**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC20549**

** **

**FORM 10-Q**

 

**(Mark One)**

** **

**ý****            QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended June 30,2005**

 

**OR**

** **

**o****            TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from                to                **

 

**Commission File Number 001-12631**

 

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**CONSOLIDATED GRAPHICS, INC.**(Exact name of Registrantas 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) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen 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 SecuritiesExchange Act of 1934).

 

Yes ý   No o

 

The number of shares of Common Stock, par value $.01 per share, of theRegistrant outstanding at July 15, 2005 was 13,777,652.

 

 

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**CONSOLIDATED GRAPHICS, INC.**

 

##### **FORM 10-Q FORTHE QUARTERLY PERIOD ENDED JUNE 30, 2005**

##### ** **

**INDEX**

 
| Part I  — Financial Information |                                                                                                      |
|-------------------------------------------|-----------------------------------------------------------------------------------------------------------|
|                                      |                                                                                                      |   |   |
|                                      | Item 1 — Financial Statements                                                                        |   |
|                                      |                                                                                                      |   |   |
|                                      |                                                                                                      | Consolidated Balance Sheets at June 30, 2005 and March 31,  2005 |   |
|                                      |                                                                                                      |   |   |
|                                      |                                                                                                      | Consolidated Income Statements for the Three Months Ended  June 30, 2005 and 2004 |   |
|                                      |                                                                                                      |   |   |
|                                      |                                                                                                      | Consolidated Statements of Cash Flows for the Three Months Ended  June 30, 2005 and 2004 |   |
|                                      |                                                                                                      |   |   |
|                                      |                                                                                                      | Notes to Consolidated Financial Statements |   |
|                                      |                                                                                                      |   |   |
|                                      | Item 2 — Management’s Discussion and Analysis of Financial Condition  and Results of Operations |   |
|                                      |                                                                                                      |   |   |
|                                      | Item  3 — Quantitative and Qualitative Disclosure About Market Risk                                  |   |
|                                      |                                                                                                      |   |   |
|                                      | Item 4  — Controls and Procedures                                                                    |   |
|                                      |                                                                                                      |   |   |
| Part II  — Other Information    |                                                                                                      |
|                                      |                                                                                                      |   |   |
|                                      | Item 1 —  Legal Proceedings                                                                          |   |
|                                      |                                                                                                      |   |   |
|                                      | Item  2 — Unregistered Sales of Equity Securities and Use of Proceeds                                |   |
|                                      |                                                                                                      |   |   |
|                                      | Item 3 — Defaults upon Senior Securities                                                             |   |
|                                      |                                                                                                      |   |   |
|                                      | Item 4 — Submission of Matters to a Vote of  Security Holders                                        |   |
|                                      |                                                                                                      |   |   |
|                                      | Item 5 — Other Information                                                                           |   |
|                                      |                                                                                                      |   |   |
|                                      | Item 6 — Exhibits                                                                                    |   |
|                                      |                                                                                                      |   |   |
| Signatures                                |                                                                                                      |
|                                      |                                                                                                      |   |   |
| Exhibit Index                        |                                                                                                      |

 

2

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**PART I – FINANCIAL INFORMATION**

 

**ITEM 1. *Financial Statements***

 

**CONSOLIDATED GRAPHICS, INC.**

**CONSOLIDATED BALANCE SHEETS**

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

 
| ** **                                                                                                      | ** ** | **June 30,   2005** | ** ** | **March 31,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                                                                                                      | ** ** | **(Unaudited)**          | ** ** | **(Audited)**            | ** ** |
| ASSETS                                                                                                          | ** ** | ** **               | ** ** | ** **               | ** ** |
|                                                                                                            |       |                     |       |                     |       |
| CURRENT ASSETS                                                                                                  |       |                     |       |                     |       |
| Cash and cash equivalents                                                                                       |       | $                        | 8,454      |                     | $          | 7,752 |   |
| Accounts receivable, net                                                                                        |       | 130,939                  |       | 136,824                  |       |
| Inventories                                                                                                     |       | 38,883                   |       | 37,149                   |       |
| Prepaid expenses                                                                                                |       | 5,619                    |       | 5,913                    |       |
| Deferred income taxes                                                                                           |       | 8,601                    |       | 7,843                    |       |
| Total current assets                                                                                            |       | 192,496                  |       | 195,481                  |       |
| PROPERTY AND EQUIPMENT, net                                                                                     |       | 292,435                  |       | 297,600                  |       |
| GOODWILL, net                                                                                                   |       | 79,690                   |       | 85,755                   |       |
| OTHER ASSETS                                                                                                    |       | 16,664                   |       | 11,393                   |       |
|                                                                                                            |       | $                        | 581,285    |                     | $          | 590,229 |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                       |       |                     |       |                     |       |
|                                                                                                            |       |                     |       |                     |       |
| CURRENT LIABILITIES                                                                                             |       |                     |       |                     |       |
| Current portion of long-term  debt                                                                              |       | $                        | 7,562      |                     | $          | 7,595 |   |
| Accounts payable                                                                                                |       | 43,796                   |       | 46,705                   |       |
| Accrued liabilities                                                                                             |       | 69,351                   |       | 75,143                   |       |
| Income taxes payable                                                                                            |       | 5,172                    |       | 1,813                    |       |
| Total current liabilities                                                                                       |       | 125,881                  |       | 131,256                  |       |
| LONG-TERM DEBT, net of current  portion                                                                         |       | 99,678                   |       | 111,895                  |       |
| DEFERRED INCOME TAXES                                                                                           |       | 63,160                   |       | 63,746                   |       |
| COMMITMENTS AND CONTINGENCIES                                                                                   |       |                     |       |                     |       |
| SHAREHOLDERS’ EQUITY                                                                                       |       |                     |       |                     |       |
| Common stock, $.01 par value;  100,000,000 shares authorized; 13,777,228 and 13,760,042 issued and  outstanding |       | 138                      |       | 138                      |       |
| Additional paid-in capital                                                                                      |       | 169,410                  |       | 168,905                  |       |
| Retained earnings                                                                                               |       | 123,018                  |       | 114,289                  |       |
| Total shareholders’ equity                                                                                 |       | 292,566                  |       | 283,332                  |       |
|                                                                                                            |       | $                        | 581,285    |                     | $          | 590,229 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

3

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**CONSOLIDATED GRAPHICS, INC.**

