**UNITED STATES**

**SECURITIES 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 thequarterly period ended December 31, 2001**

 

**OR**

 

| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------|

** **

**For thetransition period from                to                 **

 

**CommissionFile Number 0-24068**

 

**___________________**

** **

**CONSOLIDATEDGRAPHICS, INC.**

(Exact name of Registrant asspecified 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)                            |
|                                                            |
| **(713) 787-0977**                                              |
| Registrant’s telephone number, including area code         |

 

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

 

Thenumber of shares of Common Stock, par value $.01 per share, of the Registrantoutstanding at January 31, 2002 was 13,174,520

 

 

**CONSOLIDATED GRAPHICS, INC.**

 

**FORM 10-Q FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2001**

 

**INDEX**

 
| Part I -- Financial Information |
|---------------------------------|
|                            |
|                            | Item 1 --Financial Statements |
|                            |   |   |
|                            | Consolidated  Balance Sheets at December 31, 2001 and March 31, 2001 |
|                            |   |   |
|                            | Consolidated  Income Statements for the Three and Nine Months Ended December 31, 2001 and  2000 |
|                            |   |   |
|                            | Consolidated  Statements of Cash Flows for the Nine Months Ended December 31, 2001 and 2000 |
|                            |   |   |
|                            | 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 |
|                            |   |   |
| 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                      |

 

 

**PART I —FINANCIAL INFORMATION**

 

**ITEM 1.  *Financial Statements***

 

**CONSOLIDATEDGRAPHICS, INC.**

**CONSOLIDATED BALANCE SHEETS**

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

 
|                                                          |   | **December 31,** |       | **March 31,** |       |
|---------------------------------------------------------------|--------|------------------|------------|---------------|------------|
|                                                          |   | **2001**         | ** ** | **2001**      | ** ** |
| **ASSETS**                                                    |   | **(Unaudited)**  |       | **(Audited)** |       |
| CURRENT ASSETS                                                |   |             | ** ** |          | ** ** |
| Cash and cash equivalents                                     |   | $                | 8,690      |          | $          | 8,667 |   |
| Accounts receivable, net                                      |   | 103,247          |       | 116,095       |       |
| Inventories                                                   |   | 30,442           |       | 31,536        |       |
| Prepaid expenses                                              |   | 6,184            |       | 4,605         |       |
| Deferred income tax assets                                    |   | 5,411            |       | 4,023         |       |
| Total current assets                                          |   | 153,974          |       | 164,926       |       |
|                                                          |   |             |       |          |       |
| PROPERTY AND EQUIPMENT, net                                   |   | 283,340          |       | 299,871       |       |
| GOODWILL, net                                                 |   | 199,852          |       | 203,030       |       |
| OTHER ASSETS                                                  |   | 8,622            |       | 6,840         |       |
|                                                          |   | $                | 645,788    |          | $          | 674,667 |   |
|                                                          |   |             |       |          |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                 |   |             |       |          |       |
|                                                          |   |             |       |          |       |
| CURRENT LIABILITIES                                           |   |             |       |          |       |
| Current portion of long-term debt                             |   | $                | 18,968     |          | $          | 18,711 |   |
| Accounts payable                                              |   | 25,994           |       | 33,865        |       |
| Accrued liabilities                                           |   | 34,928           |       | 32,609        |       |
| Income taxes payable                                          |   | 2,042            |       | 253           |       |
| Total current liabilities                                     |   | 81,932           |       | 85,438        |       |
|                                                          |   |             |       |          |       |
| LONG-TERM DEBT, net of current portion                        |   | 201,418          |       | 246,729       |       |
| DEFERRED INCOME TAXES                                         |   | 60,050           |       | 54,966        |       |
| COMMITMENTS AND CONTINGENCIES                                 |   |             |       |          |       |
| SHAREHOLDERS’ EQUITY                                     |   |             |       |          |       |
| Common stock, $.01 par value; 100,000,000  shares authorized; |   |             |       |          |       |
| 13,172,119 and 13,018,795 issued and  outstanding             |   | 131              |       | 130           |       |
| Additional paid-in capital                                    |   | 157,098          |       | 155,199       |       |
| Retained earnings                                             |   | 145,159          |       | 132,205       |       |
| Total shareholders’ equity                               |   | 302,388          |       | 287,534       |       |
|                                                          |   | $                | 645,788    |          | $          | 674,667 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

1

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**CONSOLIDATEDGRAPHICS, INC.**

