**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 
| **ý****    QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                              |
| **For the quarterly period ended December 31,  2002**                                                                                                                                                                                             |
|                                                                                                                                                                                                                                              |   |
| **OR**                                                                                                                                                                                                                                            |
|                                                                                                                                                                                                                                              |
| **o****    TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                       |
|                                                                                                                                                                                                                                              |
| **For the transition period  from                 to                 ** |
|                                                                                                                                                                                                                                              |
| **Commission File Number 0-24068**                                                                                                                                                                                                                |

 

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| **CONSOLIDATED GRAPHICS, 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 area code:  **(713) 787-0977** |

 

Indicate by check mark whether the Registrant(1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.

 

Yes ý  No o

 

Indicate by check mark whether the Registrantis an accelerated filer (as defined in Rule 12b-2 of the Securities ExchangeAct of 1934).

 

Yes o  No ý

 

The number of shares of Common Stock, par value $.01 per share, of theRegistrant outstanding at January 31, 2003 was 13,328,647.

 

 

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**CONSOLIDATEDGRAPHICS, INC.**

 

**FORM 10-Q FOR THEQUARTERLY PERIOD ENDED DECEMBER 31, 2002**

 

**INDEX**

 
| Part I – Financial Information |
|-------------------------------------|
|                                |   |   |
|                                | Item 1 – Financial Statements |
|                                |   |   |
|                                |   | Consolidated Balance Sheets at December 31,  2002 and March 31, 2002 |
|                                |   |   |
|                                |   | Consolidated Income Statements for the Three and Nine Months Ended  December 31, 2002 and 2001 |
|                                |   |   |
|                                |   | Consolidated Statements of Cash Flows for the Nine Months Ended  December 31, 2002 and 2001 |
|                                |   |   |
|                                |   | 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 – Changes in 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 and Reports on Form 8-K |
|                                |   |   |
| Signatures                          |
|                                |   |   |
| Certifications                      |

 

2

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##### **PART I –FINANCIAL**INFORMATION

 

**ITEM 1.  *Financial Statements***

** **

**CONSOLIDATEDGRAPHICS, INC.CONSOLIDATED BALANCE SHEETS(In thousands, except share and per sharedata)**

** **
|                                                                                                            |   | **December 31,  2002** |       | **March 31,  2002** |       |
|-----------------------------------------------------------------------------------------------------------------|--------|------------------------|------------|---------------------|------------|
|                                                                                                            |   | **(Unaudited)**        |       | **(Audited)**       |       |
| ASSETS                                                                                                          |   |                   | ** ** |                | ** ** |
|                                                                                                            |   |                   |       |                |       |
| CURRENT ASSETS                                                                                                  |   |                   |       |                |       |
| Cash and cash  equivalents                                                                                      |   | $                      | 7,050      |                | $          | 8,955 |   |
| Accounts  receivable, net                                                                                       |   | 113,018                |       | 121,981             |       |
| Inventories                                                                                                     |   | 31,991                 |       | 32,771              |       |
| Prepaid  expenses                                                                                               |   | 5,586                  |       | 6,114               |       |
| Deferred  income tax assets                                                                                     |   | 4,631                  |       | 5,153               |       |
| Total current  assets                                                                                           |   | 162,276                |       | 174,974             |       |
| PROPERTY AND  EQUIPMENT, net                                                                                    |   | 281,661                |       | 293,831             |       |
| GOODWILL, net                                                                                                   |   | 110,556                |       | 199,331             |       |
| OTHER ASSETS                                                                                                    |   | 7,973                  |       | 8,597               |       |
|                                                                                                            |   | $                      | 562,466    |                | $          | 676,733 |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                       |   |                   |       |                |       |
|                                                                                                            |   |                   |       |                |       |
| CURRENT  LIABILITIES                                                                                            |   |                   |       |                |       |
| Current portion  of long-term debt                                                                              |   | $                      | 21,198     |                | $          | 19,877 |   |
| Accounts  payable                                                                                               |   | 32,759                 |       | 32,068              |       |
| Accrued  liabilities                                                                                            |   | 43,435                 |       | 37,382              |       |
| Income taxes  payable                                                                                           |   | 50                     |       | 611                 |       |
| Total current  liabilities                                                                                      |   | 97,442                 |       | 89,938              |       |
| LONG-TERM  DEBT, net of current portion                                                                         |   | 155,136                |       | 213,860             |       |
| DEFERRED  INCOME TAX LIABILITIES                                                                                |   | 60,079                 |       | 66,337              |       |
| COMMITMENTS  AND CONTINGENCIES                                                                                  |   |                   |       |                |       |
| SHAREHOLDERS’  EQUITY                                                                                      |   |                   |       |                |       |
| Common stock,  $.01 par value; 100,000,000 shares authorized;  13,313,956 and 13,205,863 issued and outstanding |   | 134                    |       | 132                 |       |
| Additional  paid-in capital                                                                                     |   | 158,980                |       | 157,581             |       |
| Retained  earnings                                                                                              |   | 90,695                 |       | 148,885             |       |
| Total  shareholders’ equity                                                                                |   | 249,809                |       | 306,598             |       |
|                                                                                                            |   | $                      | 562,466    |                | $          | 676,733 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

