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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED MARCH 31, 1996
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED) 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 (IRS EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
2210 WEST DALLAS STREET 77019
HOUSTON, TEXAS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(713) 529-4200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities Registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(TITLE OF CLASS)
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[ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of May 31, 1996:
COMMON STOCK, $.01 PAR VALUE -- $111,933,718
The number of shares outstanding of the issuer's common stock as of May 31,
1996:
COMMON STOCK, $.01 PAR VALUE -- 5,931,360
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Shareholders'
Meeting to be held on or about August 5, 1996, to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended, are incorporated by reference into Part III of this
Report. Such Proxy Statement, except for the parts therein which have been
specifically incorporated by reference, shall not be deemed "filed" for the
purposes of this report on Form 10-K.
PART I
ITEM 1. BUSINESS
GENERAL
Consolidated Graphics, Inc. ("COGI" or the "Company") is one of the fastest
growing providers of general commercial printing services in the United States.
Since its formation in 1985, the Company has expanded its operations to include
13 printing companies in nine markets: Dallas, Denver (3), Houston (3), Phoenix,
Portland, San Antonio, Seattle, San Diego and Tulsa. In addition, the Company
has signed nonbinding letters of intent for the acquisitions of printing
companies in Sacramento, California and Des Moines, Iowa. Each operation
provides 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. One of the Houston printing companies also provides
transaction-oriented financial printing services, including the printing of
registration and information statements filed with the Securities and Exchange
Commission (the "SEC") and official statements for municipal securities. Each
printing company currently operated by the Company has an established operating
history (ranging from 15 to 118 years), solid customer relationships and a
strong reputation for customer service, particularly with respect to
responsiveness and quality. The Company's customer list includes major
corporations headquartered in the markets in which the Company operates.
INDUSTRY BACKGROUND
The printing industry is one of the largest and most fragmented industries
in the United States, with total 1995 sales estimated at $92 billion by Printing
Industries of America, Inc., a national trade organization. The printing
services market includes general commercial printing, financial printing,
printing and publishing of books, newspapers and periodicals, quick printing and
production of business forms and greeting cards. Within the printing services
market, the Company serves a portion of the commercial and financial printing
sectors which had total U.S. sales of $67.3 billion in 1995 based on U.S.
Department of Commerce sources.
In 1995, 7,400 of the 37,000 commercial printing companies in the U.S. had
over 20 employees as estimated by the U.S. Department of Commerce. While these
operations are involved in various aspects of printing, the identification of
this large group of printing companies contributed to the development of the
Company's acquisition strategy described below.
BUSINESS STRATEGY
Due to the fragmented nature of the United States general commercial
printing industry, management believes an abundance of acquisition opportunities
exist. The commercial printing business is characterized by a significant number
of locally oriented, family-owned businesses, many of which tend to be viable
acquisition targets. The owners are eager to grow by becoming part of a larger
organization, desire to increase their liquidity and, in some cases, retire from
the business. Because there are relatively few buyers with adequate financing
and management expertise attempting to acquire these local printing companies,
the Company has been and expects to continue to be able to implement its
acquisition strategy at prices it considers to be attractive.
The Company believes a large part of its success results from its ability
to combine the responsiveness and service of a local printing company with the
critical mass and economic advantages of a large company. The Company's strategy
is to grow through acquisitions of smaller, locally oriented printing companies
(generally having $2 million to $20 million in annual sales), to enhance the
competitiveness and profitability of each acquired company and develop a
critical mass of companies in individual geographic markets. Generally, each
acquired company retains its identity and continues to operate autonomously in
maintaining and building relationships with its own customers.
1
The principal advantages of the Company's strategy are as follows:
o MARGIN IMPROVEMENT. Through the use of company-wide master purchasing
arrangements for principal supplies such as paper, plates, film and
ink, each operating company can receive the benefit of volume
discounts which can have a significant impact on gross margin. The
combined purchasing power may also result in more favorable pricing
for capital expenditures. In addition, consolidating certain
administrative services for insurance, employee benefits, safety and
environmental programs, financial management and information systems
can further improve operating margins.
o STRATEGIC COUNSEL. Many of the printing companies of the size that
the Company has targeted for acquisition are family-owned businesses,
which by their nature typically place heavy demands on the skills of
the proprietor. The Company provides strategic counsel and
professional management techniques to the management of its acquired
companies in such areas as planning, organization, controls,
accounting and finance and regulatory compliance, the effect of which
is improved efficiency and competitive advantages.
o FLEXIBLE SERVICE. The wide range of equipment capabilities of its
operating companies provides COGI with greater flexibility to meet
customer needs than is available to a company with a single operation.
From time to time, to meet customers' needs, the various operating
companies work together when an individual operation does not have the
equipment to perform a particular project. This allows an operating
company to compete economically for business it might otherwise have
been unable to obtain. Further, geographic concentration in the
Houston and Denver markets permits the Company to offer the customers
of its operating companies in those markets the capacity to handle
large jobs on short notice.
o MANAGEMENT DEVELOPMENT. The Company has historically been committed,
beyond industry custom, to recruiting, training and developing recent
college graduates as printing management and sales professionals. The
Company believes these professionals are a key factor contributing to
its ability to provide a high degree of quality customer service and
maximize profits. An acquired company is encouraged to adopt and
actively participate in the Company's management development strategy.
Further, the Company is able to increase the benefits of its strategy by
developing a critical mass of locally oriented printing companies in individual
geographic markets. Owning a cluster of printing companies in a local market
improves COGI's opportunities to secure a variety of printing projects and
reduces the risk associated with any single printing operation, particularly in
the Houston and Denver markets where it has most fully developed its cluster
concept.
By taking advantage of the above benefits, the Company believes it has
become one of the lowest-cost producers of quality printing products in its
markets and has improved the operating margins of each printing company it has
acquired.
In fiscal 1996, the Company expanded its presence in the Texas region with
the acquisition of a company in San Antonio. It also entered the West Coast
market with one acquisition in each of San Diego, California and Seattle,
Washington, and made one acquisition in each of Phoenix, Arizona and Tulsa,
Oklahoma. In June 1996, the Company completed an acquisition in Portland,
Oregon, its first in fiscal 1997. Currently, the Company has signed nonbinding
letters of intent for two acquisitions in new markets -- Sacramento, California
and Des Moines, Iowa. The Company will focus its future expansion efforts on
further penetration into existing markets, particularly the West Coast area, and
expansion into other high potential metropolitan markets, including certain East
Coast markets.
THE PRINTING COMPANIES
The Company currently operates thirteen printing companies, all as
wholly-owned subsidiaries. Together, the operating subsidiaries provide a range
of commercial printing products and services to the business communities in the
Rocky Mountain, Southwest, and West Coast regions of the United
2
States. One of the Company's Houston subsidiaries also provides financial
printing services. COGI is one of the largest providers of commercial printing
services and products in Houston and Denver and is one of four financial
printers in the Houston area.
The Company's commercial printing focuses on the production of promotional,
investor relations and other sales materials for a variety of customers
including corporations, mutual fund companies, advertising agencies, graphic
design firms and direct mail and catalog retailers. The Company's commercial
printing business involves digital imaging, printing and distribution of
commercial and corporate documents, including training manuals, multicolor
product and capability brochures, direct mail pieces, catalogs and other
information supplied by its clients. Commercial printing also includes
shareholder communications, which are prepared at regular intervals, such as
annual reports, interim reports and proxy materials. Most of these projects are
recurring in nature. Commercial printing accounted for approximately 97.9% of
the Company's consolidated sales in fiscal 1996.
The Company's ability to offer both commercial and financial printing at
one subsidiary also enhances its marketability by offering customers a single
source to meet substantially all of their printing needs as well as mitigating
the potential impact of a downturn in the amount of business activity that
requires financial printing services. In its financial printing business, the
Company typesets, prints and distributes financial documents which are used for
specific business transactions, including registration or information statements
filed with the SEC. Transaction-oriented financial printing accounted for
approximately 2.1% of the Company's consolidated sales in fiscal 1996.
The following table lists the name and location of the Company's principal
operating subsidiaries and the dates of their founding and acquisition by the
Company. Each of the operating companies is a full-service commercial printer,
and Chas. P. Young Company also provides financial printing services.
CALENDAR FISCAL YEAR
YEAR ACQUIRED
NAME LOCATION FOUNDED BY COGI
- ----------------------------------- ------------ -------- -----------
Western Lithograph Company......... Houston 1960 1986
Grover Printing Company............ Houston 1974 1988
Tewell Warren Printing Company..... Denver 1962 1989
Chas. P. Young Company............. Houston 1953 1991
Gritz-Ritter Graphics, Inc......... Boulder 1973 1995
The Jarvis Press, Inc.............. Dallas 1951 1995
Frederic Printing Company.......... Denver 1878 1995
Clear Visions, Inc................. San Antonio 1981 1996
Heritage Graphics, Inc............. Phoenix 1979 1996
Emerald City Graphics, Inc......... Seattle 1981 1996
Precision Litho, Inc............... San Diego 1981 1996
Tulsa Litho Company................ Tulsa 1935 1996
Bridgetown Printing Co............. Portland 1902 1997
Each printing company currently operated by COGI has an established
operating history (from 15 to 118 years), solid customer relationships and a
strong reputation for customer service, particularly with respect to
responsiveness and quality. Each of the Company's operating subsidiaries is
autonomous, with its own printing facilities and management, sales and
accounting staff. Each maintains and develops its own customer relationships. In
the process of soliciting business, an operating subsidiary may compete with one
or more of its sister companies in the same geographic market.
In late fiscal 1996, the Company merged Gulf Printing Company into Western
Lithograph Company. The Company recorded a restructuring charge of $1.5 million
for the direct and incremental costs and charges associated with the merger and
certain of Gulf Printing Company's pre-existing
3
contractual obligations. The Company believes the consolidation of those two
Houston-based operations will result in a more efficient operation with lower
overhead and improved utilization of printing capacity; however, there can be no
assurance that any such benefits will be achieved.
See Item 3. Legal Proceedings for additional information on Tulsa Litho
Company.
CUSTOMERS
Management believes that COGI is one of the leading general commercial
printers in both the Houston and Denver markets. Due to the project-oriented
nature of customers' printing requirements, sales to particular customers may
vary significantly from year to year depending upon the number and size of their
projects. During fiscal 1996, the Company's top ten customers accounted for
22.1% of total sales, of which no customer accounted for more than 6%.
