**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 the quarterly period ended  December 31, 2005**                                                                                                      |
|       |       |                                                                                                                                                            |
| ** ** | ** ** | **OR**                                                                                                                                                          |
|       |       |                                                                                                                                                            |
| ** ** | **o**      | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d)**                                                                                                     |
| ** ** | ** ** | **OF THE SECURITIES EXCHANGE ACT  OF 1934**                                                                                                                     |
| ** ** | ** ** | ** **                                                                                                                                                      |
| ** ** | ** ** | **For the transition period from             to          ** |

 

**Commission File Number 001-12631**

 

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**CONSOLIDATED GRAPHICS, INC.**

(Exact name of Registrant as specified in itscharter)

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

 

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

 

Indicate by check mark whether the Registrant(1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

 

Yes  ý    No  o

 

Indicate by check mark whether the Registrant is a shellcompany (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

Yes  o    No  ý

 

Indicateby check mark whether the Registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accerlerated filer” in Rule 12b-2 of the Exchange Act. (Checkone):

 
| Large accelerated filer o |   | Accelerated filer ý |   | Non-accelerated filer o |
|--------------------------------|--------|-------------------------------|--------|------------------------------|

 

Thenumber of shares of Common Stock, par value $.01 per share, of the Registrantoutstanding at January 15, 2006 was 13,682,973.

 

 

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**CONSOLIDATED GRAPHICS, INC.**

 

##### **FORM 10-Q FOR THE QUARTERLYPERIOD ENDED DECEMBER 31, 2005**

##### ** **

**INDEX**

 
| Part I —  Financial Information |                                                                                                      |
|--------------------------------------|-----------------------------------------------------------------------------------------------------------|
|                                 |                                                                                                      |
|                                 | Item 1 —  Financial Statements                                                                       |   |
|                                 |                                                                                                      |   |
|                                 |                                                                                                      | Consolidated  Balance Sheets at December 31, 2005 and March 31, 2005 |   |
|                                 |                                                                                                      |   |   |
|                                 |                                                                                                      | Consolidated Income  Statements for the Three and Nine Months Ended December 31, 2005 and 2004 |   |
|                                 |                                                                                                      |   |   |
|                                 |                                                                                                      | Consolidated Statements of  Cash Flows for the Nine Months Ended December 31, 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.  *FinancialStatements***

 

**CONSOLIDATED GRAPHICS, INC.**

**CONSOLIDATED BALANCE SHEETS**

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

 
| ** **                                                                                                       | ** **    | **December 31,  2005** | ** ** | **March 31,  2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------|---------------|-----------------------------|------------|--------------------------|------------|
| **(Unaudited)**                                                                                                  | **(Audited)** |
| ASSETS                                                                                                           | ** **    | ** **                  | ** ** | ** **               | ** ** |
|                                                                                                             |          |                        |       |                     |       |
| CURRENT ASSETS                                                                                                   |          |                        |       |                     |       |
| Cash and cash equivalents                                                                                        |          | $                           | 10,284     |                     | $          | 7,752 |   |
| Accounts receivable, net                                                                                         |          | 145,230                     |       | 136,824                  |       |
| Inventories                                                                                                      |          | 36,927                      |       | 37,149                   |       |
| Prepaid expenses                                                                                                 |          | 5,742                       |       | 5,913                    |       |
| Deferred income taxes                                                                                            |          | 7,599                       |       | 7,843                    |       |
| Total current assets                                                                                             |          | 205,782                     |       | 195,481                  |       |
| PROPERTY AND EQUIPMENT, net                                                                                      |          | 283,827                     |       | 297,600                  |       |
| GOODWILL AND OTHER INTANGIBLE  ASSETS, net                                                                       |          | 91,718                      |       | 85,755                   |       |
| OTHER ASSETS                                                                                                     |          | 9,538                       |       | 11,393                   |       |
|                                                                                                             |          | $                           | 590,865    |                     | $          | 590,229 |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                        |          |                        |       |                     |       |
|                                                                                                             |          |                        |       |                     |       |
| CURRENT LIABILITIES                                                                                              |          |                        |       |                     |       |
| Current portion of long-term  debt                                                                               |          | $                           | 8,846      |                     | $          | 7,595 |   |
| Accounts payable                                                                                                 |          | 50,230                      |       | 46,705                   |       |
| Accrued liabilities                                                                                              |          | 77,435                      |       | 75,143                   |       |
| Income taxes payable                                                                                             |          | 3,447                       |       | 1,813                    |       |
| Total current liabilities                                                                                        |          | 139,958                     |       | 131,256                  |       |
| LONG-TERM DEBT, net of current  portion                                                                          |          | 78,570                      |       | 111,895                  |       |
| DEFERRED INCOME TAXES                                                                                            |          | 64,981                      |       | 63,746                   |       |
| COMMITMENTS AND CONTINGENCIES                                                                                    |          |                        |       |                     |       |
| SHAREHOLDERS’ EQUITY                                                                                        |          |                        |       |                     |       |
| Common stock, $.01 par value;  100,000,000 shares authorized; 13,682,973. and 13,760,042 issued and  outstanding |          | 137                         |       | 138                      |       |
| Additional paid-in capital                                                                                       |          | 169,487                     |       | 168,905                  |       |
| Retained earnings                                                                                                |          | 137,732                     |       | 114,289                  |       |
| Total shareholders’ equity                                                                                  |          | 307,356                     |       | 283,332                  |       |
|                                                                                                             |          | $                           | 590,865    |                     | $          | 590,229 |   |

 

See accompanying notes to consolidated financial statements.

 

3

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**CONSOLIDATED GRAPHICS, INC.**