3

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**CONSOLIDATEDGRAPHICS, INC.CONSOLIDATED INCOMESTATEMENTS**

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

**(Unaudited)**

 
|                                                |   | **Three Months Ended  December 31** |    | **Nine Months Ended  December 31** |   |
|-----------------------------------------------------|--------|-------------------------------------|---------|------------------------------------|--------|
|                                                |   | **2002**                            |    | **2001**                           |   | **2002** |   | **2001** |   |
|                                                |   |                                |    |                               |   |   |   |   |   |
| SALES                                               |   | $                                   | 186,296 |                               | $      | 153,750 |   | $ | 544,174 |   | $ | 478,342 |   |
|                                                |   |                                |    |                               |   |   |   |   |   |
| COST OF SALES                                       |   | 141,444                             |    | 114,375                            |   | 411,860 |   | 353,257 |   |
|                                                |   |                                |    |                               |   |   |   |   |   |
| Gross profit                                        |   | 44,852                              |    | 39,375                             |   | 132,314 |   | 125,085 |   |
|                                                |   |                                |    |                               |   |   |   |   |   |
| SELLING  EXPENSES                                   |   | 19,820                              |    | 16,591                             |   | 58,931 |   | 50,652 |   |
|                                                |   |                                |    |                               |   |   |   |   |   |
| GENERAL AND  ADMINISTRATIVE EXPENSES                |   | 13,333                              |    | 12,134                             |   | 39,257 |   | 36,706 |   |
|                                                |   |                                |    |                               |   |   |   |   |   |
| AMORTIZATION  OF GOODWILL                           |   | —                              |    | 1,346                              |   | — |   | 4,025 |   |
|                                                |   |                                |    |                               |   |   |   |   |   |
| Operating  income                                   |   | 11,699                              |    | 9,304                              |   | 34,126 |   | 33,702 |   |
|                                                |   |                                |    |                               |   |   |   |   |   |
| INTEREST  EXPENSE, net                              |   | 2,430                               |    | 3,347                              |   | 8,020 |   | 12,111 |   |
|                                                |   |                                |    |                               |   |   |   |   |   |
| Income before  taxes and accounting change          |   | 9,269                               |    | 5,957                              |   | 26,106 |   | 21,591 |   |
|                                                |   |                                |    |                               |   |   |   |   |   |
| INCOME TAXES                                        |   | 3,522                               |    | 2,383                              |   | 9,920 |   | 8,637 |   |
|                                                |   |                                |    |                               |   |   |   |   |   |
| Income before  accounting change                    |   | 5,747                               |    | 3,574                              |   | 16,186 |   | 12,954 |   |
|                                                |   |                                |    |                               |   |   |   |   |   |
| CUMULATIVE  EFFECT OF ACCOUNTING CHANGE, net of tax |   | —                              |    | —                             |   | 74,376 |   | — |   |
|                                                |   |                                |    |                               |   |   |   |   |   |
| Net income  (loss)                                  |   | $                                   | 5,747   |                               | $      | 3,574 |   | $ | (58,190 | ) | $ | 12,954 |   |
|                                                |   |                                |    |                               |   |   |   |   |   |
| BEFORE  ACCOUNTING CHANGE                           |   |                                |    |                               |   |   |   |   |   |
|                                                |   |                                |    |                               |   |   |   |   |   |
| Basic earnings  per share                           |   | $                                   | .43     |                               | $      | .27 |   | $ | 1.22 |   | $ | .99 |   |
| Diluted  earnings per share                         |   | $                                   | .42     |                               | $      | .27 |   | $ | 1.20 |   | $ | .97 |   |
|                                                |   |                                |    |                               |   |   |   |   |   |
| AFTER  ACCOUNTING CHANGE                            |   |                                |    |                               |   |   |   |   |   |
|                                                |   |                                |    |                               |   |   |   |   |   |
| Basic earnings  per share                           |   | $                                   | .43     |                               | $      | .27 |   | $ | (4.39 | ) | $ | .99 |   |
| Diluted  earnings per share                         |   | $                                   | .42     |                               | $      | .27 |   | $ | (4.31 | ) | $ | .97 |   |
|                                                |   |                                |    |                               |   |   |   |   |   |
| SHARES USED TO  COMPUTE EARNINGS PER SHARE          |   |                                |    |                               |   |   |   |   |   |
|                                                |   |                                |    |                               |   |   |   |   |   |
| Basic                                               |   | 13,295                              |    | 13,150                             |   | 13,245 |   | 13,082 |   |
| Diluted                                             |   | 13,570                              |    | 13,449                             |   | 13,505 |   | 13,360 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

4

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**CONSOLIDATEDGRAPHICS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)**

**(Unaudited)**

 
|                                                                                             |   | **Nine Months Ended****December 31** |    |
|--------------------------------------------------------------------------------------------------|--------|--------------------------------------|---------|
|                                                                                             |   | **2002**                             |    | **2001** |   |
|                                                                                             |   |                                 |    |   |   |
| OPERATING  ACTIVITIES                                                                            |   |                                 |    |   |   |
| Net income  (loss)                                                                               |   | $                                    | (58,190 | ) | $ | 12,954 |   |
| Adjustments to  reconcile net income (loss) to net cash provided  by operating activities – |   |                                 |    |   |   |
| Cumulative  effect of accounting change, net of tax                                              |   | 74,376                               |    | — |   |
| Depreciation  and amortization                                                                   |   | 27,658                               |    | 30,329 |   |
| Deferred  income tax provision                                                                   |   | 9,643                                |    | 3,696 |   |
| Changes in  assets and liabilities, net of effects of acquisitions-                              |   |                                 |    |   |   |
| Accounts  receivable, net                                                                        |   | 12,893                               |    | 13,123 |   |
| Inventories                                                                                      |   | 1,239                                |    | 1,094 |   |
| Prepaid  expenses                                                                                |   | 540                                  |    | (1,579 | ) |
| Other assets                                                                                     |   | (2,037                               | )       | (1,782 | ) |
| Accounts  payable and accrued liabilities                                                        |   | 7,005                                |    | (3,989 | ) |
| Income taxes  payable                                                                            |   | (561                                 | )       | 2,061 |   |
| Net cash  provided by operating activities                                                       |   | 72,566                               |    | 55,907 |   |
|                                                                                             |   |                                 |    |   |   |
| INVESTING  ACTIVITIES                                                                            |   |                                 |    |   |   |
| Acquisitions  of businesses, net of cash acquired                                                |   | (5,554                               | )       | (2,880 | ) |
| Purchases of  property and equipment                                                             |   | (9,507                               | )       | (10,939 | ) |
| Proceeds from  asset dispositions                                                                |   | 626                                  |    | 1,818 |   |
| Net cash used  in investing activities                                                           |   | (14,435                              | )       | (12,001 | ) |
|                                                                                             |   |                                 |    |   |   |
| FINANCING  ACTIVITIES                                                                            |   |                                 |    |   |   |
| Proceeds from  bank credit facilities                                                            |   | 9,449                                |    | 13,277 |   |
| Payments on  bank credit facilities                                                              |   | (64,547                              | )       | (52,120 | ) |
| Payments on  long-term debt                                                                      |   | (6,339                               | )       | (6,668 | ) |
| Proceeds from  exercise of stock options                                                         |   | 1,401                                |    | 1,628 |   |
| Net cash used  in financing activities                                                           |   | (60,036                              | )       | (43,883 | ) |
|                                                                                             |   |                                 |    |   |   |
| NET  INCREASE  (DECREASE) IN CASH AND CASH  EQUIVALENTS                                     |   | (1,905                               | )       | 23 |   |
| CASH AND CASH  EQUIVALENTS AT BEGINNING OF PERIOD                                                |   | 8,955                                |    | 8,667 |   |
| CASH AND CASH  EQUIVALENTS AT END OF PERIOD                                                      |   | $                                    | 7,050   |   | $ | 8,690 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

5

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**CONSOLIDATED GRAPHICS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(In thousands)(Unaudited)**

 

 

**1.  BASISOF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES**

 

The accompanying unaudited consolidated financial statements includethe accounts of Consolidated Graphics, Inc. and subsidiaries (collectively, the“Company”).  All intercompany accountsand transactions have been eliminated. Such statements have been prepared in accordance with generally acceptedaccounting principles and the Securities and Exchange Commission’s rules andregulations for reporting interim financial information.  Accordingly, they do not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements.  Inthe opinion of management, all adjustments (consisting of normal recurringaccruals) considered necessary for a fair presentation of the accompanying unauditedconsolidated financial statements have been included.  Operating results for the nine months ended December 31, 2002 arenot necessarily indicative of future operating results.  Balance sheet information as of March 31,2002 has been derived from the 2002 annual audited consolidated financialstatements 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 31,2002, filed with the Securities and Exchange Commission in May 2002.

 

Basic earnings per share are calculated by dividing net income by theweighted average number of common shares outstanding.  Diluted earnings per share reflect net income divided by theweighted average number of common shares and dilutive stock optionsoutstanding.