**CONSOLIDATED INCOME STATEMENTS**

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

**(Unaudited)**

 
|                                            |   | **Three Months Ended** |    | **Nine Months Ended** |   |
|-------------------------------------------------|--------|------------------------|---------|-----------------------|--------|
|                                            |   | **December 31,**       |    | **December 31,**      |   |
|                                            |   | **2001**               |    | **2000**              |   | **2001** |   | **2000** |   |
| SALES                                           |   | $                      | 153,750 |                  | $      | 171,211 |   | $ | 478,342 |   | $ | 517,200 |   |
|                                            |   |                   |    |                  |   |   |   |   |   |
| COST OF SALES                                   |   | 114,375                |    | 125,594               |   | 353,257 |   | 372,896 |   |
|                                            |   |                   |    |                  |   |   |   |   |   |
| Gross profit                                    |   | 39,375                 |    | 45,617                |   | 125,085 |   | 144,304 |   |
|                                            |   |                   |    |                  |   |   |   |   |   |
| SELLING EXPENSES                                |   | 16,591                 |    | 17,649                |   | 50,652 |   | 52,280 |   |
|                                            |   |                   |    |                  |   |   |   |   |   |
| GENERAL AND ADMINISTRATIVE EXPENSES             |   | 13,480                 |    | 13,663                |   | 40,731 |   | 41,026 |   |
|                                            |   |                   |    |                  |   |   |   |   |   |
| Operating income                                |   | 9,304                  |    | 14,305                |   | 33,702 |   | 50,998 |   |
|                                            |   |                   |    |                  |   |   |   |   |   |
| INTEREST EXPENSE                                |   | 3,347                  |    | 5,145                 |   | 12,111 |   | 15,254 |   |
|                                            |   |                   |    |                  |   |   |   |   |   |
| Income before income taxes                      |   | 5,957                  |    | 9,160                 |   | 21,591 |   | 35,744 |   |
|                                            |   |                   |    |                  |   |   |   |   |   |
| PROVISION FOR INCOME TAXES                      |   | 2,383                  |    | 3,664                 |   | 8,637 |   | 14,298 |   |
|                                            |   |                   |    |                  |   |   |   |   |   |
| NET INCOME                                      |   | $                      | 3,574   |                  | $      | 5,496 |   | $ | 12,954 |   | $ | 21,446 |   |
|                                            |   |                   |    |                  |   |   |   |   |   |
| BASIC EARNINGS PER SHARE                        |   | $                      | .27     |                  | $      | .42 |   | $ | .99 |   | $ | 1.62 |   |
|                                            |   |                   |    |                  |   |   |   |   |   |
| DILUTED EARNINGS PER SHARE                      |   | $                      | .27     |                  | $      | .42 |   | $ | .97 |   | $ | 1.62 |   |
|                                            |   |                   |    |                  |   |   |   |   |   |
| SHARES USED TO COMPUTE EARNINGS PER  SHARE |   |                   |    |                  |   |   |   |   |   |
|                                            |   |                   |    |                  |   |   |   |   |   |
| Basic                                           |   | 13,150                 |    | 13,026                |   | 13,082 |   | 13,259 |   |
| Diluted                                         |   | 13,449                 |    | 13,031                |   | 13,360 |   | 13,267 |   |

 

See accompanying notes to consolidated financialstatements

 

2

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**CONSOLIDATEDGRAPHICS, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Inthousands)**

**(Unaudited)**

 
|                                                                                     |   | **Nine Months Ended** |       |
|------------------------------------------------------------------------------------------|--------|-----------------------|------------|
|                                                                                     |   | **December 31,**      |       |
|                                                                                     |   | **2001**              | ** ** | **2000** | ** ** |
| OPERATING ACTIVITIES:                                                                    |   |                  |       |   |   |
| Net income                                                                               |   | $                     | 12,954     |   | $ | 21,446 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities – |   |                  |       |   |   |
| Depreciation and amortization                                                            |   | 30,329                |       | 29,057 |   |
| Deferred income tax provision                                                            |   | 3,696                 |       | 8,907 |   |
| Changes in assets and liabilities, net of  effects of acquisitions—                 |   |                  |       |   |   |
| Accounts receivable                                                                      |   | 13,123                |       | 2,788 |   |
| Inventories                                                                              |   | 1,094                 |       | (408 | ) |
| Prepaid expenses                                                                         |   | (1,579                | )          | (1,104 | ) |
| Other assets                                                                             |   | (1,782                | )          | (1,712 | ) |
| Accounts payable and accrued liabilities                                                 |   | (3,989                | )          | 753 |   |
| Income taxes payable                                                                     |   | 2,061                 |       | (2,903 | ) |
| Net cash provided by operating activities                                                |   | 55,907                |       | 56,824 |   |
|                                                                                     |   |                  |       |   |   |
| INVESTING ACTIVITIES:                                                                    |   |                  |       |   |   |
| Acquisitions of businesses                                                               |   | (2,880                | )          | (3,857 | ) |
| Purchases of property and equipment                                                      |   | (10,939               | )          | (19,792 | ) |
| Proceeds from asset dispositions                                                         |   | 1,818                 |       | 1,367 |   |
| Net cash used in investing activities                                                    |   | (12,001               | )          | (22,282 | ) |
|                                                                                     |   |                  |       |   |   |
| FINANCING ACTIVITIES:                                                                    |   |                  |       |   |   |
| Proceeds from bank credit facilities                                                     |   | 13,277                |       | 352,400 |   |
| Payments on bank credit facilities                                                       |   | (52,120               | )          | (375,137 | ) |
| Payments on long-term debt                                                               |   | (6,668                | )          | (5,326 | ) |
| Payments to repurchase and retire common stock                                           |   | —                |       | (7,354 | ) |
| Proceeds from exercise of stock options and  other                                       |   | 1,628                 |       | 165 |   |
| Net cash used in financing activities                                                    |   | (43,883               | )          | (35,252 | ) |
|                                                                                     |   |                  |       |   |   |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                                    |   | 23                    |       | (710 | ) |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                         |   | 8,667                 |       | 8,197 |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                               |   | $                     | 8,690      |   | $ | 7,487 |   |

 

See accompanying notes to consolidated financialstatements.