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

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

**(Unaudited)**

 
| ** **                                 | ** ** | **Three Months Ended  December 31** | ** ** | **Nine Months Ended  December 31** | ** ** |
|--------------------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                                 | **2005**   | ** **                          | **2004**   | ** **                         | **2005**   | ** ** | **2004** | ** ** |
| SALES                                      |       | $                                   | 226,204    |                               | $          | 208,640 |   | $ | 657,112 |   | $ | 581,298 |   |
|                                       |       |                                |       |                               |       |   |   |   |   |
| COST OF SALES                              |       | 170,472                             |       | 157,077                            |       | 495,512 |   | 437,753 |   |
|                                       |       |                                |       |                               |       |   |   |   |   |
| Gross profit                               |       | 55,732                              |       | 51,563                             |       | 161,600 |   | 143,545 |   |
|                                       |       |                                |       |                               |       |   |   |   |   |
| SELLING EXPENSES                           |       | 23,325                              |       | 21,232                             |       | 67,868 |   | 60,458 |   |
|                                       |       |                                |       |                               |       |   |   |   |   |
| GENERAL AND ADMINISTRATIVE EXPENSES        |       | 15,091                              |       | 14,140                             |       | 44,554 |   | 40,796 |   |
|                                       |       |                                |       |                               |       |   |   |   |   |
| Operating income                           |       | 17,316                              |       | 16,191                             |       | 49,178 |   | 42,291 |   |
|                                       |       |                                |       |                               |       |   |   |   |   |
| INTEREST EXPENSE, net                      |       | 1,449                               |       | 1,083                              |       | 4,239 |   | 3,879 |   |
|                                       |       |                                |       |                               |       |   |   |   |   |
| Income before taxes                        |       | 15,867                              |       | 15,108                             |       | 44,939 |   | 38,412 |   |
|                                       |       |                                |       |                               |       |   |   |   |   |
| INCOME TAXES                               |       | 5,926                               |       | 5,364                              |       | 16,936 |   | 14,275 |   |
|                                       |       |                                |       |                               |       |   |   |   |   |
| Net income                                 |       | $                                   | 9,941      |                               | $          | 9,744 |   | $ | 28,003 |   | $ | 24,137 |   |
|                                       |       |                                |       |                               |       |   |   |   |   |
| BASIC EARNINGS PER SHARE                   |       | $                                   | .73        |                               | $          | .71 |   | $ | 2.04 |   | $ | 1.77 |   |
| DILUTED EARNINGS PER SHARE                 |       | $                                   | .71        |                               | $          | .68 |   | $ | 1.98 |   | $ | 1.70 |   |
|                                       |       |                                |       |                               |       |   |   |   |   |
| SHARES USED TO COMPUTE EARNINGS  PER SHARE |       |                                |       |                               |       |   |   |   |   |
|                                       |       |                                |       |                               |       |   |   |   |   |
| Basic                                      |       | 13,657                              |       | 13,666                             |       | 13,726 |   | 13,623 |   |
| Diluted                                    |       | 14,093                              |       | 14,258                             |       | 14,146 |   | 14,180 |   |

 

See accompanying notes to consolidated financialstatements.

 

4

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**CONSOLIDATED GRAPHICS, INC.**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(In thousands)**

**(Unaudited)**

 
| ** **                                                                                | ** ** | **Nine Months Ended  December 31** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                | **2005**   | ** **                              | **2004**   | ** ** |
|                                                                                      |       |                                    |       |   |   |
| OPERATING ACTIVITIES                                                                      |       |                                    |       |   |   |
| Net income                                                                                |       | $                                       | 28,003     |   | $ | 24,137 |   |
| Adjustments to reconcile net  income to net cash provided  by  operating activities: |       |                                    |       |   |   |
| Depreciation and amortization                                                             |       | 34,994                                  |       | 32,001 |   |
| Deferred income tax provision                                                             |       | 1,251                                   |       | 1,202 |   |
| Changes in assets and  liabilities, net of effects of acquisitions:                       |       |                                    |       |   |   |
| Accounts receivable, net                                                                  |       | (7,451                                  | )          | (4,380 | ) |
| Inventories                                                                               |       | 527                                     |       | (2,831 | ) |
| Prepaid expenses                                                                          |       | 178                                     |       | (730 | ) |
| Other assets                                                                              |       | (313                                    | )          | (687 | ) |
| Accounts payable and accrued  liabilities                                                 |       | 351                                     |       | (783 | ) |
| Income taxes payable                                                                      |       | 2,624                                   |       | 3,964 |   |
| Net cash provided by operating  activities                                                |       | 60,164                                  |       | 51,893 |   |
|                                                                                      |       |                                    |       |   |   |
| INVESTING ACTIVITIES                                                                      |       |                                    |       |   |   |
| Acquisitions of businesses, net  of cash acquired                                         |       | (7,094                                  | )          | (2,233 | ) |
| Purchases of property and  equipment                                                      |       | (8,961                                  | )          | (9,623 | ) |
| Proceeds from asset  dispositions                                                         |       | 2,019                                   |       | 1,503 |   |
| Net cash used in investing  activities                                                    |       | (14,036                                 | )          | (10,353 | ) |
|                                                                                      |       |                                    |       |   |   |
| FINANCING ACTIVITIES                                                                      |       |                                    |       |   |   |
| Proceeds from bank credit  facilities                                                     |       | 25,300                                  |       | 58,470 |   |
| Payments on bank credit  facilities                                                       |       | (57,977                                 | )          | (58,232 | ) |
| Payments on term equipment  notes and other debt                                          |       | (5,950                                  | )          | (48,947 | ) |
| Payments to repurchase and  retire common stock                                           |       | (6,655                                  | )          | — |   |
| Proceeds from exercise of stock  options                                                  |       | 1,686                                   |       | 2,177 |   |
| Net cash used in financing  activities                                                    |       | (43,596                                 | )          | (46,532 | ) |
|                                                                                      |       |                                    |       |   |   |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                      |       | 2,532                                   |       | (4,992 | ) |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                          |       | 7,752                                   |       | 10,472 |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                |       | $                                       | 10,284     |   | $ | 5,480 |   |

 

See accompanying notes to consolidated financial statements.

 

5

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**CONSOLIDATED GRAPHICS, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

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

**(Unaudited)**

 

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

 

The accompanying unaudited consolidated financialstatements include the accounts of Consolidated Graphics, Inc. andsubsidiaries (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 (“SEC”) 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 nine months ended December 31, 2005 are not necessarily indicativeof future operating results. Balance sheet information as of March 31,2005 has been derived from the 2005 annual audited consolidated financialstatements of the Company. For further information, refer to the consolidatedfinancial statements and footnotes thereto included in the Company’s AnnualReport on Form 10-K for the fiscal year ended March 31, 2005, filedwith the SEC in June 2005.

 

*Use of Estimates*—The preparation of financial statements in conformity with generallyaccepted accounting principles requires the use of certain estimates andassumptions by management in determining the reported amounts of assets andliabilities, disclosure of contingent liabilities as of the date of thefinancial statements and the reported amounts of revenues and expenses duringthe reporting period, including depreciation of property and equipment andamortization and impairment of intangible assets. The Company evaluates itsestimates and assumptions on an ongoing basis and relies on historicalexperience and various other factors that it believes to be reasonable underthe circumstances to determine such estimates. Because uncertainties withrespect to estimates and assumptions are inherent in the preparation offinancial statements, actual results could differ from these estimates.

 

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

 

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

 

*Inventories*—Inventories are valued at the lower of cost or market utilizing thefirst-in, first-out method for raw materials and the specific identificationmethod for work in progress and finished goods. The carrying values ofinventories are set forth below:

 
| ** **        | ** ** | **December 31,   2005** | ** ** | **March 31,  2005** | ** ** |
|-------------------|------------|------------------------------|------------|--------------------------|------------|
|              |       |                         |       |                     |       |
| Raw  materials    |       | $                            | 11,178     |                     | $          | 11,863 |   |
| Work in  progress |       | 21,723                       |       | 21,518                   |       |
| Finished  goods   |       | 4,026                        |       | 3,768                    |       |
|              |       | $                            | 36,927     |                     | $          | 37,149 |   |

 

*Goodwill and Other IntangibleAssets, net –*Goodwill totaled $80,628 at December 31, 2005 and represents the excess of ourpurchase cost over the fair value of the net assets of acquired businesses, netof previously recorded amortization and impairment expense.  The net book value of other intangible assetsat December 31, 2005 was $11,090.  Otherintangible assets consist primarily of the value assigned to such items as customerlists, customer contracts and tradenames in connection with the allocation ofpurchase price for acquisitions under Statement of Financial  Accounting Standards (“SFAS”) No. 142. Otherintangible assets are generally amortized on a straight-line basis over periodsof up to ten years.