 

The consolidated statements of cash flows provide information about theCompany’s sources and uses of cash and exclude the effects of non-cashtransactions.  The Company issued termnotes payable totaling $4,034 (see Note 4. Long-Term Debt) during the ninemonths ended December 31, 2002 to finance the purchase of certain newequipment.  The following is a summaryof total cash paid for interest and income taxes, net of refunds:

 

|             |   | **Nine Months Ended  December 31** |   |
|------------------|--------|------------------------------------|--------|
|             |   | **2002**                           |   | **2001** |   |
| *Cash Paid for:* |   |                               |   |   |   |
| Interest         |   | $                                  | 8,200  |   | $ | 12,966 |   |
| Income taxes     |   | 870                                |   | 2,790 |   |
|                  |        |                                    |        |  |  |  |  |

 

 

**2.  ACCOUNTINGCHANGE**

 

Effective April 1, 2002, the Company adopted Statement of FinancialAccounting Standards (“SFAS”) No. 142, *Goodwilland Other Intangible Assets*, which requires companies to discontinueamortizing goodwill and perform annual impairment tests to determine if theremaining balance should be reduced to reflect estimated fair values of itsreporting units.  * *Priorto its adoption of SFAS No. 142, the Company periodically evaluated whether theremaining balance of goodwill was recoverable by assessing current and futurelevels of income and cash flows on an undiscounted basis, as well as otherfactors, such as business trends and general market conditions.  The Company determines fair value under SFASNo. 142 using capitalization of earnings estimates and market valuationmultiples for each reporting unit.

 

6

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As of April 1, 2002, net goodwill balances attributable to each of theCompany’s reporting units were tested for impairment by comparing the fairvalue of each reporting unit to its carrying value.  Based on these impairment tests the Company recognized atransitional impairment charge of $74,376, net of deferred tax benefit totaling$15,379, which is reflected as a cumulative effect of accounting change in theaccompanying consolidated income statement.

 

The following unaudited pro forma financial data for the nine monthsended December 31, 2002 and 2001, are presented as if the provisions of SFASNo. 142 had been in effect for all periods presented:

 
|                                                     |   | **Nine Months Ended****December 31** |       |
|----------------------------------------------------------|--------|--------------------------------------|------------|
|                                                     |   | **2002**                             |       | **2001** |   |
|                                                     |   |                                 |       |   |   |
| Net income (loss) as reported                            |   | $                                    | (58,190    | ) | $ | 12,954 |   |
| Add: cumulative effect of accounting  change, net of tax |   | 74,376                               |       | — |   |
| Add: goodwill amortization                               |   | —                               |       | 4,025 |   |
| Less: tax benefit of deductible goodwill  amortization   |   | —                               |       | (509 | ) |
| Adjusted pro forma net income                            |   | $                                    | 16,186     |   | $ | 16,470 |   |
|                                                     |   |                                 |       |   |   |
| **Basic Earnings Per  Share:**                           |   |                                 |       |   |   |
| Net income (loss) as reported                            |   | $                                    | (4.39      | ) | $ | .99 |   |
| Add: cumulative effect of accounting  change, net of tax |   | 5.61                                 |       | — |   |
| Add: goodwill amortization                               |   | —                               |       | .31 |   |
| Less: tax benefit of deductible goodwill  amortization   |   | —                               |       | (.04 | ) |
| Adjusted pro forma net income                            |   | $                                    | 1.22       |   | $ | 1.26 |   |
|                                                     |   |                                 |       |   |   |
| **Diluted Earnings  Per Share:**                         |   |                                 | ** ** |   | ** ** |
| Net income (loss) as reported                            |   | $                                    | (4.31      | ) | $ | .97 |   |
| Add: cumulative effect of accounting  change, net of tax |   | 5.51                                 |       | — |   |
| Add: goodwill amortization                               |   | —                               |       | .30 |   |
| Less: tax benefit of deductible goodwill  amortization   |   | —                               |       | (.04 | ) |
| Adjusted pro forma net income                            |   | $                                    | 1.20       |   | $ | 1.23 |   |

 

In accordancewith SFAS No. 142, the Company is required to annually test the remainingbalance of goodwill for impairment and intends to test for impairment at theconclusion of each fiscal year.  Anumber of factors could cause the Company to further impair its goodwillbalance. These factors include a decline in the financial performance of anindividual reporting unit due to adverse business developments and/or changesin general market conditions.  A declinein market valuation multiples could also impact the test. Subject to thepotential impact of these factors, the Company may be required to recordadditional impairment on certain reporting units when its annual impairmenttest is conducted as of March 31, 2003.

 

**3.  ACQUISITIONS**

 

During thenine months ended December 31, 2002, the Company acquired the business andassets of two companies located near Baltimore, Maryland, one of which wasimmediately merged into another existing operation of the Company. To completethese acquisitions, the Company paid cash totaling $4,205.

 

7

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The allocation of the purchase price of the businesses acquiredincluded current assets of $3,627, property and equipment of $1,012 and otherassets of $655, less current liabilities of $1,089. Additionally, to satisfycertain liabilities of acquired businesses or pursuant to earnout agreements,the Company paid cash of $1,349 during the nine months ended December 31, 2002.

 

**4.  LONG-TERMDEBT**

 

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

 
|                    |   | **December 31,  2002** |    | **March 31,  2002** |   |
|-------------------------|--------|------------------------|---------|---------------------|--------|
| Bank credit  facilities |   | $                      | 94,183  |                | $      | 149,281 |   |
| Term equipment  notes   |   | 71,829                 |    | 73,708              |   |
| Other                   |   | 10,322                 |    | 10,748              |   |
|                    |   | 176,334                |    | 233,737             |   |
| Less current  portion   |   | (21,198                | )       | (19,877             | )      |
|                    |   | $                      | 155,136 |                | $      | 213,860 |   |

 

The Companyentered into a five-year $225,000 senior secured credit facility (the “BankCredit Facility”) with eleven banks in December 2000.  The Bank Credit Facility is composed of a $50,000 five-year termloan (the “Term Loan”), of which $27,500 was outstanding at December 31, 2002,and a $175,000 five-year revolving credit line (the “Revolving Line”), of which$63,000 was outstanding at December 31, 2002. The Term Loan requires quarterly payments of $2,500 each throughSeptember 30, 2005.

 

The proceedsof the Bank Credit Facility 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 theBank Credit Facility are secured by substantially all of the Company’s assetsother than real estate and certain equipment subject to term equipment notesand other financing.  Borrowings underthe Bank Credit Facility accrue interest, at the Company’s option, at either(1) the London Interbank Offered Rate (LIBOR) plus a margin of 1.25% to 2.25%,or (2) an alternate base rate (based upon the greater of the agent bank’s primelending rate or the Federal Funds effective rate plus .50%) plus a margin of upto 1.00%.  The Company is also requiredto pay a commitment fee on available but unused amounts ranging from .275% to..375% annually.  The interest ratemargin and the commitment fee are based upon the Company’s ratio of Funded Debtto Pro Forma Consolidated EBITDA, as defined, redetermined quarterly.  On December 31, 2002, borrowings outstandingunder the Term Loan and the Revolving Line accrued interest at a weighted averagerate of 3.29%.

 

The Company issubject to certain covenants and restrictions and must meet certain financialtests as defined in the Bank Credit Facility. The Company was in compliance with these covenants and financial testsat December 31, 2002.  The Companyobtained an amendment to its Bank Credit Facility which specifically providedthat the transitional goodwill impairment charge (see Note 2. AccountingChange) would not impact compliance with these covenants.