##### **CONSOLIDATED INCOME STATEMENTS**

**(In thousands, except per sharedata)**

**(Unaudited)**

 
| ** **                                 | ** ** | **Three Months Ended   June 30** | ** ** |
|--------------------------------------------|------------|---------------------------------------|------------|
| ** **                                 | ** ** | **2005**                              | ** ** | **2004** | ** ** |
|                                       |       |                                  |       |   |   |
| SALES                                      |       | $                                     | 209,915    |   | $ | 181,529 |   |
|                                       |       |                                  |       |   |   |
| COST OF SALES                              |       | 158,112                               |       | 136,657 |   |
|                                       |       |                                  |       |   |   |
| Gross profit                               |       | 51,803                                |       | 44,872 |   |
|                                       |       |                                  |       |   |   |
| SELLING EXPENSES                           |       | 22,030                                |       | 19,521 |   |
|                                       |       |                                  |       |   |   |
| GENERAL AND ADMINISTRATIVE  EXPENSES       |       | 14,359                                |       | 12,848 |   |
|                                       |       |                                  |       |   |   |
| Operating income                           |       | 15,414                                |       | 12,503 |   |
|                                       |       |                                  |       |   |   |
| INTEREST EXPENSE, net                      |       | 1,364                                 |       | 1,407 |   |
|                                       |       |                                  |       |   |   |
| Income before taxes                        |       | 14,050                                |       | 11,096 |   |
|                                       |       |                                  |       |   |   |
| INCOME TAXES                               |       | 5,321                                 |       | 4,272 |   |
|                                       |       |                                  |       |   |   |
| Net income                                 |       | $                                     | 8,729      |   | $ | 6,824 |   |
|                                       |       |                                  |       |   |   |
| BASIC EARNINGS PER SHARE                   |       | $                                     | .63        |   | $ | .50 |   |
| DILUTED EARNINGS PER SHARE                 |       | $                                     | .61        |   | $ | .48 |   |
|                                       |       |                                  |       |   |   |
| SHARES USED TO COMPUTE EARNINGS  PER SHARE |       |                                  |       |   |   |
|                                       |       |                                  |       |   |   |
| Basic                                      |       | 13,767                                |       | 13,584 |   |
| Diluted                                    |       | 14,273                                |       | 14,230 |   |

 

See accompanying notes toconsolidated financial statements.

 

4

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**CONSOLIDATED GRAPHICS, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(In thousands)**

**(Unaudited)**

 
| ** **                                                                                | ** ** | **Three Months Ended  June 30** | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                | ** ** | **2005**                             | ** ** | **2004** | ** ** |
|                                                                                      |       |                                 |       |   |   |
| OPERATING ACTIVITIES                                                                      |       |                                 |       |   |   |
| Net income                                                                                |       | $                                    | 8,729      |   | $ | 6,824 |   |
| Adjustments to reconcile net  income to net cash provided  by  operating activities: |       |                                 |       |   |   |
| Depreciation and amortization                                                             |       | 10,442                               |       | 9,362 |   |
| Deferred income tax provision                                                             |       | (756                                 | )          | 1,627 |   |
| Changes in assets and  liabilities, net of effects of acquisitions:                       |       |                                 |       |   |   |
| Accounts receivable, net                                                                  |       | 5,885                                |       | 2,070 |   |
| Inventories                                                                               |       | (1,734                               | )          | (1,837 | ) |
| Prepaid expenses                                                                          |       | 294                                  |       | (354 | ) |
| Other assets                                                                              |       | (33                                  | )          | (818 | ) |
| Accounts payable and accrued  liabilities                                                 |       | (10,209                              | )          | (9,641 | ) |
| Income taxes payable                                                                      |       | 3,531                                |       | 746 |   |
| Net cash provided by operating  activities                                                |       | 16,149                               |       | 7,979 |   |
|                                                                                      |       |                                 |       |   |   |
| INVESTING ACTIVITIES                                                                      |       |                                 |       |   |   |
| Acquisitions of businesses, net  of cash acquired                                         |       | (465                                 | )          | (1,812 | ) |
| Purchases of property and  equipment                                                      |       | (3,877                               | )          | (1,643 | ) |
| Proceeds from asset  dispositions                                                         |       | 812                                  |       | 233 |   |
| Net cash used in investing  activities                                                    |       | (3,530                               | )          | (3,222 | ) |
|                                                                                      |       |                                 |       |   |   |
| FINANCING ACTIVITIES                                                                      |       |                                 |       |   |   |
| Proceeds from bank credit  facilities                                                     |       | 12,633                               |       | 5,076 |   |
| Payments on bank credit  facilities                                                       |       | (23,400                              | )          | (9,254 | ) |
| Payments on term equipment  notes and other debt                                          |       | (1,483                               | )          | (3,083 | ) |
| Proceeds from exercise of stock  options                                                  |       | 333                                  |       | 421 |   |
| Net cash used in financing  activities                                                    |       | (11,917                              | )          | (6,840 | ) |
|                                                                                      |       |                                 |       |   |   |
| NET INCREASE (DECREASE) IN CASH  AND CASH EQUIVALENTS                                     |       | 702                                  |       | (2,083 | ) |
| CASH AND CASH EQUIVALENTS AT BEGINNING  OF PERIOD                                         |       | 7,752                                |       | 10,472 |   |
| CASH AND CASH EQUIVALENTS AT  END OF PERIOD                                               |       | $                                    | 8,454      |   | $ | 8,389 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

5

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**CONSOLIDATED GRAPHICS, INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(In thousands, except per sharedata and percentages)**

**(Unaudited)**

 

**1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES**

 

The accompanying unaudited consolidatedfinancial statements include the accounts of Consolidated Graphics, Inc.and subsidiaries (collectively, 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 interimfinancial information.  Accordingly, theydo not include all of the information and footnotes required by generallyaccepted accounting principles for complete financial statements.  In the opinion of management, all adjustments(consisting of normal recurring accruals) considered necessary for a fairpresentation of the accompanying unaudited consolidated financial statementshave been included.  Operating resultsfor the three months ended June 30, 2005 are not necessarily indicative offuture operating results. Balance sheet information as of March 31, 2005has been derived from the 2005 annual audited consolidated financial statementsof the Company. For further information, refer to the consolidated financialstatements and footnotes thereto included in the Company’s AnnualReport on Form 10-K for the fiscal year ended March 31, 2005, filedwith the Securities and Exchange Commission in June 2005.