 

*Earnings Per Share –* Basic earnings pershare are calculated by dividing net income by the weighted average number of commonshares outstanding.  Diluted earnings pershare reflect net income divided by the weighted average number of commonshares and dilutive stock options outstanding.

 

6

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*Supplemental Cash Flow Information*— The consolidated statements of cash flowsprovide information about the Company’s sources and uses of cash and excludethe effects of non-cash transactions. Certain of the Company’s capitalexpenditures are considered to be non-cash transactions, including for the ninemonths ended December 31, 2005, $6,553 which was financed using term notes (seeNote 3. Long-Term Debt) and $1,744 which was accrued as a current liability inthe accompanying consolidated balance sheet. For the nine months ended December 31,2005, the Company paid cash for interest and income taxes, net of refunds,totaling $3,912 and $12,228. For the nine months ended December 31, 2004,the Company paid cash for interest and income taxes, net of refunds, totaling$3,912 and $8,262.

 

*Stock-Based Compensation –* The Company’s only element of stock-basedcompensation is derived pursuant to the Consolidated Graphics, Inc.Long-Term Incentive Plan (the “Plan”), which has been approved by the Company’sshareholders.  Under the Plan, employeesof the Company and members of the Company’s Board of Directors have been, ormay be, granted options to purchase shares of the Company’s common stock at aprice not less than the market price of the stock at the date of grant. TheCompany accounts for its stock-based compensation programs using the intrinsicvalue method of accounting established by Accounting Principles Board OpinionNo. 25, *Accounting for Stock Issued toEmployees*and relatedinterpretations. Accordingly, no compensation expense is recognized whenthe exercise price of an employee stock option is equal to the market price ofcommon stock on the grant date and all other provisions are fixed.

 

Pro formainformation regarding net income and net income per share is required by theSFAS No. 123, *Accounting for Stock-BasedCompensation*. The pro forma information has been determined as ifthe Company had accounted for its stock options under the fair value method.The following is a summary of the Company’s net income and earnings per shareas reported and pro forma as if the fair value-based method of accountingdefined in SFAS No. 123 had been applied. For purposes of pro formadisclosures, the estimated fair value of the options is amortized to expenseover 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 Companyused the fair value-based method of accounting for the Plan prescribed by SFASNo. 123 and charged compensation expense against net income over thevesting period based on the fair value of options at the date of grant, netincome and earnings per share as reported would have been reduced to the followingpro forma amounts:

 
| ** **                            | ** ** | **Three Month Ended  December 31** | ** ** | **Nine Months Ended  December 31** | ** ** |
|---------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|
| **2005**                              | ** ** | **2004**                           | **2005**   | ** **                         | **2004**   |
|                                  |       |                               |       |                               |       |   |   |   |   |
| Net income  as reported               |       | $                                  | 9,941      |                               | $          | 9,744 |   | $ | 28,003 |   | $ | 24,137 |   |
| Less: Pro forma compensation  expense |       | (474                               | )          | (311                               | )          | (1,515 | ) | (969 | ) |
| Pro forma net income                  |       | $                                  | 9,467      |                               | $          | 9,433 |   | $ | 26,488 |   | $ | 23,168 |   |
|                                  |       |                               |       |                               |       |   |   |   |   |
| **Basic Earnings Per Share:**         |       |                               |       |                               |       |   |   |   |   |
| Net income as reported                |       | $                                  | .73        |                               | $          | .71 |   | $ | 2.04 |   | $ | 1.77 |   |
| Less: Pro forma compensation  expense |       | (.03                               | )          | (.02                               | )          | (.10 | ) | (.07 | ) |
| Pro forma net income                  |       | $                                  | .70        |                               | $          | .69 |   | $ | 1.94 |   | $ | 1.70 |   |
|                                  |       |                               |       |                               |       |   |   |   |   |
| **Diluted Earnings Per Share:**       |       |                               |       |                               |       |   |   |   |   |
| Net income as reported                |       | $                                  | .71        |                               | $          | .68 |   | $ | 1.98 |   | $ | 1.70 |   |
| Less: Pro forma compensation  expense |       | (.03                               | )          | (.02                               | )          | (.10 | ) | (.06 | ) |
| Pro forma net income                  |       | $                                  | .68        |                               | $          | .66 |   | $ | 1.88 |   | $ | 1.64 |   |

 

7

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SFAS No. 123(R), *Share-Based Payment*, was issued in December 2004 andreplaces SFAS No. 123, and supercedes APB Opinion No. 25.  SFAS No. 123(R) will require compensationcosts related to share-based payment transactions to be recognized in theconsolidated financial statements. With limited exceptions, the amount ofcompensation cost will be measured based on the grant date fair value of theequity or liability instruments issued. In addition, liability awards will beremeasured each reporting period. Compensation cost will be recognized over theperiod that an employee provides services in exchange for the award.  SFAS No. 123(R) becomes effective for theCompany at the beginning of fiscal 2007. The Company expects that the impact ofadopting the SFAS No. 123(R) will be materially consistent with the pro formaexpense (discussed above), adjusted for future vesting occurrences, grants,cancellations and exercises of stock options, that have been previouslydisclosed in accordance with SFAS No. 123.

 

**2.  ACQUISITIONS**

 

Duringthe nine months ended December 31, 2005, the Company paid cash totaling$6,310 to acquire the operations and assets of three businesses, two of which wereimmediately merged into other existing operations of the Company. Thepreliminary allocation of the purchase price of the businesses acquired includecurrent assets of $1,819, property and equipment of $1,645, goodwill and other intangibleassets of $4,192 and other assets of $130 less current liabilities of $1,476.Additionally, the Company paid cash totaling $784 in connection withfinalization of certain working capital adjustments related to the Company’sfiscal 2005 acquisitions. Based on certain additional information receivedregarding the fiscal 2005 acquisitions, $2,513 of purchase price previouslyattributed to property and equipment was allocated to goodwill and anallocation of $8,844 was made from goodwill to intangible assets other thangoodwill in the nine month period ended December 31, 2005.  The Company is awaiting additionalinformation concerning certain asset and liability valuations in order tofinalize the allocation of purchase price for certain of the Company’s 2006acquisitions, and expects to receive such information no later than one yearfollowing the respective dates of the acquisitions.