 

In addition,the Company maintains an auxiliary revolving credit facility (the “AuxiliaryBank Facility”) with a commercial bank expiring in February 2003.  The Auxiliary Bank Facility is unsecured andhas a maximum borrowing capacity of $5,000. At December 31, 2002, borrowingsoutstanding under the Auxiliary Bank Facility totaled $3,683 and accruedinterest at 3.13%.  In February 2003,the Auxiliary Bank Facility was extended for a one year period.

 

8

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The Company’sterm equipment notes consist primarily of notes payable pursuant to financingagreements between the Company and various lenders (the “Lender Notes”) andbetween the Company and two printing equipment manufacturers (the “EquipmentNotes”).  During the three months endedDecember 31, 2002, the Company issued Lender Notes in an aggregate principalamount of $38,472 and utilized the proceeds thereof to retire certain of theoutstanding Equipment Notes.  The LenderNotes are secured by the equipment subject to this refinancing.  At December 31, 2002 outstanding borrowingsunder the Lender Notes totaled $37,647 and accrued interest at a weightedaverage rate of 5.91%.  The Lender Notesprovide for fixed monthly principal payments plus interest over a five-yearterm, ending with a balloon payment at maturity.  At December 31, 2002 outstanding borrowings under the EquipmentNotes totaled $32,009 and accrued interest at a weighted average rate of6.14%.   The Equipment Notes provide forfixed payments of principal and interest for defined periods of up to ten yearsfrom the date of issuance and are secured by the purchased equipment.  The remaining balance of term equipmentnotes totaling $2,173 primarily consists of various secured debt obligationsassumed by the Company in connection with certain prior year acquisitions.  The Company is not subject to anysignificant financial covenants in connection with any of the term equipmentnotes; however, the Bank Credit Facility places certain limitations on theamount of additional term note obligations the Company may incur in the future.

 

The Company’sremaining debt obligations consist of a promissory note totaling $5,223,industrial revenue bonds totaling $4,505 and various other debt obligationstotaling $594.  The Company does nothave any significant financial covenants or restrictions associated with thesedebt obligations.

 

**5.  RECENTACCOUNTING PRONOUNCEMENTS**

 

SFAS No. 145, *Rescission of FASB Statement Nos. 4, 44, and 64, Amendment of FASBStatement No. 13, and Technical Corrections,*was issued in April2002.  SFAS No. 145 amends existingauthoritative pronouncements to make various technical corrections, clarifymeanings, and describe their applicability under changed conditions.  This statement requires that gains andlosses from the extinguishment of debt be classified as extraordinary itemsonly if they meet the criteria in Accounting Principles Board (“APB”) OpinionNo. 30, *Reporting the Results of Operations- Reporting the Effects of Disposal of a Segment of a Business, andExtraordinary, Unusual and Infrequently Occurring Events and Transactions. *SFAS No. 145 is effective forfiscal years beginning after May 15, 2002. Management does not believe that the adoption of SFAS No. 145 will havea material impact on its financial position or results of operations.

 

SFAS No. 146, *Accounting for Costs Associated with Exit or Disposal Activities*,was issued in July 2002 and is effective for exit or disposal activities thatare initiated after December 31, 2002. SFAS No. 146 requires that exit or disposal costs be recorded at theirfair value when they are incurred.  TheCompany adopted SFAS No. 146 as of October 1, 2002.  The adoption did not have a material impact on its financialposition or results of operations.

 

SFAS No. 148, *Accounting for Stock-Based Compensation – Transition and Disclosure*,was issued in December 2002 and is effective for interim periods beginningafter December 15, 2002 and annual periods ending after December 15, 2002.  This statement amends the disclosurerequirements and provides additional guidance with respect to certain otherprovisions of SFAS No. 123, *Accounting forStock-based Compensation*. Management does not believe that the adoption of the additionaldisclosure requirements of SFAS No. 148 will have a material impact on itsfinancial position or results of operations.

 

9

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**ITEM 2.  *Management’s Discussion and Analysis of FinancialCondition and Results of Operations***

 

*The following discussion containsforward-looking information.  Readersare cautioned that such information involves known and unknown risks anduncertainties, including those created by general market conditions,competition and the possibility that events may occur which limit the abilityof our Company to maintain or improve its operating results and acquireadditional printing businesses. Although we believe that the assumptions underlying the forward-lookingstatements are reasonable, any of the assumptions could be inaccurate, andthere can be no assurance that the forward-looking statements included hereinwill prove to be accurate.  Theinclusion of such information should not be regarded as a representation by usor any other persons that our objectives and plans will 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 theoccurrence of events or circumstances or changes in expectations.*

*The following discussion of the financialcondition and performance of our Company should be read in conjunction with theconsolidated financial statements included herein and the consolidatedfinancial statements and related notes and other detailed information regardingour Company included in our Annual Report on Form 10-K for the fiscal yearended March 31, 2002 and other reports filed by us with the Securities andExchange Commission.  Operating resultsfor the nine months ended December 31, 2002 are not necessarily indicative ofthe results to be expected for the entire fiscal year ending March 31, 2003 orany periods thereafter.*

 

**Overview**

 

Our Company isa leading national provider of commercial printing services with 65 printingfacilities in 25 states and is recognized as the largest sheet-fed and half-webcommercial printing company in the United States.  We are focused on adding value to our operating companies byproviding the financial and operational strengths, management support andtechnological advantages associated with a national organization.  Our strategy currently includes thefollowing initiatives to generate sales and profit growth:

 

•             *Internal Sales Growth –*Inthe midst of prevailing difficult industry conditions, we are seeking to useour competitive advantages to expand market share. We continue to pursueadditional experienced sales professionals, invest in new equipment andtechnology, expand our national accounts program and develop complementary,value-added services.

•             *Disciplined Acquisition Program –*Weselectively pursue opportunities to acquire well-managed printing businesses atreasonable prices.

•             *Cost Savings –*Because ofour size and national presence, we leverage our economies of scale to purchasesupplies and equipment at preferential prices, and centralize variousadministrative services to generate cost savings.

•             *Best Practices/Benchmarking –*Weprovide a forum for our printing businesses to share their knowledge oftechnical processes and their best practices with one another, as well as benchmarkfinancial and operational data to help our printing businesses identify andrespond to changes in operating trends.

•             *Leadership*Development*–*Throughour unique Leadership Development Program, we develop talent for future salesand management positions at our printing businesses.

 

Our printing operations maintain their ownsales, estimating, customer service, prepress, production, postpress andaccounting departments.  Our corporateheadquarters staff provides support to our printing operations in such areas ashuman resources, purchasing and management information systems. We alsomaintain centralized treasury, risk management, tax and consolidated financialreporting activities.

 

The majority of our sales are derived fromcommercial printing services, which include electronic prepress, printing,finishing, storage and delivery of high quality, custom-designed products.Examples of such products include multicolor product and capability brochures,shareholder communications, catalogs, training manuals, point-of-purchasemarketing materials and direct mail pieces. We also serve our customers by providing a variety of complementaryservices, including fulfillment and mailing services and print-relatede-commerce software solutions and electronic media services through CGXmedia.