 

*Use of Estimates*—Thepreparation of financial statements in conformity with generally acceptedaccounting principles requires the use of certain estimates and assumptions bymanagement in determining the reported amounts of assets and liabilities,disclosure of contingent liabilities as of the date of the financial statementsand the reported amounts of revenues and expenses during the reporting period,including depreciation of property and equipment and amortization of intangibleassets other than goodwill. The Company evaluates its estimates and assumptionson an ongoing basis and relies on historical experience and various otherfactors that it believes to be reasonable under the circumstances to determinesuch estimates. Because uncertainties with respect to estimates and assumptionsare inherent in the preparation of financial statements, actual results coulddiffer from these estimates.

 

*Reclassification* –Certain reclassifications of prior period’s data have been made to conform tothe current period reporting.

 

*Revenue Recognition –*The Company recognizes revenue upon deliveryof each job, except for “bill and hold transactions,” in which case suchrevenue is recognized when all of the service delivery criteria are fully metas per Staff Accounting Bulletin 104 issued by the Securities and ExchangeCommission. Losses, if any, on jobs are recognized at the earliest date suchamount is determinable.

 

*Inventories*—Inventoriesare valued at the lower of cost or market utilizing the first-in, first-outmethod for raw materials and the specific identification method for work inprogress and finished goods. The carrying values of inventories are set forthbelow:

 
| ** **       | ** ** | **June 30,** | ** ** | **March 31,** | ** ** |
|------------------|------------|-------------------|------------|--------------------|------------|
| ** **       | ** ** | **2005**          | ** ** | **2005**           | ** ** |
|             |       |              |       |               |       |
| Raw materials    |       | $                 | 11,826     |               | $          | 11,863 |   |
| Work in progress |       | 22,728            |       | 21,518             |       |
| Finished goods   |       | 4,329             |       | 3,768              |       |
|             |       | $                 | 38,883     |               | $          | 37,149 |   |

 

*Earnings Per Share*– 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.

 

*Supplemental Cash Flow Information*–The consolidated statements of cash flows provide information about the Company’ssources and uses of cash and exclude the effects of non-cash transactions. Forthe three months ended June 30, 2005, the Company paid cash for interestand income taxes, net of refunds, totaling $1,133 and $2,264. For the threemonths ended June 30, 2004, the Company paid cash for interest and incometaxes, net of refunds, totaling $1,399 and $1,615.

 

6

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*Stock-Based Compensation*–The Company’s only element of stock-based compensation is derived pursuant tothe Consolidated Graphics, Inc. Long-Term Incentive Plan (the “Plan”),which has been approved by the Company’s shareholders.  Under the Plan, employees of the Company andmembers of the Company’s Board of Directors have been, or may be, grantedoptions to purchase shares of the Company’s common stock at a price not lessthan the market price of the stock at the date of grant. The Company accountsfor its stock-based compensation programs using the intrinsic value method ofaccounting established by Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees*and related interpretations. Accordingly,no compensation expense is recognized when the exercise price of an employeestock option is equal to the market price of common stock on the grant date andall other provisions are fixed.

 

Pro forma informationregarding net income and net income per share is required by the Statement ofFinancial Accounting Standards (“SFAS”) No. 123, *Accountingfor Stock-Based Compensation*. The pro forma information has beendetermined as if the Company had accounted for its stock options under the fairvalue method. The following is a summary of the Company’s net income and earningsper share as reported and pro forma as if the fair value-based method ofaccounting defined in SFAS No. 123 had been applied. For purposes ofpro forma disclosures, the estimated fair value of the options is amortized toexpense over the options’ vesting period. The pro forma effects of applyingSFAS No. 123 may not be representative of the effects on reported netincome for future years since options vest over several years and additionalawards are made each year.

 

Had the Company used the fair value-based method of accounting for thePlan prescribed by SFAS No. 123 and charged compensation expense againstincome over the vesting period based on the fair value of options at the dateof grant, net income and earnings per share as reported would have been reducedto the following pro forma amounts:

 
| ** **                            | ** ** | **Three Months Ended   June 30** | ** ** |
|---------------------------------------|------------|---------------------------------------|------------|
| ** **                            | ** ** | **2005**                              | ** ** | **2004** | ** ** |
|                                  |       |                                  |       |   |   |
| Net income as reported                |       | $                                     | 8,729      |   | $ | 6,824 |   |
| Less: Pro forma compensation  expense |       | (549                                  | )          | (290 | ) |
| Pro forma net income                  |       | $                                     | 8,180      |   | $ | 6,534 |   |
|                                  |       |                                  |       |   |   |
| **Basic Earnings Per Share:**         |       |                                  |       |   |   |
| Net income as reported                |       | $                                     | .63        |   | $ | .50 |   |
| Less: Pro forma compensation  expense |       | (.04                                  | )          | (.02 | ) |
| Pro forma net income                  |       | $                                     | .59        |   | $ | .48 |   |
|                                  |       |                                  |       |   |   |
| **Diluted Earnings Per Share:**       |       |                                  |       |   |   |
| Net income as reported                |       | $                                     | .61        |   | $ | .48 |   |
| Less: Pro forma compensation  expense |       | (.04                                  | )          | (.02 | ) |
| Pro forma net income                  |       | $                                     | .57        |   | $ | .46 |   |

 

**2. ACQUISITIONS**

 

During the three months ended June 30, 2005, theCompany paid cash totaling $465 to acquire the operations and assets of onebusiness, which was immediately merged into another existing operation of theCompany.  In connection with theafore-mentioned acquisition and certain of the Company’s fiscal 2005acquisitions, the Company is awaiting additional information concerning certainasset and liability valuations for purposes of finalizing the allocation of thepurchase price.  Based on certainadditional information received regarding the fiscal 2005 acquisitions, anallocation of an additional $6,000 was made to intangible assets other thangoodwill in the quarter ended June 30, 2005, which amount is reflected inOther Assets in the accompanying consolidated balance sheet as of such date.

 

7

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**3. LONG-TERM DEBT**

 

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

 
| ** **             | ** ** | **June 30,  2005** | ** ** | **March 31,   2005** | ** ** |
|------------------------|------------|-------------------------|------------|---------------------------|------------|
| Bank credit facilities |       | $                       | 59,428     |                      | $          | 70,195 |   |
| Term equipment notes   |       | 30,970                  |       | 32,295                    |       |
| Other                  |       | 16,842                  |       | 17,000                    |       |
|                   |       | 107,240                 |       | 119,490                   |       |
| Less: current portion  |       | (7,562                  | )          | (7,595                    | )          |
|                   |       | $                       | 99,678     |                      | $          | 111,895 |   |

 

The Company’s primary bank credit facility (as amended and restated,the “Credit Agreement”) is composed of a $150,000 revolving credit facilitythat will mature in July 2007. At June 30, 2005, outstandingborrowings under the Credit Agreement were $50,500 and accrued interest at aweighted average rate of 5.18%.

