**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

**ý****          ****QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended December 31, 2004**

 

**OR**

 

**o****          ****TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from             to            **

 

**Commission File Number 001-12631**

 

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**CONSOLIDATEDGRAPHICS, INC.**

(Exact name of Registrant as specified in its charter)

 
| **Texas**                                                        | ** ** | **76-0190827**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction  of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |
|                                                             |       |                                  |
| **5858 Westheimer Road, Suite 200  Houston, Texas**              | ** ** | **77057**                             |
| (Address of principal  executive offices)                        |       | (Zip Code)                            |

 

Registrant’s telephone number, including areacode:   **(713) 787-0977**

 

Indicateby check mark whether the Registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

Yes ý   No o

 

Indicate by check mark whether the Registrant is anaccelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of1934).

 

Yes ý   No o

 

Thenumber of shares of Common Stock, par value $.01 per share, of the Registrantoutstanding at January 15, 2005 was 13,693,002.

 

 

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**CONSOLIDATED GRAPHICS, INC.**

 

##### **FORM 10-Q FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2004**

##### ** **

**INDEX**

 
| Part I — Financial  Information |                                                                                                      |
|--------------------------------------|-----------------------------------------------------------------------------------------------------------|
|                                 |                                                                                                      |   |
|                                 | Item 1 — Financial Statements                                                                        |   |
|                                 |                                                                                                      |   |
|                                 |                                                                                                      | Consolidated Balance Sheets at December 31, 2004 and March 31, 2004 |   |
|                                 |                                                                                                      |   |   |
|                                 |                                                                                                      | Consolidated Income Statements for the Three and Nine Months Ended  December 31, 2004 and 2003 |   |
|                                 |                                                                                                      |   |   |
|                                 |                                                                                                      | Consolidated Statements of Cash Flows for  the Nine Months Ended December 31, 2004 and 2003 |   |
|                                 |                                                                                                      |   |   |
|                                 |                                                                                                      | Notes to Consolidated Financial Statements |   |
|                                 |                                                                                                      |   |
|                                 | Item 2 — Management’s Discussion and  Analysis of Financial Condition and Results of Operations |   |
|                                 |                                                                                                      |   |
|                                 | Item 3 — Quantitative and Qualitative  Disclosure About Market Risk                                  |   |
|                                 |                                                                                                      |   |
|                                 | Item 4 — Controls and Procedures                                                                     |   |
|                                 |                                                                                                      |   |
| Part II — Other Information     |                                                                                                      |
|                                 |                                                                                                      |   |
|                                 | Item 1 — Legal Proceedings                                                                           |   |
|                                 |                                                                                                      |   |
|                                 | Item 2 — Unregistered Sales of Equity  Securities and Use of Proceeds                                |   |
|                                 |                                                                                                      |   |
|                                 | Item 3 — Defaults upon  Senior Securities                                                            |   |
|                                 |                                                                                                      |   |
|                                 | Item 4 —  Submission of Matters to a Vote of Security Holders                                        |   |
|                                 |                                                                                                      |   |
|                                 | Item 5 — Other Information                                                                           |   |
|                                 |                                                                                                      |   |
|                                 | Item 6  — Exhibits                                                                                   |   |
|                                 |                                                                                                      |   |
| Signatures                           |                                                                                                      |
|                                 |                                                                                                      |
| Exhibit Index                        |                                                                                                      |

 

2

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**PART I – FINANCIAL INFORMATION**

 

**ITEM1.  *Financial Statement******s***

 

**CONSOLIDATED GRAPHICS, INC.**

**CONSOLIDATED BALANCE SHEETS**

**(In thousands, except share and per share data)**

 
| ** **                                                                                                      | ** ** | **December 31,  2004** | ** ** | **March 31,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|---------------------|------------|
| ** **                                                                                                      | ** ** | **(Unaudited)**        | ** ** | **(Audited)**       | ** ** |
| ASSETS                                                                                                          |       |                   |       |                |       |
|                                                                                                            |       |                   |       |                |       |
| CURRENT ASSETS                                                                                                  |       |                   |       |                |       |
| Cash and cash equivalents                                                                                       |       | $                      | 5,480      |                | $          | 10,472 |   |
| Accounts receivable, net                                                                                        |       | 120,655                |       | 114,658             |       |
| Inventories                                                                                                     |       | 36,177                 |       | 32,728              |       |
| Prepaid expenses                                                                                                |       | 6,615                  |       | 5,874               |       |
| Deferred income taxes                                                                                           |       | 6,815                  |       | 6,159               |       |
| Total current assets                                                                                            |       | 175,742                |       | 169,891             |       |
| PROPERTY AND EQUIPMENT, net                                                                                     |       | 272,364                |       | 272,801             |       |
| GOODWILL, net                                                                                                   |       | 73,889                 |       | 73,658              |       |
| OTHER ASSETS                                                                                                    |       | 6,472                  |       | 5,785               |       |
|                                                                                                            |       | $                      | 528,467    |                | $          | 522,135 |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                       |       |                   |       |                |       |
|                                                                                                            |       |                   |       |                |       |
| CURRENT LIABILITIES                                                                                             |       |                   |       |                |       |
| Current portion of long-term  debt                                                                              |       | $                      | 6,269      |                | $          | 13,204 |   |
| Accounts payable                                                                                                |       | 37,311                 |       | 41,062              |       |
| Accrued liabilities                                                                                             |       | 76,661                 |       | 66,585              |       |
| Income taxes payable                                                                                            |       | 4,570                  |       | 1,552               |       |
| Total current liabilities                                                                                       |       | 124,811                |       | 122,403             |       |
| LONG-TERM DEBT, net of current  portion                                                                         |       | 73,071                 |       | 98,265              |       |
| DEFERRED INCOME TAXES                                                                                           |       | 57,713                 |       | 55,855              |       |
| COMMITMENTS AND CONTINGENCIES                                                                                   |       |                   |       |                |       |
| SHAREHOLDERS’ EQUITY                                                                                       |       |                   |       |                |       |
| Common stock, $.01 par value;  100,000,000 shares authorized; 13,690,356 and 13,573,964 issued and  outstanding |       | 137                    |       | 135                 |       |
| Additional paid-in capital                                                                                      |       | 167,031                |       | 163,910             |       |
| Retained earnings                                                                                               |       | 105,704                |       | 81,567              |       |
| Total shareholders’ equity                                                                                 |       | 272,872                |       | 245,612             |       |
|                                                                                                            |       | $                      | 528,467    |                | $          | 522,135 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

3

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**CONSOLIDATED GRAPHICS, INC.**

##### **CONSOLIDATED INCOMESTATEMENTS**

**(In thousands, except per share data)**

**(Unaudited)**

 
| ** **                                 | ** ** | **Three Months Ended  December 31** | ** ** | **Nine Months Ended  December 31** | ** ** |
|--------------------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                                 | ** ** | **2004**                            | ** ** | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                       |       |                                |       |                               |       |   |   |   |   |
| SALES                                      |       | $                                   | 208,640    |                               | $          | 184,238 |   | $ | 581,298 |   | $ | 524,691 |   |
|                                       |       |                                |       |                               |       |   |   |   |   |
| COST OF SALES                              |       | 157,077                             |       | 141,034                            |       | 437,753 |   | 401,046 |   |
|                                       |       |                                |       |                               |       |   |   |   |   |
| Gross profit                               |       | 51,563                              |       | 43,204                             |       | 143,545 |   | 123,645 |   |
|                                       |       |                                |       |                               |       |   |   |   |   |
| SELLING EXPENSES                           |       | 21,232                              |       | 19,539                             |       | 60,458 |   | 56,229 |   |
|                                       |       |                                |       |                               |       |   |   |   |   |
| GENERAL AND ADMINISTRATIVE  EXPENSES       |       | 14,140                              |       | 12,640                             |       | 40,796 |   | 39,107 |   |
|                                       |       |                                |       |                               |       |   |   |   |   |
| Operating income                           |       | 16,191                              |       | 11,025                             |       | 42,291 |   | 28,309 |   |
|                                       |       |                                |       |                               |       |   |   |   |   |
| INTEREST EXPENSE, net                      |       | 1,083                               |       | 2,032                              |       | 3,879 |   | 5,762 |   |
|                                       |       |                                |       |                               |       |   |   |   |   |
| Income before taxes                        |       | 15,108                              |       | 8,993                              |       | 38,412 |   | 22,547 |   |
|                                       |       |                                |       |                               |       |   |   |   |   |
| INCOME TAXES                               |       | 5,364                               |       | 3,507                              |       | 14,275 |   | 8,736 |   |
|                                       |       |                                |       |                               |       |   |   |   |   |
| Net income                                 |       | $                                   | 9,744      |                               | $          | 5,486 |   | $ | 24,137 |   | $ | 13,811 |   |
|                                       |       |                                |       |                               |       |   |   |   |   |
| BASIC EARNINGS PER SHARE                   |       | $                                   | .71        |                               | $          | .41 |   | $ | 1.77 |   | $ | 1.03 |   |
| DILUTED EARNINGS PER SHARE                 |       | $                                   | .68        |                               | $          | .39 |   | $ | 1.70 |   | $ | 1.00 |   |
|                                       |       |                                |       |                               |       |   |   |   |   |
| SHARES USED TO COMPUTE EARNINGS  PER SHARE |       |                                |       |                               |       |   |   |   |   |
|                                       |       |                                |       |                               |       |   |   |   |   |
| Basic                                      |       | 13,666                              |       | 13,470                             |       | 13,623 |   | 13,409 |   |
| Diluted                                    |       | 14,259                              |       | 13,947                             |       | 14,180 |   | 13,769 |   |