 

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Most of our sales are generatedby individual orders through commissioned sales personnel and, in some cases,pursuant to long-term contracts.  Werecognize revenue from these orders when we deliver the ordered products.  To a large extent, continued engagement ofour Company by our customers for successive jobs depends upon the customer’son-going satisfaction with the quality of services we provide. As such it isdifficult for us to predict the number, size and profitability of printing jobsthat we expect to produce for more than a few weeks in advance.

 

Our cost ofsales mainly consists of raw materials consumed in the printing process, aswell as labor and outside services.  Paper cost is the largest component of our materials cost;however, fluctuations in paper prices generally do not significantly impact ouroperating margins because any changes in paper pricing are generally passed onby our printing businesses.  Additionally,our cost of sales includes maintenance, repair, rental and insurance costsassociated with operating our facilities and equipment, along with depreciationcharges.

 

Our sellingexpenses generally include the salary and commissions paid to our sales professionalsor third-party sales agents, along with promotional, travel and entertainmentcosts.  Our general and administrativeexpenses generally include the salary and benefits paid to support personnel atour printing businesses and our corporate staff.  These expenses also include office rent and utilities,communications expenses and professional fees.

 

**Results of Operations**

 

The following tables set forth the Company’shistorical consolidated income statements for the periods indicated:

 
|                                       |   | **Three Months  Ended December 31** |   | **Nine Months  Ended December 31** |   |
|--------------------------------------------|--------|-------------------------------------|--------|------------------------------------|--------|
|                                       |   | **2002**                            |   | **2001**                           |   | **2002** |   | **2001** |   |
|                                       |   | **(in millions)**                   |   | **(in millions)**                  |   |
| Sales                                      |   | $                                   | 186.3  |                               | $      | 153.8 |   | $ | 544.2 |   | $ | 478.3 |   |
| Cost of sales                              |   | 141.5                               |   | 114.4                              |   | 411.9 |   | 353.2 |   |
| Gross profit                               |   | 44.8                                |   | 39.4                               |   | 132.3 |   | 125.1 |   |
| Selling  expenses                          |   | 19.8                                |   | 16.6                               |   | 58.9 |   | 50.7 |   |
| General and  administrative expenses       |   | 13.3                                |   | 12.2                               |   | 39.3 |   | 36.7 |   |
| Amortization  of goodwill                  |   | —                              |   | 1.3                                |   | — |   | 4.0 |   |
| Operating  income                          |   | 11.7                                |   | 9.3                                |   | 34.1 |   | 33.7 |   |
| Interest  expense, net                     |   | 2.4                                 |   | 3.3                                |   | 8.0 |   | 12.1 |   |
| Income before  taxes and accounting change |   | 9.3                                 |   | 6.0                                |   | 26.1 |   | 21.6 |   |
| Income taxes                               |   | 3.5                                 |   | 2.4                                |   | 9.9 |   | 8.6 |   |
| Income before  accounting change           |   | $                                   | 5.8    |                               | $      | 3.6 |   | $ | 16.2 |   | $ | 13.0 |   |

# ** **

# **Thefollowing tables set forth the components of income expressed as a percentageof sales for the periods indicated:**

 
|                                       |   | **Three Months  Ended December 31** |   | **Nine Months  Ended December 31** |   |
|--------------------------------------------|--------|-------------------------------------|--------|------------------------------------|--------|
|                                       |   | **2002**                            |   | **2001**                           |   | **2002** |   | **2001** |   |
| Sales                                      |   | 100.0                               | %      | 100.0                              | %      | 100.0 | % | 100.0 | % |
| Cost of sales                              |   | 75.9                                |   | 74.4                               |   | 75.7 |   | 73.9 |   |
| Gross profit                               |   | 24.1                                |   | 25.6                               |   | 24.3 |   | 26.1 |   |
| Selling  expenses                          |   | 10.6                                |   | 10.8                               |   | 10.8 |   | 10.6 |   |
| General and  administrative expenses       |   | 7.2                                 |   | 8.0                                |   | 7.2 |   | 7.7 |   |
| Amortization  of goodwill                  |   | —                              |   | .8                                 |   | — |   | .8 |   |
| Operating  income                          |   | 6.3                                 |   | 6.0                                |   | 6.3 |   | 7.0 |   |
| Interest  expense, net                     |   | 1.3                                 |   | 2.2                                |   | 1.5 |   | 2.5 |   |
| Income before  taxes and accounting change |   | 5.0                                 |   | 3.8                                |   | 4.8 |   | 4.5 |   |
| Income taxes                               |   | 1.9                                 |   | 1.5                                |   | 1.8 |   | 1.8 |   |
| Income before  accounting change           |   | 3.1                                 | %      | 2.3                                | %      | 3.0 | % | 2.7 | % |

 

11

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# ***ComparativeAnalysis of Consolidated Income Statements for the Three and Nine Months EndedDecember 31, 2002 and 2001***

 

Sales for the three months ended December 31,2002 increased 21% to $186.3 million, and sales for the nine months endedDecember 31, 2002 increased 14% to $544.2 million.  The increase in sales for both the three and nine month periodsof this fiscal year is primarily due to the incremental impact of threebusinesses acquired during the quarter ended March 31, 2002 and two businessesacquired during the nine months ended December 31, 2002.  Further, our sales increase demonstrates theinitial return on our efforts to expand market share through our recruitingprogram for experienced sales professionals and our pursuit of nationalaccounts.

 

Gross profit margin for the three months endedDecember 31, 2002 declined to 24.1% from 25.6% in the corresponding quarter ayear ago, and gross profit margin for the nine months ended December 31, 2002declined to 24.3% from 26.1% in the same period last year.  The gross profit margin decline for both thethree and nine month periods of this fiscal year reflects continued pricingpressures caused by the current economic weakness and prevailing negativeindustry conditions.  Further, grossprofit margins of acquired businesses generally are lower than our Company’shistorical average and typically improve over time as we work with themanagement of the acquired businesses to implement cost savings strategies andother operating best practices.

 

Selling expenses for the three months ended December 31, 2002 increased19% to $19.8 million, and selling expenses for the nine months ended December31, 2002 increased 16% to $58.9 million. The increase in selling expenses for both the three and nine monthperiods of this fiscal year corresponds to the higher sales levels notedabove.  As a percentage of sales,selling expenses for the three months ended December 31, 2002 decreased to10.6% from 10.8% in the corresponding quarter a year ago primarily due to agreater mix of non-commissioned sales in the current quarter.  For the nine months ended December 31, 2002,selling expenses as a percentage of sales increased to 10.8% from 10.6% in thesame period last year.  This increasereflects our investments in recruiting and hiring new sales professionals andmarketing efforts to promote our extensive printing capabilities andcomplementary services.

 

General and administrative expenses for the three months ended December31, 2002 increased 10% to $13.3 million, and general and administrativeexpenses for the nine months ended December 31, 2002 increased 7% to $39.3million.  The increase in general andadministrative expenses for both the three and nine month periods of thisfiscal year is primarily due to the incremental impact of our recently acquiredbusinesses.  As a percentage of sales,general and administrative expenses for the three months ended December 31,2002 declined to 7.2% from 8.0% in the corresponding quarter a year ago and forthe nine months ended December 31, 2002 declined to 7.2% from 7.7% in the sameperiod last year (excluding amortization of goodwill recorded in the priorcomparable periods).   The decline ingeneral and administrative expenses as a percentage of sales for both the threeand nine month periods of this fiscal year reflects our efforts to control ouradministrative costs and thereby leverage the higher sales levels describedabove.