 

The proceeds from borrowings under the Credit Agreement can be used torepay certain indebtedness, finance certain acquisitions, provide for workingcapital and general corporate purposes and, subject to certain restrictions,repurchase the Company’s common stock. Borrowings outstanding under the CreditAgreement are secured by substantially all of the Company’s assets other thanreal estate and certain equipment subject to term equipment notes and otherfinancings. Borrowings under the Credit Agreement accrue interest, at theCompany’s option, at either (1) the London Interbank Offered Rate (“LIBOR”)plus a margin of 1.25% to 2.00%, or (2) an alternate base rate (based uponthe greater of the agent bank’s prime lending rate or the Federal Fundseffective rate plus .50%) plus a margin of up to .75%. The Company is alsorequired to pay an annual commitment fee ranging from .275% to .375% onavailable but unused amounts under the Credit Agreement. The interest ratemargin and the commitment fee are based upon certain financial performancemeasures as set forth in the Credit Agreement and are redetermined quarterly.At June 30, 2005, the applicable LIBOR interest rate margin was 1.25% andthe applicable commitment fee was .275%.

 

The Company is subject to certain covenants and restrictions and mustmeet certain financial tests under the Credit Agreement. The Company was incompliance with such covenants, restrictions and financial tests at June 30,2005.

 

In addition to the Credit Agreement, the Company maintains twoauxiliary revolving credit facilities (each an “Auxiliary Bank Facility” and collectivelythe “Auxiliary Bank Facilities”) with commercial banks. Each Auxiliary BankFacility is unsecured and has a maximum borrowing capacity of $5,000. Onefacility expires in November 2005 while the other facility expires in November 2006.At June 30, 2005, borrowings outstanding under the Auxiliary BankFacilities totaled $8,928 and accrued interest at a weighted average rate of 4.68%.Because the Company currently has the ability to refinance borrowingsoutstanding under the Auxiliary Bank Facility expiring in November 2005and plans to do so, such borrowings are classified as long-term debt in theaccompanying consolidated balance sheet at June 30, 2005. The AuxiliaryBank Facilities cross-default to the covenants and restrictions set forth inthe Credit Agreement.

 

The Company’s term equipment notes consist primarily of notes payablepursuant to financing agreements between the Company and various lenders (the “LenderNotes”) and between the Company and the finance affiliate of a printingequipment manufacturer (the “Equipment Notes”). At June 30, 2005,outstanding borrowings under the Lender Notes totaled $16,341 and accruedinterest at a weighted average rate of 4.74%. The Lender Notes provide forfixed monthly principal payments plus interest (at fixed rates) for definedperiods of up to seven years from the date of issuance, and are secured bycertain equipment of the Company. At June 30, 2005, outstanding borrowingsunder the Equipment Notes totaled $13,001 and accrued interest at a weighted averagerate of 5.93%. The Equipment Notes provide for fixed payments of principal andinterest (at fixed rates) for defined periods of up to ten years from the dateof issuance and are secured by the equipment which was concurrently purchasedfrom the manufacturer. At June 30, 2005, the remaining balance of termequipment notes totaling $1,628 primarily consists of various secured debtobligations assumed by the Company in connection with certain prior yearacquisitions. The Company is not subject to any significant financial covenantsin connection with any of the term equipment notes; however, the CreditAgreement places certain limitations on the amount of additional term noteobligations the Company may incur in the future.

 

The Company’s remaining debt obligations consist of a mortgage totaling$4,932, a promissory note totaling $2,663, industrial revenue bonds totaling$8,085 and various other debt totaling $1,162. The Company does not have anysignificant financial covenants or restrictions associated with these otherdebt obligations.

 

8

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**ITEM 2.  Management’s Discussionand Analysis of Financial Condition and Results of Operations**

 

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

 

*The following discussion of thefinancial condition and performance of our Company should be read inconjunction with the consolidated financial statements included herein and theconsolidated financial statements and related notes and other detailedinformation regarding our Company included in our Annual Report on Form 10-Kfor the fiscal year ended March 31, 2005 and other reports filed by uswith the Securities and Exchange Commission. Operating results for the threemonths ended June 30, 2005 are not necessarily indicative of the resultsto be expected for the entire fiscal year ending March 31, 2006 or anyperiods thereafter.*

 

**Overview**

** **

*Our Organization*

* *

Our Company is a leadingnational provider of commercial printing services and is recognized as the largest sheetfed and half-webcommercial printing company in the United States.  We currently operate 70printing businesses in 25 states, with each business operated as a wholly-ownedsubsidiary. Each ofour printing businesses has a well-established operating history, more than25 years in most cases, and operates as a separatebusiness and reporting unit, with their own management, sales, customerservice, estimating and planning, prepress, production and accounting staff. Generally,each facility substantially relies on locally based customers; accordingly, wehave a broad diversification of customers by industry-type and geographicorientation, totaling more than 19,000. No individual facility nor anyindividual customer account for more than 10% of our revenues.

 

Our corporate headquartersstaff provides support to our printing businesses in such areas as humanresources, purchasing and management information systems. We also maintaincentralized treasury, risk management, tax and consolidated financial reportingactivities.

 

*Natureof Our Services*

 

Weare a service business that utilizes sophisticated technology and equipment toproduce and deliver high quality printed documents, materials and products forour customers to their specification and design, including all content. Thescope and extent of services provided to our customers typically varies foreach individual order we receive, depending on customer-specific factorsincluding the intended uses for the printed materials. Furthermore, each of ourprinting businesses generally is capable of providing the complete range of ourservices to their customers which include fulfillment, mailing or other print-related services. They may also useour Internet-based e-commerce solutions, marketed under the “CGX Solutions”trademark which are complementary to the production and delivery of the printedmaterials. Collectively, all of these discrete capabilities comprise a “comprehensiverange of printing services” for which we typically charge an “all-inclusive”fee.  Accordingly, for financialreporting purposes, we report our revenues and results of operations as asingle segment.

 

9

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Our sales are derived from commercial printing services. These servicesconsist of (i) traditional print services, including electronic prepress,printing, finishing, storage and delivery of high-quality printed documentswhich are custom manufactured to our customers’ design specifications; (ii) fulfillmentand mailing services for such printed materials, and (iii) e-commercesolutions that enable our customers to improve their processes over theprocurement and management of printed materials. Examples of the types ofdocuments we print for our customers include high-quality, multicolor marketingmaterials, product and capability brochures, point-of-purchase displays, directmail pieces, shareholder communications, catalogs, and training manuals. 