 

See accompanying notes to consolidated financialstatements.

 

4

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**CONSOLIDATED GRAPHICS, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Nine Months Ended  December 31** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                         | ** ** | **2004**                           | ** ** | **2003** | ** ** |
|                                                                               |       |                               |       |   |   |
| OPERATING ACTIVITIES                                                               |       |                               |       |   |   |
| Net income                                                                         |       | $                                  | 24,137     |   | $ | 13,811 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                               |       |   |   |
| Depreciation                                                                       |       | 32,001                             |       | 26,911 |   |
| Deferred income tax provision                                                      |       | 1,202                              |       | 3,325 |   |
| Changes in assets and  liabilities, net of effects of acquisitions:                |       |                               |       |   |   |
| Accounts receivable, net                                                           |       | (4,380                             | )          | (1,278 | ) |
| Inventories                                                                        |       | (2,831                             | )          | (4,606 | ) |
| Prepaid expenses                                                                   |       | (730                               | )          | (1,977 | ) |
| Other assets                                                                       |       | (687                               | )          | (2,324 | ) |
| Accounts payable and accrued  liabilities                                          |       | (783                               | )          | 19,674 |   |
| Income taxes payable                                                               |       | 3,018                              |       | 1,368 |   |
| Net cash provided by operating  activities                                         |       | 50,947                             |       | 54,904 |   |
|                                                                               |       |                               |       |   |   |
| INVESTING ACTIVITIES                                                               |       |                               |       |   |   |
| Acquisitions of businesses, net  of cash acquired                                  |       | (2,233                             | )          | (6,043 | ) |
| Purchases of property and  equipment                                               |       | (9,623                             | )          | (8,249 | ) |
| Proceeds from asset  dispositions                                                  |       | 1,503                              |       | 1,797 |   |
| Net cash used in investing  activities                                             |       | (10,353                            | )          | (12,495 | ) |
|                                                                               |       |                               |       |   |   |
| FINANCING ACTIVITIES                                                               |       |                               |       |   |   |
| Proceeds from bank credit  facilities                                              |       | 58,470                             |       | 58,469 |   |
| Payments on bank credit  facilities                                                |       | (58,232                            | )          | (98,007 | ) |
| Payments for financing costs on  bank credit facilities                            |       | —                             |       | (480 | ) |
| Proceeds from issuance of term  equipment note                                     |       | —                             |       | 6,117 |   |
| Payments on term equipment  notes and other debt                                   |       | (48,947                            | )          | (9,183 | ) |
| Proceeds from exercise of stock  options                                           |       | 3,123                              |       | 2,635 |   |
| Net cash used in financing  activities                                             |       | (45,586                            | )          | (40,449 | ) |
|                                                                               |       |                               |       |   |   |
| NET INCREASE (DECREASE) IN CASH  AND CASH EQUIVALENTS                              |       | (4,992                             | )          | 1,960 |   |
| CASH AND CASH EQUIVALENTS AT  BEGINNING OF PERIOD                                  |       | 10,472                             |       | 9,641 |   |
| CASH AND CASH EQUIVALENTS AT  END OF PERIOD                                        |       | $                                  | 5,480      |   | $ | 11,601 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

5

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**CONSOLIDATED GRAPHICS, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(In thousands, except share and per share data and percentages)**

**(Unaudited)**

 

**1.  BASIS OF PRESENTATION AND SIGNIFICANTACCOUNTING POLICIES**

 

Theaccompanying unaudited consolidated financial statements include the accountsof Consolidated Graphics, Inc. and subsidiaries (collectively, the “Company”). Allintercompany accounts and transactions have been eliminated. Such statementshave been prepared in accordance with generally accepted accounting principlesand the Securities and Exchange Commission’s rules and regulations forreporting interim financial information. Accordingly, they do not include allof the information and footnotes required by generally accepted accountingprinciples for complete financial statements. In the opinion of management, alladjustments (consisting of normal recurring accruals) considered necessary fora fair presentation of the accompanying unaudited consolidated financialstatements have been included. Operating results for the nine months ended December31, 2004 are not necessarily indicative of future operating results. Balancesheet information as of March 31, 2004 has been derived from the 2004 annualaudited consolidated financial statements of the Company. For furtherinformation, refer to the consolidated financial statements and footnotesthereto included in the Company’s Form 10-K for the fiscal year ended March 31,2004, filed with the Securities and Exchange Commission in June 2004.

 

*Use ofEstimates*—The preparation of financial statements inconformity with generally accepted accounting principles requires the use ofcertain estimates and assumptions by management in determining the reportedamounts of assets and liabilities, disclosure of contingent liabilities as ofthe date of the financial statements and the reported amounts of revenues andexpenses during the reporting period. The Company evaluates its estimates andassumptions on an ongoing basis and relies on historical experience and variousother factors that it believes to be reasonable under the circumstances todetermine such estimates. Because uncertainties with respect to estimates andassumptions are inherent in the preparation of financial statements, actual resultscould differ from these estimates.

 

*RevenueRecognition –*The Company recognizes revenue upon delivery ofeach job, except for “bill and hold transactions,” in which case such revenueis recognized when all of the service delivery criteria are fully met as perStaff Accounting Bulletin 104 issued by the Securities and Exchange Commission.Losses, if any, on jobs are recognized at the earliest date such amount isdeterminable.

 

*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 forwork in progress and finished goods. The carrying values of inventories are setforth below:

 
| ** **       | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
|------------------|------------|------------------|------------|---------------|------------|
| ** **       | ** ** | **2004**         | ** ** | **2004**      | ** ** |
|             |       |             |       |          |       |
| Raw materials    |       | $                | 10,772     |          | $          | 10,051 |   |
| Work in progress |       | 22,517           |       | 20,054        |       |
| Finished goods   |       | 2,888            |       | 2,623         |       |
|             |       | $                | 36,177     |          | $          | 32,728 |   |

 

*Earnings Per Share –* Basic earnings pershare are calculated by dividing net income by the weighted average number ofcommon shares outstanding.  Dilutedearnings per share reflect net income divided by the weighted average number ofcommon shares and dilutive stock options outstanding.

 

*Supplemental Cash Flow Information -* The consolidated statements of cash flowsprovide information about the Company’s sources and uses of cash and excludethe effects of non-cash transactions. The Company issued term notes payabletotaling $6,564 (see Note 3. Long-Term Debt) during the nine months ended December31, 2004 to finance the purchase of certain new equipment.  The Company assumed a mortgage obligationtotaling $5,116 in May 2004 in connection with a prior year acquisition, and italso assumed two industrial revenue bonds in August 2004 totaling $4,900 inconnection with a current year acquisition (see Note 2. Acquisitions). For the ninemonths ended December 31, 2004, the Company paid cash for interest and incometaxes, net of refunds, totaling $3,912 and $8,262. For the nine months ended December31, 2003, the Company paid (or received) cash for interest and income taxes,net of refunds, totaling $5,900 and ($2,867).