MARKETING AND SALES
The Company's business is service-oriented, and its primary marketing focus
is on responding rapidly to customer requirements. Responsiveness is essential
because of the short lead time on most printing jobs handled by COGI. The
Company's printing operations are designed to maintain maximum flexibility to
meet customer needs both on a scheduled and an emergency basis. Each operating
subsidiary targets those printing jobs that its management believes will best
utilize its equipment and expertise profitably. Another important aspect of the
Company's marketing strategy is attention to quality and price. In addition, one
of the Company's subsidiaries serves as a single source for substantially all of
a customer's commercial and financial printing needs.
The printing business requires a great deal of interaction with customers,
including personal sales calls, art work reviews, reviews of color and other
proofs and "press checks" (customer approval of the printed piece while it is on
the printing press). Through its salespeople and other management professionals,
the Company maintains strict control of the printing process from the time a
prospective customer is introduced through the scheduling, prepress, printing
and postpress operations. Because of the costs involved and the need for
customer interaction, projects having small to medium print runs, as well as
time-sensitive projects of any size, are almost always produced locally. COGI
also has a large web and financial printing capability used primarily by
customers located throughout Texas, but also on occasion by customers of sister
companies located outside of Texas.
The Company employed 109 salespeople at May 31, 1996, all of whom are
knowledgeable about the industry and the printing capabilities offered by the
operations they serve. The Company's sales philosophy stresses frequent sales
calls on existing customers and constant marketing for new customers. COGI
communicates to its customers the breadth and sophistication of its printing
services, the speed and quality of its service and the personal attention
offered by the Company's salespeople. In addition to soliciting business from
existing and prospective customers, the salespeople act as liaisons between
customers and those in charge of service operations and provide technical advice
and assistance to customers throughout the printing process.
OPERATIONS
The Company provides service in all areas of commercial and financial
printing, including prepress, printing and postpress operations.
Commercial prepress services involve photographically duplicating
mechanical images and/or digitally producing images, separating color images
into process colors, assembling films and burning the film images onto plates.
Financial prepress goes a step further by preparing manuscript copy and
typesetting. The Company has computerized prepress operations at most of its
facilities.
There are a number of different printing processes, each with its own
distinguishing qualities and appearance characteristics. The Company uses the
offset lithography process to provide the highest-quality, lowest-cost printed
products for most run lengths. Short- to medium-run commercial work
4
generally is printed on sheet-fed presses, while long-run commercial and
financial printing projects typically are printed on web presses. Presses may be
single or multicolor.
Most of COGI's presses are large, sheet-fed, 40-inch presses, which are
typically capable of printing 16 pages of letter-sized finished product on a 28
by 40-inch sheet of paper with eight pages on each side (known as a 16-page
"signature"). The sheet-fed presses in all of the subsidiaries are capable of
simultaneously printing up to two, four, five or six colors. As of May 31, 1996,
the Company operates 44 sheet-fed presses with each capable of running at
standard press speeds of 6,000 to 10,000 sheets per hour.
As of May 31, 1996, the Company operates six web presses located at certain
of its Dallas, Houston and Seattle facilities. These presses are higher
production presses, which start with a roll of paper at one end, print on both
sides of the paper at maximum speeds of up to 50,000 32-page signatures per hour
and produce a product which is often folded, glued or perforated on the press.
The postpress operations provided by the Company include cutting, folding,
binding and finishing. Warehousing, packaging and distribution services also are
critical elements in the printing process, and the Company is equipped to
provide these services by storing printed materials for its customers, handling
bulk shipments and mailing to meet customer needs. The Company utilizes courier
services to provide customers with pick-up and delivery services. Through its
membership in FPNet, The International Network of Independent Financial
Printers, the Company is able to expedite delivery of corporate and financial
documents to most major U.S. and Canadian cities and London, England.
The Company's ability to respond to the urgent needs of its customers and
scheduling flexibility allow it to consistently react swiftly to its customers'
requirements. Because of the need for rapid implementation of printing projects,
from conception through delivery, the Company must maintain physical plant and
customer service staff which allow it to maximize work loads when called upon to
do so. Consequently, the Company's subsidiaries do not always operate at full
capacity.
One of the most significant technological improvements in the commercial
printing business in the past several years has been in the computerization of
the prepress area. The Company believes its state-of-the-art prepress
capabilities give it a competitive advantage in the marketplace. The Company has
a program to continually evaluate its electronic prepress needs and, perhaps
more importantly, the growing expectations of its customers in this area.
Pursuant to this program, the Company has added electronic prepress operations
to substantially all of its significant operations and expects to continually
upgrade its current and acquired printing operations in this area.
During fiscal 1997, the Company plans to purchase at least seven sheet-fed
printing presses with up to seven-color capability at certain of its printing
companies to supplement existing equipment. The presses will provide more
efficient levels of operations and higher levels of service in response to
customers' increasing demands for six-color or more printing capabilities. The
Company anticipates spending about $10.0 million in the aggregate for the
purchase of these presses. The Company believes its prepress operations and
certain of its production and postpress equipment are state-of-the-art. The
remainder of its equipment is more than adequate for producing products of the
kind and in the quantities required by the Company's customers. The Company
continuously reviews its printing equipment needs and evaluates advances in
computer software, hardware and peripherals, computer networking and
telecommunication systems as they relate to the Company's operations.
MANAGEMENT AND SALES DEVELOPMENT PROGRAM
Management believes that the successful implementation of the Company's
growth strategy depends primarily on its ability to continue to recruit and
retain qualified, well-trained, professional managers and salespeople. For this
program, the Company recruits individuals management believes display the
characteristics necessary to lead one of the Company's operations at some future
date. At May 31, 1996, the Company employed approximately 50 persons who have
graduated from or are currently participating in the development program.
5
The Company implemented its development program based on the premise that
traditional printing industry hiring and training practices were neither
sophisticated nor effective. Historically, printing companies only hired either
new employees to whom they provided little or no formal training, or experienced
sales or management personnel.
Management of the operating subsidiaries devote a great deal of time and
attention to the training of management employees. Certain aspects of the
development program are specially tailored to the needs of each company. The
program is constantly being refined and improved based on the experiences of
recent participants and observations of training personnel. In hiring for the
program, the Company targets recent college graduates who do not have a printing
or graphics background. A recruiting team, usually consisting of operating
company presidents and recent graduates of the program, actively recruits on
behalf of COGI at major universities near its operations.
The Company's three-year sales and management development program is
composed of a basic training course, an intermediate course and an advanced
course. The first level is a one-week, fast-paced, basic training course that
gives the individual an overview of the printing industry. The intermediate
course is a highly structured, hands-on program that guides the participants and
craftsmen/instructors by providing schedules, objectives, goals and required
activities. The participants spend six weeks in prepress, one week on each
printing press, two weeks in postpress operations and one week in shipping. The
intermediate course continues with a four-month rotation among production
planning, production coordinating, estimating and sales/operations, where the
participant actually performs job requirements as stipulated by the program's
required activities.
The advanced course, which is the job specific part of the development
program, typically continues for a period of up to 30 months. At this point, the
participant departs on a career path, either production or sales, dictated by
the participant's strengths and the individual company's needs. The production
management path leads the participant into a rotation among planning,
coordinating, estimating and purchasing. The participant generally performs a
specific job for a year or more and then rotates to another job in the
production area. This advanced course path is designed to produce a well-rounded
staff of production managers.
The sales management path duplicates the sales and operations part of the
intermediate course by requiring that the participant train another six months
in an operations function before entering the sales area. At this point the
participant will begin accompanying experienced sales representatives on sales
calls and attending advanced sales meetings, while at the same time beginning to
identify, qualify and obtain new customers.
The Company does not have any employment contracts with participants in its
training program. Nevertheless, the Company believes it has been able to retain
program participants by offering compensation comparable to that attainable from
other area printers and by providing what the Company considers to be greater
opportunities for advancement than may be available at its competitors as new
acquisitions are made. There can be no assurance, however, that the Company will
be able to retain program participants in the future.
While other printers may offer sales and management training to their
employees, management believes the Company is the only printer of its size
offering such a focused, comprehensive and extensive training program and
opportunities for upward mobility. The participants in the Company's development
program are monitored by and receive guidance from each operating company
president. They are highly motivated and bring an increased level of
professionalism and performance to the Company's sales and management team.
PURCHASING AND RAW MATERIALS
The Company purchases various materials, including paper, ink, film, offset
plates, proofing materials, chemicals, solvents, glue and wire, from a number of
suppliers. The Company has entered into a number of master purchasing
arrangements for the purchase of paper, ink, film and plates. Because of the
Company's size, each of its operating subsidiaries is able to take advantage of
bulk
6
purchasing arrangements that are generally unavailable to smaller printing
companies that purchase in lesser quantities.
The Company's most significant expenditures are for paper. The Company
purchases paper directly from one manufacturer and from various distributors
that sell paper produced by various manufacturers. Generally, COGI is able to
pass on any increase in paper prices to its customers. The Company has not
experienced any significant difficulty in obtaining raw materials necessary for
its operations.
COMPETITION
The Company competes with a number of other commercial and financial
printers, some of which are subsidiaries or divisions of companies having
greater financial resources than those of the Company. Because of the nature of
the Company's business, most of the Company's competition is in the local
printing market. The major competitive factors in the Company's commercial
printing business are ongoing customer service, quality of finished products and
price. Customer service often is dependent on production and distribution
capabilities and availability of printing time on equipment which is appropriate
in size and function for a given project. In addition, competition in the
commercial and financial printing areas is based upon the ability to perform the
services described with speed and accuracy. Price and the quality of supporting
services are also important in this regard. The Company believes it competes
effectively on all of these bases.
EMPLOYEES
At May 31, 1996, the Company had a total of 998 employees, 308 of whom were
salaried or commissioned employees and 690 of whom were hourly employees. One of
the Company's subsidiaries has collective bargaining agreements expiring June,
1998 with certain of its employees and another subsidiary currently operates
under terms of collective bargaining agreements in place with certain of its
employees prior to its recent acquisition. The Company believes that its
relations with its employees, including those covered by the collective
bargaining agreements, are satisfactory.