 

3

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**CONSOLIDATEDGRAPHICS, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**(Inthousands)**

**(Unaudited)**

 

**1. BASIS OF PRESENTATION ANDSIGNIFICANT ACCOUNTING POLICIES**

 

Theaccompanying unaudited consolidated financial statements include the accountsof Consolidated Graphics, Inc. and subsidiaries (collectively with itssubsidiaries referred to as “the Company”). All intercompany accounts and transactions have been eliminated.  Such statements have been prepared inaccordance with generally accepted accounting principles and the Securities andExchange Commission’s rules and regulations for reporting interim financialinformation.  Accordingly, they do notinclude all of the information and footnotes required by generally acceptedaccounting principles 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 December 31, 2001 are notnecessarily indicative of future operating results.  Balance sheet information as of March 31, 2001 has been derivedfrom the 2001 annual audited consolidated financial statements of the Company.  For further information, refer to theconsolidated financial statements and footnotes thereto included in theCompany’s Form 10-K filed with the Securities and Exchange Commission in June2001.

 

Basicearnings per share are calculated by dividing net income by the weightedaverage number of common shares outstanding. Diluted earnings per share reflect net income divided by the weightedaverage number of common shares and dilutive stock options outstanding.

 

The consolidated statementsof cash flows provide information about the Company’s sources and uses of cashand exclude the effects of non-cash transactions.  Significant non-cash transactions for the nine months endedDecember 31, 2001, include the issuance of term equipment notes totaling $457related to the purchase of printing equipment (see Note 2. Long-termDebt).  The following is a summary oftotal cash paid for interest and income taxes (net of refunds):

** **

|             |   | **Nine Months Ended****December 31,** |         |
|------------------|--------|---------------------------------------|--------------|
|             |   | **2001**                              | ** **   | **2000** | ** ** |
| *Cash Paid for:* |   |                                  | ** **   |   | ** ** |
| Interest         |   | $                                     |  12,966 |   | $ |  16,137 |   |
| Income taxes     |   | 2,790                                 |         | 8,245 |   |
|                  |        |                                       |              |  |  |  |  |

 

**2. LONG-TERM DEBT**

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

 

|                   |   | **December  31,** |    | **March 31,** |   |
|------------------------|--------|-------------------|---------|---------------|--------|
|                   |   | **2001**          |    | **2001**      |   |
| Bank credit facilities |   | $                 | 144,335 |          | $      | 183,178 |   |
| Term equipment notes   |   | 70,339            |    | 75,665        |   |
| Other                  |   | 5,712             |    | 6,597         |   |
|                   |   | 220,386           |    | 265,440       |   |
| Less current portion   |   | (18,968           | )       | (18,711       | )      |
|                   |   | $                 | 201,418 |          | $      | 246,729 |   |

 

4

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The Company entered into afive-year $225,000 senior secured credit facility (the “Bank Credit Facility”)with eleven banks in December 2000.  TheBank Credit Facility is composed of a $50,000 five-year term loan (the “TermLoan”), of which $37,500 was outstanding at December 31, 2001, and a $175,000five-year revolving credit line (the “Revolving Line”), of which $104,000 wasoutstanding at December 31, 2001.  Thesize of the Revolving Line may be increased by $50,000 at a later date byadding additional lenders.  The TermLoan requires quarterly payments of $2,500 each through September 30, 2005.

 

Borrowings outstanding underthe Bank Credit Facility are secured by substantially all of the Company’sassets other than real estate and certain equipment subject to term noteobligations and other financing. Borrowings under the Bank Credit Facility accrue interest, at the Company’soption, at either (1) the London Interbank Offered Rate (LIBOR) plus a marginof 1.25% to 2.25%, or (2) an alternate base rate (based upon the greater of theagent bank’s prime lending rate or the Federal Funds effective rate plus .50%)plus a margin of up to 1.00%.  TheCompany is also required to pay a commitment fee on available but unusedamounts ranging from .275% to .375%. The interest rate margin and the commitment fee are based upon theCompany’s ratio of Funded Debt to Pro Forma Consolidated EBITDA, as defined,redetermined quarterly.  At December 31,2001 borrowings outstanding under the Term Loan and the Revolving Line accruedinterest at a weighted average rate of 4.20%.

 

The proceeds of the BankCredit Facility can be used to repay certain indebtedness, finance certainacquisitions and provide for working capital and general corporatepurposes.  Proceeds can also be used bythe Company to repurchase its common stock, subject to a limit of $25,000 and certainother restrictions.  The Company issubject to certain covenants and restrictions and we must meet certainfinancial tests pursuant to and as defined in the Bank Credit Facility.