 

InNovember 2005, the Company announced that it had entered into a non-bindingletter of intent to acquire an affiliated group of commercial printingcompanies operating as Nies/Artcraft Printing, Valcour Printing, and ImpressionLabel in St. Louis, Missouri. The completion of this transaction, which issubject to certain conditions, is expected to occur by the end of the 2006fiscal year.

 

**3.  LONG-TERM DEBT**

 

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

 
| ** **             | ** ** | **December 31,  2005** | ** ** | **March 31,   2005** | ** ** |
|------------------------|------------|-----------------------------|------------|---------------------------|------------|
| Bank credit facilities |       | $                           | 37,518     |                      | $          | 70,195 |   |
| Term equipment notes   |       | 34,460                      |       | 32,295                    |       |
| Other                  |       | 15,438                      |       | 17,000                    |       |
|                   |       | 87,416                      |       | 119,490                   |       |
| Less: current portion  |       | (8,846                      | )          | (7,595                    | )          |
|                   |       | $                           | 78,570     |                      | $          | 111,895 |   |

 

TheCompany’s primary bank credit facility (as amended and restated, the “CreditAgreement”) is composed of a $150,000 revolving credit facility that willmature in July 2007. At December 31, 2005, outstanding borrowings underthe Credit Agreement were $30,000 and accrued interest at a weighted averagerate of 6.1%.

 

Theproceeds from borrowings under the Credit Agreement can be used to repaycertain indebtedness, finance certain acquisitions, provide for working capitaland general corporate purposes and, subject to certain restrictions, repurchasethe Company’s common stock. Borrowings outstanding under the Credit Agreementare secured by substantially all of the Company’s assets other than real estateand certain equipment subject to term equipment notes and other financings.Borrowings under the Credit Agreement accrue interest, at the Company’s option,at either (1) the London Interbank Offered Rate (“LIBOR”) plus a margin of1.25% to 2.00%, or (2) an alternate base rate (based upon the greater ofthe agent bank’s prime lending rate or the Federal Funds effective rate plus..50%) plus a margin of up to .75%. The Company is also required

 

8

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topay an annual commitment fee ranging from .275% to .375% on available butunused amounts under the Credit Agreement. The interest rate margin and thecommitment fee are based upon certain financial performance measures as setforth in the Credit Agreement and are redetermined quarterly. AtDecember 31, 2005, the applicable LIBOR interest rate margin was 1.25% andthe applicable commitment fee was .275%.

 

TheCompany is subject to certain covenants and restrictions and must meet certainfinancial tests under the Credit Agreement. The Company was in compliance withsuch covenants, restrictions and financial tests at December 31, 2005.

 

Inaddition to the Credit Agreement, the Company maintains two auxiliary revolvingcredit facilities (each an “Auxiliary Bank Facility” and collectively the “AuxiliaryBank Facilities”) with commercial banks. Each Auxiliary Bank Facility isunsecured and has a maximum borrowing capacity of $5,000. One facility expiresin November 2006 while the

otherfacility expires in December 2006. At December 31, 2005, borrowingsoutstanding under the Auxiliary Bank Facilities totaled $7,518 and accruedinterest at a weighted average rate of 5.6%. Because the Company currently hasthe ability to refinance borrowings outstanding under the Auxiliary BankFacilities expiring in November and December 2006 and plans to do so, suchborrowings are classified as long-term debt in the accompanying consolidatedbalance sheet at December 31, 2005. The Auxiliary Bank Facilities cross-defaultto the covenants and restrictions set forth in the Credit Agreement.

 

TheCompany’s term equipment notes consist primarily of notes payable pursuant tofinancing agreements between the Company and various lenders (the “Lender Notes”)and between the Company and the finance affiliate of a printing equipmentmanufacturer (the “Equipment Notes”). At December 31, 2005, outstandingborrowings under the Lender Notes****totaled $20,843and accrued interest at a weighted average rate of 5.1%. The Lender Notesprovide for fixed monthly principal payments plus interest (at fixed rates) fordefined periods of up to seven years from the date of issuance, and are securedby certain equipment of the Company. At December 31, 2005, outstandingborrowings under the Equipment Notes totaled $12,177 and accrued interest at aweighted average rate of 5.9%. The Equipment Notes provide for fixed paymentsof principal and interest (at fixed rates) for defined periods of up to tenyears from the date of issuance and are secured by the equipment which wasconcurrently purchased from the manufacturer. At December 31, 2005, theremaining balance of term equipment notes totaling $1,440 primarily consists ofvarious secured debt obligations assumed by the Company in connection withcertain prior year acquisitions. The Company is not subject to any significantfinancial covenants in connection with any of the term equipment notes;however, the Credit Agreement places certain limitations on the amount ofadditional term note obligations the Company may incur in the future.

 

TheCompany’s remaining debt obligations consist of a mortgage totaling $4,844, apromissory note totaling $2,685, industrial revenue bonds totaling $6,995 andvarious other debt obligations totaling $914. The Company does not have anysignificant financial covenants or restrictions associated with these otherdebt obligations.

 

9

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**ITEM 2.  Management’s Discussion and Analysis ofFinancial 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.********Weexpressly disclaim any duty to provide updates to these forward-lookingstatements, assumptions or other factors after the date of this Report onForm 10-Q to reflect the occurrence of events or changes in circumstancesor expectations.*

 

*The following discussion of thefinancial condition and performance of our Company should be read in conjunctionwith the consolidated financial statements included herein and the consolidatedfinancial statements and related notes and other detailed information regardingour Company included in our Annual Report on Form 10-K for the fiscal yearended March 31, 2005 and other reports filed by us with the Securities andExchange Commission. Operating results for the nine months endedDecember 31, 2005 are not necessarily indicative of the results to beexpected for the entire fiscal year ending March 31, 2006 or any periodsthereafter.*

 

**Overview**

 

*Our Organization*

 

Our Company is a leading national provider ofcommercial printing services and is recognized as the largest sheetfed andhalf-web commercial printing company in the United States.  We currently operate 70 printing businessesin 25 states, with each business operated as a wholly-owned subsidiary. Each ofour printing businesses has a well-established operating history, more than25 years in most cases, and operates as a separate business and reportingunit, with their own management, sales, customer service, estimating andplanning, prepress, production and accounting staff. Generally, each facilitysubstantially relies on locally based customers; accordingly, we have a broaddiversification of customers by industry-type and geographic orientation,totaling more than 19,000. No individual facility nor any individual customeraccount for more than 10% of our revenues.

 

Our corporate headquarters staff provides support toour printing businesses in such areas as human resources, purchasing andmanagement information systems. We also maintain centralized treasury, riskmanagement, tax and consolidated financial reporting activities.

 

*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 who include fulfillment, mailing or otherprint-related services. They may also use our Internet-based e-commercesolutions, marketed under the “CGX Solutions” trademark which are complementaryto the production and delivery of the printed materials. Collectively, all ofthese discrete capabilities comprise a “comprehensive range of printingservices” for which we typically charge an “all-inclusive” fee.  Accordingly, for financial reportingpurposes, we report our revenues and results of operations as a single segment.