 

6

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*Stock-BasedCompensation –* The Company’s only element of stock-basedcompensation is derived pursuant to the Consolidated Graphics, Inc. Long-TermIncentive Plan (the “Plan”), which has been approved by the Company’sshareholders.  Under the Plan, employeesof the Company and non-employee members of the Company’s Board of Directorshave been, or may be, granted options to purchase shares of the Company’scommon stock at a price not less than the market price of the stock at the dateof grant. The Company adopted the disclosure requirements of Statement ofFinancial Accounting Standards (“SFAS”) No. 148, *Accounting for Stock-Based Compensation-Transition and Disclosure,*asof March 31, 2003; however, as permitted under SFAS No. 123, it continues touse the intrinsic value method of accounting prescribed by AccountingPrinciples Board Opinion No. 25, *Accountingfor Stock Issued to Employees*.  Accordingly, no compensation expense orliability is recognized for options issued under the Plan in the accompanyingconsolidated financial statements since all stock options were granted at thefair market value of the stock at the date of grant.

 

Had the Company used thefair-value-based method of accounting for the Plan prescribed by SFAS No. 123and charged compensation expense against net income over the vesting periodbased on the fair value of stock options at the date of grant, net income andearnings per share as reported would have been reduced to the following proforma amounts:

 
| ** **                            | ** ** | **Three Months Ended  December 31** | ** ** | **Nine Months Ended  December 31** | ** ** |
|---------------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                            | ** ** | **2004**                            | ** ** | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                  |       |                                |       |                               |       |   |   |   |   |
| Net income as reported                |       | $                                   | 9,744      |                               | $          | 5,486 |   | $ | 24,137 |   | $ | 13,811 |   |
| Less: Pro forma compensation  expense |       | (311                                | )          | (595                               | )          | (969 | ) | (1,747 | ) |
| Pro forma net income                  |       | $                                   | 9,433      |                               | $          | 4,891 |   | $ | 23,168 |   | $ | 12,064 |   |
|                                  |       |                                |       |                               |       |   |   |   |   |
| **Basic Earnings Per Share:**         |       |                                |       |                               |       |   |   |   |   |
| Net income as reported                |       | $                                   | .71        |                               | $          | .41 |   | $ | 1.77 |   | $ | 1.03 |   |
| Less: Pro forma compensation  expense |       | (.02                                | )          | (.04                               | )          | (.07 | ) | (.13 | ) |
| Pro forma net income                  |       | $                                   | .69        |                               | $          | .37 |   | $ | 1.70 |   | $ | .90 |   |
|                                  |       |                                |       |                               |       |   |   |   |   |
| **Diluted Earnings Per Share:**       |       |                                |       |                               |       |   |   |   |   |
| Net income as reported                |       | $                                   | .68        |                               | $          | .39 |   | $ | 1.70 |   | $ | 1.00 |   |
| Less: Pro forma compensation  expense |       | (.02                                | )          | (.04                               | )          | (.06 | ) | (.12 | ) |
| Pro forma net income                  |       | $                                   | .66        |                               | $          | .35 |   | $ | 1.64 |   | $ | .88 |   |

 

The effect on pro forma netincome, basic earnings per share, and diluted earnings per share of expensingthe estimated fair value of stock options is not necessarily representative ofthe effect on reported earnings for future years due to the vesting period ofthe stock options and the potential for the forfeiture of previously grantedstock options and the future issuance of additional stock options.

 

**2.  ACQUISITIONS**

 

During the nine months ended December 31, 2004, the Company assumeddebt totaling $4,900 and paid cash of $397 to acquire two printing businesses,one of which was merged into an existing operation of the Company. Theallocation of the purchase price of the businesses acquired include currentassets of $2,246, property and equipment of $4,116, and other assets of $138,less current liabilities of $1,203. Additionally, the Company paid cashtotaling $1,836 to acquire certain real property (in addition to the assumptionof a related mortgage obligation) and to satisfy certain liabilities incurredin connection with the acquisition of certain businesses in prior periods.

 

On January 26, 2005, the Company announced that it signed a definitivepurchase agreement to acquire Kelmscott Communications LLC (“Kelmscott”), aprivately-held provider of commercial printing services in five Midwest andWest Coast states with annual sales of $100 million.  The completion of this transaction, which issubject to certain conditions and the approvals of the Boards of the Companyand Kelmscott, is expected to occur in March 2005.

 

7

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**3.****    ****LONG-TERM DEBT**

 

Thefollowing is a summary of the Company’s long-term debt as of:

 
| ** **             | ** ** | **December 31,  2004** | ** ** | **March 31,  2004** | ** ** |
|------------------------|------------|------------------------|------------|---------------------|------------|
| Bank credit facilities |       | $                      | 35,801     |                | $          | 35,563 |   |
| Term equipment notes   |       | 25,730                 |       | 67,772              |       |
| Other                  |       | 17,809                 |       | 8,134               |       |
|                   |       | 79,340                 |       | 111,469             |       |
| Less: current portion  |       | (6,269                 | )          | (13,204             | )          |
|                   |       | $                      | 73,071     |                | $          | 98,265 |   |

 

The Company’s bank creditfacility (as amended and restated, the “Credit Agreement”) is composed of a$150,000 revolving credit facility that will mature in July 2007. AtDecember 31, 2004, outstanding borrowings under the Credit Agreement were$27,000 and accrued interest at a weighted average rate of 4.28%.

 

The proceeds from borrowingsunder the Credit Agreement can be used to repay certain indebtedness, financecertain acquisitions, provide for working capital and general corporatepurposes and, subject to certain restrictions, repurchase the Company’s commonstock. Borrowings outstanding under the Credit Agreement are secured bysubstantially all of the Company’s assets other than real estate and certainequipment subject to term equipment notes and other financings. Borrowingsunder the Credit Agreement accrue interest, at the Company’s option, at either(1) the London Interbank Offered Rate (LIBOR) plus a margin of 1.25% to2.00%, or (2) an alternate base rate (based upon the greater of the agentbank’s prime lending rate or the Federal Funds effective rate plus .50%) plus amargin of up to .75%. The Company is also required to pay an annual commitmentfee ranging from .275% to .375% on available but unused amounts under theCredit Agreement. The interest rate margin and the commitment fee are basedupon certain financial performance measures as set forth in the CreditAgreement and are redetermined quarterly. At December 31, 2004, the applicable LIBORinterest rate margin was 1.25% and the applicable commitment fee was .275%.

 

The Company is subject tocertain covenants and restrictions and must meet certain financial tests underthe Credit Agreement. The Company was in compliance with such covenants,restrictions and financial tests at December 31, 2004.

 

In addition to the CreditAgreement, the Company maintains two auxiliary revolving credit facilities(each an “Auxiliary Bank Facility” and collectively the “Auxiliary BankFacilities”) with commercial banks. Both Auxiliary Bank Facilities areunsecured and have a maximum borrowing capacity of $5,000. One such facilityexpires in November 2005 and the other such facility expires in November 2006.At December 31, 2004, borrowings outstanding under the Auxiliary BankFacilities totaled $8,801 and accrued interest at a weighted average rate of 3.78%.Because the Company has the ability to refinance borrowings outstanding under theAuxiliary Bank Facility expiring in November 2005 and plans to do so, borrowingsare classified as long-term debt in the accompanying consolidated balance sheetat December 31, 2004.

 

The Company’s term equipmentnotes consist primarily of notes payable pursuant to financing agreementsbetween the Company and various lenders (the “Lender Notes”) and between theCompany and the finance affiliate of a printing equipment manufacturer (the “EquipmentNotes”). At December 31, 2004, outstanding borrowings under the Lender Notestotaled $17,987 and accrued interest at a weighted average rate of 4.74%. TheLender Notes provide for fixed monthly principal payments plus interest (atfixed rates) for defined periods of up to seven years from the date ofissuance, most ending with a balloon payment at maturity, and are secured bycertain equipment of the Company. At December 31, 2004, outstanding borrowingsunder the Equipment Notes totaled $6,952 and accrued interest at a weightedaverage rate of 6.31%. The Equipment Notes provide for fixed payments ofprincipal and interest (at fixed rates) for defined periods of up to ten yearsfrom the date of issuance and are secured by the equipment which wasconcurrently purchased from the manufacturer. At December 31, 2004, theremaining balance of term equipment notes totaling $791 primarily consists ofvarious secured debt obligations assumed by the Company in connection withcertain prior year acquisitions. The Company is not subject to any significantfinancial covenants in connection with any of the term equipment notes;however, the Credit Agreement places certain limitations on the amount ofadditional term note obligations the Company may incur in the future.