 

In addition, the Companyentered into an auxiliary revolving credit facility (the “Auxiliary BankFacility”) with a commercial bank expiring in February 2003.  This Auxiliary Bank Facility is unsecuredand has a maximum borrowing capacity of $5,000.  At December 31, 2001, borrowings outstanding under the AuxiliaryBank Facility totaled $2,835 and accrued interest at 3.90%.

 

The term equipment notesconsist primarily of term notes payable pursuant to printing equipment purchaseand financing agreements between the Company and two printing equipmentmanufacturers.  The agreements providefor fixed monthly payments over periods of either five or ten years and aresecured by the purchased equipment.  AtDecember 31, 2001, outstanding borrowings under these agreements totaled$65,213 and were subject to a weighted average interest rate of 7.76%.  The remaining balance of term equipmentnotes totaling $5,126 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 these equipmentnotes; however, the Bank Credit Facility places certain limitations on theamount of additional term note obligations the Company may incur in the future.

 

**3. ACQUISITIONS**

 

During the nine months ended December 31, 2001, theCompany paid cash of $2,880 to satisfy certain liabilities of acquiredbusinesses that existed at March 31, 2001 or pursuant to earnout agreementsentered into in connection with certain prior year acquisitions.

 

In February 2002,the Company completed the acquisitions of American Lithographers, Inc. ofHayward and Sacramento, California, and Carqueville Graphics of Steamwood,Illinois.  To complete theseacquisitions, the Company paid cash of $9,047 and issued debt totaling $5,459.

 

5

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**4. RECENT ACCOUNTING PRONOUNCEMENTS**

 

Statement of Financial Accounting Standards (“SFAS”)No. 141, *Business Combinations*,and SFAS No. 142, *Goodwill and OtherIntangible Assets,*were issued in July 2001.  SFAS No. 141 primarily requires that allacquisitions initiated after June 30, 2001, be accounted for using the purchasemethod of accounting.  Management doesnot believe that the adoption of SFAS No. 141 will have a material impact onits consolidated financial statements. SFAS 142 primarily requires that companies discontinue amortizinggoodwill and perform annual impairment tests to determine if the remainingbalance of goodwill or other intangible assets should be reduced to theirestimated fair values.  At December 31,2001, the Company’s net goodwill was $199,852 and amortization for the ninemonths ended December 31, 2001, totaled $4,025.  SFAS No. 141 also requires companies to separately report morespecifically identifiable intangible assets and SFAS No. 142 requires the amortizationof such intangible assets over their useful life, if determinable.  SFAS No. 142 is effective for fiscal yearsbeginning after December 15, 2001.  TheCompany expects to adopt SFAS No. 142 during its fiscal 2003 first quarter,which ends June 30, 2002.   Managementis currently reviewing the impact of the adoption of SFAS No. 142 on itsconsolidated financial position and consolidated results of operations.

 

SFAS No. 143, A*ccounting for Asset Retirement Obligations*and SFAS No. 144*, Accounting for the Impairment or Disposal ofLong-Lived Assets*were issued in August 2001.  SFAS 143 requires that a liability for anasset retirement obligation be recognized in the period in which it is incurredif a reasonable estimate of fair value can be made.  The associated asset retirement costs are capitalized as part ofthe carrying amount of the long-lived asset. SFAS 143 is effective for fiscal years beginning after June 15,2002.  SFAS No. 144 addresses the financial accounting andreporting for the impairment or disposal of long-lived assets and supersedesSFAS No. 121.* *SFAS 144 is effective for fiscal years beginning afterDecember 15, 2001, and interim periods within those fiscal years.  Management does not believe that theadoption of SFAS Nos. 143 and 144 will have a material impact on itsconsolidated financial position and consolidated results of operations.

 

6

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

 

*The following discussioncontains forward-looking information. Readers are cautioned that such information involves known and unknownrisks and uncertainties, including those created by general market conditions,competition and the possibility that events may occur which limit the abilityof the Company to maintain or improve its operating results and acquireadditional printing businesses. Although the Company believes 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 theCompany or any other person that the objectives and plans of the Company willbe achieved***.  ***The Company expresslydisclaims any duty to provide updates to  these  forward-looking  statements, assumptions  or  other factors after the date of this Report on Form 10-Q  to reflect the occurrence of events orcircumstances or changes in expectations.*

*The**followingdiscussion of the financial condition and performance of the Company should beread in conjunction with the consolidated financial statements included hereinand the consolidated financial statements and related notes and other detailedinformation regarding the Company included in the Company’s Annual Report onForm 10-K for the fiscal year ended March 31, 2001 and other reports filed bythe Company with the Securities and Exchange Commission.  Operating results for the nine months endedDecember 31, 2001 are not necessarily indicative of the results to be expectedfor the entire fiscal year ending March 31, 2002 or any periods thereafter.*

 

**Overview**

 

Our Company is a leading national provider of commercial printing servicesand is recognized as the largest sheet-fed and half-web commercial printingcompany in the United States with 63 printing facilities in 25 states.  We are focused on adding value to ouroperating companies by providing the financial and operational strengths,management support and technological advantages associated with a nationalorganization.  All of our printingbusinesses represent one reportable operating segment because, in general, theyprovide the same type of services and exhibit similar economic characteristics.