 

Oursales are derived from commercial printing services. These services consist of(i) traditional print services, including electronic prepress, printing,finishing, storage and delivery of high-quality printed documents which arecustom manufactured to our customers’ design specifications;(ii) fulfillment and mailing services for such printed materials, and(iii) e-commerce solutions that enable our customers to improve theirprocesses over the procurement and management of 

 

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printed materials. Examples ofthe types of documents we print for our customers include high-quality,multicolor marketing materials, product and capability brochures,point-of-purchase displays, direct mail pieces, shareholder communications,catalogs, and training manuals.

 

Thesubstantial majority of our sales are generated by individual orders throughcommissioned sales personnel. We recognize revenue from these orders when wedeliver the ordered goods and services. To a large extent, continued engagementof our Company by our customers for successive business opportunities dependsupon the customers’ satisfaction with the quality of services we provide. Assuch, it is difficult for us to predict the number, size, and profitability ofprinting services that we expect to provide for more than a few weeks inadvance.

 

Ourcost of sales mainly consists of raw materials consumed in the printingprocess, as well as labor and outside services, such as delivery costs. Papercost is the most significant component of our materials cost; however,fluctuation in paper pricing generally does not materially impact our operatingmargins because we typically quote, and subsequently purchase, paper for eachspecific printing job we are awarded. As a result, any changes in paper pricingare effectively passed through to customers by our printing businesses.Additionally, our cost of sales includes salary and benefits paid to operatingpersonnel, maintenance, repair, rental and insurance costs associated withoperating our facilities and equipment and depreciation charges.

 

Ourselling expenses generally include the compensation paid to our salesprofessionals, along with promotional, travel and entertainment costs. Ourgeneral and administrative expenses generally include the salary and benefitspaid to support personnel at our printing businesses and our corporate staff,as well as office rent, utilities and communications expenses, and variousprofessional 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:

 

•              *InternalSales Growth—*We seek to use our competitive advantages to expandmarket share. We continue to pursue additional experienced sales professionals,invest in new equipment and technology, expand our national accounts customerbase and develop new and expanded print-related services.

 

•              *DisciplinedAcquisition Program—*We selectively pursue opportunities to acquireadditional printing businesses at reasonable prices. Some of these acquisitionsmay include smaller and/or distressed printing businesses for merger into oneof our existing businesses.

 

•              *CostSavings—*Because of our size and national presence, we leverage oureconomies of scale to purchase supplies and equipment at preferential prices,and centralize various administrative services to generate cost savings.

 

•              *BestPractices/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 helpour printing businesses identify and respond to changes in operating trends.

 

•              *LeadershipDevelopment—*Through our unique Leadership Development Program, wedevelop talent for future sales and management positions at our printingbusinesses.

 

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**Results of Operations**

 

The following table sets forth our Company’s unauditedcondensed consolidated income statements for the periods indicated:

 
| ** **                          | ** ** | **Three Months  Ended December 31** | ** ** | **Nine Months  Ended December 31** | ** ** |
|-------------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                          | ** ** | **2005**                            | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                          | ** ** | **(In millions)**                   | ** ** | **(In millions)**                  | ** ** |
| Sales                               |       | $                                   | 226.2      |                               | $          | 208.6 |   | $ | 657.1 |   | $ | 581.3 |   |
| Cost of sales                       |       | 170.5                               |       | 157.1                              |       | 495.5 |   | 437.7 |   |
| Gross profit                        |       | 55.7                                |       | 51.5                               |       | 161.6 |   | 143.6 |   |
| Selling expenses                    |       | 23.3                                |       | 21.2                               |       | 67.9 |   | 60.5 |   |
| General and administrative expenses |       | 15.1                                |       | 14.1                               |       | 44.6 |   | 40.8 |   |
| Operating income                    |       | 17.3                                |       | 16.2                               |       | 49.1 |   | 42.3 |   |
| Interest expense, net               |       | 1.4                                 |       | 1.1                                |       | 4.2 |   | 3.9 |   |
| Income before taxes                 |       | 15.9                                |       | 15.1                               |       | 44.9 |   | 38.4 |   |
| Income taxes                        |       | 6.0                                 |       | 5.4                                |       | 16.9 |   | 14.3 |   |
| Net Income                          |       | $                                   | 9.9        |                               | $          | 9.7 |   | $ | 28.0 |   | $ | 24.1 |   |

 

The following table sets forth the components of incomeexpressed as a percentage of sales for the periods indicated:

 
| ** **                          | ** ** | **As a Percentage  of Sales**       | ** ** | **As a Percentage  of Sales**      | ** ** |
|-------------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                          | ** ** | **Three Months  Ended December 31** | ** ** | **Nine Months  Ended December 31** | ** ** |
| ** **                          | ** ** | **2005**                            | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Sales                               |       | 100.0                               | %          | 100.0                              | %          | 100.0 | % | 100.0 | % |
| Cost of sales                       |       | 75.4                                |       | 75.3                               |       | 75.4 |   | 75.3 |   |
| Gross profit                        |       | 24.6                                |       | 24.7                               |       | 24.6 |   | 24.7 |   |
| Selling expenses                    |       | 10.3                                |       | 10.2                               |       | 10.3 |   | 10.4 |   |
| General and administrative expenses |       | 6.6                                 |       | 6.8                                |       | 6.8 |   | 7.0 |   |
| Operating income                    |       | 7.7                                 |       | 7.7                                |       | 7.5 |   | 7.3 |   |
| Interest expense, net               |       | 0.7                                 |       | 0.5                                |       | 0.6 |   | 0.7 |   |
| Income before taxes                 |       | 7.0                                 |       | 7.2                                |       | 6.9 |   | 6.6 |   |
| Income taxes                        |       | 2.6                                 |       | 2.5                                |       | 2.6 |   | 2.4 |   |
| Net Income                          |       | 4.4                                 | %          | 4.7                                | %          | 4.3 | % | 4.2 | % |

 

Oursales and expenses during the periods shown were impacted by the acquisition ofeight printing businesses in fiscal 2005 and three printing businesses infiscal 2006. In accordance with the purchase method of accounting, ourconsolidated income statements reflect sales and expenses of acquiredbusinesses only for post-acquisition periods. Accordingly, acquisitions affectour financial results in any current year period compared to the prior yearperiod by (i) the full-period impact of prior year acquisitions (ascompared to the partial period impact in the prior year) and (ii) thepartial-period impact of current year acquisitions, and is referred to below as“incremental impact of acquisitions.”