 

8

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In the nine month periodended December 31, 2004, the Company retired $41,061 of Lender Notes withborrowings from the Credit Agreement. The purpose of retiring these notes wasto utilize available capacity under the Credit Agreement to effect an overallreduction in the Company’s interest costs. No financial penalties were incurredin connection with the retirement of these obligations.

 

The Company’s remaining debtobligations consist of a mortgage totaling $5,019, a promissory note totaling$3,550, industrial revenue bonds totaling $8,085 and various other debttotaling $1,155. The Company does not have any significant financial covenantsor restrictions associated with these other debt obligations.

 

9

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**ITEM2.  *Management’s Discussionand Analysis of Financial Condition and R******esults of Operations***

 

*The following discussion contains forward-lookinginformation. Readers are cautioned that such information involves known andunknown risks and uncertainties, including those created by general marketconditions, competition and the possibility that events may occur beyond ourcontrol, which may limit our ability to maintain or improve our operatingresults or financial condition or acquire additional printing businesses. Ourexpectations regarding future sales and profitability assume, among otherthings, stability in the economy and reasonable growth in the demand for ourproducts, the continued availability of raw materials at affordable prices andretention of our key management and operating personnel. In addition, ourexpectations regarding future acquisitions assume, among other things, ourability to identify new acquisition opportunities and our ability to negotiateand finance such acquisitions on acceptable terms, as well as the ability tosuccessfully absorb and manage such acquisitions. Although management believesthat the assumptions underlying the forward looking statements are reasonable,any of the assumptions could be inaccurate and there can be no assurance thatany or all of the assumptions underlying the forward-looking statements willprove to be accurate. The inclusion of such information should not be regardedas a representation by us or any other person that our objectives and planswill be achieved.**** ****We expressly disclaim any duty to provide updates to theseforward-looking statements, assumptions or other factors after the date of thisReport on Form 10-Q to reflect the occurrence of events or changes incircumstances or expectations.*

 

*Thefollowing discussion of the financial condition and performance of our Companyshould be read in conjunction with the consolidated financial statements includedherein and the consolidated financial statements and related notes and otherdetailed information regarding our Company included in our Annual Report onForm 10-K for the fiscal year ended March 31, 2004 and other reports filed byus with the Securities and Exchange Commission. Operating results for the nine months ended December 31, 2004 are notnecessarily indicative of the results to be expected for the entire fiscal yearending March 31, 2005 or any periods thereafter.*

 

**Overview**

 

*OurOrganization*

 

Our Company is a leading national provider of commercial printingservices. We are organized as a holding company and currently own and operate65 printing facilities located in 25 states. Each facility operates as aseparate business and reporting unit, with its own management, sales, customerservice, production and accounting staff. Generally, each facilitysubstantially relies on locally based customers; accordingly, we have a broaddiversification of customers by industry-type and geographic orientation,totaling more than 18,000. No individual facility nor any individual customeraccount for more than 10% of our revenues.

 

Our corporate headquarters staff provides support to our printingbusinesses in such areas as human resources, purchasing and managementinformation systems. We also maintain centralized treasury, risk management,tax and consolidated financial reporting activities.

 

*Nature of Our Services*

 

We are a service businessthat utilizes sophisticated technology and equipment to produce and deliverhigh quality printed documents, materials and products for our customers totheir specification and design, including all content. Examples of the types ofdocuments, materials and products we print for our customers include multicolormarketing materials, product and capability brochures, point-of-purchasedisplays, direct mail pieces, shareholder communications, catalogs, andtraining manuals.

 

The items we print for ourcustomers are pursuant to individual orders with specific instructions regardingprinting, finishing and delivery. Our customers frequently request us toprovide fulfillment, mailing or other print-related services. They may also useour Internet-based software solutions and electronic media services, marketedunder “CGX Solutions,” which are complementary to the production and deliveryof the printed materials. Collectively, all of these discrete capabilitiescomprise a “comprehensive range of printing services” for which we typicallycharge an “all-inclusive” fee. Accordingly, for financial reporting purposes,we report our revenues and results of operations as a single segment.

 

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Our sales are generated byindividual orders through commissioned sales personnel and, in some cases, pursuantto national contracts. We recognize revenue from these orders when we deliverthe ordered products, except for “bill and hold transactions,” in which casesuch revenue is recognized when all of the service delivery criteria are fullymet as per Staff Accounting Bulletin 104 issued by the Securities and ExchangeCommission. To a large extent, continued engagement of our Company by ourcustomers for successive jobs depends upon the customer’s satisfaction with thequality of services we provide. As such, it is difficult for us to predict thenumber, size and profitability of printing jobs that we expect to produce formore than a few weeks in advance.

 

Our cost of sales mainlyconsists of raw materials consumed in the printing process, as well as laborand outside services, such as delivery costs. Paper cost is the mostsignificant component of our materials cost; however, changes in paper pricinggenerally do not materially impact our operating margins because any changes inpaper pricing are generally passed directly by our printing businesses to theircustomers. Additionally, our cost of sales includes maintenance, repair, rentaland insurance costs associated with operating our facilities and equipment,along with depreciation charges.

 

Our selling expensesgenerally include the salary and commissions paid to our sales personnel orthird-party sales agents, along with promotional, travel and entertainmentcosts. Our general and administrative expenses generally include the salary andbenefits paid to support personnel at our printing businesses and our corporatestaff, as well as office rent, utilities and communications expenses, andvarious professional services.

 

*OurStrategy*

 

We are focused on addingvalue to our printing businesses by providing them with the financial andoperational strengths, management support and technological advantagesassociated with a national organization. Our strategy currently includes thefollowing initiatives to generate sales and profit growth:

 

•              *Internal Sales Growth—*We seek to use our competitive advantages toexpand market share. We continue to pursue hiring of additional experiencedsales professionals, invest in new equipment and technology, expand ournational sales program (referred to herein as “National Sales”), promotecross-selling among our locations and develop complementary, value-added printrelated services.

 

•              *Disciplined AcquisitionProgram—*We selectivelypursue opportunities to acquire well-managed, medium-sized printing businessesat reasonable prices and smaller and/or distressed printing businesses formerger into one of our existing facilities.

 

•              *Cost Savings—*Because of our size and national presence, weleverage our economies of scale to purchase supplies and equipment atpreferential prices, and centralize various administrative services to generatecost savings.

 

•              *BestPractices/Benchmarking—*Weprovide a forum for our printing businesses to share their knowledge oftechnical processes and best practices with one another. We also benchmark financialand operational data to help our printing businesses identify and respond tochanges in operating trends.

 

•              *Leadership Development—*Through our unique Leadership DevelopmentProgram, we develop talent for future sales and management positions at ourprinting businesses.

