets. As of June 30, 1998, approximately
$700,000 ((pound)420,000) was outstanding on the credit facility and $1.4
million ((pound)840,000) was outstanding under the term loan. The term loan is
payable in equal monthly installments through October 20, 2001. Certain
technical defaults under the Roda Facility existed as of June 30, 1998 but have
been waived by the Bank. On August 10, 1998 the Company, through its revolving
credit facility with Summit Bank, issued a Standby Letter of Credit to Bank of
Scotland to guarantee the Roda Facility and in consideration therefor, the Bank
of Scotland eliminated existing financial covenants under such line of credit.
13
Recent Pronouncements of the Financial Accounting Standards Board
Recent pronouncements of the Financial Accounting Standards Board ("FASB") which
were not required to be adopted at December 31, 1997, include the following
Statements of Financial Accounting Standards ("SFAS").
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information" which will be effective for the Company for the year ending
December 31, 1998, establishes standards for reporting information about
operating segments in the annual financial statements, selected information
about operating segments in the interim financial reports and disclosures about
products and services, geographic areas and major customers. This new standard
will require the Company to report financial information on the basis that is
used internally for evaluating segment performance and deciding how to allocate
resources to segments, which may result in more detailed information in the
notes to the Company's financial statements than is currently required and
provided. The Company has not yet determined the effects, if any, of
implementing SFAS 131 on its reporting financial information.
Forward Looking Statements
When used in this and in future filings by the Company with the Securities and
Exchange Commission, in the Company's press releases and in oral statements made
with the approval of an authorized executive officer of the Company, the words
or phrases "will likely result." "expects," "plans," "will continue," " is
anticipated," "estimated," "project" or "outlook" or similar expressions
(including confirmations by an authorized executive officer of the Company of
any such expressions made by a third party with respect to the Company) are
intended to identify forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements, each
of which speak only as of the date made. Such statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical earnings and those presently anticipated or projected. The
Company has no obligation to publicly release the result of any revisions that
may be made to any forward-looking statements to reflect anticipated or
unanticipated events or circumstances occurring after the date of such
statements.
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
(d) The Company's Registration Statement on Form S-1 (File No. 333-46541) was
declared effective by the Securities and Exchange Commission on April 21, 1998.
The Company's Registration Statement on Form S-1 (File No. 333-50713), filed
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, became
effective on April 22, 1998. Pursuant to the foregoing Registration Statements,
the Company's initial public offering (the "Offering") of Common Stock, no par
value per share, began on April 22, 1998. All of the 2,530,000 shares of Common
Stock offered by the Company, inclusive of 330,000 shares subject
14
to an over-allotment option, were sold on April 22 and 23, 1998. The managing
underwriters for the Offering were Schroder & Co. Inc. and Prudential Securities
Incorporated.
The aggregate offering price of the securities sold was $32,890,000. The
Company incurred underwriting discounts and commissions of $2,302,300 and
reasonably estimates that it incurred $1,150,000 on account of Securities and
Exchange Commission registration fees, NASD filing fee, Nasdaq National Market
Fee, "Blue Sky" fees, legal and accounting fees, printing costs and transfer
agent fees. None of the expenses were incurred to directors, officers or persons
owning 10% or more of any class of the Company's securities.
The net proceeds of the Offering after deducting expenses was $29,437,700,
which has been applied to date, as follows:
(A) Acquisition of ordinary share capital
of Roda Limited, an English corporation
("Roda"): $ 4,103,148
(B) Acquisition of preference share capital
of Roda: $ 1,837,745
(C) Advance to Roda for repayment of
indebtedness: $ 1,429,305
(D) Acquisition cost associated with Roda $ 166,000
(E) Payment of indebtedness due to
stockholders of the Company prior to
the offering: $ 4,800,000
(F) Payment of indebtedness to bank: $ 2,200,000
(G) Payment of trade creditors to take
advantage of discounts: $ 2,162,391
(H) Equipment purchases $ 1,323,000
-----------
TOTAL $18,021,589
===========
The remaining $11.4 million net proceeds have been invested in short term high
grade Commercial Paper and money market funds.
15
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.17 - Credit and Security Agreement dated July 9, 1998
between Summit Bank and Cunningham Graphics International, Inc.
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
16
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
(Registrant)
By: /s/ Michael R. Cunningham August 11, 1998
- ------------------------------------- -------------------
Michael R. Cunningham (Date)
President and Chief Executive Officer
(Duly authorized officer)
By: /s/ Robert M. Okin August 11, 1998
- ------------------------------------- -------------------
Robert M. Okin (Date)
Chief Financial Officer
(Principal Financial Officer)
17