 

Themajorityof our sales are derived from traditional printing services, which includeelectronic prepress, printing, finishing, storage, and delivery ofhigh-quality, custom-designed products. Examples of such products include multicolor product and capabilitybrochures, shareholder communications, catalogs, training manuals,point-of-purchase marketing material and direct mail pieces.  We have a diverse customer base, includingnational and local corporations, mutual fund companies, advertising agencies,graphic design firms, catalog retailers and direct mail distributors.

 

Ourprinting operations also capitalize on their advanced technologicalcapabilities and expertise in digital processes to provide a variety ofelectronic products and services that are complementary to our traditionalprinting services.  Our electronicproducts and services are developed and marketed to existing and potentialcustomers through CGXmedia.  Our twoproprietary, Internet-based software solutions include COIN (Custom OrderingInteractive Network), our on-line print procurement and fulfillment software,and OPAL (On-line Private Asset Library), our Web-based tool used by companiesto efficiently manage their valuable digital assets.  CGXmedia also offers a variety of additional electronic mediasolutions, such as CD-ROM development and production, conversion of text inprinted or digital form to eBook format, electronic journal composition and variabledata and on-demand printing for short run, fast turnaround projects.

 

Our Company offers fulfillment services, whereby we assemble, package, storeand distribute promotional, educational and training documents on behalf of ourcustomers.  We help customers managetheir inventory of printed products and related materials (such as binders andproduct samples), while also providing “just-in-time” assembly and delivery ofcustomized materials to end users.  Ourconvenient mailing services include a number of options for sorting, packaging,inkjet labeling and shipping of large quantities of printed materials to anynumber of distribution points.

 

Ourprinting operations maintain their own sales, estimating, customer service,prepress, production, postpress and accounting departments.  Our corporate headquarters staff providessupport to our printing operations in such areas as human resources,purchasing, and management information systems.  We also maintain centralized risk management, treasury, investorrelations, tax and consolidated financial reporting activities.

 

7

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Mostof the products we produce are generated by individual orders throughcommissioned sales personnel and, in some cases, pursuant to long-termcontracts.  To a large extent, continuedengagement of our Company by our customers for successive jobs depends upon thecustomer’s satisfaction with the quality of services provided.  As such, we are unable to accuratelypredict, for more than a few weeks in advance, the number, size andprofitability of printing jobs that we expect to produce.

 

OurCompany’sprimary business strategy is to generate sales and profit growth bycapitalizing on our nationwide coverage, extensive range of capabilities andfinancial strength to:

 

•                  Increase local market share,

 

•                  Invest in new technology and expand our capabilities,

 

•                  Aggressively pursue national account opportunities,

 

•                  Maximize the potential of CGXmedia to create additional revenue sourcesand generate additional print demand.

 

Wecontinue to selectively pursue opportunities to acquire profitable,well-managed printing companies that fit our general criteria.  We also strive to achieve operationalimprovements by leveraging our economies of scale with national purchasingagreements, sharing best practices and benchmarking financial and operationaldata across our network of 63 companies.

 

**Results of Operations**

 

Thefollowing tables set forth the Company’s historical income statements for theperiods indicated:

 
|                                |   | **Three  Months**      |   | **Nine Months**        |   |
|-------------------------------------|--------|------------------------|--------|------------------------|--------|
|                                |   | **Ended December 31,** |   | **Ended December 31,** |   |
|                                |   | **2001**               |   | **2000**               |   | **2001** |   | **2000** |   |
|                                |   | **(in millions)**      |   | **(in millions)**      |   |
| Sales                               |   | $                      | 153.8  |                   | $      | 171.2 |   | $ | 478.3 |   | $ | 517.2 |   |
| Cost of sales                       |   | 114.4                  |   | 125.6                  |   | 353.2 |   | 372.9 |   |
| Gross profit                        |   | 39.4                   |   | 45.6                   |   | 125.1 |   | 144.3 |   |
| Selling expenses                    |   | 16.6                   |   | 17.6                   |   | 50.7 |   | 52.3 |   |
| General and administrative expenses |   | 13.5                   |   | 13.7                   |   | 40.7 |   | 41.0 |   |
| Operating income                    |   | 9.3                    |   | 14.3                   |   | 33.7 |   | 51.0 |   |
| Interest expense                    |   | 3.3                    |   | 5.1                    |   | 12.1 |   | 15.3 |   |
| Income before income taxes          |   | 6.0                    |   | 9.2                    |   | 21.6 |   | 35.7 |   |
| Provision for income taxes          |   | 2.4                    |   | 3.7                    |   | 8.6 |   | 14.3 |   |
| Net income                          |   | $                      | 3.6    |                   | $      | 5.5 |   | $ | 13.0 |   | $ | 21.4 |   |

 