 

# ***ComparativeAnalysis of Consolidated Income Statements for the Three Months EndedDecember 31, 2005 and 2004***

# ** **

Salesfor the quarter ended December 31, 2005 increased $17.6 million or 8% to$226.2 million from $208.6 million in the same period last year. After takinginto account the $13.0 million sales impact in the 2004 quarter fromelection-related printing, our 2005 quarterly sales increase was $30.6 million,or 16%, which reflects a $29.0 million increase from the incremental impact ofacquisitions and $1.6 million, or 1%, from internal sales growth.  National sales were a significant componentof our overall internal sales growth for the quarter. As a whole, nationalsales accounted for 8% of our revenue in the quarter ended December 31, 2005,up from 6% in the prior year.

 

Forthe quarter ended December 31, 2005, gross profit margin decreasedslightly to 24.6% as compared to the same period last year. Because of theoverall increase in sales discussed above, gross profit for the quarterincreased by $4.2 million.

 

Selling expenses for the quarter ended December 31, 2005 increased$2.1 million or 10% from $21.2 million for the same period last year. Theincrease is directly attributable to the increased sales levels noted above. Asa percentage of sales, selling expenses increased slightly to 10.3% as comparedto 10.2% for the same period last year.

 

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General and administrative expenses for the quarter endedDecember 31, 2005 increased $1.0 million or 7% from $14.1 million in thesame period last year, due principally to the incremental impact ofacquisitions. Our continuing efforts to control costs, together with therelatively fixed nature of corporate overhead, enabled us to gain additionalleverage on our sales, resulting in a decrease in our general andadministrative expenses as a percentage of sales to 6.6% as compared to 6.8%for the same period last year.

 

Interestexpense for the quarter ended December 31, 2005 increased to $1.4 millionfrom $1.1 million in the same period last year due to slightly higher overalldebt levels and a generally prevailing rising interest rate environment.

 

Weprovided for income taxes for the quarter ended December 31, 2005 of $6.0million, reflecting an effective tax rate of 37.3% as compared to a lowereffective tax rate of 35.5% for the same period last year.  The effective rate in the prior periodreflected a benefit due to a revision in our estimate of the effective tax ratefor the full year of fiscal 2005.

 

# ***ComparativeAnalysis of Consolidated Income Statements for the Nine Months Ended December31, 2005 and 2004***

 

Salesfor the nine months ended December 31, 2005 increased $75.8 million or 13%to $657.1 million from $581.3 million for the same period last year. Aftertaking into account the $18.0 million sales impact in the prior year fromelection-related printing, our sales increase for the nine months endedDecember 31, 2005, was $93.8 million, or 17%, which reflects a $88.4 millionincrease from the incremental impact of acquisitions and $5.4 million, or 1%,from internal sales growth.  Nationalsales were a significant component of our overall internal sales growth in thecurrent year. As a whole, national sales accounted for 7% of our revenue in thenine months ended December 31, 2005, up from 6% in the prior year.

 

Forthe nine months ended December 31, 2005, gross profit margin decreased slightlyto 24.6% as compared to the same period last year.  Because of the overall increase in salesdiscussed above, gross profit for the nine months ended December 31, 2005increased by $18.0 million.

 

Selling expenses for the nine months ended December 31, 2005 increased$7.4 million or 12% to $67.9 million from $60.5 million for the same periodlast year. The increase for the nine month period of this fiscal year isdirectly attributable to the increased sales levels noted above. As apercentage of sales, selling expenses for the nine months ended December 31,2005 decreased slightly to 10.3% as compared to 10.4% for the same period lastyear.

 

General and administrative expenses for the nine months ended December31, 2005 increased $3.8 million or 9% from $40.8 million for the same periodlast year, due principally to the incremental impact of acquisitions. Ourcontinuing efforts to control costs, together with the relatively fixed natureof corporate overhead, enabled us to gain additional leverage on our sales,resulting in the decrease in our general and administrative expenses as apercentage of sales to 6.8% for the nine months ended December 31, 2005, comparedto 7.0% for the same period last year.

 

Interestexpense for the nine months ended December 31, 2005 increased slightly to $4.2million from $3.9 million for the same period last year.  While debt levels were generally comparableyear-over-year, a generally prevailing environment of rising interest ratesresulted in the increase in interest expense in the current year.

 

Weprovided for income taxes for the nine months ended December 31, 2005 of $16.9million, reflecting an effective tax rate of 37.7% as compared to a slightlylower effective tax rate of 37.2% 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, payment of principaland interest on outstanding debt obligations and on occasion repurchases of ourcommon stock. Supplemental information pertaining to our historical sources anduses of cash is presented as follows and should be read in conjunction with ourconsolidated statements of cash flows and notes thereto included in *Item 1. Financial Statements:*

* *
| ** **                                                         | ** ** | **Nine Months Ended   December 31** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                         | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| ** **                                                         | ** ** | **(In millions)**                        | ** ** |
| Net cash  provided by operating activities                         |       | $                                        | 60.2       |   | $ | 51.9 |   |
| Acquisitions  of businesses                                        |       | (7.1                                     | )          | (2.2 | ) |
| Capital  expenditures, net of proceeds from asset dispositions (1) |       | (6.9                                     | )          | (8.1 | ) |
| Net proceeds  (payments) under bank credit facilities              |       | (32.7                                    | )          | .2 |   |
| Net payments  on term equipment notes and other debt               |       | (6.0                                     | )          | (48.9 | ) |
| Payments to  repurchase and retire common stock                    |       | (6.7                                     | )          | — |   |
|                                                                    |            |                                          |            |  |  |  |  |  |

 

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(1)*Excludescapital expenditures of $8.3 million in the nine month period ended December31, 2005 and $10.8 million in the nine month period ended December 31, 2004,which were directly financed and/or accrued as a current liability in suchperiods.*

 

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.****Financial Statements:*

 
| ** **                                               | ** ** | **December 31,  2****005** | ** ** | **March 31,   2005** | ** ** |
|----------------------------------------------------------|------------|----------------------------|------------|---------------------------|------------|
| ** **                                               | ** ** | **(In millions)**          | ** ** |
| Cash and  cash equivalents                               |       | $                          | 10.3       |                      | $          | 7.8 |   |
| Working  capital, inclusive of cash and cash equivalents |       | 65.8                       |       | 64.2                      |       |
| Total debt  obligations                                  |       | 87.4                       |       | 119.5                     |       |
|                                                          |            |                            |            |                           |            |  |  |

 

During the nine monthsended December 31, 2005, net cash provided by operating activitiesincreased by $8.3 million as compared to the same period last year.  This increase was the result of (i) a $6.9million relative increase in net cash provided by operating activitiesexcluding working capital changes, net of effects of acquisitions, primarilydue to a $3.9 million increase in net income and (ii) a relative increase inworking capital changes of $1.4 million. As with prior periods, we have continued our strategy to furtherstrengthen our financial position by primarily using cash flow in excess of ourrequirements for acquisitions and capital expenditures to make payments on our outstandingdebt obligations.  In addition, asdiscussed below, the Company paid $6.7 million to repurchase and retire 170,300shares of its common stock during the nine month period ended December 31, 2005.