EXECUTIVE OFFICERS OF THE COMPANY
Set forth below are the executive officers of the Company, together with
their positions and ages:
NAME AGE POSITION
- -------------------------- --- -----------------------------------------------
Joe R. Davis.............. 53 President, Chief Executive Officer and Director
Mary K. Collins........... 39 Senior Vice President
G. Christopher Colville... 38 Vice President -- Mergers and Acquisitions,
Chief Financial and Accounting Officer
JOE R. DAVIS has been the President and Chief Executive Officer of the
Company since he founded it in 1985. Prior to forming COGI, Mr. Davis was
formerly employed by a division of International Paper Company. He had
previously served as a partner with Arthur Andersen LLP, an accounting firm,
where he was active in the mergers and acquisition program. Mr. Davis is a
certified public accountant.
MARY K. COLLINS joined the Company in September 1992, as Vice
President -- Finance and Administration. She was appointed to her current
position in January 1996. Ms. Collins also serves as Secretary and Treasurer of
the Company. Prior to her employment by the Company, she was employed for 13
years by Arthur Andersen LLP, most recently as a manager, where she specialized
in accounting, auditing and business systems consulting. Ms. Collins is a
certified public accountant.
G. CHRISTOPHER COLVILLE joined the Company in September 1994 as Vice
President -- Mergers and Acquisitions and was appointed to the additional
position of Chief Financial and Accounting Officer in January 1996. For three
years prior thereto, he served as the Financial Accounting and Reporting Manager
for Trident NGL Holding, Inc. Prior to that position, he was employed with
Arthur Andersen LLP, most recently as an audit manager. Mr. Colville is a
certified public accountant.
7
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
The Company is subject to the environmental laws and regulations of the
United States and the applicable state and local laws and regulations concerning
emissions into the air, discharges into waterways and the generation, handling
and disposal of waste materials. The printing business generates substantial
quantities of inks, solvents and other waste products requiring disposal under
the numerous federal, state and local laws and regulations relating to the
environment. The Company typically recycles waste paper and contracts for the
removal of waste products. The Company believes it is in substantial compliance
with all applicable air quality, waste disposal and other environmental-related
rules and regulations, as well as with other general employee health and safety
laws and regulations. No significant capital expenditures for environmental
control facilities are anticipated for the remainder of the current fiscal year
and the succeeding fiscal year. There can be no assurance, however, that future
changes in such laws and regulations will not have a material effect on the
Company's operations.
8
ITEM 2. PROPERTIES AND FACILITIES
COGI's principal facilities as of March 31, 1996 are described in the table
below. All of the listed facilities contain office, production and storage
space. In addition, the facilities at one operation have an expanded customer
service area. All facilities leases are with unaffiliated third parties except
for the lease in Vista, California, which is leased from the former owner and
current president of Precision Litho, Inc.
APPROXIMATE
BUILDING SPACE
LOCATION (SQUARE FEET)
- ------------------------------------- --------------
OWNED
2210 W. Dallas, Houston, Texas 200,000
1616 McGowen, Houston, Texas 70,000
4335 Directors Row, Houston,
Texas 40,000
5829 Beverly Hill, Houston,
Texas 23,000
14701 E. 38th Avenue, Aurora,
Colorado 110,000
4710 Lipan Street, Denver,
Colorado 20,000
9112 Viscount Row, Dallas, Texas 25,000
9118 Diplomacy Row, Dallas,
Texas 17,000
2926 N. 33rd Avenue, Phoenix,
Arizona 16,000
--------------
521,000
==============
LEASED
5595 Arapahoe Road, Boulder,
Colorado 18,000
9109 Premier Row, Dallas, Texas 25,000
121 Interpark Boulevard, No.
801, San Antonio, Texas 42,000
2926 N. 33rd Avenue, Phoenix,
Arizona 14,000
2223 68th Avenue South, Kent,
Washington 33,000
1135 Joshua Way, Vista,
California 48,000
2201 South Rosedale, Tulsa,
Oklahoma 35,000
--------------
215,000
==============
In addition to the 521,000 square feet of owned property described above,
the Company also owns a 63,000 square-foot building in Houston, Texas. The
Company leases 44,000 square feet of this facility to a third party under a
ten-year lease expiring in 2003. The remaining space in this facility is used by
the Company for storage. Of the 110,000 square-feet owned in Aurora, Colorado,
35,000 is leased to a third-party under a five-year lease expiring in 2001. Two
of the Houston facilities and one of the Denver facilities listed in the above
table are encumbered by mortgages, as further discussed in the Notes to
Consolidated Financial Statements included elsewhere in this Form 10-K. The
Company believes its facilities are suitable for their present and intended
purposes and are more than adequate for the Company's current level of
operations.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. The Company
maintains insurance coverage against potential claims in an amount which it
believes to be adequate. The Company recently received a
9
summary judgment in its favor from the presiding court in a case styled
ALEJANDRO ROBLES V. CONSOLIDATED GRAPHICS, INC. ET AL. involving a claim by the
plaintiff pertaining to a sales commission contract. The plaintiff appealed the
ruling. The Company believes the decision of the presiding court should be
upheld; however, there can be no assurance that the appellate court will rule in
favor of the Company. 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.
Tulsa Litho Company, the operations of which are not material to the
Company as a whole and in which the Company has only a nominal investment,
entered into voluntary reorganization in May 1996. Management is unable to
predict at this time the outcome of these proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock is traded over-the-counter in the Nasdaq
National Market (symbol: COGI). As of May 31, 1996, there were 101 shareholders
of record and, based on security position listings, the Company believes that it
has in excess of 4,700 beneficial owners.
Following are the range of the high and low sales prices for the Company's
Common Stock as reported by Nasdaq:
FISCAL 1996 -- QUARTER ENDED: HIGH LOW
- ------------------------------------- ------ ------
June 30, 1995........................ 15 1/4 11 1/2
September 30, 1995................... 21 1/2 13 3/4
December 31, 1995.................... 26 1/8 20 1/4
March 31, 1996....................... 26 16 1/4
FISCAL 1995 -- QUARTER ENDED: HIGH LOW
- ------------------------------------- ------ ------
June 30, 1994 (from June 9, 1994).... 12 1/4 10 3/4
September 30, 1994................... 22 1/2 10 3/4
December 31, 1994.................... 21 3/4 9 3/4
March 31, 1995....................... 13 3/4 9 1/2
The Company currently intends to retain all future earnings to finance the
continuing development of its business and does not anticipate paying cash
dividends on the Common Stock in the foreseeable future. Further, the Company is
prohibited from paying dividends by covenants under an existing loan agreement.
Any payment of cash dividends in the future will depend upon the financial
condition, future loan covenants, capital requirements and earnings of the
Company, as well as other factors the Board of Directors may deem relevant.
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Form 10-K contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, which are intended to be
covered by the safe harbors created thereby. Investors are cautioned that all
forward-looking statements involve risks and uncertainties, including without
limitation the ability of the Company to continue its expansion strategy, the
ability of the Company to continue to acquire companies on acceptable terms and
general market conditions and competition. Although the Company believes that
the assumptions underlying the forward-looking statements contained herein 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. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
GENERAL
The Company's sales are derived from the production and sale of printed
materials. The product is sold and manufactured by each of the operating
subsidiaries, and each product is customized depending on the needs of the
customer. All of the operating subsidiaries provide commercial printing
services. In addition, one of the subsidiaries also provides financial printing
services. Each printing company has its own separate operations which include
sales, estimating, customer service, prepress, production and postpress
operations and accounting. The Company's headquarters, located in Houston,
provides centralized cash management, financial reporting and certain
administrative services to all of the subsidiaries.
The Company's financial results in a given period may be affected by the
timing and magnitude of acquisitions. In addition, gross profit margins of
acquired companies typically have been lower and general and administrative
expenses higher in the initial years following their acquisition. As a result,
COGI's overall gross profit margins may be lower following an acquisition while
the acquired company is adapting to and implementing the Company's management
practices.
The Company competes in the general commercial and financial printing
sectors, which are characterized by individual orders from customers for
specific printing projects rather than long-term contracts, with continued
engagement for successive jobs dependent upon the customer's satisfaction with
the services provided. As such, the Company is unable to predict, for more than
a few weeks in advance, the number, size and profitability of printing jobs in a
given period. Consequently, the timing of projects in any quarter could have a
significant impact on financial results in that quarter.
12
RESULTS OF OPERATIONS
The following table sets forth the Company's historical income statements
and certain percentage relationships based thereon for the periods indicated:
AS A PERCENTAGE OF SALES
-------------------------------
YEAR ENDED MARCH 31 YEAR ENDED MARCH 31
------------------------------- -------------------------------
1996 1995 1994 1996 1995 1994
--------- --------- --------- --------- --------- ---------
(IN MILLIONS)
Sales................................ $ 85.1 $ 57.1 $ 48.6 100.0% 100.0% 100.0%
Cost of sales........................ 61.2 39.8 33.9 71.9 69.7 69.7
--------- --------- --------- --------- --------- ---------
Gross profit.................... 23.9 17.3 14.7 28.1 30.3 30.3
Selling expenses..................... 8.5 5.7 4.9 10.0 10.0 10.1
General and administrative
expenses........................... 6.9 4.3 3.5 8.1 7.5 7.1
Restructuring charge................. 1.5 -- -- 1.8 -- --
--------- --------- --------- --------- --------- ---------
Operating income................ 7.0 7.3 6.3 8.2 12.8 13.1
Interest expense..................... 0.9 0.7 1.0 1.0 1.2 2.1
Interest income...................... -- (.3) -- -- (.5) --
--------- --------- --------- --------- --------- ---------
Income before provision for
income taxes................. 6.1 6.9 5.3 7.2 12.1 11.0
Provision for income taxes........... 2.1 2.4 1.8 2.5 4.2 3.7
--------- --------- --------- --------- --------- ---------
Net income...................... $ 4.0 $ 4.5 $ 3.5 4.7% 7.9% 7.3%
========= ========= ========= ========= ========= =========
Acquisitions in fiscal 1996 and 1995 are the primary cause of the absolute
increases in revenues and expenses since fiscal 1994. In fiscal 1995, the
Company acquired Gritz-Ritter Graphics in July, 1994, The Jarvis Press in
October, 1994 and Frederic Printing Company in October, 1994 (collectively, the
"1995 Acquisitions"). In fiscal 1996, the Company acquired Clear Visions, Inc.
in August, 1995, Heritage Graphics, Inc., in September, 1995, Emerald City
Graphics, Inc. in February, 1996, Precision Litho, Inc. in February, 1996 and
Tulsa Litho Company in March, 1996 (collectively, the "1996 Acquisitions").