 

The substantial majority of our sales are generated by individualorders through commissioned sales personnel. We recognize revenue from theseorders when we deliver the ordered goods and services. To a large extent,continued engagement of our Company by our customers for successive businessopportunities depends upon the customers’ satisfaction with the quality ofservices we provide. As such, it is difficult for us to predict the number,size, and profitability of printing services that we expect to provide for morethan a few weeks in advance.

 

Our cost of sales mainly consists of raw materials consumed in theprinting process, as well as labor and outside services, such as deliverycosts. Paper cost is the most significant component of our materials cost;however, fluctuation in paper pricing generally does not materially impact ouroperating margins because we typically quote, and subsequently purchase, paperfor each specific printing job we are awarded. As a result, any changes inpaper pricing are effectively passed through to customers by our printingbusinesses. Additionally, our cost of sales includes salary and benefits paidto operating personnel, maintenance, repair, rental and insurance costsassociated with operating our facilities and equipment and depreciationcharges. 

 

Our selling expenses generally include the compensation paid to oursales professionals, along with promotional, travel and entertainment costs.Our general and administrative expenses generally include the salary andbenefits paid to support personnel at our printing businesses and our corporatestaff, as well as office rent, utilities and communications expenses, andvarious professional services. 

 

*Our Strategy*

 

Weare focused on adding value to our printing businesses by providing thefinancial and operational strengths, management support and technologicaladvantages associated with a national organization. Our strategy currentlyincludes the following initiatives to generate sales and profit growth:

 

•              *Internal Sales Growth—*We seek to use our competitive advantages toexpand market share. We continue to pursue additional experienced salesprofessionals, invest in new equipment and technology, expand our national accountsprogram and develop new and expanded print-related services.

 

•              *Disciplined AcquisitionProgram—*We selectivelypursue opportunities to acquire additional printing businesses at reasonableprices. Some of these acquisitions may include smaller and/or distressedprinting businesses for merger into one of our existing businesses.

 

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

 

•              *Best Practices/Benchmarking—*We provide a forum for our printingbusinesses to share their knowledge of technical processes and best practiceswith one another, as well as benchmark financial and operational data to help our printing businesses identifyand respond to changes in operating trends.

 

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

 

10

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**Results of Operations**

** **

The following table sets forth our Company’sunaudited condensed consolidated income statements and certain percentagerelationships for the periods indicated:

 
| ** **                           | ** ** | ** **                            | ** ** | ** **                            | ** ** | **As a Percentage   of Sales** | ** ** |
|--------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|--------------------------------|------------|
| ** **                           | ** ** | **Three Months   Ended June 30** | ** ** | **Three Months   Ended June 30** | ** ** |
| ** **                           | ** ** | **2005**                              | ** ** | **2004**                              | ** ** | **2005**                       | ** ** | **2004** | ** ** |
| ** **                           | ** ** | **(In millions)**                     | ** ** | ** **                            | ** ** | ** **                     | ** ** |
| Sales                                |       | $                                     | 209.9      |                                  | $          | 181.5                          |       | 100.0 | % | 100.0 | % |
| Cost of sales                        |       | 158.1                                 |       | 136.6                                 |       | 75.3                           |       | 75.3 |   |
| Gross profit                         |       | 51.8                                  |       | 44.9                                  |       | 24.7                           |       | 24.7 |   |
| Selling expenses                     |       | 22.0                                  |       | 19.5                                  |       | 10.5                           |       | 10.8 |   |
| General and administrative  expenses |       | 14.4                                  |       | 12.9                                  |       | 6.9                            |       | 7.0 |   |
| Operating income                     |       | 15.4                                  |       | 12.5                                  |       | 7.3                            |       | 6.9 |   |
| Interest expense, net                |       | 1.4                                   |       | 1.4                                   |       | 0.6                            |       | 0.8 |   |
| Income before taxes                  |       | 14.0                                  |       | 11.1                                  |       | 6.7                            |       | 6.1 |   |
| Income taxes                         |       | 5.3                                   |       | 4.3                                   |       | 2.5                            |       | 2.4 |   |
| Net income                           |       | $                                     | 8.7        |                                  | $          | 6.8                            |       | 4.2 | % | 3.7 | % |

 

Oursales and expenses during the periods shown were impacted by the acquisition ofeight printing businesses in fiscal 2005. Because each acquisition wasaccounted for using the purchase method of accounting, our consolidated incomestatements reflect sales and expenses of acquired businesses only forpost-acquisition periods. Accordingly, acquisitions affect our financialresults in any current year period compared to the prior year period by (i) thefull-period impact of prior year acquisitions (as compared to the partial periodimpact in the prior year) and (ii) the partial-period impact of currentyear acquisitions, and is referred to below as “incremental impact ofacquisitions.”

 

# ***ComparativeAnalysis of Consolidated Income Statements for the Three Months Ended June 30,2005 and 2004***

# ** **

Sales for the quarter ended June 30, 2005 increased $28.4 millionor 16% to $209.9 million from $181.5 million in the same period a year ago, allof which increase is attributable to the incremental impact of acquisitions. Internalsales growth was negligible for the quarter, as a $4.2 million, or 38%,increase in national sales was offset by generally lower sales at several ofour locations. As a whole, national sales accounted for 7% of revenue in thefirst quarter of 2005, up from 6% in the prior year. In our opinion, based ongeneral and anecdotal information available to us, the offsetting decline inother sales is attributable to variability in economic and industry conditions.

 

For the quarter ended June 30, 2005, gross profit margin remainedconstant at 24.7% as compared to the same period last year and, coupled withour overall sales increase, resulted in a $6.9 million increase in gross profitfor the quarter. 

 

Selling expenses for the quarter ended June 30,2005 increased $2.5 million or 13% from $19.5 million for the same period ayear ago. The increase is directly attributable to the increased sales levelsnoted above. As a percentage of sales, selling expenses decreased slightly to10.5% as compared to 10.8% for the same period last year.

 

General and administrative expenses for thequarter ended June 30, 2005 increased $1.5 million or 12% from $12.9million in the same period a year ago, due principally to the incremental impactof acquisitions.  Our continuing effortsto control costs further, together with the relatively fixed nature ofcorporate overhead, enabled us to gain additional leverage on our sales,resulting in a decrease in our general and administrative expenses as apercentage of sales to 6.9% as compared to 7.0% for the same period lastyear.  