 

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 primary bank credit facility or the issuance of additional termequipment 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. In November 2005, the Company announced that ithad entered into a non-binding letter of intent to acquire an affiliated groupof commercial printing companies operating as Nies/Artcraft Printing, ValcourPrinting and Impression Label in St. Louis, Missouri (the “St. Louis Group”).  The completion of this transaction, which issubject to certain conditions, is expected to occur by the end of the 2006fiscal year.

 

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We expect to fundfuture acquisitions, including the St. Louis Group, through cash flow providedby operations and/or additional borrowings. We have on occasion in the pastissued our common stock as purchase price consideration in ouracquisitions.  Although we may issuecommon stock for such purposes in the future, we do not expect to do so in thenear term because of our current financial liquidity and capability to utilizecash or make additional borrowings instead of issuing common stock.  The extent to which we will be willing orable to use our common stock in the future to make acquisitions will depend onits market value from time to time and the willingness of potential sellers toaccept it as full or partial payment for the acquisition price, as well as ourfinancial liquidity and available financing options.

 

In May 2004,our Board of Directors approved a common stock share repurchase program,providing for the repurchase of up to one million shares of our stock, not toexceed $40.0 million in the aggregate, in open-market or block purchasetransactions through March 31, 2006. We expect to fund any repurchasesunder the program through cash flow provided by operations or additionalborrowings under our primary bankcredit 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 limit us to repurchases not to exceed $75.0 millionin the aggregate. During the nine month period ended December 31, 2005, werepurchased 170,300 shares of our common stock at a total cost of $6.7 million.There can be no assurance that we will continue to repurchase any of our commonstock, and if so, whether we will be able to do so on terms acceptable to us.

 

*Debt Obligations*

 

Ourprimary bank credit facility (as amended and restated, the “Credit Agreement,”)is composed of a $150.0 million revolving credit facility that will maturein July 2007. At December 31, 2005, borrowings outstanding under theCredit Agreement were $30.0 million and accrued interest at a weightedaverage rate of 6.1%.

 

Theproceeds from borrowings under the Credit Agreement can be used to repaycertain indebtedness, finance certain acquisitions, provide for working capitaland general corporate purposes and, subject to certain restrictions, repurchaseour common stock. Borrowings outstanding under the Credit Agreement are securedby substantially all of our assets other than real estate and certain equipmentsubject to term equipment notes and other financings. Borrowings under theCredit Agreement accrue interest, at our option, at either (1) the LondonInterbank Offered Rate (LIBOR) plus a margin of 1.25% to 2.00%, 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 to..75%. We are also required to pay an annual commitment fee ranging from .275%to .375% on available but unused amounts under the Credit Agreement. Theinterest rate margin and the commitment fee are based upon certain financialperformance measures as set forth in the Credit Agreement and are redeterminedquarterly. At December 31, 2005, the applicable LIBOR interest rate marginwas 1.25% and the applicable commitment fee was .275%.

 

Weare subject to certain covenants and restrictions and we must meet certainfinancial tests as defined in the Credit Agreement. We were in compliance withthese covenants and financial tests at December 31, 2005. In the eventthat we are unable to remain in compliance with these covenants and financialtests in the future, our lenders would have the right to declare us in defaultwith respect to such obligations, and consequently, certain of our other debtobligations, including substantially all of our term equipment notes, would bedeemed to also be in default. All debt obligations in default would be requiredto be re-classified as a current liability. In the event that we were to beunable to obtain a waiver, re-negotiate or re-finance these obligations, amaterial adverse effect on our ability to conduct our operations in theordinary course likely would be the result. Based on our view of current marketand business conditions and our expectations regarding our future operatingresults and cash flows, we believe that we will be able to remain in compliancewith these covenants and financial tests in the foreseeable future.

 

In addition tothe Credit Agreement, we maintain two auxiliary revolving credit facilities(each an “Auxiliary Bank Facility” and collectively the “Auxiliary BankFacilities”) with commercial banks. Each Auxiliary Bank Facility is unsecuredand has a maximum borrowing capacity of $5.0 million. One facility expiresin November 2006 while the other facility expires in December 2006.At December 31, 2005, borrowings outstanding under the Auxiliary BankFacilities totaled $7.5 million and accrued interest at a weighted average rateof 5.6%. Because we currently have the ability to refinance the borrowingsoutstanding under the Auxiliary Bank Facilities expiring in November andDecember 2006 and plan to do so, such borrowings are classified as long-termdebt in our consolidated balance sheet at December 31, 2005. The AuxiliaryBank Facilities cross-default to the covenants and restrictions set forth inthe Credit Agreement.

 

Ourterm equipment notes consist primarily of notes payable pursuant to financingagreements between us and various lenders (the “Lender Notes”) and between usand the finance affiliate of a printing equipment manufacturer (the 

 

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“Equipment Notes”). AtDecember 31, 2005, outstanding borrowings under the Lender Notes totaled $20.9 millionand accrued interest at a weighted average rate of 5.1%. The Lender Notesprovide for fixed monthly principal payments plus interest (at fixed rates) fordefined periods of up to seven years from the date of issuance, and are securedby certain equipment of the Company. At December 31, 2005, outstandingborrowings under the Equipment Notes totaled $12.2 million and accrued interestat a weighted average rate of 5.9%. The Equipment Notes provide for fixedpayments of principal and interest (at fixed rates) for defined periods of upto ten years from the date of issuance and are secured by equipment which wasconcurrently purchased from the manufacturer. At December 31, 2005, theremaining balance of term equipment notes totaling $1.4 million primarilyconsists of various secured debt obligations assumed by us in connection withcertain prior year acquisitions. We are not subject to any significantfinancial covenants in connection with any of the term equipment notes. TheCredit Agreement places certain limitations on the amount of additional termnote obligations we may incur in the future; however, we do not anticipate thatthese limitations will restrict our ability to make any of our remainingplanned 2006 capital expenditures.

 

Ourother debt obligations consist of a mortgage of $4.8 million, a promissory notetotaling $2.7 million, industrial revenue bonds totaling $7.0 millionand various other debt obligations totaling $.9 million. We do not haveany significant financial covenants or restrictions associated with these otherdebt obligations.

 

**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 $54.7 million as of December 31, 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 December 31, 2005 for a combined total of $7.3million.  In addition, we had one otherletter of credit totaling $.1 million outstanding as of December 31, 2005. Allof 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 coveragein amounts and against risks we believe are reasonable under our circumstances.We are self-insured against most workers’ compensation claims and for asignificant component of our group health insurance programs. For theseexposures, we accrue expected loss amounts which are determined 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. Although we believe that the accrued estimated loss amounts arereasonable under the circumstances, significant differences related to theitems 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.

 

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**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 —*Accounts receivable at December 31, 2005were $145.2 million, net of a

$3.2million allowance for doubtful accounts. The valuation allowance was determinedbased upon our evaluation of known requirements, aging of receivables,historical experience and the current economic environment. While we believe wehave appropriately considered known or expected outcomes, our customers’ability to pay their obligations could be adversely affected by contraction inthe economy or other factors beyond our control. Changes in our estimates ofcollectibility could have a material adverse affect on our consolidatedfinancial condition or results of operations.