The 1995 Acquisitions affected fiscal 1995 results, as compared to fiscal 1994,
for the portion of the year after their respective dates of acquisition and
affected fiscal 1996 results, as compared to fiscal 1995, because they were
under ownership for a full calendar year. Similarly, the 1996 Acquisitions
affected fiscal 1996 results, as compared to fiscal 1995, for the portion of the
year after the respective dates of acquisition.
FISCAL YEAR ENDED MARCH 31, 1996 COMPARED WITH FISCAL YEAR ENDED MARCH 31, 1995
Sales for fiscal 1996 increased 49% from $57.1 million for the fiscal year
ended March 31, 1995, to $85.1 million for the fiscal year ended March 31, 1996.
The increase in sales primarily resulted from the effects of the 1995
Acquisitions and the 1996 Acquisitions (together, the "Acquired Companies"),
partially offset by lower sales immediately prior to and following the decision
in the third quarter of fiscal 1996 to merge two of the Company's Houston based
subsidiaries.
The merger of the subsidiaries (Gulf Printing Company into Western
Lithograph Company) was precipitated by the cancellation of a significant
printing contract by SBC Communications Inc. and affiliates ("SBC") in
December 1994. As a result, Gulf Printing was unable to meet management's
revenue and profit margin expectations. The merger of Gulf Printing into Western
Lithograph is expected to improve profit margins through reduced administrative
costs and improved utilization of printing capacity.
Gross profit increased 38% from $17.3 million for the fiscal year ended
March 31, 1995 to $23.9 million for the fiscal year ended March 31, 1996 due
primarily to profit margin contributions by the 1996 Acquired Companies. Gross
profit as a percentage of sales decreased from 30.3% for the fiscal year ended
March 31, 1995 to 28.1% for the fiscal year ended March 31, 1996. The decline in
gross
13
profit percentage was attributable primarily to the marginal performance of Gulf
Printing prior to its merger into Western Lithograph and the lower profit
margins of the 1996 Acquisitions. Margins generally do not improve at the
acquired companies until they adapt to and implement the Company's management
practices.
Selling expenses increased $2.8 million to $8.5 million for the fiscal year
ended March 31, 1996 as compared to $5.7 million for the fiscal year ended March
31, 1995. The effect of the Acquired Companies accounted for substantially all
of the increase. Selling expenses as a percentage of sales remained constant at
10.0% for the fiscal year ended March 31, 1996 as compared to the prior fiscal
year.
General and administrative expenses increased 60% from $4.3 million for the
fiscal year ended March 31, 1995 to $6.9 million for the fiscal year ended March
31, 1996 due primarily to the general and administrative expenses attributable
to the Acquired Companies and a general increase in overhead attributable to the
need to manage the Company's overall growth. A generally higher level of general
and administrative expenses carried over by the Acquired Companies plus the
increase in general corporate overhead contributed to the increase in general
and administrative expenses as a percentage of sales.
The Company recorded a $1.5 million restructuring charge during the quarter
ended December 31, 1995 to provide for the costs associated with the merger of
Gulf Printing into Western Lithograph.
Interest expense increased from $.7 million for the fiscal year ended March
31, 1995 to $.9 million for the fiscal year ended March 31, 1996 due primarily
to additional debt outstanding during fiscal 1996. The increase in the Company's
debt is primarily attributable to borrowings under the Company's revolving
credit facility to finance the 1996 Acquisitions, together with debt issued or
assumed in connection with such acquisitions.
Effective income tax rates increased slightly from 34.8% for the fiscal
year ended March 31, 1995 to 35.0% for the fiscal year ended March 31, 1996,
reflecting primarily increased state income taxes attributable to the Company's
further expansion into states with higher income tax rates than the state of
Texas.
FISCAL YEAR ENDED MARCH 31, 1995 COMPARED WITH FISCAL YEAR ENDED MARCH 31, 1994
Sales increased 17.5% from $48.6 million for the fiscal year ended March
31, 1994, to $57.1 million for the fiscal year ended March 31, 1995. The
increase in sales primarily resulted from sales attributable to the 1995
Acquisitions and was partially offset by decreases in sales to SBC, decreases in
transaction-oriented financial printing sales and the redirection of a portion
of the Company's web press capacity away from larger-volume, lower-margin
projects.
Gross profit increased 17.8% from $14.7 million for the fiscal year ended
March 31, 1994 to $17.3 million for the fiscal year ended March 31, 1995 due
primarily to increased sales levels resulting from the 1995 Acquisitions and the
redirection of a portion of the Company's web press capacity away from
larger-volume, lower-margin projects. Gross profit as a percentage of sales
remained constant at 30.3%.
Selling expenses as a percentage of sales remained relatively constant at
10.1% for the fiscal year ended March 31, 1994 compared with 10.0% for the
fiscal year ended March 31, 1995. General and administrative expenses increased
24.3% from $3.5 million for the fiscal year ended March 31, 1994 to $4.3 million
for the fiscal year ended March 31, 1995 due primarily to general and
administrative expenses attributable to the 1995 Acquisitions and an increase in
corporate overhead attributable to being a publicly-traded company.
Interest expense decreased from $1.0 million for the fiscal year ended
March 31, 1994 to $.7 million for the fiscal year ended March 31, 1995. The
decrease was primarily due to a decrease in interest expense resulting from the
retirement of $9.7 million of debt with a portion of the proceeds
14
from the Company's initial public offering in June 1994 and the retirement of a
$2.3 million note payable to SBC in February 1995. Offsetting the effect of the
debt retirements was an assumption of certain debt in connection with the 1995
Acquisitions and certain borrowings under the Company's revolving line of
credit. Interest income in fiscal 1995 is attributable to short-term investments
made, pending completion of certain of the 1995 Acquisitions, with the balance
of the initial public offering proceeds following debt retirements.
Effective income tax rates increased from 34.0% for the fiscal year ended
March 31, 1994 to 34.8% for the fiscal year ended March 31, 1995 due to an
expanded presence in Colorado resulting in an increase in state and local taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are for working capital, capital
expenditures and acquisitions. Working capital increases, excluding
acquisitions, were $4.0 million, $5.1 million and $2.0 million for fiscal years
1996, 1995 and 1994, respectively. Capital expenditures relate primarily to the
purchase of new equipment at the operating companies. These expenditures
amounted to $6.0 million in fiscal 1996, $2.4 million in fiscal 1995 and $3.4
million in fiscal 1994. Capital expenditures by the Company to complete the 1996
and 1995 Acquisitions, inclusive of the retirement of a portion of the assumed
debt associated therewith, totalled $10.2 million and $14.5 million,
respectively. In total, the Company's cash requirements for working capital,
capital expenditures and acquisitions were $20.2 million for fiscal 1996, $22.0
million for fiscal 1995 and $5.4 million for fiscal 1994.
The Company financed its fiscal 1996 capital requirements through
internally generated funds, external financing and seller financing. Financing
of the Company's fiscal 1995 capital requirements occurred through internally
generated funds, external financing and proceeds from the Company's initial
public offering. The Company has generated cash from operations (net income from
continuing operations plus depreciation, amortization and deferred tax
provision) since its inception. Cash generated from operations was $9.3 million
in fiscal 1996, $9.1 million in fiscal 1995 and $5.8 million in fiscal 1994. In
each of fiscal 1996, 1995 and 1994, cash flow from operations exceeded the
Company's working capital and equipment capital expenditure requirements.
In addition to cash expended on its acquisitions in fiscal 1996, the
Company also issued 424,658 shares of its common stock in connection with one of
its 1996 acquisitions and is contingently obligated at certain times and under
certain circumstances to issue for up to three years, a total of 95,000 shares
of its common stock for all periods in the aggregate.
In June 1994, the Company completed an initial public offering of 2,103,652
shares of common stock for net proceeds of $21.3 million. The Company used $9.7
million of such proceeds to retire two term notes. The remaining proceeds were
used to complete the 1995 Acquisitions discussed above.
On August 23, 1995, the Company entered into a $25 million revolving credit
agreement (the "Agreement") with a bank, which expires on August 31, 1997, and
replaced an existing agreement which was due to expire on November 8, 1996.
Loans outstanding under the agreement accrue interest at the London Interbank
Offered Rate (LIBOR) plus 1%, or at the lending bank's prime rate, depending
upon the borrowing option chosen by the Company. On March 31, 1996, loans
outstanding under the agreement were $16.3 million and were subject to an
interest rate of 6.8% per annum. On May 31, 1996, loans outstanding under the
agreement were $16.4 million and were subject to an interest rate of 6.5% per
annum. Certain of the Company's operating subsidiaries have guaranteed the
Company's indebtedness under the credit agreement. The covenants in the
Agreement, among other things, restrict the Company's ability to (i) merge,
consolidate with or acquire other companies where the total consideration paid
is above certain levels, (ii) engage in hostile acquisitions, (iii) change its
primary business and (iv) incur other borrowed debt or pledge assets as
collateral in excess of certain levels. Although there can be no assurances
made, the Company believes that the convenants in the Agreement pertaining to
restrictions on acquisitions of other companies do not adversely affect its
acquisition strategy and that, if necessary, the Company would likely be able to
obtain the appropriate
15
waivers. The Company must also meet certain financial tests defined by the
Agreement, including achieving specific ratios of current assets to current
liabilities, leverage and coverage of fixed charges. The indebtedness is
unsecured; however, the bank could require inventories and receivables as
collateral for the payment of indebtedness in certain circumstances. The Company
currently is in compliance with all financial tests set forth in the loan
agreement. Net borrowings under the agreement during fiscal 1996 were $11.3
million and were used primarily to fund $10.2 million paid by the Company in
connection with the 1996 Acquisitions.
The Company has mortgages of $2.2 million (maturing between 2002 and 2009)
secured by three of the operating facilities located in Houston and Denver. The
Company also has $1.6 million of debt maturing in 1999 which is secured by
substantially all of the assets of one of the Company's subsidiaries and was
assumed in connection with its acquisition in fiscal 1995. The Company also has
notes payable totalling $1.1 million which were assumed or incurred in
connection with the completion of one of the 1996 Acquisitions.