 

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**Results ofOperations**

 

Thefollowing table sets forth the Company’s unaudited condensed consolidatedincome statements for the periods indicated:

 
| ** **                           | ** ** | **Three Months  Ended December 31** | ** ** | **Nine Months  Ended December 31** | ** ** |
|--------------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                           | ** ** | **2004**                            | ** ** | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                           | ** ** | **(In millions)**                   | ** ** | **(In millions)**                  | ** ** |
| Sales                                |       | $                                   | 208.6      |                               | $          | 184.2 |   | $ | 581.3 |   | $ | 524.7 |   |
| Cost of sales                        |       | 157.1                               |       | 141.0                              |       | 437.7 |   | 401.1 |   |
| Gross profit                         |       | 51.5                                |       | 43.2                               |       | 143.6 |   | 123.6 |   |
| Selling expenses                     |       | 21.2                                |       | 19.5                               |       | 60.5 |   | 56.2 |   |
| General and administrative  expenses |       | 14.1                                |       | 12.7                               |       | 40.8 |   | 39.1 |   |
| Operating income                     |       | 16.2                                |       | 11.0                               |       | 42.3 |   | 28.3 |   |
| Interest expense, net                |       | 1.1                                 |       | 2.0                                |       | 3.9 |   | 5.8 |   |
| Income before taxes                  |       | 15.1                                |       | 9.0                                |       | 38.4 |   | 22.5 |   |
| Income taxes                         |       | 5.4                                 |       | 3.5                                |       | 14.3 |   | 8.7 |   |
| Net Income                           |       | $                                   | 9.7        |                               | $          | 5.5 |   | $ | 24.1 |   | $ | 13.8 |   |

 

Thefollowing table sets forth the components of income expressed as a percentageof sales for the periods indicated:

 
| ** **                           | ** ** | **As a Percentage  of Sales**       | ** ** | **As a Percentage**

**of Sales**  | ** ** |
|--------------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                           | ** ** | **Three Months  Ended December 31** | ** ** | **Nine Months  Ended December 31** | ** ** |
| ** **                           | ** ** | **2004**                            | ** ** | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                           | ** ** | ** **                          | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales                                |       | 100.0                               | %          | 100.0                              | %          | 100.0 | % | 100.0 | % |
| Cost of sales                        |       | 75.3                                |       | 76.5                               |       | 75.3 |   | 76.4 |   |
| Gross profit                         |       | 24.7                                |       | 23.5                               |       | 24.7 |   | 23.6 |   |
| Selling expenses                     |       | 10.2                                |       | 10.6                               |       | 10.4 |   | 10.7 |   |
| General and administrative  expenses |       | 6.8                                 |       | 6.9                                |       | 7.0 |   | 7.5 |   |
| Operating income                     |       | 7.7                                 |       | 6.0                                |       | 7.3 |   | 5.4 |   |
| Interest expense, net                |       | .5                                  |       | 1.1                                |       | .7 |   | 1.1 |   |
| Income before taxes                  |       | 7.2                                 |       | 4.9                                |       | 6.6 |   | 4.3 |   |
| Income taxes                         |       | 2.5                                 |       | 1.9                                |       | 2.4 |   | 1.7 |   |
| Net Income                           |       | 4.7                                 | %          | 3.0                                | %          | 4.2 | % | 2.6 | % |

 

Our sales and expensesduring the periods shown were impacted by the acquisition of six printingbusinesses in fiscal 2004 and two printing businesses in fiscal 2005 to date.Because each acquisition was accounted for using the purchase method ofaccounting, our consolidated income statements reflect sales and expenses ofacquired businesses only for post-acquisition periods. Accordingly,acquisitions affect our financial results in any current year period comparedto the prior year period by (i)  thefull-period impact of prior year acquisitions (as compared to the partialperiod impact in the prior year) and (ii) the partial-period impact of currentyear acquisitions, and is referred to below as “incremental impact of acquisitions.”

 

# ***Comparative Analysis of Consolidated Income Statementsfor the Three Months Ended December 31, 2004 and 2003***

 

Salesfor the quarter ended December 31, 2004 increased $24.4 million or 13% to $208.6million from $184.2 million in the same period a year ago.  The $24.4 million revenue increase isattributable to $5.1 million from the incremental impact of acquisitions and $19.3million of internal sales growth. The $19.3 million of internal sales growth equatesto a 10% year-over-year internal growth rate. Approximately two-thirds of theinternal sales growth was attributable to election related printing, which recursgenerally on a bi-annual basis. Excluding election related printing, internalsales growth for the period was 3%, which includes growth in National Sales of$2.5 million. As a whole, National Sales accounted for 6% of revenue in thequarter.  The remainder of this quarter’sinternal growth is attributable to incremental cross-selling activities amongour locations, as well as improved economic and industry conditions, in ouropinion based on general and anecdotal information available to us.

 

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Forthe quarter ended December 31, 2004, gross profit increased $8.3 million andgross profit margin increased to 24.7% from 23.5% from the same period a yearago. Approximately $6.9 million of the increase is attributable to theincreased sales levels discussed above, including the incremental impact ofacquisitions.  This increase waspartially offset by additional depreciation expense in the quarter totaling $3.2million, of which $2.0 is attributable to a reduction in the carrying value ofcertain assets the Company intends to monetize and $1.2 million is attributableto the incremental impact of acquisitions and capital expenditures.  The remaining increase in gross profit of $4.6million is attributable to margin leverage achieved as a result of improvedindustry conditions.

 

Selling expensesfor the quarter ended December 31, 2004 increased 9% to $21.2 million from $19.5million in the same period a year ago. This increase is directly attributable to the increased sales levelsnoted above. As a percentage of sales, selling expenses for the quarter ended December31, 2004 decreased slightly to 10.2% as compared to the 10.6% for the sameperiod a year ago primarily because the generation of the incremental election relatedrevenues discussed above generally does not result in the same level of salesexpense as does the generation of other revenues.

 

General andadministrative expenses for the quarter ended December 31, 2004 increased 12%to $14.1 million from $12.7 million in the same period a year ago. The majorityof this increase is attributable to the incremental impact ofacquisitions.  Overall, the positiveresults of our ability to control costs and gain additional leverage on ourcosts through sales growth is reflected by the improvement in our general andadministrative expenses as a percentage of sales, which decreased to 6.8% forthe quarter ended December 31, 2004, from 6.9% for the same period a year ago.

 

Interest expense for thequarter ended December 31, 2004 decreased 47% to $1.1 million from $2.0 millionin the same period a year ago. This decrease is principally due to theapplication of our cash flow from operations to reduce outstandingindebtedness.

 

# **We provided for income taxes totaling $5.4 million for thequarter ended December 31, 2004, reflecting an effective tax rate of 35.5% ascompared to an effective tax rate of 39.0% for the same period a year ago**.  Dueto the increase in pretax earnings, non-deductible expenses have become asmaller percentage of pretax earnings, thus lowering the effective tax rate forthe quarter.

 

# ***Comparative Analysis of Consolidated Income Statementsfor the Nine Months Ended December 31, 2004 and 2003***

 

Salesfor the nine months ended December 31, 2004 increased $56.6 million or 11% to $581.3million from $524.7 million in the same period a year ago. In addition to theincremental election related revenues totaling approximately $18.0 million inthe second and third fiscal quarters, this revenue increase is attributable to $18.8million from the incremental impact of acquisitions and $19.8 million, or 4%,of internal sales growth.  As a whole,National Sales accounted for 6 % of revenue in the nine months ended December31, 2004.  Growth in National Salesaccounted for approximately $3.8 million of such internal sales growth with theremainder being attributable to incremental cross-selling activities among ourlocations, as well as improved economic and industry conditions, in our opinionbased on general and anecdotal information available to us.

 

Forthe nine months ended December 31, 2004, gross profit increased $20.0 millionand gross profit margin increased to 24.7% from 23.6% from the same period ayear ago. Approximately $16.2 million of the increase is attributable to theincreased sales levels discussed above, including the incremental impact ofacquisitions.  This increase waspartially offset by additional depreciation expense in the nine month periodtotaling $5.1 million, of which $2.0 million is attributable to a reduction inthe carrying value of certain assets the Company intends to monetize and $3.1million is attributable to the incremental impact of acquisitions and capitalexpenditures.  The remaining increase ingross profit of $8.9 million is attributable to margin leverage achieved as aresult of improved industry conditions.

 

Selling expensesfor the nine months ended December 31, 2004 increased 8% to $60.5 million from$56.2 million in the same period a year ago. The increase for the nine month period of this fiscal year is directlyattributable to the increased sales levels noted above.  As a percentage of sales, selling expensesfor the nine months ended December 31, 2004 decreased slightly to 10.4% ascompared to 10.7% for the same period a year ago, with most of this decreaseattributable to the incremental election related revenues as discussed above.

 

General andadministrative expenses for the nine months ended December 31, 2004 increased slightlyto $40.8 million from $39.1 million in the same period a year ago, dueprincipally to the incremental impact of acquisitions.  During the nine month period of this fiscalyear, we have gained additional leverage on our sales, resulting in thedecrease in our general and administrative expenses as a percentage of sales to7.0% from 7.5% a year ago.