 

Interestexpense for the three months ended December 31, 2002 decreased 27% to $2.4million, and interest expense for the nine months ended December 31, 2002decreased 34% to $8.0 million.  Thedecrease in interest expense for both the three and nine month periods of thisfiscal year is due to lower borrowings outstanding under our variable-rate bankcredit facility, coupled with a more favorable interest rate environment ascompared to the same periods last year.

 

Effective April 1, 2002, we adopted Statement of Financial AccountingStandards (“SFAS”) No. 142 which required us to perform a series oftransitional impairment tests pertaining to the valuation of our outstandinggoodwill balance, which totaled $199.3 million as of March 31, 2002.  Pursuant to the adoption of SFAS No. 142, wedetermined that an after-tax impairment charge of $74.4 million was required,and such charge has been classified as the cumulative effect of an accountingchange as provided for by the new accounting standard.  Further, under SFAS No. 142, we are nolonger required to amortize the remaining outstanding goodwill balance, but arerequired to perform annual impairment tests to determine if the remainingbalance of goodwill should be reduced to estimated fair values.  As a result of discontinuing goodwillamortization, we reduced our overall effective tax rate for the three and ninemonths ended 

 

12

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December 31, 2002 to 38%, ascompared to 40% in the same periods last year. The higher tax rate of 40% infiscal 2002 was necessary to provide for the effect of the portion of goodwillamortization that was not deductible for tax purposes.

 

**Liquidityand Capital Resources**

 

*Sources and Uses ofCash*

 

Our Company’s historical sources of cash have primarily been cashprovided by operations or borrowings under our bank credit facilities.  Our Company’s historical uses of cash havebeen for capital expenditures, acquisitions of printing businesses and paymentof principal 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** |   |
|--------------------------------------------------|--------|------------------------------------|--------|
|                                             |   | **2002**                           |   | **2001** |   |
|                                             |   | **(In  millions)**                 |   |
| Net cash provided by operating activities        |   | $                                  | 72.6   |   | $ | 56.0 |   |
| Acquisitions of businesses                       |   | (5.6                               | )      | (2.9 | ) |
| Capital expenditures                             |   | (9.5                               | )      | (11.0 | ) |
| Net repayments under bank credit facilities      |   | (55.1                              | )      | (38.8 | ) |
| Payments on term equipment notes and other  debt |   | (6.3                               | )      | (6.7 | ) |
|                                                  |        |                                    |        |  |  |  |  |

 

Additionally,our cash position, working capital and debt obligations are shown below for theperiods indicated and should be read in conjunction with our consolidatedbalance sheets and notes thereto included in ***Item 1. Financial Statements: ***

*** ***
|                      |   | **December 31,2002** |   | **March 31,**2002 |   |
|---------------------------|--------|----------------------|--------|-------------------|--------|
|                      |   | **(In  millions)**   |   |
| Cash and cash equivalents |   | $                    | 7.1    |              | $      | 9.0 |   |
| Working capital           |   | 64.8                 |   | 85.0              |   |
| Total debt obligations    |   | 176.3                |   | 233.7             |   |
|                           |        |                      |        |                   |        |  |  |

 

We believethat our cash flow from operations will be adequate to cover our workingcapital needs, debt service requirements and capital expenditures for theremainder of fiscal 2003 and for fiscal 2004 to the extent such items are knownor are reasonably determinable based on current business and market conditions.However, we may elect to finance certain of our capital expenditurerequirements through borrowings under our bank credit facilities or theissuance of additional term notes.

 

We intend tocontinue pursuing acquisition opportunities at prices we believe are reasonablebased upon market conditions.  However,we cannot accurately predict the timing, size and success of our acquisitionefforts or our associated potential capital commitments.  There can be no assurance that we will beable to acquire additional businesses on terms acceptable to us.

 

We expect tofund future acquisitions through cash flow from operations, additionalborrowings or the issuance of our common stock.  The extent to which we will be willing or able to use our commonstock to make acquisitions will depend on its market value from time to timeand the willingness of potential sellers to accept it as full or partialpayment.

 

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*Debt Obligations*

 

We enteredinto a five-year $225.0 million senior secured credit facility (the “BankCredit Facility”) with eleven banks in December 2000.  The Bank Credit Facility is composed of a $50.0 million five-yearterm loan (the “Term Loan”), of which $27.5 million was outstanding at December31, 2002, and a $175.0 million five-year revolving credit line (the “RevolvingLine”), of which $63.0 million was outstanding at December 31, 2002.  The Term Loan requires quarterly payments of$2.5 million each through September 30, 2005.

 

The proceedsof the Bank Credit Facility can be used to repay certain indebtedness, financecertain acquisitions, provide for working capital and general corporatepurposes and, subject to certain restrictions, repurchase our commonstock.  Borrowings outstanding under theBank Credit Facility are secured by substantially all of our assets other thanreal estate and certain equipment subject to term equipment notes and otherfinancings.  Borrowings under the BankCredit Facility accrue interest, at our option, at either (1) the LondonInterbank Offered Rate (LIBOR) plus a margin of 1.25% to 2.25%, or (2) analternate base rate (based upon the greater of the agent bank’s prime lendingrate or the Federal Funds effective rate plus .50%) plus a margin of up to1.00%. We are also required to pay a commitment fee on available but unusedamounts ranging from .275% to .375% annually. The interest rate margin and the commitment fee are based upon our ratioof Funded Debt to Pro Forma Consolidated EBITDA, as defined, redeterminedquarterly. On December 31, 2002, borrowings outstanding under the Term Loan andthe Revolving Line accrued interest at a weighted average rate of 3.29%.

 

We are subjectto certain covenants and restrictions and we must meet certain financial testsas defined in the Bank Credit Facility. We were in compliance with thesecovenants and financial tests at December 31, 2002.  The Company obtained an amendment to its Bank Credit Facilitywhich specifically provided that the transitional goodwill impairment charge(see Note 2. Accounting Change) would not impact compliance with thesecovenants.

 

In addition,we maintain an auxiliary revolving credit facility (the “Auxiliary BankFacility”) with a commercial bank expiring in February 2003. This AuxiliaryBank Facility is unsecured and has a maximum borrowing capacity of $5.0million. At December 31, 2002, borrowings outstanding under the AuxiliaryFacility totaled $3.7 million and accrued interest at a rate of 3.13%.  In February 2003, the Auxiliary BankFacility was extended for a one year period.