In addition to the restrictions and covenants under the Agreement, the
Company's other debt agreements contain various covenants, the most significant
of which places certain restrictions on future borrowings and acquisitions above
specified levels. The Company believes these restrictions do not adversely
affect its acquisition strategy.
For fiscal 1997, the Company has expended or has committments for
acquisitions and significant capital expenditures, as follows:
The Company completed the acquisition of Bridgetown Printing Co. in
Portland, Oregon in June 1996. Further, the Company has signed nonbinding
letters of intent to purchase a printing company in Sacramento, California and a
printing company in Des Moines, Iowa. The total cash expenditure by the Company
to complete these three acquisitions is expected to be approximately $7.8
million. The Company anticipates that it can finance these acquisitions with
borrowings on the Agreement.
During fiscal 1997, the Company plans to purchase at least seven sheet-fed
presses at certain of its printing companies to supplement existing equipment.
The Company expects that it will spend approximately $10.0 million in the
aggregate on the presses and fund these expenditures primarily with a financing
agreement with the manufacturer. Borrowings under the Agreement and internal
cash flow are also expected to be used to fund a portion of these expenditures.
The Company expects to continue to make additional acquisitions, although
currently it has no other understanding, arrangement or agreement to acquire
entities other than those discussed above. The Company also expects to make
other capital expenditures in fiscal 1997. In addition to internally generated
funds, the Company anticipates that it will be able to borrow additional funds
on acceptable terms to make additional acquisitions and other capital
expenditures and to meet its other future cash requirements. The Company may
also issue shares of its common stock as consideration in future acquisitions.
There can be no assurance that the Company will be able to acquire additional
companies, nor that it will be able to finance significant acquisitions on
acceptable terms in the future. In addition, there can be no assurance that the
Company will be able to establish, maintain or increase profitability of an
entity once it has been acquired, or that the diversion of its management and
financial resources away from existing operations will not have a material
adverse impact on the Company.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In 1995, the Financial Accounting Standards Board issued statements
establishing accounting standards for the impairment of long-lived assets and
assets to be disposed of and stock based compensation. Statement of Financial
Accounting Standard ("SFAS") 121 requires that long-lived assets be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be realizable. SFAS 123 requires companies
to change disclosures about their employee stock based compensation plans and
permits, but does not require, a fair value based method of accounting for
employee stock option plans which results in compensation expense recognition
when stock options are granted. The Company is required to adopt these
statements no
16
later than its fiscal year ending March 31, 1997, although earlier
implementation is permitted. As of March 31, 1996, the Company has not adopted
these statements; however, the Company anticipates that application of these
statements will not have a material effect on its consolidated financial
position or results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company, together with the
report thereon of Arthur Andersen LLP dated June 20, 1996, including the
information required by Item 302 of Regulation S-K, are set forth on pages F-1
through F-14 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
17
PART III
The information called for by "Item 10. Directors and Executive Officers
of the Registrant" (except for the information regarding executive officers
which is included in Part I hereof as "Item 1. Business -- Executive Officers
of the Company"), "Item 11. Executive Compensation", "Item 12. Security
Ownership of Certain Beneficial Owners and Management", and "Item 13. Certain
Relationships and Related Transactions", is hereby incorporated by reference to
the Company's Proxy Statement for its Annual Meeting of Shareholders (presently
scheduled to be held August 5, 1996) to be filed with the SEC pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS:
See the Index to Consolidated Financial Statements on page F-1 hereof.
(a)(2) FINANCIAL STATEMENT SCHEDULES:
Schedules of the Company and its subsidiaries are omitted because of the
absence of the conditions under which they are required or because the required
information is included in the financial statements or notes thereto.
(a)(3) EXHIBITS:
*3.1 -- Restated Articles of Incorporation of the Company filed with the Secretary of State of the
State of Delaware on July 27, 1995 (Consolidated Graphics, Inc. Form 10-Q (June 30, 1994)
SEC File No. 0-24068, Exhibit 4(a)).
*3.2 -- By-Laws of the Company, dated as of May 31, 1995 (Consolidated Graphics, Inc. Form 10-K
(March 31, 1995) SEC File No. 0-24068, Exhibit 3.2).
*4.1 -- Registration Rights Agreement by and among Consolidated Graphics, Inc., James R. Cook and
Herbert J. Blackinton dated as of February 15, 1996.
*4.2 -- Registration Rights Agreement by and among Consolidated Graphics, Inc. and Dennis Rampe
dated as of February 23, 1996.
*10.1 -- Amended and Restated Loan Agreement by and between Consolidated Graphics, Inc. and
NationsBank of Texas N.A. dated as of November 7, 1994 (Consolidated Graphics, Inc. Form
10-Q (September 30, 1994) SEC File No. 0-24068, Exhibit 10(a)).
*10.2 -- Revolving Promissory Note by and between Consolidated Graphics, Inc. and NationsBank of
Texas, N.A., dated as of November 7, 1994 (Consolidated Graphics, Inc. Form 10-Q
(September 30, 1994) SEC File No. 0-24068, Exhibit 10(b)).
*10.3 -- Amended and Restated Loan Agreement by and between Consolidated Graphics, Inc. and
NationsBank of Texas, N.A., dated as of August 23, 1995 (Consolidated Graphics, Inc. Form
10-Q (September 30, 1995) SEC File No. 0-24068, Exhibit 10(a)).
*10.4 -- Revolving Promissory Note by and between Consolidated Graphics, Inc. and NationsBank of
Texas, N.A. dated as of August 23, 1995 (Consolidated Graphics, Inc. Form 10-Q (September
30, 1995) SEC File No. 0-24068, Exhibit 10(b)).
*10.5 -- Assignment and Assumption Agreement by and between Jarvis Acquisition Co., The Jarvis
Press, Inc., Consolidated Graphics, Inc. and Phoenixcor, Inc. dated as of October 14, 1994
(Consolidated Graphics, Inc. Form 10-Q (September 30, 1994) SEC File No. 0-24068, Exhibit
10(c)).
18
*10.6 -- Asset Purchase Agreement dated as of October 14, 1994 by and among Jarvis Acquisition Co.,
as the Purchaser, Consolidated Graphics, Inc., as the Parent, The Jarvis Press, Inc., as
the Seller and Peter B. White, Paul Lasiter, Michael C. Regan and Dennis Sholl, as the
Interest Holders (Consolidated Graphics, Inc. Form 8-K (October 14, 1994) SEC File No.
0-24068, Exhibit 1).
*10.7 -- Stock Purchase Agreement dated as of October 21, 1994 by and among Consolidated Graphics,
Inc., as the Purchaser, and John Frederic Printing Company, as the Seller and Randall C.
Frederic, as an accommodating party (Consolidated Graphics, Inc. Form 8-K (October 14,
1994) SEC File No. 0-24068, Exhibit 3).
*10.8 -- Stock Purchase Agreement by and among Consolidated Graphics, Inc. and James R. Cook and
Herbert J. Blackinton as the stockholders of Emerald City Graphics, Inc. dated as of
February 15, 1996 (Consolidated Graphics, Inc. Form 8-K filed February 29, 1996, Exhibit
1).
*10.9 -- Stock Purchase Agreement by and among Consolidated Graphics, Inc., Precision Litho, Melson
Leasing LLC and Dennis Rampe and Jeannine Rampe, as the equity interest holders in
Precision Litho and Melson Leasing LLC dated as of February 23, 1996 (Consolidated
Graphics, Inc. Form 8-K filed February 29, 1996, Exhibit 3).
*10.10 -- 1994 Consolidated Graphics, Inc. Long-Term Incentive Plan (Consolidated Graphics, Inc.
Registration Statement on Form S-1 (Reg. No. 33-77468), Exhibit 10.14).
*10.12 -- Form of Indemnification Agreement together with a schedule identifying the directors and
officers parties to such agreement (Consolidated Graphics, Inc. Registration Statement on
Form S-1 (Reg. No. 33-77468), Exhibit 10.15).
21 -- List of Subsidiaries.
23 -- Consent of Arthur Andersen LLP.
24 -- Powers of Attorney.
- ------------
* Incorporated by reference.
(b) REPORTS ON FORM 8-K:
(1) Form 8-K, filed January 9, 1996 in connection with the Company's
third quarter earnings release and announcement of the
consolidation of two of the Company's Houston based subsidiaries
and the signing of letters of intent to acquire Emerald City
Graphics, Inc. and Precision Litho, Inc.
(2) Form 8-K, filed February 29, 1996 (as amended by Form 8-K/A)
in connection with the acquisition of all of the issued and
outstanding common stock of Emerald City Graphics, Inc. on
February 15, 1996 and the acquisition of the capital stock of
Precision Litho, Inc. on February 23, 1996, including
financial statements of each of Emerald City Graphics, Inc.
and Precision Litho, Inc., as well as pro forma financial
statements of the Company.
(3) Form 8-K, filed May 24, 1996 in connection with the press
release issued on May 23, 1996 regarding the letter of
intent signed between Consolidated Graphics, Inc. and
Garner Printing of Des Moines, Iowa.
(4) Form 8-K, filed June 20, 1996 in connection with the
press release issued on June 19, 1996 with respect
to the completion of the acquisition of Bridgetown
Printing Co. of Portland, Oregon.
19
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF OF THE UNDERSIGNED, THEREUNDER DULY AUTHORIZED, IN THE CITY OF
HOUSTON, STATE OF TEXAS ON THE 28TH DAY OF JUNE, 1996.
CONSOLIDATED GRAPHICS, INC.