 

Interest expense for the ninemonths ended December 31, 2004 decreased 33% to $3.9 million from $5.8 millionin the same period a year ago.  Thedecrease in interest expense for the nine months ended December 31, 2004 isprincipally due to the application of our cash flow from operations to reducethe aggregate borrowings outstanding under our various bank credit facilities.

 

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We provided for income taxesfor the nine months ended December 31, 2004 of $14.3 million, reflecting aneffective tax rate of 37.2% as compared to an effective tax rate of 38.7% forthe same period a year ago.  Due to theincrease in pretax earnings, non-deductible expenses have become a smallerpercentage of pretax earnings, thus lowering the effective tax rate for thenine months ended December 31, 2004.

 

**Liquidityand Capital Resources**

 

*Sourcesand Uses of Cash*

 

Our historical sources ofcash have primarily been cash provided by operations or borrowings undervarious bank credit facilities. Our historical uses of cash have been foracquisitions of printing businesses, capital expenditures, and payment ofprincipal and interest on outstanding debt obligations.  Supplemental information pertaining to ourhistorical sources and uses of cash is presented as follows and should be readin conjunction with our consolidated statements of cash flows and notes theretoincluded in *Item 1. Financial Statements:*

 
| ** **                                                     | ** ** | **Nine Months Ended  December 31** | ** ** |
|----------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                     | ** ** | **2004**                           | ** ** | **2003** | ** ** |
| ** **                                                     | ** ** | **(In millions)**                  | ** ** |
| Net cash provided by operating activities                      |       | $                                  | 50.9       |   | $ | 54.9 |   |
| Acquisitions of businesses                                     |       | (2.2                               | )          | (6.0 | ) |
| Capital expenditures, net of proceeds from  asset dispositions |       | (8.1                               | )          | (6.5 | ) |
| Net proceeds (payments) under bank credit  facilities          |       | .2                                 |       | (39.5 | ) |
| Net payments on term equipment notes and  other debt           |       | (48.9                              | )          | (3.1 | ) |
|                                                                |            |                                    |            |  |  |  |  |

 

Additionally, our cashposition, working capital and debt obligations are shown below for the periodsindicated and should be read in conjunction with our consolidated balancesheets and notes thereto included in *Item****1.Financial Statements:*

 
| ** **                | ** ** | **December 31,****2004** | ** ** | **March 31,  2004** | ** ** |
|---------------------------|------------|--------------------------|------------|---------------------|------------|
| ** **                | ** ** | **(In millions)**        | ** ** |
| Cash and cash equivalents |       | $                        | 5.5        |                | $          | 10.5 |   |
| Working capital           |       | 50.9                     |       | 47.5                |       |
| Total debt obligations    |       | 79.3                     |       | 111.5               |       |
|                           |            |                          |            |                     |            |  |  |

 

During the nine monthsended December 31, 2004, net cash provided by operating activities decreased $4.0million or 7% as compared to the same period last year. This decrease inoperating cash flow principally resulted from the relative difference inworking capital changes in each period. In the current year, working capitalhas increased as a result of growth in our business. In the prior year, workingcapital was favorably impacted by the implementation of tighter working capitalmanagement practices. Consistent with recent prior quarters, we have continuedour strategy to further strengthen our financial position by primarily usingavailable cash flow to make payments on outstanding debt obligations.

 

We believe that our cashflow provided by operations will be adequate to cover our fiscal 2005 workingcapital needs, debt service requirements and planned capital expenditures tothe extent such items are known or are reasonably determinable based on currentbusiness and market conditions. However, we may elect to finance certain of ourcapital expenditure requirements through borrowings under our bank creditfacilities or the issuance of additional term notes.

 

  We intend to continue pursuing acquisitionopportunities at prices we believe are reasonable based upon marketconditions.  However, we cannotaccurately predict the timing, size, and success of our acquisition efforts orour associated potential capital commitments. There can be no assurance that wewill be able to acquire additional printing businesses on terms acceptable tous.

 

We expect to fund futureacquisitions through cash flow provided by operations, additional borrowings orthe issuance of our common stock. The extent to which we will be willing orable to use our common stock to make acquisitions will depend on its marketvalue and the willingness of potential sellers to accept it as full or partialpayment for the acquisition price.

 

On January 26, 2005, weannounced the signing of a definitive purchase agreement to acquire KelmscottCommunications LLC (“Kelmscott”), a privately-held provider of commercialprinting services in five Midwest and West Coast states with annual sales of$100 million.  The completion of thistransaction, which is subject to certain conditions and the approvals of theBoards of our company and Kelmscott, is expected to occur in March 2005. Wewill use available capacity under our bank credit facility to complete thetransaction.

 

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In May 2004, our Board of Directors approved a common stock sharerepurchase program, providing for the repurchase of up to one million shares ofour stock in open-market purchases or in privately negotiated block purchasetransactions. We expect to fund any repurchases under the program through cashflow provided by operations or additional borrowings under our

primary bank credit facility. The amount and timing of any purchaseswill depend upon a number of factors, including the Company’s liquidity andpotential alternative uses of our capital resources, the price and availabilityof our shares, general market conditions and certain repurchase restrictions inour existing bank credit facility, which limit us to repurchases not to exceed$75.0 million in the aggregate as of December 31, 2004. As of January 15, 2005,we have not repurchased any shares of stock under this program. There can be noassurance that we will be able to repurchase any of our common stock on termsacceptable to us.

 

*DebtObligations*

 

Our bank credit facility (asamended and restated, the “Credit Agreement”) is composed of a$150.0 million revolving credit facility that will mature inJuly 2007. At December 31, 2004, borrowings outstanding under the CreditAgreement were $27.0 million and accrued interest at a weighted averagerate of 4.28%.

 

The proceeds from borrowingsunder the Credit Agreement can be used to repay certain indebtedness, financecertain acquisitions, provide for working capital and general corporatepurposes and, subject to certain restrictions, repurchase our common stock.Borrowings outstanding under the Credit Agreement are secured by substantiallyall of our assets other than real estate and certain equipment subject to termequipment notes and other financings. Borrowings under the Credit Agreementaccrue interest, at our option, at either (1) the London Interbank OfferedRate (LIBOR) plus a margin of 1.25% to 2.00%, or (2) an alternate baserate (based upon the greater of the agent bank’s prime lending rate or theFederal Funds effective rate plus .50%) plus a margin of up to .75%. We arealso required to pay an annual commitment fee ranging from .275% to .375% onavailable but unused amounts under the Credit Agreement. The interest ratemargin and the commitment fee are based upon certain financial performancemeasures as set forth in the Credit Agreement and are redetermined quarterly.At December 31, 2004, the applicable LIBOR interest rate margin was 1.25% andthe applicable commitment fee was .275%.

 

We are subject to certaincovenants and restrictions and we must meet certain financial tests as definedin the Credit Agreement. We were in compliance with these covenants and financialtests at December 31, 2004. In the event that we were unable to remain incompliance with these covenants and financial tests in the future, our lenderswould have the right to declare us in default with respect to such obligations,and consequently, certain of our other debt obligations, includingsubstantially all of our term equipment notes, would be deemed to also be indefault. All debt obligations in default would be required to be re-classifiedas a current liability. In the event that we were to be unable to obtain awaiver, re-negotiate or re-finance these obligations, a material adverse effecton our ability to conduct our operations in the ordinary course likely would bethe result. Based on our view of current market and business conditions and ourexpectations regarding our future operating results and cash flows, we believethat we will be able to remain in compliance with these covenants and financialtests in the future.

 

In addition to the CreditAgreement, we maintain two auxiliary revolving credit facilities (each an “AuxiliaryBank Facility” and collectively the “Auxiliary Bank Facilities”) withcommercial banks. Both Auxiliary Bank Facilities are unsecured and have amaximum borrowing capacity of $5.0 million.   One such facility expires in November 2005and the other such facility expires in November 2006. At December 31, 2004,borrowings outstanding under the Auxiliary Bank Facilities totaled $8.8 millionand accrued interest at a weighted average rate of 3.78%. Because we have the abilityto refinance the borrowings outstanding under the Auxiliary Bank Facility expiringin November 2005 and plan to do so, borrowings are classified as long-term debtin the consolidated balance sheet at December 31, 2004.