 

Our termequipment notes consist primarily of notes payable pursuant to financingagreements between us and various lenders (the “Lender Notes”) and between usand two printing equipment manufacturers (the “Equipment Notes”).  During the three months ended December 31,2002, we issued Lender Notes in an aggregate principal amount of $38.5 millionand utilized the proceeds thereof to retire certain of the outstandingEquipment Notes.  The Lender Notes aresecured by the equipment subject to this refinancing.  At December 31, 2002 outstanding borrowings under the LenderNotes totaled $37.6 million and accrued interest at a weighted average rate of5.91%.  The Lender Notes provide forfixed monthly principal payments plus interest over a five-year term, endingwith a balloon payment upon maturity. At December 31, 2002 outstanding borrowings under the Equipment Notestotaled $32.0 million and accrued interest at a weighted average rate of6.14%.   The Equipment Notes provide forfixed payments of principal and interest for defined periods of up to ten yearsfrom the date of issuance and are secured by the purchased equipment.  The remaining balance of term equipmentnotes totaling $2.2 million primarily consists of various secured debtobligations assumed by us in connection with certain prior yearacquisitions.  We are not subject to anysignificant financial covenants in connection with any of the term equipmentnotes; however, the Bank Credit Facility places certain limitations on theamount of additional term note obligations we may incur in the future.

 

Our remainingdebt obligations consist of a promissory note totaling $5.2 million, industrialrevenue bonds totaling $4.5 million and various other debt obligations totaling$.6 million.  We do not have anysignificant financial covenants or restrictions associated with these debtobligations.

 

14

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**Other Commitments**

 

We haveentered into various noncancelable operating leases primarily related tofacilities and equipment used in the ordinary course of our business. Our futurecontractual obligations under such operating leases total approximately $39.1million as of December 31, 2002.

 

In connectionwith our assumption of obligations under outstanding industrial revenue bondsrelated to the acquisition of two printing businesses, which are reflected asoutstanding debt obligations in our consolidated financial statements, we hadtwo letters of credit outstanding for a combined total of $4.6 million as ofDecember 31, 2002.  These letters ofcredit were issued pursuant to the terms of our Bank Credit Facility, whichexpires in December 2005, and we may be required to obtain replacement lettersof credit at that time.

 

We haveentered into earnout agreements in connection with certain prior yearacquisitions.  If the acquired printingbusinesses generate operating profits in excess of pre-determined targets, wemay be obligated to issue additional shares of our common stock or makeadditional cash payments. As of December 31, 2002, we were contingentlyobligated through fiscal 2005 to issue up to 35,955 shares of our common stockand make additional cash payments of up to $5.3 million for all periods in theaggregate.  Based on current operatinglevels, we expect that the issuance of shares and actual payments pursuant tothese obligations will be substantially less than the maximum amountsindicated.

 

**Factors Which MayAffect Future Results**

 

Our futureoperating results may be impacted by a number of factors, including generaleconomic conditions and competitive factors in our industry, seasonal andcyclical variations in commercial printing demand, reasonable growth in thedemand for our products and retention of key management and operatingpersonnel. The magnitude and timing of any future acquisitions, as well as ourability to absorb and manage such businesses, will also impact our futureresults.  In accordance with SFAS No.142, the Company is required to annually test the remaining balance of goodwillfor impairment and intends to test for impairment as the conclusion of each fiscalyear.  The Company may be required torecord additional impairment on certain reporting units when its annualimpairment test is conducted on March 31, 2003.  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.

 

**Critical AccountingPolicies**

 

We haveidentified our critical accounting policies based on the following factors –significance to our overall financial statement presentation, complexity of thepolicy and its use of estimates and assumptions.  We are required to make certain estimates and assumptions indetermining the reported amounts of assets and liabilities, disclosure ofcontingent liabilities and the reported amounts of revenues and expenses. Weevaluate our estimates and assumptions on an ongoing basis and rely onhistorical 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.

 

We maintain anallowance for doubtful accounts as deemed necessary based upon expected collectibilityof accounts receivable.  We exercisejudgment in determining the valuation and useful lives of our long-livedassets, primarily property/equipment and goodwill.  We determine the realization of long-lived assets, other thangoodwill, by assessing the future cash flows and income from such assets on anundiscounted basis, as well as other factors such as business trends andgeneral economic conditions.  Annually,as of the end of the Company’s fiscal year, we determine the realization ofgoodwill by comparing the fair value of each reporting unit to its carryingvalue.  The fair value is determined byusing capitalization of earnings estimates and market valuation multiples foreach reporting unit.  We areself-insured up to specified limits for the majority of our workers’compensation costs and group health insurance costs, and we rely on claimsexperience and the advice of our administrators and consulting actuaries indetermining an adequate liability

 

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for self-insurance claims.  Finally, we utilize certain estimates andassumptions in our determination and allocation of the purchase price foracquisitions and in determining accruals for current and deferred income taxes.

 

**RecentAccounting Pronouncements**

 

SFAS No.145, *Rescission of FASB Statement Nos. 4,44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,*wasissued in April 2002.  SFAS No. 145amends existing authoritative pronouncements to make various technical corrections,clarify meanings, and describe their applicability under changedconditions.  This statement requiresthat gains and losses from the extinguishment of debt be classified asextraordinary items only if they meet the criteria in Accounting PrinciplesBoard (“APB”) Opinion No. 30, *Reporting theResults of Operations - Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and Infrequently Occurring Events andTransactions. *SFAS No. 145is effective for fiscal years beginning after May 15, 2002.  Management does not believe that theadoption of SFAS No. 145 will have a material impact on its financial positionor results of operations.

 

SFAS No. 146, *Accounting for Costs Associated with Exit or Disposal Activities*,was issued in July 2002 and is effective for exit or disposal activities thatare initiated after December 31, 2002. SFAS No. 146 requires that exit or disposal costs be recorded at theirfair value when they are incurred.  Weadopted SFAS No. 146 as of October 1, 2002. The adoption did not have a material impact on our financial position orresults of operations.

 

SFAS No. 148, *Accounting for Stock-Based Compensation – Transition and Disclosure*,was issued in December 2002 and is effective for interim periods beginningafter December 15, 2002 and annual periods ending after December 15, 2002.  This statement amends the disclosurerequirements and provides additional guidance with respect to certain otherprovisions of SFAS No. 123, *Accounting forStock-based Compensation*. Management does not believe that the adoption of the additionaldisclosure requirements of SFAS No. 148 will have a material impact on itsfinancial position or results of operations.

 

***ITEM 3.  Quantitative andQualitative Disclosure About Market Risk***

 

Market risk generally means the risk that losses may occur in theestimated fair value of certain financial instruments as a result of adversemovements in interest rates, foreign currency exchange rates and commodityprices.  We do not hold or utilizederivative financial instruments which could expose our Company to significantmarket risk.  However, we are exposed tomarket risk for changes in interest rates related primarily to our debtobligations, which includes borrowings under our bank credit facilities,various term equipment notes and other debt obligations.  As of December 31, 2002, there were nomaterial 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, 2002.

 

***ITEM4.  Controls and Procedures***

 

Our ChiefExecutive Officer (“CEO”) and Chief Financial Officer (“CFO”) have evaluatedthe effectiveness of the Company’s disclosure controls and procedures (asdefined in Rules 13a-4(c) and 15d-14(c) of the Securities Exchange Act of 1934,as amended) as of a date (“Evaluation Date”) within 90 days prior to the filingdate of this quarterly report.  Based onsuch evaluation, our CEO and CFO have each concluded that as of the EvaluationDate, the Company’s disclosure controls and procedures were effective to ensurethat information required to be disclosed by the Company in reports that itfiles or submits under the Securities Exchange Act of 1934, as amended, isrecorded, processed, summarized and reported within the time periods specifiedin the Securities and Exchange Commission’s rules and forms.  There were no significant changes in theCompany’s internal controls or in other factors that could significantly affectthe internal controls subsequent to the Evaluation Date.