By:/s/:JOE R. DAVIS
JOE R. DAVIS
PRESIDENT, CHIEF EXECUTIVE OFFICER
AND
CHAIRMAN OF THE BOARD OF DIRECTORS
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND
IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
- ---------------------------------------------------------------------------------- ------------------------
/s/:JOE R. DAVIS President, Chief Executive
JOE R. DAVIS Officer and Director June 28, 1996
(Principal Executive Officer)
/s/:G. CHRISTOPHER COLVILLE Vice President -- Mergers and
G. CHRISTOPHER COLVILLE Acquisitions; Chief Financial and June 28, 1996
Accounting Officer
LARRY J. ALEXANDER* Director
LARRY J. ALEXANDER
BRADY F. CARRUTH* Director
BRADY F. CARRUTH
CLARENCE C. COMER* Director
CLARENCE C. COMER
GARY L. FORBES* Director
GARY L. FORBES
W.D. HAWKINS* Director
W. D. HAWKINS
JAMES H. LIMMER* Director
JAMES H. LIMMER
THOMAS E. SMITH* Director
THOMAS E. SMITH
HUGH N. WEST* Director
HUGH N. WEST
* By:/s/:JOE R. DAVIS
JOE R. DAVIS June 28, 1996
Attorney-in-Fact
20
FINANCIAL SUPPLEMENT TO
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED MARCH 31, 1996
CONSOLIDATED GRAPHICS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
-----
Report of Independent Public
Accountants........................ F-2
Consolidated Balance Sheets at March
31, 1996 and 1995.................. F-3
Consolidated Income Statements for
the Years Ended March 31, 1996,
1995 and 1994...................... F-4
Consolidated Statements of
Shareholders' Equity for the Years
Ended March 31, 1996, 1995 and
1994............................... F-5
Consolidated Statements of Cash Flows
for the Years Ended March 31, 1996,
1995 and 1994...................... F-6
Notes to Consolidated Financial
Statements......................... F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Consolidated Graphics, Inc.:
We have audited the accompanying consolidated balance sheets of
Consolidated Graphics, Inc. (a Texas corporation) and subsidiaries as of March
31, 1996 and 1995, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended March 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Consolidated Graphics, Inc.
and subsidiaries as of March 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
June 20, 1996
F-2
CONSOLIDATED GRAPHICS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
MARCH 31
--------------------
1996 1995
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 3,086 $ 1,707
Accounts receivable, net........ 19,317 14,422
Inventories..................... 8,023 7,776
Prepaid expenses................ 1,077 355
--------- ---------
Total current assets...... 31,503 24,260
PROPERTY AND EQUIPMENT, net.......... 50,591 35,504
GOODWILL, net........................ 5,015 -
OTHER ASSETS......................... 700 524
--------- ---------
$ 87,809 $ 60,288
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term
debt.......................... $ 1,221 $ 1,143
Accounts payable................ 5,719 4,898
Accrued liabilities............. 5,648 3,649
Income taxes payable............ 60 773
--------- ---------
Total current
liabilities............. 12,648 10,463
LONG-TERM DEBT, net of current
portion............................ 20,105 8,820
DEFERRED INCOME TAXES................ 5,180 2,835
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value;
20,000,000 shares authorized;
5,927,360 and 5,466,552 issued
and outstanding............... 59 55
Additional paid-in capital...... 32,762 25,045
Retained earnings............... 17,055 13,070
--------- ---------
Total shareholders'
equity.................. 49,876 38,170
--------- ---------
$ 87,809 $ 60,288
========= =========
See accompanying notes to consolidated financial statements.
F-3
CONSOLIDATED GRAPHICS, INC.
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED MARCH 31
-------------------------------
1996 1995 1994
--------- --------- ---------
SALES................................ $ 85,133 $ 57,166 $ 48,643
COST OF SALES........................ 61,237 39,821 33,916
--------- --------- ---------
Gross profit.................... 23,896 17,345 14,727
SELLING EXPENSES..................... 8,532 5,731 4,923
GENERAL AND ADMINISTRATIVE
EXPENSES........................... 6,873 4,313 3,469
RESTRUCTURING CHARGE................. 1,500 - -
--------- --------- ---------
Operating income................ 6,991 7,301 6,335
INTEREST EXPENSE..................... 876 680 1,054
INTEREST INCOME...................... (16) (253) (36)
--------- --------- ---------
Income before provision for
income taxes................. 6,131 6,874 5,317
PROVISION FOR INCOME TAXES........... 2,146 2,392 1,806
--------- --------- ---------
NET INCOME........................... 3,985 4,482 3,511
DIVIDENDS ON REDEEMABLE PREFERRED
STOCK.............................. - (45) (210)
ACCRETION IN VALUE OF REDEEMABLE
PREFERRED STOCK AND WARRANT........ - - (347)
--------- --------- ---------
NET INCOME AVAILABLE TO COMMON
SHAREHOLDERS....................... $ 3,985 $ 4,437 $ 2,954
========= ========= =========
PRIMARY EARNINGS PER SHARE OF COMMON
STOCK.............................. $.72 $.91 $1.06
========= ========= =========
FULLY DILUTED EARNINGS PER SHARE OF
COMMON STOCK....................... $.72 $.90 $.90
========= ========= =========
See accompanying notes to consolidated financial statements.
F-4
CONSOLIDATED GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK TOTAL
------- ---------- --------- -------- ---------
BALANCE, March 31, 1993.............. $ 38 $ 915 $ 5,679 $ (605) $ 6,027
Dividends on redeemable
preferred
stock........................ - - (210) - (210)
Accretion in value of redeemable
preferred stock and
warrant...................... - - (347) - (347)
Cancellation of treasury
stock........................ (10) (595) - 605 -
Net income...................... - - 3,511 - 3,511
------- ---------- --------- -------- ---------
BALANCE, March 31, 1994.............. 28 320 8,633 - 8,981
Dividends on redeemable
preferred
stock........................ - - (45) - (45)
Conversion of preferred stock... 6 3,341 - - 3,347
Common stock offering, net...... 21 21,326 - - 21,347
Exercise of stock options....... - 58 - - 58
Net income...................... - - 4,482 - 4,482
------- ---------- --------- -------- ---------
BALANCE, March 31, 1995.............. 55 25,045 13,070 - 38,170
Common stock
issuance -- acquisition...... 4 7,215 - - 7,219
Exercise of stock options....... - 502 - - 502
Net income...................... - - 3,985 - 3,985
------- ---------- --------- -------- ---------
BALANCE, March 31, 1996.............. $ 59 $ 32,762 $ 17,055 $ - $ 49,876
======= ========== ========= ======== =========
See accompanying notes to consolidated financial statements.
F-5
CONSOLIDATED GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED MARCH 31
-------------------------------------
1996 1995 1994
----------- ----------- -----------
OPERATING ACTIVITIES:
Net income........................... $ 3,985 $ 4,482 $ 3,511
Adjustments to reconcile net income
to net cash provided by operating
activities --
Depreciation and amortization... 3,782 4,089 1,571
Deferred tax provision.......... 1,555 499 726
Noncash portion of restructuring
charge....................... 1,123 - -
Changes in assets and
liabilities, net of effects
of acquisitions --
Accounts receivable....... (124) 965 (155)
Inventories............... (469) (3,341) (63)
Prepaid expenses.......... (655) (76) (61)
Other assets.............. 85 22 (99)
Accounts payable and
accrued liabilities..... (2,136) (3,354) (947)
Income taxes payable...... (713) 661 (682)
----------- ----------- -----------
Net cash provided by
operating
activities........ 6,433 3,947 3,801
----------- ----------- -----------
INVESTING ACTIVITIES:
Acquisitions of businesses........... (10,181) (14,492) -
Acquisitions of property and
equipment.......................... (6,014) (2,423) (3,440)
Proceeds from disposition of
assets............................. 536 38 624
Payments from (advances to)
significant shareholder............ - 534 (17)
----------- ----------- -----------
Net cash used in
investing
activities........ (15,659) (16,343) (2,833)
----------- ----------- -----------
FINANCING ACTIVITIES:
Proceeds from revolving credit
agreement.......................... 34,420 11,050 -
Payments on revolving credit
agreement.......................... (23,120) (7,050) -
Proceeds from long-term debt......... - - 1,323
Payments on long-term debt........... (1,197) (13,359) (1,586)
Proceeds from common stock offering,
net................................ - 21,347 -
Proceeds from exercise of stock
options............................ 502 58 -
Dividends paid on redeemable
preferred stock.................... - (45) (210)
----------- ----------- -----------
Net cash provided by
(used in)
financing
activities........ 10,605 12,001 (473)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 1,379 (395) 495
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR.................. 1,707 2,102 1,607
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF
YEAR............................... $ 3,086 $ 1,707 $ 2,102
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-6
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
1. BUSINESS:
Consolidated Graphics, Inc. (the "Company") is a consolidator in the highly
fragmented commercial printing industry. At March 31, 1996, the Company operated
12 printing companies in eight markets. Each acquired operation provides general
commercial printing services relating to the production of such documents as
annual reports, training manuals, product and capability brochures, catalogs,
direct mail pieces and other promotional material, all of which tend to be
recurring in nature. One of the Houston printing companies also provides
transaction-oriented financial printing services.
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER INFORMATION:
ACCOUNTING POLICIES
The accounting policies of the Company reflect industry practices and
conform to generally accepted accounting principles. The more significant of
such accounting policies are described below.
Principles of Consolidation -- The accompanying consolidated financial
statements include the accounts of Consolidated Graphics, Inc., and its wholly
owned subsidiaries. All intercompany balances and transactions have been
eliminated.
Use of Estimates -- The preparation of the accompanying consolidated
financial statements requires the use of certain estimates by management in
determining the Company's assets and liabilities at the date of the consolidated
financial statements and the reported amount of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Revenue Recognition and Accounts Receivable -- The Company recognizes
revenue upon delivery of each job. Losses, if any, on jobs are recognized at the
earliest date such amount is determinable. The Company derives the majority of
its revenues from sales and services to a broad and diverse group of customers
with no individual customer accounting for more than 10% of the Company's
revenues during the years ended March 31, 1996 and 1995. During the year ended
March 31, 1994, SBC Communications Inc. and its affiliates ("SBC") accounted for
11.1% of the Company's sales. The Company maintains an allowance for doubtful
accounts based upon the expected collectibility of trade accounts receivable.
Accounts receivable in the accompanying consolidated balance sheets are
reflected net of allowance for doubtful accounts of $926 and $592 at March 31,
1996 and 1995, respectively. Accounts receivable are generally not
collateralized.
Inventories -- Inventories are valued at the lower of cost or market
utilizing the first-in, first-out method for raw materials and the specific
identification method for work in progress and finished goods. The carrying
values of inventories are set forth below:
MARCH 31
--------------------
1996 1995
--------- ---------
Raw materials........................... $ 4,455 $ 4,858
Work in progress........................ 2,954 2,814
Finished goods.......................... 614 104
--------- ---------
$ 8,023 $ 7,776
========= =========
Goodwill -- Goodwill is amortized by the straight line method over the
estimated benefit period but, in any event, not in excess of 40 years. At March
31, 1996, accumulated amortization of goodwill totalled $20.