 

Our term equipment notesconsist primarily of notes payable pursuant to financing agreements between usand various lenders (the “Lender Notes”) and between us and the financeaffiliate of a printing equipment manufacturer (the “Equipment Notes”). At December31, 2004, outstanding borrowings under the Lender Notes totaled $18.0 millionand accrued interest at a weighted average rate of 4.74%. The Lender Notesprovide for fixed monthly principal payments plus interest (at fixed rates) fordefined periods of up to seven years from the date of issuance, most endingwith a balloon payment at maturity, and are secured by certain equipment of theCompany. At December 31, 2004, outstanding borrowings under the Equipment Notestotaled $6.9 million and accrued interest at a weighted average rate of6.31%. The Equipment Notes provide for fixed payments of principal and interest(at fixed rates) for defined periods of up to ten years from the date ofissuance and are secured by equipment which was concurrently purchased from themanufacturer. At December 31, 2004, the remaining balance of term equipmentnotes totaling $.8 million primarily consists of various secured debtobligations assumed by us in connection with certain prior year acquisitions.We are not subject to any significant financial covenants in connection withany of the term equipment notes and we do not anticipate that our termequipment note limits will restrict our ability to finance any planned capitalexpenditures; however, the Credit Agreement places certain limitations on the amountof additional term note obligations we may incur in the future.

 

In the nine month periodended December 31, 2004, we retired $41.1 million of Lender Notes withborrowings from the Credit Agreement. The purpose of retiring these notes wasto utilize available capacity under the Credit Agreement to effect an overallreduction in our interest costs. No financial penalties were incurred inconnection with the retirement of these obligations.

 

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Our other debt obligationsconsist of a mortgage totaling $5.0 million, a promissory note totaling $3.6 million,industrial

revenue bonds totaling $8.1 million andvarious other debt obligations totaling $1.1 million. We do not have anysignificant financial covenants or restrictions associated with these otherdebt obligations.

 

**ContractualObligations and Other Commitments**

 

*Operating Leases*— We have entered into various noncancelable operating leases primarily relatedto facilities and equipment used in the ordinary course of our business. Ourfuture contractual obligations under such operating leases total approximately $54.4million as of December 31, 2004.

 

*Lettersof Credit* — In connection with our assumption of obligationsunder outstanding industrial revenue bonds related to certain current and prioryear acquisitions of printing businesses, which are reflected as debt in theaccompanying consolidated financial statements, we had four letters of creditoutstanding as of December 31, 2004 for a combined total of $8.4 million. Theseletters of credit were issued pursuant to the terms of our Credit Agreement,which expires in July 2007, and we may be required to obtain replacementletters of credit at that time.

 

*InsurancePrograms*— We maintain third-party insurance coverage inamounts and against risks we believe are reasonable under our circumstances. Weare self-insured against most workers compensation claims and for a significantcomponent of our group health insurance programs. For these exposures, weaccrue expected loss amounts which are determined using a combination of ourhistorical loss experience and subjective assessment of our future lossexposure, together with advice provided by administrators and consultingactuaries. The estimates of expected loss amounts are subject to uncertaintiesarising from various sources, including changes in claims reporting patterns,claims settlement patterns, judicial decisions, legislation and economicconditions.  Although we believe that theaccrued estimated loss amounts are reasonable under the circumstances,significant differences related to the items noted above could materiallyaffect our risk exposure, insurance obligations and future expense.

 

**FactorsWhich May Affect Future Results**

 

Our future operatingresults may be impacted by a number of factors, including general economicconditions and competitive factors in our industry, seasonal and cyclicalvariations in commercial printing demand, reasonable growth in the demand forour services and retention of key management and operating personnel. To theextent an economic slowdown causes businesses to reduce their spending onprinted advertising and marketing materials, the demand for commercial printingservices may be adversely affected. Further, compounding the adverse effect ofa decline in demand, competitive pricing pressures may occur and couldnegatively impact the level of sales and profit margins generated by ourprinting businesses. Also, the magnitude and timing of any future acquisitions,as well as our ability to absorb and manage such businesses, will impact ourfuture results. Because of these and other factors, there can be no assurancethat we will not experience material fluctuations in our future operatingresults or cash flows on a quarterly or annual basis.

 

**CriticalAccounting Policies**

 

We have identified ourcritical accounting policies based on the following factors — significance toour overall financial statement presentation, complexity of the policy and itsuse of estimates and assumptions. We are required to make certain estimates andassumptions in determining the reported amounts of assets and liabilities,disclosure of contingent liabilities and the reported amounts of revenues andexpenses. We evaluate our estimates and assumptions on an ongoing basis andrely on historical experience and various other factors that we believe to bereasonable under the circumstances to determine such estimates. Becauseuncertainties with respect to estimates and assumptions are inherent in thepreparation of financial statements, actual results could differ from theseestimates.

 

*Receivables,net of valuation allowance –*Accounts receivable at December 31, 2004 were $120.7 million, net of a$2.1 million allowance for doubtful accounts. The valuation allowance wasdetermined based upon our evaluation of known requirements, aging ofreceivables, historical experience and the economic environment. While webelieve we have appropriately considered known or expected outcomes, ourcustomers’ ability to pay their obligations could be adversely affected bycontraction in the economy or other factors beyond our control. Changes in ourestimates of collectability could have a material adverse affect on ourearnings.

 

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*Goodwill**–***We evaluate the carrying value of ourgoodwill as of March 31st of each year, or at any time that management becomesaware of an indication of impairment. Our evaluation is based on certain dataestimated by management to be indicators of future cash flows at each of ourfacilities. Estimating future cash flows requires judgments regarding futureeconomic conditions, product demand and pricing. Our evaluation also makes useof estimates of market multiples of cash flow at which transactions could becompleted in the current market. If our estimates of future cash flows ormarket multiples prove to be inaccurate, an impairment charge could benecessary in future periods.

 

*Impairmentof long-lived assets* –We evaluate long-lived assets, including property, plant and equipment andother intangible assets whenever events or changes in conditions indicate thatthe carrying value may not be recoverable. The evaluation requires us toestimate future undiscounted cash flows associated with an asset or group ofassets. If the cost of the asset or group of assets cannot be recovered bythese undiscounted cash flows, then an impairment may exist. Estimating futurecash flows requires judgments regarding future economic conditions, productdemand and pricing. Although we believe our estimates are appropriate,significant differences in the actual performance of the asset or group ofassets may materially affect our asset values and require an impairment chargein future periods.

 

*Insuranceliabilities* – We areself-insured for the majority of our workers’ compensation costs and grouphealth insurance costs. Insurance claims liabilities have been accrued usingactuarial principles and industry standard rates on an undiscounted basis.Third party administrators estimate the ultimate potential cost for individualclaims. Actual development of individual claims could vary from the estimatedamounts due to severity of injuries, the potential for damage awards and futurechanges in medical costs, which could result in an increase or decrease inaccrued costs in future periods for claim matters which occurred in a priorperiod.

 

*Accountingfor income taxes* – Aspart of the process of preparing our consolidated financial statements, we arerequired to estimate our income taxes. This process involves estimating ouractual current tax exposure, together with assessing temporary differencesresulting from differing treatment of items for tax and financial reportingpurposes. The tax effects of these temporary differences are recorded asdeferred tax assets or deferred tax liabilities. We must then assess thelikelihood that our deferred tax assets will be recovered from future taxableincome, and to the extent we believe that recovery is not likely, we mustestablish a valuation allowance. Significant judgment is required indetermining our provision for income taxes, our deferred tax assets andliabilities and any valuation allowance recorded against our net deferred taxassets. Additionally, we establish reserves when, despite our belief that ourtax return positions are fully supportable, we believe that certain positionsare likely to be challenged and that we may not succeed. We adjust thesereserves in light of changing facts and circumstances. Our effective tax rate includesthe impact of reserve provisions and changes to reserves that we considerappropriate.

 

***ITEM 3. Quantitative and Qualitative Discl******osure About Market Risk***

 

Market risk generally meansthe risk that losses may occur in the value of certain financial instruments asa result of movements in interest rates, foreign currency exchange rates andcommodity prices. We do not hold or utilize derivative financial instrumentsthat could expose our Company to market risk. However, we are exposed to marketrisk for changes in interest rates related primarily to our debt obligations,which includes borrowings under our bank credit facilities, various termequipment notes and other debt obligations. As of December 31, 2004, there wereno material changes in our market risk or the estimated fair value of our debtobligations relative to their recorded value, as reported in our Annual Reporton Form 10-K for the fiscal year ended March 31, 2004.