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,** |   |
|-------------------------------------|--------|-------------------------------------|--------|------------------------------------|--------|
|                                |   | **2001**                            |   | **2000**                           |   | **2001** |   | **2000** |   |
| Sales                               |   | 100.0                               | %      | 100.0                              | %      | 100.0 | % | 100.0 | % |
| Cost of sales                       |   | 74.4                                |   | 73.4                               |   | 73.9 |   | 72.1 |   |
| Gross profit                        |   | 25.6                                |   | 26.6                               |   | 26.1 |   | 27.9 |   |
| Selling expenses                    |   | 10.8                                |   | 10.3                               |   | 10.6 |   | 10.1 |   |
| General and administrative expenses |   | 8.8                                 |   | 7.9                                |   | 8.5 |   | 7.9 |   |
| Operating income                    |   | 6.0                                 |   | 8.4                                |   | 7.0 |   | 9.9 |   |
| Interest expense                    |   | 2.2                                 |   | 3.0                                |   | 2.5 |   | 3.0 |   |
| Income before income taxes          |   | 3.8                                 |   | 5.4                                |   | 4.5 |   | 6.9 |   |
| Provision for income taxes          |   | 1.5                                 |   | 2.1                                |   | 1.8 |   | 2.8 |   |
| Net income                          |   | 2.3                                 | %      | 3.3                                | %      | 2.7 | % | 4.1 | % |

 

 

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**Three Months Ended December 31,2001 Compared With Three Months Ended December 31, 2000**

 

Sales decreased 10% to$153.8 million for the quarter ended December 31, 2001, from $171.2 million forthe same period last year.  This declineis due primarily to soft commercial printing demand in the midst of the currenteconomic slowdown and a reduction in pricing necessary for our operatingcompanies to maintain or increase market share.  The remaining decline is related to management’s decision to exita portion of our business at one operation and combine three under-performingoperations into nearby facilities during the quarter ended March 31, 2001.

 

Gross profit decreased 14%to $39.4 million for the quarter ended December 31, 2001, from $45.6 millionfor the same period last year.  Grossprofit as a percentage of sales decreased to 25.6% during the quarter from26.6% for the same period last year. This decrease resulted from the pricing pressures and business slowdowndescribed above.

 

Selling expenses decreased6% to $16.6 million for the quarter ended December 31, 2001, from $17.6 millionfor the same period last year, primarily due to the decreased sales levels notedabove.  Selling expenses as a percentageof sales increased to 10.8% during the quarter, as compared to 10.3% in thesame period last year.  This percentageincrease is due to higher costs attributable to our pursuit of nationalaccounts, continued promotion of CGXmedia products and services and recruitment of additional salesprofessionals at our operating companies.

 

General and administrativeexpenses decreased to $13.5 million for the quarter ended December 31, 2001,from $13.7 million for the same period last year.  General and administrative expenses as a percentage of salesincreased to 8.8% during the quarter, as compared to 7.9% in the same periodlast year.  This percentage increasereflects the impact of the sales decline, while fixed and administrative costsnecessary to maintain our current level of operations remained constant.

 

Net interest expensedecreased to $3.3 million for the quarter ended December 31, 2001, from $5.1million for the same period last year, primarily due to lower borrowingsoutstanding and lower interest rates paid under our bank credit facilities.

 

Effective income tax ratesremained constant at 40% for the quarter ended December 31, 2001 as compared tothe same period last year.

 

**Nine Months Ended December 31, 2001Compared With Nine Months Ended December 31, 2000**

 

Sales decreased 8% to $478.3million for the nine months ended December 31, 2001, from $517.2 million forthe same period last year.  Thisdecrease reflects reduced print demand and significant pricing pressures due tothe weak economy.  We also exited aportion of our business at one operation and combined three under-performingoperations into nearby facilities during the quarter ended March 31, 2001.

 

Gross profit decreased 13%to $125.1 million for the nine months ended December 31, 2001, from $144.3million for the same period last year. Gross profit as a percentage of sales decreased to 26.1% during the ninemonths ended December 31, 2001, from 27.9% for the same period last year.   This decrease is primarily due to acombination of weak economic conditions discussed above and higher depreciationon our prior year investments in additional capital equipment.

 

Selling expenses decreased3% to $50.7 million for the nine months ended December 31, 2001, from $52.3million for the same period last year. Selling expenses as a percentage of sales increased to 10.6% for thenine months ended December 31, 2001, as compared to 10.1% in the same periodlast year, due primarily to higher costs attributable to our pursuit ofnational accounts and new business through CGXmedia.

 

General  and administrative  expenses  decreased slightly  to   $40.7 million  for   the nine  months  ended December 31, 2001,   from   $41.0  million   for   the  same  period  last year.   General   and administrative  expenses  as a  percentage  of sales  increased  to 8.5%   for  the nine   months  ended  December 31, 2001,  as  compared to 7.9% in the same period lastyear due to the impact of the sales decline noted above.  

 

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Net interest expensedecreased to $12.1 million for the nine months ended December 31, 2001, from$15.3 million for the same period last year, primarily due to lower borrowingsoutstanding and lower interest rates paid under our bank credit facilities.

 

Effective income tax ratesremained constant at 40% for the nine months ended December 31, 2001 ascompared to the corresponding period last year.

 

**Liquidityand Capital Resources**

 

At December 31, 2001, we hadcash and cash equivalents of $8.7 million, working capital of $72.0 million andtotal debt outstanding of $220.4 million. Our cash requirements are financed through internally generated fundsand, as necessary, borrowings under our bank credit facilities.  We generated cash flow from operations of$55.9 million for the nine months ended December 31, 2001.   During the nine months ended December 31,2001, we utilized cash for capital expenditures totaling $10.9 million andreduced the balance outstanding on our bank credit facilities and other debt by$45.5 million.