Supplemental Cash Flow Information -- 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 years ended March 31, 1996, 1995 and
F-7
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
1994 was $876, $679 and $1,118. Income tax payments, net of refunds during the
years ended March 31, 1996, 1995 and 1994 were $1,700, $1,232 and $1,762.
Additionally, during fiscal 1996, the Company issued notes or assumed debt of
$1,143 and issued common stock of the Company valued at $7,219 in connection
with its acquisitions of Precision Litho, Inc. ("Precision") and Emerald City
Graphics, Inc., ("Emerald") respectively.
Acquisitions -- All acquisitions have been accounted for as purchases.
Operations of the companies and businesses acquired have been included in the
accompanying consolidated financial statements from their respective dates of
acquisitions. The allocation of purchase price to the assets and liabilities
acquired is based on estimates of fair market value. The allocation of purchase
price in connection with certain of the acquisitions in fiscal 1996 may be
revised when additional information concerning asset and liability valuations is
obtained.
Recent Accounting Pronouncements -- In 1995 the Financial Accounting
Standards Board issued statements establishing accounting standards for the
impairment of long-lived assets and assets to be disposed of and stock based
compensation. Statement of Financial Accounting Standard ("SFAS") 121 requires
that long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
realizable. SFAS 123 requires companies to change disclosures about their
employee stock-based compensation plans and permits, but does not require, a
fair value based method of accounting for employee stock option plans which
results in compensation expense recognition when stock options are granted. The
Company is required to adopt these statements no later than its fiscal year
ending March 31, 1997, although earlier implementation is permitted. As of March
31, 1996, the Company has not adopted these statements; however, the Company
anticipates that application of these statements will not have a material effect
on its consolidated financial position or results of operations.
OTHER INFORMATION
Accrued Liabilities -- The significant components of accrued liabilities
were $1,702 of accrued wages and related expenses, $1,027 of other accrued taxes
and $2,919 of other accruals as of March 31, 1996. As of March 31, 1995, the
significant components of accrued liabilities were $1,175 of accrued wages and
related expenses, $852 of other accrued taxes and $1,622 of other accruals.
Earnings Per Share -- Primary earnings per common share are calculated by
dividing net income available to common shareholders by the weighted average of
common equivalent shares outstanding from the date of issue of 5,534,180 shares,
4,860,371 shares and 2,798,250 shares for the years ended March 31, 1996, 1995
and 1994, respectively. On a fully diluted basis, both net income available to
common shareholders and shares outstanding are adjusted to assume the conversion
of the redeemable preferred stock and warrant (see Note 8) from the date of
issue, resulting in 4,984,567 shares and 3,498,150 shares outstanding for the
years ended March 31, 1995 and 1994, respectively.
Related Party Transactions -- Effective April 1994, the Company entered
into a five-year equipment lease with a purchase option whereby it leased three
printing presses from a company owned by a significant shareholder for a monthly
rental of $6. On January 13, 1995, the Company exercised its option to purchase
the presses under the terms of the agreement for $520. The Company believes that
the terms of the lease and the equipment purchase were at least as favorable as
could have been obtained in arm's-length negotiations with a third party.
Additionally, the Company advanced a significant shareholder amounts which were
repaid in full by the significant shareholder in 1995 and, in connection with
the purchase of a printing company in fiscal 1996, entered into a real estate
lease agreement and purchase option with that company's former owner and current
president under terms the Company believes are comparable to market rates.
F-8
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
SBC Settlement -- In February 1995 the Company reached an agreement with
SBC whereby SBC paid the Company $3,200 in lieu of paying the amount it would
have owed the Company in 1999 for unused printing services pursuant to contract.
The Company applied $300 of such settlement to outstanding accounts receivable
from SBC and further, in connection with the termination of the contract and
resulting excess capacity, recorded an impairment of $1,800 to equipment and
$600 to inventory, which, together with $500 in direct costs, offset the balance
of the settlement amount.
Restructuring Charge -- In December 1995 the Company merged the operations
of two of its Houston subsidiaries. The Company recorded a restructuring charge
of $1,500 ($975 after-tax), which included $377 of direct and incremental costs
associated with the merger and certain pre-existing contractual obligations,
with the remainder recorded as an impairment of inventory.
Credit Risk and Fair Value of Financial Instruments -- Financial
instruments which potentially subject the Company to concentrations of credit
risk are primarily cash and cash equivalents and trade receivables. It is the
Company's practice to place its cash and cash equivalents in high-quality
financial institutions. The Company's long-term debt (See Note 5) is composed
primarily of a floating rate revolving credit agreement; accordingly, the
Company believes the fair value of its liabilities is the same as the notional
value in all material respects.
Certain reclassifications have been made to fiscal 1995 and 1994 amounts to
conform to the current year presentation.
3. ACQUISITIONS
The Company completed the following acquisitions in fiscal 1996:
On August 4, 1995, the Company acquired for $2,347 substantially all of the
assets and assumed all of the liabilities of Clear Visions, Inc. ("Clear
Visions") in San Antonio, Texas. The Company immediately thereafter paid $1,925
to retire all of the outstanding debt of Clear Visions.
On September 26, 1995, the Company acquired for $3,168 substantially all of
the assets and assumed all of the liabilities of Heritage Graphics, Inc.
("Heritage") in Phoenix, Arizona. The Company immediately thereafter paid $970
to retire all of the outstanding debt of Heritage.
On February 15, 1996, the Company acquired all of the issued and
outstanding capital stock of Emerald in Seattle, Washington. The Company issued
424,658 shares of its common stock valued at $17 per share to the Emerald
shareholders as consideration in the acquisition. Pursuant to its acquisition of
Emerald, the Company is contingently obligated at certain times and under
certain circumstances, depending on the performance and operating results of
Emerald for three consecutive one-year periods beginning January 1, 1996, to
issue, for all periods in the aggregate, up to a total of 75,000 additional
shares of its common stock to the selling shareholders.
On February 23, 1996, the Company acquired the capital stock of Precision
in San Diego, California. The Company paid cash of $700 and, immediately
following the acquisition, retired certain of Precision's outstanding debt for
approximately $4,942. The Company also issued a note for $768 and assumed notes
totalling $375 in connection with the transaction (see Note 5). Pursuant to its
acquisition of Precision, the Company is contingently obligated, at certain
times and under certain circumstances, depending on the performance and
operating results of Precision for three consecutive one-year periods beginning
April 1, 1996, to issue, for all periods in the aggregate, up to a total of
20,000 shares of its common stock.
On March 28, 1996, the Company acquired the capital stock of Tulsa Litho
Company in Tulsa, Oklahoma for cash consideration of $5 (including capitalized
acquisition costs). The assets, liabilities and results of operations of Tulsa
Litho Company are not material to the Company's financial position or results of
operations.
F-9
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
During fiscal 1995 the Company acquired Gritz-Ritter Graphics, Inc.
("Gritz-Ritter"), The Jarvis Press ("Jarvis") and Frederic Printing Company
("Frederic") for a combined total of $14,500.
The following table sets forth pro forma information assuming that for the
year ended March 31, 1996, the acquisitions in fiscal 1996 were completed on
April 1, 1995, and for the year ended March 31, 1995, each of the acquisitions
in fiscal 1995 and 1996, together with the Company's initial public offering of
its common stock in fiscal 1995 (see Note 8), occurred on April 1, 1994.
YEAR ENDED MARCH 31
------------------------
1996 1995
----------- -----------
Sales................................... $ 111,000 $ 106,100
Net income available to common
shareholders.......................... 5,700 6,600
Earnings per share of common stock...... $ .97 $ 1.12
Assuming the fiscal 1995 acquisitions and the initial public offering of
common stock were completed on April 1, 1993, the unaudited pro forma combined
sales, net income available to common shareholders and net income per share of
common stock of the Company for the year ended March 31, 1994 would have been
$75,500, $4,700 and $.86, respectively.
The preceding pro forma financial information does not purport to be
indicative of the Company's financial position or results of operations that
would have occurred had the transactions been completed as of or at the
beginning of the periods presented, nor do such statements purport to indicate
the Company's results of operations at any future date or for any future period.
Subsequent to March 31, 1996, the Company has announced the completion of
the accquisition of Bridgetown Printing Co. in Portland, Oregon and the signing
of nonbinding letters of intent to accquire Eagle Press of Sacramento,
California and Garner Printing of Des Moines, Iowa.
4. PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. The cost of major renewals and
betterments is capitalized; repairs and maintenance costs are expensed when
incurred. Upon retirement or sale, the cost of the assets disposed of and the
related accumulated depreciation are removed from the accounts, with any
resultant gain or loss being reflected in income.
Depreciation of property and equipment is computed using the straight-line
method over the estimated useful lives of the assets for financial reporting
purposes.
The following is a summary of property and equipment and their estimated
useful lives.
MARCH 31
-------------------- ESTIMATED
DESCRIPTION 1996 1995 LIFE IN YEARS
- ------------------------------------- --------- --------- -------------
Land................................. $ 4,012 $ 3,786 --
Buildings and leasehold
improvements....................... 10,630 9,394 15-40
Printing presses and equipment....... 45,762 28,776 5-15
Furniture, fixtures and office
equipment.......................... 1,688 1,260 5-15
Other................................ 258 454 5-10
--------- ---------
62,350 43,670
Less accumulated depreciation and
amortization....................... (11,759) (8,166)
--------- ---------
$ 50,591 $ 35,504
========= =========
F-10
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
5. LONG-TERM DEBT:
Long-term debt consisted of:
MARCH 31,
--------------------
1996 1995
--------- ---------
Revolving credit agreement........... $ 16,300 $ 5,000
Term equipment note payable.......... 1,629 2,030
Mortgage notes payable to an
insurance company.................. 1,838 2,059
Acquisition note payable............. 768 -
Installment notes payable............ 375 -
Term real estate note payable........ 365 381
Capital lease........................ 51 493
--------- ---------
21,326 9,963
Less current portion................. (1,221) (1,143)
--------- ---------
$ 20,105 $ 8,820
========= =========
On August 23, 1995 the Company entered into a $25,000 revolving credit
agreement (the "Agreement") with a bank, which expires on August 31, 1997, and
replaced an existing agreement which was due to expire on November 8, 1996.