 

*Goodwill**–***We evaluate the carrying value of ourgoodwill as of March 31st of each year, or at any time that managementbecomes aware of an indication of impairment. Our evaluation is based oncertain data estimated by management to be indicators of future cash flows ateach of our facilities. Estimating future cash flows requires judgmentsregarding future economic conditions, demand for services and pricing. Ourevaluation also makes use of estimates of market multiples of cash flow atwhich transactions could be completed in the current market. If our estimatesof future cash flows or market multiples prove to be materially inaccurate, animpairment charge could be necessary in future periods.

 

*Impairment of long-lived assets* – We evaluate long-lived assets, includingproperty, plant and equipment and intangible assets other than goodwillwhenever events or changes in conditions indicate that the carrying value maynot be recoverable. The evaluation requires us to estimate future undiscountedcash flows associated with an asset or group of assets. If the cost of theasset or group of assets cannot be recovered by these undiscounted cash flows,then an impairment may exist. Estimating future cash flows requires judgmentsregarding future economic conditions, demand for services and pricing. Althoughwe believe our estimates are reasonable, significant differences in the actualperformance of the asset or group of assets may materially affect our assetvalues and require an impairment charge in future periods.

 

*Insurance liabilities* — We are self-insured for the majority of our workers’ compensationand group health insurance costs. Insurance claims liabilities have beenaccrued using a combination of our historical loss experience and subjectiveassessment of our future loss exposure, together with advice provided byadministrators and consulting actuaries. The estimates of expected loss amountsare subject to uncertainties arising from various sources, including changes inclaims reporting patterns, claims settlement patterns, judicial decisions,legislation and economic conditions, which could result in an increase ordecrease in accrued costs in future periods for claim matters which occurred ina prior period.

 

*Accounting for income taxes* – As part of the process of preparing our consolidated financialstatements, we are required to estimate our income taxes. This process involvesestimating our actual current tax exposure, together with assessing temporarydifferences resulting from differing treatment of items for tax and financialreporting purposes. The tax effects of these temporary differences are recordedas deferred 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 must establisha valuation allowance. Significant judgment is required in determining ourprovision for income taxes, our deferred tax assets and liabilities and anyvaluation allowance recorded against our net deferred tax assets. Additionally,we establish reserves when, despite our belief that our tax return positionsare fully supportable, we believe that certain positions are likely to bechallenged and that we may not succeed. We adjust these reserves in light ofchanging facts and circumstances. Our effective tax rate includes the impact ofreserve provisions and changes to reserves that we consider appropriate.

 

*Accounting for acquisitions* – The allocations of purchase price to acquired assets and liabilitiesare initially based on estimates of fair value and is prospectively revised ifand when additional information we are waiting for at the time of the initialallocations concerning certain asset and liability valuations is obtained,provided that such information is received no later than one year after thedate of acquisition.

 

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

 

Market risk generally meansthe risk that losses may occur in the value of certain financial instruments asa result of movements in interest rates, foreign currency exchange rates andcommodity prices. We do not currently hold or utilize derivative financialinstruments that could expose our Company to market risk. However, we areexposed to market risk for changes in interest rates related primarily to ourdebt obligations, which as of December 31, 2005 include borrowings underour bank credit facilities, various term equipment notes and other debtobligations. As of December 31, 2005, there were no material changes inour market risk or the estimated fair value of our debt obligations relative totheir recorded value, as reported in our Annual Report on Form 10-K forthe fiscal year ended March 31, 2005.

 

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

 

**DisclosureControls and Procedures**

 

TheCompany’s management, with the participation of the Company’s Chief ExecutiveOfficer (“CEO”) and Chief Financial Officer (“CFO”), has evaluated theeffectiveness of the Company’s disclosure controls and procedures (as such termis defined in Rules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”)) as of the end of theperiod covered by this report. Based on such evaluation, the Company’s CEO andCFO have concluded that, as of the end of such period, the Company’s disclosurecontrols and procedures were effective to ensure that information required tobe disclosed by the Company in reports that it files or submits under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the Securities and Exchange Commission’s rules andforms.

 

**InternalControl Over Financial Reporting**

 

Therehave not been any changes in the Company’s internal control over financialreporting (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.

 

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**CONSOLIDATED GRAPHICS, INC.**

**PART II – OTHER INFORMATION**

 

**ITEM 1.  *Legal Proceedings***

 

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

 

#### **ITEM 2.  *UnregisteredSales of Equity Securities and Use of Proceeds***

 

The Company has a common stock sharerepurchase program, providing for the repurchase of up to one million shares ofits common stock, not to exceed $40.0 million in the aggregate, in open-marketor block purchase transactions through March 31, 2006.  The following are details of repurchasesunder this program for the period covered by this report:

 
| **Period**                                                   | ** ** | **Total  Number of   Shares   Repurchased (a)** | ** ** | **Average   Price Paid   per Share** | ** ** | **Total  Number   of Shares   Repurchased   as Part of   Publicly   Announced   Plans** | ** ** | **Maximum   Number of Shares   that May Yet Be   Repurchased   Under the   Announced Plans** | ** ** |
|--------------------------------------------------------------|------------|-------------------------------------------------|------------|--------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
|                                                         |       |                                            |       |                                 |       |                                                                                    |       |                                                                                         |       |
| Repurchases from October 1, 2005 through  October 31, 2005   |       | 6,200                                           |       | $                                    | 39.50      |                                                                                    | 6,200      |                                                                                         | 829,700    |   |
|                                                         |       |                                            |       |                                 |       |                                                                                    |       |                                                                                         |       |
| Repurchases from November 1, 2005 through  November 30, 2005 |       | —                                          |       | —                               |       | —                                                                                  |       | 829,700                                                                                      |       |
|                                                         |       |                                            |       |                                 |       |                                                                                    |       |                                                                                         |       |
| Repurchases from December 1, 2005 through  December 31, 2005 |       | —                                          |       | —                               |       | —                                                                                  |       | 829,700                                                                                      |       |
|                                                         |       |                                            |       |                                 |       |                                                                                    |       |                                                                                         |       |
| Total                                                        |       | 6,200                                           |       | $                                    | 39.50      |                                                                                    | 6,200      |                                                                                         |       |   |

 

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(a)  All shares were purchased in open-markettransactions. The Company’s common stock share repurchase program was announcedin May 2004 and provides for the repurchase of up to one million shares of itscommon stock, not to exceed $40.0 million in the aggregate. The sharerepurchase program expires on March 31, 2006.

 

#### **ITEM 3.  *Defaults upon SeniorSecurities***

#### ** **

None.

 

**ITEM 4.  *Submission of 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). |
| 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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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:   February 1, 2006 | 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). |
| 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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*Incorporatedby reference

 

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