 

The Company has entered intovarious off-balance sheet financing agreements that consist entirely ofoperating lease commitments.  Thesenoncancelable leases are for facilities and equipment usage in the ordinarycourse of business.  As of December 31,2001, the Company’s lease commitments are comparable to those as disclosed inour annual report on Form 10-K for the fiscal year ended March 31, 2001.

 

**InvestingActivities**

 

Pursuant to earnoutagreements entered into in connection with certain acquisitions, we paid $1.9million during the nine months ended December 31, 2001, and, as of that date,we were contingently obligated at certain times and under certain circumstancesthrough fiscal 2005 to issue up to 81,039 shares of our common stock and tomake additional cash payments of up to $12.9 million for all periods in theaggregate.

 

In February 2002, wecompleted the acquisitions of American Lithographers, Inc. of Hayward andSacramento, California, and Carqueville Graphics of Steamwood, Illinois.  To complete these acquisitions, we paid cashof $9.0 million and issued debt totaling $5.5 million.

 

We intend to continuepursuing acquisition opportunities at prices we believe are reasonable basedupon market conditions and at returns relative to alternative opportunities toinvest our available capital.  There canbe no assurance that we will be able to acquire additional businesses at pricesand on terms acceptable to us in the future. In addition, there can be no assurances that we will be able toestablish, maintain or increase the profitability of any acquired business.

 

We expect to fund futureacquisitions through cash flow from operations, borrowings under our revolvingcredit facilities or the issuance of our common stock.  To the extent we seek to fund a significantportion of the consideration for future acquisitions with cash, we may seek toincrease the amount of our bank credit facilities or obtain alternative sourcesof financing, although there can be no assurance that we will be able to do so.

 

We also expect to continuemaking capital expenditures using cash flow from operations, supplemented asnecessary by borrowings under our bank credit facilities or the issuance of termnotes.

 

**FinancingActivities**

 

The Company entered into afive-year $225.0 million senior secured credit facility (the “Bank CreditFacility”) with eleven banks in December 2000. The Bank Credit Facility is composed of a $50.0 million five-year, termloan (the “Term Loan”), of which $37.5 million was outstanding at December 31,2001, and a $175.0 million five-year revolving credit line (the “RevolvingLine”), of which $104.0 million was outstanding at December 31, 2001.  The size of the Revolving Line may beincreased by $50.0 million at a later date by adding additional lenders.  The Term Loan requires quarterly payments of$2.5 million each through September 30, 2005.

 

Borrowings outstanding underthe Bank Credit Facility are secured by substantially all of our assets otherthan our real estate and certain equipment subject to term note obligations andother financing.  Borrowings under theBank Credit 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 acommitment fee on available but unused amounts ranging from .275% to .375%.  The interest rate margin and thecommitment fee are based upon our ratio of Funded Debt to Pro FormaConsolidated EBITDA, as defined, 

 

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redetermined quarterly.  At December 31, 2001, borrowings outstandingunder the Term Loan and the Revolving Line accrued interest at a weightedaverage rate of 4.20%.

 

The proceeds of the BankCredit Facility can be used to repay certain indebtedness, finance certain acquisitionsand provide for working capital and general corporate purposes.  Proceeds can also be used by the Company torepurchase its common stock, subject to a limit of $25.0 million and certainother restrictions.  Our Company issubject to certain covenants and restrictions and we must meet certainfinancial tests pursuant to and as defined in the Bank Credit Facility.

 

In addition, we entered intoan auxiliary revolving credit facility (the “Auxiliary Bank Facility”) with acommercial bank expiring in February 2003. This Auxiliary Bank Facility is unsecured and has a maximum borrowingcapacity of $5.0 million.  At December31, 2001, borrowings outstanding under the Auxiliary Bank Facility totaled $2.8million and accrued interest at 3.90%.

 

We also have agreements withtwo printing equipment manufacturers, pursuant to which we receive certainvolume purchase incentives and long-term financing options with respect to thepurchase of printing presses and other equipment.  Under these agreements, we were obligated on term notes totaling$65.2 million and subject to a weighted average interest rate of 7.76% as ofDecember 31, 2001.  The agreementsprovide for fixed monthly payments over periods of either five or ten years andare secured by the purchased equipment. Our Company is not subject to any significant financial covenants inconnection with any of these equipment notes; however, our Bank Credit Facilityplaces certain limitations on the amount of additional term note obligations wemay incur in the future.