Loans outstanding under the Agreement accrue interest at the London Interbank
Offered Rate plus 1%, or at the lending bank's prime rate, depending upon the
borrowing option chosen by the Company. Loans outstanding under the Agreement at
March 31, 1996 accrued interest at an effective rate of 6.8% per annum. The
covenants in the Agreement, among other things, restrict the Company's ability
to (i) merge, consolidate with or acquire other companies where the total
consideration exceeds certain levels, (ii) engage in hostile acquisitions, (iii)
change its primary business and (iv) incur other debt or pledge assets as
collateral in excess of certain levels. Further, the Company must meet certain
financial tests defined in the Agreement, including achieving specified ratios
of current assets to current liabilities, leverage and coverage of fixed
charges. The indebtedness is unsecured; however, the bank could require
inventories and receivables as collateral for the payment of indebtedness in
certain circumstances. The Company currently is in compliance with all financial
tests set forth in the Agreement.
The term equipment note payable outstanding at March 31, 1996 is payable to
a financial institution and was assumed in connection with a fiscal 1995
acquisition. The note is payable in equal monthly installments, bears interest
at 8.45% and matures on March 10, 1999.
The mortgage notes payable to an insurance company mature in 2002 and 2003,
respectively, and bear interest at 2.55% over the 30-day commercial paper rate.
Amounts due at March 31, 1996 are subject to interest at an effective rate of
6.95% per annum.
The acquisition note payable was issued in connection with the acquisition
of Precision and bears interest at 6.0%. Principal and interest payments are due
monthly and the note matures in 1999.
The installment notes payable were assumed in connection with the
acquisition of Precision and bear interest at 6.0%. Principal and interest
payments are due monthly and the notes mature in 1999.
The term real estate note is payable monthly to an individual based on a
15-year amortization with the balance due in 2009. The note bears interest at
prime (8.25% at March 31, 1996).
The principal payment requirements under the debt agreements are $1,221 in
1997, $17,480 in 1998, $1,150 in 1999, $287 in 2000, $312 in 2001 and $876
thereafter.
F-11
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
Three of the Company's operating facilities are pledged as collateral under
the mortgages and the term real estate note and substantially all of the assets
of one of the Company's subsidiaries are pledged as collateral under the term
equipment note outstanding at March 31, 1996.
In addition to the covenants under the Agreement, the Company's other debt
agreements contain certain covenants, the most significant of which places
certain restrictions on future borrowings and acquisitions above specified
levels. The Company is also required to maintain certain financial ratios,
minimum equity balances and keyman life insurance on the majority shareholder.
6. INCOME TAXES:
Provision for income taxes is composed of the following:
YEAR ENDED MARCH 31
-------------------------------
1996 1995 1994
--------- --------- ---------
Current.............................. $ 591 $ 1,893 $ 1,080
Deferred............................. 1,555 499 726
--------- --------- ---------
$ 2,146 $ 2,392 $ 1,806
========= ========= =========
A reconciliation of the statutory federal income tax rate to the effective
tax rate follows:
YEAR ENDED MARCH 31
-------------------------------
1996 1995 1994
--------- --------- ---------
Federal income tax, statutory rate... 34.0% 34.0% 34.0%
State and other...................... 1.0 .8 -
--------- --------- ---------
Income tax, effective rate........... 35.0 34.8% 34.0%
========= ========= =========
Deferred income taxes reflect the impact of temporary differences between
the amount of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws and regulations. The components of the net
deferred income tax liability are as follows:
MARCH 31
-------------------------------
1996 1995 1994
--------- --------- ---------
Property and equipment............... 6,421 3,402 2,587
Other................................ (1,241) (567) (251)
--------- --------- ---------
Net deferred income tax liability.... $ 5,180 $ 2,835 $ 2,336
========= ========= =========
7. COMMITMENTS AND CONTINGENCIES:
Operating lease commitments for facilities and equipment require minimum
annual payments of $907 for 1997, $724 for 1998, $369 for 1999, $297 for 2000,
$252 for 2001 and $3 thereafter. Total rent expense was $414, $222 and $155 for
the years ended March 31, 1996, 1995 and 1994, respectively.
On March 22, 1994, the Company indemnified and released SBC from, among
other matters, all obligations other than certain employment matters and a
printing services contract under the purchase and sale agreement with respect to
the Company's acquisition of a commercial printing operation from SBC in
February, 1993. To ensure payment of the Company's performance under this
arrangement, the Company has established a $3.5 million letter of credit for the
benefit of SBC, which will be maintained until September 1997, or until the
expiration of the applicable federal law regarding limitations of actions,
whichever is longer.
F-12
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
The Company is contingently obligated at certain times and under certain
circumstances to issue, for all periods in the aggregate, up to a total of
95,000 shares of its common stock pursuant to its acquisitions of Emerald and
Precision.
The Company is subject to legal proceedings and claims that arise in the
ordinary course of its business. Management believes, based on discussions with
its legal counsel, that the outcome of these legal actions will not have a
material adverse effect upon the consolidated financial position and results of
operations of the Company.
8. CAPITAL STOCK AND STOCK OPTIONS:
INITIAL PUBLIC OFFERING
In June 1994 the Company completed an initial public offering of 1,920,000
shares of common stock for proceeds of $19,600, net of expenses, and upon the
exercise of the underwriters' overallotment option in July 1994, issued an
additional 183,652 shares of common stock for proceeds of $1,700, net of
expenses (collectively, the Offering). The Company used $9,700 of such proceeds
to retire two term notes scheduled to mature in 1998 and used the remaining
$11,600 for general corporate purposes, including working capital and
acquisitions in the printing industry.
INCENTIVE PLAN
In March 1994 the Company approved the adoption of the Consolidated
Graphics, Inc., Long-Term Incentive Plan (Incentive Plan). Pursuant to the
Incentive Plan, employees of the Company and directors who are not serving on
the Compensation Committee are eligible to receive awards consisting of stock
options, stock appreciation rights, restricted or nonrestricted stock, cash or
any combination of the foregoing. Stock options granted pursuant to the
Incentive Plan may either be incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended, or non-qualified
stock options. At March 31, 1996, an aggregate of 367,500 shares of Common Stock
are reserved for issuance pursuant to the Incentive Plan.
In connection with the Offering, the Company granted options under the
Incentive Plan to certain of its directors and employees to purchase a total of
150,000 shares of Common Stock at the offering price of $11.50 per share.
Options covering 20,000 shares were granted to directors, of which 40% are
currently exercisable, and an additional 20% of which will become exercisable on
each successive anniversary of the date of grant. The options expire in June
1999. The remaining options covering 130,000 shares were granted to employees,
are currently exercisable and expire on June 9, 2004. All of the options issued
to the directors remained outstanding at March 31, 1996. Of the 130,000 options
granted to employees, 5,000 were exercised in fiscal 1995 and 12,900 were
exercised or forfeited in fiscal 1996, resulting in 112,100 options outstanding
at March 31, 1996.
In December 1994 the Company granted options to purchase 100 shares of
Common Stock at the market price per share on the date of grant ($11.25), under
the terms of the Incentive Plan, to each of its 671 employees. The options
became exercisable in June, 1995 and expire on December 30, 1999. Of the 67,100
options granted to employees, 7,200 were forfeited in fiscal 1995 and 26,500
were exercised or forfeited in fiscal 1996, resulting in 33,400 options
outstanding at March 31, 1996.
In May 1995 the Company granted options to certain employees under the
Incentive Plan to purchase a total of 104,750 shares of Common Stock at the
market price per share on the date of grant ($12.00), of which 40% of the
options are currently exercisable and an additional 20% of the options will
become exercisable on each successive anniversary date of the grant. The options
expire on May 1, 2000. A total of 4,450 options were exercised or forfeited in
fiscal 1996, resulting in 100,300 options outstanding at March 31, 1996.
F-13
CONSOLIDATED GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
REDEEMABLE PREFERRED STOCK AND WARRANT
The Company is authorized by its Articles of Incorporation to issue up to
5,000,000 shares of $1.00 par value preferred stock. On January 29, 1993, the
Company sold 3,000,000 shares of Series A $1.00 par value preferred stock with a
liquidation preference of $3,000. Each share of Series A preferred stock
entitled its holder to receive quarterly, cumulative, preferential cash
dividends at the annual rate of $.07 per share subject to certain conditions;
convert it into common stock at any time, at a conversion price of $5.36 per
common share; and receive $1.00 per share plus all accrued and unpaid dividends
on each share in the event of voluntary or involuntary liquidation.
On January 29, 1993, the Company also sold, for a nominal amount, a warrant
to purchase shares of common stock from January 29, 1999, through January 31,
2003, provided that certain cumulative results of operations are not achieved.
The Series A preferred stock was converted into 559,650 shares of common
stock and the warrant was canceled immediately prior to the initial closing of
the Offering and substantially all obligations, other than certain registration
rights with respect to securities of the Company, were eliminated. Following the
conversion of the Series A preferred stock into common stock, the Company
eliminated the Series A preferred stock from its Articles of Incorporation.
Accordingly, the Company currently has authorized and available for issuance
5,000,000 shares of $1.00 par value preferred stock.
9. UNAUDITED QUARTERLY FINANCIAL DATA:
The following table contains selected quarterly financial data from the
consolidated income statements for each quarter of fiscal 1996 and 1995. The
Company believes this information reflects all normal recurring adjustments
necessary for a fair presentation of the information for the periods presented.
The operating results for any quarter are not necessarily indicative of results
for any future period.
4TH 3RD 2ND 1ST
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL 1996:
Sales.............................. $ 24,092 $ 22,555 $ 19,308 $ 19,478
Gross profit....................... 6,651 6,138 5,619 5,488
Net income......................... 1,180 294 1,352 1,159
Fully diluted earnings per common
share............................ $ .21 $ .05 $ .25 $ .21
FISCAL 1995:
Sales.............................. $ 18,518 $ 16,333 $ 10,789 $ 11,526
Gross profit....................... 5,707 4,425 3,489 3,724
Net income......................... 1,415 932 1,063 1,072
Fully diluted earnings per common
share............................ $ .26 $ .17 $ .20 $ .30
Earnings per share are computed independently for each of the quarters
presented. Therefore the sum of the quarterly earnings per share may not equal
the annual earnings per share.
F-14