 

***ITEM 4. Controls and Procedures***

 

**Disclosure Controls andProcedures**

 

The Company’s management,with the participation of the Company’s Chief Executive Officer (“CEO”) andChief Financial Officer (“CFO”), has evaluated the effectiveness of the Company’sdisclosure controls and procedures (as such term is defined in Rules 13a-15(e)and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”)) as of the end of the period covered by this report. Based on suchevaluation, the Company’s CEO and CFO have concluded that, as of the end ofsuch period, the Company’s disclosure controls and procedures were effective toensure that information required to be disclosed by the Company in reports thatit files or submits under the Exchange Act is recorded, processed, summarizedand reported within the time periods specified in the Securities and ExchangeCommission’s rules and forms.

 

**Internal Control Over FinancialReporting**

 

There have not been anychanges in the Company’s internal control over financial reporting (as suchterm is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) duringthe fiscal quarter to which this report relates that have materially affected,or are reasonably likely to materially affect, the Company’s internal controlover financial reporting.

 

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**CONSOLIDATED GRAPHICS, INC.**

**PARTII – OTHER INFORMATIO****N**

 

**ITEM1.  *Legal Proceedi******ngs***

 

From time to time, ourCompany is involved in litigation relating to claims arising out of itsoperations in the normal course of business. We maintain insurance coveragesagainst certain types of potential claims in an amount which we believe to beadequate. Currently, we are not aware of any legal proceedings or claimspending against the Company that our management believes will have a materialadverse effect on our financial position or results of operations.

 

#### **ITEM 2.  *Unregistered Sales of Equity Securities and Use ofProceeds***

 

None.

 

#### **ITEM3.  *Defaults upon Seni****or Securities*

 

None.

 

**ITEM 4.  *Submissionof Matters to a Vote of Se******curity Holders***

 

None.

 

**ITEM 5. * Other Informat******ion***

 

The Company has issued apress release announcing its fiscal 2005 third quarter results. A copy of thepress release is attached hereto as Exhibit 99.1. The attached press releasemay contain forward-looking information. Readers are cautioned that suchinformation involves known and unknown risks, uncertainties and other factorsthat could cause actual results to materially differ from the results,performance or other expectations implied by these forward looking statements.

 

The Company will hold aconference call today at 10:00 a.m. Central Time/11:00 a.m. Eastern Time todiscuss the Company’s financial results for the third quarter ended December31, 2004. A live webcast and subsequent archive of the conference call, as wellas a copy of the attached press release, can be accessed atwww.consolidatedgraphics.com under the Investor Relations page.

 

During such conference call,management may make references to certain non-GAAP financial measures used bythe Company, such as EBITDA, for various fiscal periods.  Attached hereto as Exhibit 99.2 is a schedulethat reconciles such non-GAAP financial measures for the indicated periods tothe most directly comparable financial measures calculated and presented inaccordance with GAAP.

 

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**ITEM 6.  *Exhibits***

 
| *3.1 |   | Restated  Articles of Incorporation of the Company filed with the Secretary of State of  the State of Texas on July 27, 1994 (Consolidated Graphics, Inc. Form 10-Q  (June 30, 1994), Exhibit 4(a)).                                                                                                                                                                                                                                   |
|------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *3.2 |   | Articles  of Amendment to the Restated Articles of Incorporation of the Company dated  as of July 29, 1998 (Consolidated Graphics, Inc. Form 10-Q (June 30, 1998),  Exhibit 3.1).                                                                                                                                                                                                                                                      |
| *3.3 |   | Second  Amended and Restated By-Laws of the Company adopted as of June 30, 2004  (Consolidated Graphics, Inc. Form 10-Q (June 30, 2004), Exhibit 3.3).                                                                                                                                                                                                                                                                                 |
| *4.1 |   | Specimen  Common Stock Certificate (Consolidated Graphics, Inc. Form 10-K (March 31,  1998), Exhibit 4.1).                                                                                                                                                                                                                                                                                                                             |
| *4.2 |   | Rights  Agreement dated as of December 15, 1999 between Consolidated Graphics, Inc  and American Stock Transfer and Trust Company, as Rights Agent, which  includes as Exhibit A the Certificate of Designations of Series A Preferred  Stock, as Exhibit B the form of Rights Certificate and as Exhibit C the form  of summary of Rights to Purchase Shares (Consolidated Graphics, Inc Form 8-K  (December 15, 1999), Exhibit 4.1). |
| 31.1 |   | Certification  of Joe R. Davis pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                              |
| 31.2 |   | Certification  of G. Christopher Colville pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.                                                                                                                                                                                                                                                                                                                                  |
| 32.1 |   | Certification  of Joe R. Davis pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                              |
| 32.2 |   | Certification  of G. Christopher Colville pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002.                                                                                                                                                                                                                                                                                                                                  |
| 99.1 |   | Press  release dated February 2, 2005, in connection with the press release  announcing the Company’s fiscal 2005 third quarter results.                                                                                                                                                                                                                                                                                          |
| 99.2 |   | Reconciliations  regarding Non-GAAP Financial Measures.                                                                                                                                                                                                                                                                                                                                                                                |

 

----

|   |   | *Incorporated  by reference |
|--------|--------|-----------------------------|

 

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**SIGNATURES**

 

**Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant, Consolidated Graphics, Inc., has duly caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.**

 
| ** **                    | ** ** | **CONSOLIDATED  GRAPHICS, INC.** |
|-------------------------------|------------|----------------------------------|
|                          |       |                             |
|                          |       |                             |
| Dated:  February 2, 2005 | By:        | /s/ G. Christopher Colville      |   |
|                          |       | G. Christopher Colville          |
|                          |       | Executive Vice President,        |
|                          |       | Chief Financial and Accounting   |
|                          |       | Officer and Secretary            |

 

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***Exhibit Index***

 

***Description of Exhibits***

 
| *3.1 |   | Restated  Articles of Incorporation of the Company filed with the Secretary of State of  the State of Texas on July 27, 1994 (Consolidated Graphics, Inc. Form 10-Q  (June 30, 1994), Exhibit 4(a)).                                                                                                                                                                                                                                   |
|------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *3.2 |   | Articles  of Amendment to the Restated Articles of Incorporation of the Company dated  as of July 29, 1998 (Consolidated Graphics, Inc. Form 10-Q (June 30, 1998),  Exhibit 3.1).                                                                                                                                                                                                                                                      |
| *3.3 |   | Second  Amended and Restated By-Laws of the Company adopted as of June 30, 2004  (Consolidated Graphics, Inc. Form 10-Q (June 30, 2004), Exhibit 3.3).                                                                                                                                                                                                                                                                                 |
| *4.1 |   | Specimen  Common Stock Certificate (Consolidated Graphics, Inc. Form 10-K (March 31,  1998), Exhibit 4.1).                                                                                                                                                                                                                                                                                                                             |
| *4.2 |   | Rights  Agreement dated as of December 15, 1999 between Consolidated Graphics, Inc  and American Stock Transfer and Trust Company, as Rights Agent, which  includes as Exhibit A the Certificate of Designations of Series A Preferred  Stock, as Exhibit B the form of Rights Certificate and as Exhibit C the form  of summary of Rights to Purchase Shares (Consolidated Graphics, Inc Form 8-K  (December 15, 1999), Exhibit 4.1). |
| 31.1 |   | Certification  of Joe R. Davis pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                              |
| 31.2 |   | Certification  of G. Christopher Colville pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.                                                                                                                                                                                                                                                                                                                                  |
| 32.1 |   | Certification  of Joe R. Davis pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                              |
| 32.2 |   | Certification  of G. Christopher Colville pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002.                                                                                                                                                                                                                                                                                                                                  |
| 99.1 |   | Press  release dated February 2, 2005, in connection with the press release  announcing the Company’s fiscal 2005 third quarter results.                                                                                                                                                                                                                                                                                          |
| 99.2 |   | Reconciliations  regarding Non-GAAP Financial Measures.                                                                                                                                                                                                                                                                                                                                                                                |

 

----

|   |   | *Incorporated  by reference |
|--------|--------|-----------------------------|

 

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