 

**Recent Accounting Pronouncements**

 

Statement of FinancialAccounting Standards (“SFAS”) No. 141, Business Combinations, and SFAS No. 142,Goodwill and Other Intangible Assets, were issued in July 2001.  SFAS No. 141 primarily requires that allacquisitions initiated after June 30, 2001, be accounted for using the purchasemethod of accounting.  Management doesnot believe that the adoption of SFAS No. 141 will have a material impact onits consolidated financial statements. SFAS 142 primarily requires that companies discontinue amortizinggoodwill and perform annual impairment tests to determine if the remainingbalance of goodwill or other intangible assets should be reduced to theirestimated fair values.  At December 31,2001, our Company’s net goodwill was $199.9 million and amortization for thenine months ended December 31, 2001, totaled $4.0 million.  SFAS No. 141 also requires companies toseparately report more specifically identifiable intangible assets and SFAS No.142 requires the amortization of such intangible assets over their useful life,if determinable.  SFAS No. 142 iseffective for fiscal years beginning after December 15, 2001.  Our Company expects to adopt SFAS No. 142during its fiscal 2003 first quarter, which ends June 30, 2002.  Management is currently reviewing the impactof the adoption of SFAS No. 142 on its consolidated financial position andconsolidated results of operations.

 

SFAS No. 143, A*ccounting for Asset Retirement Obligations* and SFAS No. 144,*Accounting for the Impairment or Disposal ofLong-Lived Assets* were issued in August 2001.  SFAS 143 requires that a liability for anasset retirement obligation be recognized in the period in which it is incurredif a reasonable estimate of fair value can be made.  The associated asset retirement costs are capitalized as part ofthe carrying amount of the long-lived asset. SFAS 143 is effective for fiscal years beginning after June 15,2002.  SFAS No. 144 addresses thefinancial accounting and reporting for the impairment or disposal of long-livedassets and supersedes SFAS No. 121.* *SFAS 144 is effective for fiscalyears beginning after December 15, 2001, and interim periods within thosefiscal years.  Management does notbelieve that the adoption of SFAS Nos. 143 and 144 will have a material impacton its consolidated financial position or consolidated results of operations.

 

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**ITEM 3.*****  Quantitative and Qualitative DisclosureAbout Market Risk***

 

Marketrisk generally means the risk that losses may occur in the value of certainfinancial instruments as a result of movements in interest rates, foreigncurrency exchange rates and commodity prices. We do not hold or utilize derivative financial instruments, which couldexpose our Company to significant market risk. However, we are exposed to market risk for changes in interest ratesrelated primarily to our revolving credit facilities.  As of December 31, 2001, there were no material changes in ourmarket risk or the estimated fair value of our short-term and long-term debtobligations as reported in our Annual Report on Form   10-K for the fiscal yearended March 31, 2001.

 

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**CONSOLIDATEDGRAPHICS, INC.**

**PART II — OTHER INFORMATION**

 

**ITEM 1.  *LegalProceedings***

 

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 coverageagainst potential claims in an amount, which we believe to be adequate.  Currently, we are not aware of any legalproceedings or claims pending against our Company that management believes willhave a material adverse effect on our consolidated financial position orconsolidated results of operations.

 

**ITEM2.  *Changesin Securities and Use of Proceeds***

 

None.

 

**ITEM 3. *Defaultsupon Senior Securities***

 

None.

 

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

 

None.

 

**ITEM 5. * OtherInformation***

 

None.

 

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

 

***(a)           Exhibits:***

 

*3.1                          Restated Articles of Incorporation of the Company filed with theSecretary of State of the State of Texas on July 27, 1994

(ConsolidatedGraphics, 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 theCompany 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 (ConsolidatedGraphics, 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 (June30, 1999) 

SECFile No. 0-24068, Exhibit 3.4).

*3.5                          Amendments to the By-Laws of the Company on December 15, 1999(Consolidated Graphics, Inc. Form 8-K (December 15, 

1999)SEC File No. 0-24068, Exhibit 3.2).

*4.1                          Specimen Common Stock Certificate (Consolidated Graphics, Inc. Form 10-K(March 31, 1998) SEC File No. 0-24068, 

Exhibit4.1).

*4.2                          Rights Agreement dated as of December 15, 1999 between ConsolidatedGraphics, Inc. and American Stock Transfer and 

TrustCompany, as Rights Agent, which includes as Exhibit A the Certificate ofDesignations of Series A Preferred Stock, as

ExhibitB the form of Rights Certificate and as Exhibit C the form of summary of Rightsto Purchase Shares (Consolidated 

Graphics,Inc. Form 8-K (December 15, 1999) SEC File No. 0-24068, Exhibit 4.1).

 

* Incorporated by reference

 

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***(b)           Reports on Form 8-K:***

 

1)              Form 8-K, filed October 24,2001 in connection with the press release announcing the Company’s fiscal 2002second quarter results.

2)              Form 8-K, filed January 23,2002 in connection with the press release announcing the Company’s fiscal 2002third quarter results.

3)              Form 8-K, filed February 8,2002 in connection with the press releases announcing the acquisitions ofAmerican Lithographers, Inc. and Carqueville Graphics.

 

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**SIGNATURES**

 

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

 
|                           | **CONSOLIDATED GRAPHICS, INC.** |
|--------------------------------|---------------------------------|
|                           |                            |   |   |
| Dated:  February 14, 2002 | By:                             | /s/ |  Wayne M. Rose |
|                           |                            |   | Wayne  M. Rose |
|                           |                            |   | Executive  Vice President |
|                           |                            |   | Chief  Financial Officer and Secretary |

 

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