 

Interest expense for the quarter ended June 30, 2005 remainedrelatively constant at $1.4 million from the same period last year, asyear-over-year debt levels were generally comparable. 

 

We provided for income taxes for the quarter ended June 30, 2005of $5.3 million, reflecting an effective tax rate of 37.9% as compared to aslightly higher effective tax rate of 38.5% for the same period last year.

 

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**Liquidity and Capital Resources**

 

*Sources and Uses of Cash*

 

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

 
| ** **                                                     | ** ** | **Three Months Ended   June 30** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                     | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| ** **                                                     | ** ** | **(In millions)**                     | ** ** |
| Net cash provided by operating activities                      |       | $                                     | 16.1       |   | $ | 8.0 |   |
| Acquisitions of businesses                                     |       | (.5                                   | )          | (1.8 | ) |
| Capital expenditures, net of proceeds from  asset dispositions |       | (3.1                                  | )          | (1.4 | ) |
| Net payments under bank credit facilities                      |       | (10.8                                 | )          | (4.2 | ) |
| Net payments on term equipment notes and  other debt           |       | (1.5                                  | )          | (3.1 | ) |
|                                                                |            |                                       |            |  |  |  |  |

 

Additionally, ourcash position, working capital and debt obligations are shown below and shouldbe read in conjunction with our consolidated balance sheets and notes theretoincluded in *Item 1**.**FinancialStatements:*

 
| ** **                                               | ** ** | **June 30,****2005** | ** ** | **March 31,   2005** | ** ** |
|----------------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                                               | ** ** | **(In millions)**         | ** ** |
| Cash and cash equivalents                                |       | $                         | 8.5        |                      | $          | 7.8 |   |
| Working capital, inclusive of cash and cash  equivalents |       | 66.6                      |       | 64.2                      |       |
| Total debt obligations                                   |       | 107.2                     |       | 119.5                     |       |
|                                                          |            |                           |            |                           |            |  |  |

 

During the threemonths ended June 30, 2005, net cash provided by operating activitiesincreased by $8.2 as compared to the same period last year.  This $8.2 million increase was the result of variancein relative working capital changes in each period, primarily accountsreceivable and income taxes payable.  Aswith prior periods, we have continued our strategy to further strengthen ourfinancial position by primarily using available cash flow to make payments onoutstanding debt obligations.

 

We believe thatour cash flow provided by operations will be adequate to cover our fiscal 2006working capital needs, debt service requirements and planned capitalexpenditures to the extent such items are known or are reasonably determinablebased on current business and market conditions. However, we may elect tofinance certain of our capital expenditure requirements through borrowingsunder our bank credit facilities or the issuance 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 acquisition efforts or our associated potential capitalcommitments. There can be no assurance that we will be able to acquireadditional printing businesses on terms acceptable to us.

 

We expect to fundfuture acquisitions through cash flow provided by operations, additionalborrowings or the issuance of our common stock. The extent to which we will bewilling or able to use our common stock to make acquisitions will depend on itsmarket value from time to time and the willingness of potential sellers toaccept it as full or partial payment for the acquisition price.

 

In May 2004, our Board of Directors approved a common stock sharerepurchase program, providing for the repurchase of up to one million shares ofour stock, not to exceed $40.0 million in the aggregate, in open-market orblock purchase transactions through March 31, 2006. We expect to fund anyrepurchases under the program through cash flow provided by operations oradditional borrowings under our primarybank credit facility. The amount and timing of any purchases will depend upon anumber of factors, including the Company’s liquidity and potential alternativeuses of our capital resources, the price and availability of our shares,general market conditions and certain repurchase restrictions in our primarybank credit facility, which 

 

12

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limit us to repurchases not to exceed $75.0million in the aggregate. As of June 30, 2005, we have not repurchased anyshares of stock under this program. There can be no assurance that we willdetermine to repurchase any of our common stock, and if so, whether we will beable to do so on terms acceptable to us.

 

*Debt Obligations*

* *

Our primary bank credit facility (as amended and restated, the “CreditAgreement,”) is composed of a $150.0 million revolving credit facilitythat will mature in July 2007. At June 30, 2005, borrowingsoutstanding under the Credit Agreement were $50.5 million and accruedinterest at a weighted average rate of 5.18%.

 

The proceeds from borrowings under the Credit Agreement can be used torepay certain indebtedness, finance certain acquisitions, provide for workingcapital and general corporate purposes and, subject to certain restrictions,repurchase our common stock. Borrowings outstanding under the Credit Agreementare secured by substantially all of our assets other than real estate andcertain equipment subject to term equipment notes and other financings.Borrowings under the Credit Agreement accrue interest, at our option, at either(1) the London Interbank Offered Rate (LIBOR) plus a margin of 1.25% to2.00%, or (2) an alternate base rate (based upon the greater of the agentbank’s prime lending rate or the Federal Funds effective rate plus .50%) plus amargin of up to .75%. We are also required to pay an annual commitment feeranging from .275% to .375% on available but unused amounts under the CreditAgreement. The interest rate margin and the commitment fee are based uponcertain financial performance measures as set forth in the Credit Agreement andare redetermined quarterly. At June 30, 2005, the applicable LIBORinterest rate margin was 1.25% and the applicable commitment fee was .275%.

 

We are subject to certain covenants and restrictions and we must meetcertain financial tests as defined in the Credit Agreement. We were incompliance with these covenants and financial tests at June 30, 2005. Inthe event that we are unable to remain in compliance with these covenants andfinancial tests in the future, our lenders would have the right to declare usin default with respect to such obligations, and consequently, certain of ourother debt obligations, including substantially all of our term equipmentnotes, would be deemed to also be in default. All debt obligations in defaultwould be required to be re-classified as a current liability. In the event thatwe were to be unable to obtain a waiver, re-negotiate or re-finance theseobligations, a material adverse effect on our ability to conduct our operationsin the ordinary course likely would be the result. Based on our view of currentmarket and business conditions and our expectations regarding our futureoperating results and cash flows, we believe that we will be able to remain incompliance with these covenants and financial tests in the foreseeable future.