 

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**CONSOLIDATED GRAPHICS, INC.**

 

**PARTII – OTHER INFORMATION**

 

**ITEM 1. **** *Legal Proceedings***

 

From time to time, our Company is involved in litigation relating toclaims arising out of its operations in the normal course of business. Wemaintain insurance coverages against certain potential claims in amounts whichwe believe to be adequate.  Currently,we are not aware of any legal proceedings or claims pending against our Companythat our management believes will have a material adverse effect on ourfinancial position or results of operations.

 

#### **ITEM 2**.  *Changes in Securities and Use of Proceeds*

 

None.

 

#### **ITEM 3.**  *Defaults upon Senior Securities*

 

None.

 

**ITEM 4. **** *Submission of Matters to a Vote of Security Holders***

 

None.

 

**ITEM 5.  *****Other Information***

 

None.

 

**ITEM 6. **** *Exhibits and Reports on Form 8-K***

 

***(a)   Exhibits:***

 
| ***** 3.1 |   | Restated Articles of Incorporation of the  Company filed with the Secretary of State of the State of Texas on July 27,  1994 (Consolidated Graphics, Inc. Form 10-Q (June 30, 1994) SEC File No.  0-24068, Exhibit 4(a)).                                                                                                                                                                                                                                   |
|-----------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| * 3.2     |   | Articles of Amendment to the Restated  Articles of Incorporation of the Company dated as of July 29, 1998 (Consolidated  Graphics, Inc. Form 10-Q (June 30, 1998) SEC File No. 0-24068, Exhibit 3.1).                                                                                                                                                                                                                                                       |
| * 3.3     |   | Restated By-Laws of the Company, dated as  of November 2, 1998 (Consolidated Graphics, Inc. Form 10-Q (September 30,  1998) SEC File No. 0-24068, Exhibit 3.2).                                                                                                                                                                                                                                                                                             |
| * 3.4     |   | Restated By-Laws of the Company, as amended  on June 23, 1999  (Consolidated  Graphics, Inc. Form 10-Q (June 30, 1999) SEC File No. 0-24068, Exhibit 3.4).                                                                                                                                                                                                                                                                                             |
| * 3.5     |   | Amendments to the Restated By-Laws of the  Company effective as of December 15, 1999 (Consolidated Graphics, Inc.  Form8-K (December 15, 1999) SEC File No. 0-24068, Exhibit 3.2).                                                                                                                                                                                                                                                                          |
| 3.6       |   | Amendment to the Restated By-Laws of the  Company approved by the Board of Directors and effective as of December 2,  2002.                                                                                                                                                                                                                                                                                                                                 |
| * 4.1     |   | Specimen Common Stock Certificate  (Consolidated Graphics, Inc. Form 10-K (March 31, 1998) SEC File No. 0-24068,  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) SEC File No.  0-24068, Exhibit 4.1). |
| 10.1      |   | Form of Loan and Security Agreement and Schedule of Term Equipment  Notes with Various Lenders as of October 2002 and December 2002.                                                                                                                                                                                                                                                                                                                        |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|           |
|      |   | * Incorporated by reference                                                                                                                                                                                                                                                                                                                                                                                                                                 |

 

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***Reports on Form 8-K:***

 

1)              Form 8-K, filed October 23, 2002 inconnection with the press release announcing the Company’s fiscal 2003 secondquarter results.

2)              Form 8-K, filed November 15, 2002 inconnection with the announcement of the Company’s submission to the Securitiesand Exchange Commission of the certifications of its Chief Executive Office andChief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of2002.

3)              Form 8-K, filed January 22, 2003 inconnection with the press release announcing the Company’s fiscal 2003 thirdquarter results.

4)              Form 8-K, filed February 4, 2003 inconnection with the press release announcing the appointment of Jerry Brofft asthe Company’s Executive Vice President of Purchasing.

 

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**SIGNATURES**

 

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

 

 
|                                | **CONSOLIDATED  GRAPHICS, INC.** |
|-------------------------------------|----------------------------------|
|                                |                             |   |
|                                |                             |   |
| Dated:  February 14, 2003 | By:                              | /s/ G. Christopher Colville |   |
|                                |                             | Executive Vice President,  Chief Financial and Accounting  Officer and Secretary |

 

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**CERTIFICATION**

 

I, Joe R. Davis, certify that:

 

# **1.**              I have reviewedthis quarterly report on Form 10-Q of Consolidated Graphics, Inc.;

 

# **2.**              Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.              Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

# ** **

# **4.**              The registrant’sother certifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

## **a)**             designed such disclosure controls and procedures to ensurethat material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this quarterly report is beingprepared;

## ** **

## **b)**            evaluated the effectiveness of the registrant’s disclosurecontrols and procedures as of a date within 90 days prior to the filingdate of this quarterly report (the “Evaluation Date”); and

## ** **

## **c)**             presented in this quarterly report our conclusions aboutthe effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

 

# **5.**              The registrant’sother certifying officer and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee of registrant’sboard of directors (or persons performing the equivalent function):

 

## **a)**             all significant deficiencies in the design or operation ofinternal controls which could adversely affect the registrant’s ability torecord, process, summarize and report financial data and have identified forthe registrant’s auditors any material weaknesses in internal controls; and

 

## **b)**            any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the registrant’sinternal controls; and

 

6.              The registrant’s other certifying officerand I have indicated in this quarterly report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 
| Date:  February 14, 2003 | /s/  Joe R. Davis                                                                    |   |
|------------------------------------|------------------------------------------------------------------------------------------------|--------|
|                               | Chairman of the Board of Directors and  Chief Executive Officer  (Principal Executive Officer) |

 

20

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**CERTIFICATION**

 

I, G. Christopher Colville, certify that:

 

# **1.**              I have reviewedthis quarterly report on Form 10-Q of Consolidated Graphics, Inc.;

 

# **2.**              Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.              Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

# ** **

# **4.**              The registrant’sother certifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

## **a)**              designed such disclosure controls and procedures to ensurethat material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this quarterly report is beingprepared;

 

## **b)**             evaluated the effectiveness of the registrant’s disclosurecontrols and procedures as of a date within 90 days prior to the filingdate of this quarterly report (the “Evaluation Date”); and

 

## **c)**              presented in this quarterly report our conclusions aboutthe effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

 

# **5.**              The registrant’sother certifying officer and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

## **a)**              all significant deficiencies in the design or operation ofinternal controls which could adversely affect the registrant’s ability torecord, process, summarize and report financial data and have identified forthe registrant’s auditors any material weaknesses in internal controls; and

 

## **b)**             any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the registrant’sinternal controls; and

 

# **6.**              The registrant’sother certifying officer and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

 
| Date:  February 14, 2003 | /s/  G. Christopher Colville                                                                                         |   |
|------------------------------------|--------------------------------------------------------------------------------------------------------------------------------|--------|
|                               | Executive Vice President,  Chief Financial and Accounting  Officer and Secretary  (Principal Financial and Accounting Officer) |

 

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