 

In addition to the Credit Agreement, we maintain two auxiliaryrevolving credit facilities (each an “Auxiliary Bank Facility” and collectivelythe “Auxiliary Bank Facilities”) with commercial banks. Each Auxiliary BankFacility is unsecured and has a maximum borrowing capacity of$5.0 million. One facility expires in November 2005 while the otherfacility expires in November 2006. At June 30, 2005, borrowingsoutstanding under the Auxiliary Bank Facilities totaled $8.9 million andaccrued interest at a weighted average rate of 4.68%. Because we currently havethe ability to refinance the borrowings outstanding under the Auxiliary BankFacility expiring in November 2005 and plan to do so, such borrowings areclassified as long-term debt in our consolidated balance sheet at June 30,2005. The Auxiliary Bank Facilities cross-default to the covenants andrestrictions set forth in the Credit Agreement.

 

Our term equipment notes consist primarily of notes payable pursuant tofinancing agreements between us and various lenders (the “Lender Notes”) andbetween us and the finance affiliate of a printing equipment manufacturer (the “EquipmentNotes”). At June 30, 2005, outstanding borrowings under the Lender Notestotaled $16.4 million and accrued interest at a weighted average rate of4.74%. The Lender Notes provide for fixed monthly principal payments plusinterest (at fixed rates) for defined periods of up to seven years from thedate of issuance, and are secured by certain equipment of the Company. At June 30,2005, outstanding borrowings under the Equipment Notes totaled $13.0 millionand accrued interest at a weighted average rate of 5.93%. The Equipment Notesprovide for fixed payments of principal and interest (at fixed rates) fordefined periods of up to ten years from the date of issuance and are secured byequipment which was concurrently purchased from the manufacturer. At June 30,2005, the remaining balance of term equipment notes totaling $1.6 millionprimarily consist of various secured debt obligations assumed by us inconnection with certain prior year acquisitions. We are not subject to anysignificant financial covenants in connection with any of the term equipmentnotes. The Credit Agreement places certain limitations on the amount ofadditional term note obligations we may incur in the future; however, we do notanticipate that these limitations will restrict our ability to make any of our remainingplanned 2006 capital expenditures.

 

Our other debt obligations consist of a mortgage of $4.9 million, apromissory note totaling $2.7 million, industrial revenue bonds totaling$8.1 million and various other debt obligations totaling $1.1 million.We do not have any significant financial covenants or restrictions associatedwith these other debt obligations.

 

13

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**Contractual Obligations and Other Commitments**

** **

*OperatingLeases* — We have entered into various noncancelable operatingleases primarily related to facilities and equipment used in the ordinarycourse of our business. Our future contractual obligations under such operatingleases total approximately $61.3 million as of June 30, 2005.

 

*Lettersof Credit* — In connection with our assumption of obligationsunder outstanding industrial revenue bonds related to certain prior yearacquisitions of printing businesses, which are reflected as debt in theaccompanying consolidated financial statements, we had four letters of creditoutstanding as of June 30, 2005 for a combined total of $8.4 million.These letters of credit were issued pursuant to the terms of our CreditAgreement, which expires in July 2007, and we may be required to obtainreplacement letters of credit at that time.

 

*Insurance Programs*—We maintain third-party insurance coverage in amounts and against risks webelieve are reasonable under our circumstances. We are self-insured againstmost workers’ compensation claims and for a significant component of our grouphealth insurance programs. For these exposures, we accrue expected loss amountswhich are determined using a combination of our historical loss experience andsubjective assessment of our future loss exposure, together with adviceprovided by administrators and consulting actuaries. The estimates of expectedloss amounts are subject to uncertainties arising from various sources,including changes in claims reporting patterns, claims settlement patterns,judicial decisions, legislation and economic conditions, which could result in anincrease or decrease in accrued costs in future periods for claim matters whichoccurred in a prior period. Although we believe that the accrued estimated lossamounts are reasonable under the circumstances, significant differences relatedto the items noted above could materially affect our risk exposure, insuranceobligations, and future expense.

 

**Factors Which May Affect 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 services and retention of key management and operatingpersonnel. To the extent an economic slowdown causes businesses to reduce theirspending on printed advertising and marketing materials, the demand forcommercial printing services may be adversely affected. Further, compoundingthe adverse effect of a decline in demand, competitive pricing pressures mayoccur and could negatively impact the level of sales and profit marginsgenerated by our printing businesses. Also, the magnitude and timing of anyfuture acquisitions, as well as our ability to absorb and manage suchbusinesses, will impact our future results. Because of these and other factors,there can be no assurance that we will not experience material fluctuations inour future operating results or cash flows on a quarterly or annual basis.

 

**Critical Accounting Policies**

** **

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

 

*Receivables, net of valuation allowance –*Accountsreceivable at June 30, 2005 were $130.9 million, net of a $3.4 millionallowance for doubtful accounts. The valuation allowance was determined basedupon our evaluation of known requirements, aging of receivables, historicalexperience and the economic environment. While we believe we have appropriatelyconsidered known or expected outcomes, our customers’ ability to pay theirobligations could be adversely affected by contraction in the economy or otherfactors beyond our control. Changes in our estimates of collectibility couldhave a material adverse affect on our consolidated financial condition orresults of operations.

 

*Goodwill**–***Weevaluate the carrying value of our goodwill as of March 31st of each year,or at any time that management becomes aware of an indication of impairment.Our evaluation is based on certain data estimated by management to beindicators of future cash flows at each of our facilities. Estimating futurecash flows requires judgments regarding future economic conditions, demand forservices and pricing. Our evaluation also makes use of estimates of marketmultiples of cash flow at which transactions could be completed in the currentmarket. If our estimates of future cash flows or market multiples prove to beinaccurate, an impairment charge could be necessary in future periods.

 

*Impairment of long-lived assets*– We evaluate long-lived assets, including property, plant and equipment andintangible assets other than goodwill whenever events or changes in conditionsindicate that the carrying value may not be recoverable. The 

 

14

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evaluation requires us to estimate future undiscounted cash flowsassociated with an asset or group of assets. If the cost of the asset or groupof assets cannot be recovered by these undiscounted cash flows, then animpairment may exist. Estimating future cash flows requires judgments regardingfuture economic conditions, demand for services and pricing. Although we believeour estimates are reasonable, significant differences in the actual performanceof the asset or group of assets may materially affect our asset values andrequire an impairment charge in future periods.

 

*Insurance liabilities*– We are self-insured for the majority of our workers’ compensation and grouphealth insurance costs. Insurance claims liabilities have been accrued using acombination of our historical loss experience and subjective assessment of ourfuture loss exposure, together with advice provided by administrators andconsulting actuaries. The estimates of expected loss amounts are subject touncertainties arising from various sources, including changes in claimsreporting patterns, claims settlement patterns, judicial decisions, legislationand economic conditions, which could result in an increase or decrease inaccrued costs in future periods for claim matters which occurred in a priorperiod.

 

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

 

*Accounting for acquisitions*– The allocation of purchase price to acquired assets and liabilities isinitially based on estimates of fair value and is prospectively revised if andwhen additional information the Company is awaiting at the time of the initialallocation concerning certain asset and liability valuations is obtained,provided that such information is received no later than one year after thedate of acquisition. 

 

***ITEM 3. Quantitative and Qualitative Disclosure About 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 currently hold orutilize derivative financial instruments that could expose our Company tomarket risk. However, we are exposed to market risk for changes in interest ratesrelated primarily to our debt obligations, which as of June 30, 2005 includeborrowings under our bank credit facilities, various term equipment notes andother debt obligations. As of June 30, 2005, there were no materialchanges in our market risk or the estimated fair value of our debt obligationsrelative to their recorded value, as reported in our Annual Report on Form 10-Kfor the fiscal year ended March 31, 2005.

 

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

 

**Disclosure Controls and Procedures**

 

The Company’s management, with the participation of the Company’s ChiefExecutive Officer (“CEO”) and Chief Financial Officer (“CFO”), has evaluatedthe effectiveness of the Company’s disclosure controls and procedures (as suchterm is defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the endof the period covered by this report. Based on such evaluation, the Company’sCEO and CFO have concluded that, as of the end of such period, the Company’sdisclosure controls and procedures were effective to ensure that informationrequired to be disclosed by the Company in reports that it files or submitsunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in the Securities and Exchange Commission’s rules andforms.

 

**Internal Control Over Financial Reporting**

 

There have not been any changes in the Company’s internal control overfinancial reporting (as such term is defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) during the fiscal quarter to which thisreport relates that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

 

15

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**CONSOLIDATED GRAPHICS, INC.**

**PART II – OTHER INFORMATION**

 

**ITEM 1.  *LegalProceedings***

 

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 types of potential claims in anamount which we believe to be adequate. Currently, we are not aware of anylegal proceedings or claims pending against the Company that our managementbelieves will have a material adverse effect on our financial position orresults of operations.

 

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

#### ** **

None.

 

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

#### ** **

None.

 

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

*** ***

None.

 

**ITEM 5. * OtherInformation***

 

None.

 

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**ITEM 6.  *Exhibits***

 
| * 3.1 |   | Restated Articles of Incorporation of the  Company filed with the Secretary of State of the State of Texas on  July 27, 1994 (Consolidated Graphics, Inc. Form 10-Q  (June 30, 1994), Exhibit 4(a)).                                                                                                                                                                                                                                                  |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *3.2  |   | Articles of Amendment to the Restated  Articles of Incorporation of the Company dated as of July 29, 1998  (Consolidated Graphics, Inc. Form 10-Q (June 30, 1998),  Exhibit 3.1).                                                                                                                                                                                                                                                                     |
| *3.3  |   | Second Amended and Restated By-Laws of the  Company adopted as of June 30, 2004 (Consolidated Graphics, Inc.  Form 10-Q (June 30, 2004), Exhibit 3.3).                                                                                                                                                                                                                                                                                                |
| *4.1  |   | Specimen Common Stock Certificate (Consolidated Graphics, Inc. Form 10-K (March 31,  1998), Exhibit 4.1).                                                                                                                                                                                                                                                                                                                                                  |
| *4.2  |   | Rights Agreement dated as of  December 15, 1999 between Consolidated Graphics, Inc and American Stock  Transfer and Trust Company, as Rights Agent, which includes as Exhibit A  the Certificate of Designations of Series A Preferred Stock, as  Exhibit B the form of Rights Certificate and as Exhibit C the form  of summary of Rights to Purchase Shares (Consolidated Graphics, Inc  Form 8-K (December 15, 1999), Exhibit 4.1). |
| 10.1  |   | Form of Employee and Director Stock Option  Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 31.1  |   | Certification of Joe R. Davis pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                 |
| 31.2  |   | Certification of G. Christopher Colville  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                      |
| 32.1  |   | Certification of Joe R. Davis pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                 |
| 32.2  |   | Certification of G. Christopher Colville  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                      |

 

----

*Incorporated by reference

 

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**SIGNATURES**

 

**Pursuant to the requirements ofthe Securities 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: July 27, 2005 | By:    | /s/ G. Christopher Colville     |   |
|                      |   | G. Christopher Colville         |
|                      |   | Executive Vice President,       |
|                      |   | Chief Financial and Accounting  |
|                      |   | Officer and Secretary           |
|                           |        |                                 |  |  |

 

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***Exhibit Index***

 
| * 3.1 |   | Restated Articles of Incorporation of the  Company filed with the Secretary of State of the State of Texas on  July 27, 1994 (Consolidated Graphics, Inc. Form 10-Q  (June 30, 1994), Exhibit 4(a)).                                                                                                                                                                                                                                                  |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *3.2  |   | Articles of Amendment to the Restated  Articles of Incorporation of the Company dated as of July 29, 1998  (Consolidated Graphics, Inc. Form 10-Q (June 30, 1998),  Exhibit 3.1).                                                                                                                                                                                                                                                                     |
| *3.3  |   | Second Amended and Restated By-Laws of the  Company adopted as of June 30, 2004 (Consolidated Graphics, Inc.  Form 10-Q (June 30, 2004), Exhibit 3.3).                                                                                                                                                                                                                                                                                                |
| *4.1  |   | Specimen Common Stock Certificate (Consolidated Graphics, Inc. Form 10-K (March 31,  1998), Exhibit 4.1).                                                                                                                                                                                                                                                                                                                                                  |
| *4.2  |   | Rights Agreement dated as of  December 15, 1999 between Consolidated Graphics, Inc and American Stock  Transfer and Trust Company, as Rights Agent, which includes as Exhibit A  the Certificate of Designations of Series A Preferred Stock, as  Exhibit B the form of Rights Certificate and as Exhibit C the form  of summary of Rights to Purchase Shares (Consolidated Graphics, Inc  Form 8-K (December 15, 1999), Exhibit 4.1). |
| 10.1  |   | Form of Employee and Director Stock  Option Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 31.1  |   | Certification of Joe R. Davis pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                 |
| 31.2  |   | Certification of G. Christopher Colville  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                      |
| 32.1  |   | Certification of Joe R. Davis pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                 |
| 32.2  |   | Certification of G. Christopher Colville  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                      |

 

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*Incorporated by reference

 

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