**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  September 30, 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 its charter)

 
| **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**

 

Indicateby check mark whether the Registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

 

Yes ý   No o

 

Indicateby check mark whether the Registrant is an accelerated filer (as defined inRule 12b-2 of the Securities Exchange Act of 1934).

 

Yes ý   No o

Indicateby check mark whether the Registrant is a shell company (as defined inRule 12b-2 of the Securities Exchange Act of 1934).

 

Yes o    No ý

 

The number of shares ofCommon Stock, par value $.01 per share, of the Registrant outstanding atOctober 15, 2005 was 13,638,698.

 

 

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**CONSOLIDATED GRAPHICS, INC.**

 

##### **FORM 10-Q FOR THE QUARTERLY PERIOD ENDEDSEPTEMBER 30, 2005**

##### ** **

**INDEX**

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

 

2

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**PART I – FINANCIAL INFORMATION**

 

**ITEM 1.  *FinancialStatements***

 

**CONSOLIDATED GRAPHICS, INC.**

**CONSOLIDATED BALANCE SHEETS**

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

 
| ** **                                                                                                      | ** ** | **September 30,  2005** | ** ** | **March 31,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|--------------------------|------------|
| ** **                                                                                                      | ** ** | **(Unaudited)**              | ** ** | **(Audited)**            | ** ** |
| ASSETS                                                                                                          | ** ** | ** **                   | ** ** | ** **               | ** ** |
|                                                                                                            |       |                         |       |                     |       |
| CURRENT ASSETS                                                                                                  |       |                         |       |                     |       |
| Cash and cash equivalents                                                                                       |       | $                            | 8,303      |                     | $          | 7,752 |   |
| Accounts receivable, net                                                                                        |       | 146,390                      |       | 136,824                  |       |
| Inventories                                                                                                     |       | 38,945                       |       | 37,149                   |       |
| Prepaid expenses                                                                                                |       | 4,762                        |       | 5,913                    |       |
| Deferred income taxes                                                                                           |       | 8,840                        |       | 7,843                    |       |
| Total current assets                                                                                            |       | 207,240                      |       | 195,481                  |       |
| PROPERTY AND EQUIPMENT, net                                                                                     |       | 288,880                      |       | 297,600                  |       |
| GOODWILL, net                                                                                                   |       | 82,017                       |       | 85,755                   |       |
| OTHER ASSETS                                                                                                    |       | 13,863                       |       | 11,393                   |       |
|                                                                                                            |       | $                            | 592,000    |                     | $          | 590,229 |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                       |       |                         |       |                     |       |
|                                                                                                            |       |                         |       |                     |       |
| CURRENT LIABILITIES                                                                                             |       |                         |       |                     |       |
| Current portion of long-term  debt                                                                              |       | $                            | 8,550      |                     | $          | 7,595 |   |
| Accounts payable                                                                                                |       | 49,151                       |       | 46,705                   |       |
| Accrued liabilities                                                                                             |       | 70,624                       |       | 75,143                   |       |
| Income taxes payable                                                                                            |       | 8,139                        |       | 1,813                    |       |
| Total current liabilities                                                                                       |       | 136,464                      |       | 131,256                  |       |
| LONG-TERM DEBT, net of current  portion                                                                         |       | 97,216                       |       | 111,895                  |       |
| DEFERRED INCOME TAXES                                                                                           |       | 62,288                       |       | 63,746                   |       |
| COMMITMENTS AND CONTINGENCIES                                                                                   |       |                         |       |                     |       |
| SHAREHOLDERS’ EQUITY                                                                                       |       |                         |       |                     |       |
| Common stock, $.01 par value;  100,000,000 shares authorized; 13,636,695 and 13,760,042 issued and  outstanding |       | 137                          |       | 138                      |       |
| Additional paid-in capital                                                                                      |       | 167,935                      |       | 168,905                  |       |
| Retained earnings                                                                                               |       | 127,960                      |       | 114,289                  |       |
| Total shareholders’ equity                                                                                 |       | 296,032                      |       | 283,332                  |       |
|                                                                                                            |       | $                            | 592,000    |                     | $          | 590,229 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

3

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**CONSOLIDATED GRAPHICS, INC.**

##### **CONSOLIDATED INCOMESTATEMENTS**

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

**(Unaudited)**

 
| ** **                                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                 | ** ** | **September 30**       | ** ** | **September 30**     | ** ** |
| ** **                                 | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                       |       |                   |       |                 |       |   |   |   |   |
| SALES                                      |       | $                      | 220,993    |                 | $          | 191,129 |   | $ | 430,908 |   | $ | 372,658 |   |
|                                       |       |                   |       |                 |       |   |   |   |   |
| COST OF SALES                              |       | 166,928                |       | 144,019              |       | 325,040 |   | 280,676 |   |
|                                       |       |                   |       |                 |       |   |   |   |   |
| Gross profit                               |       | 54,065                 |       | 47,110               |       | 105,868 |   | 91,982 |   |
|                                       |       |                   |       |                 |       |   |   |   |   |
| SELLING EXPENSES                           |       | 22,513                 |       | 19,705               |       | 44,543 |   | 39,226 |   |
|                                       |       |                   |       |                 |       |   |   |   |   |
| GENERAL AND ADMINISTRATIVE  EXPENSES       |       | 15,104                 |       | 13,808               |       | 29,463 |   | 26,656 |   |
|                                       |       |                   |       |                 |       |   |   |   |   |
| Operating income                           |       | 16,448                 |       | 13,597               |       | 31,862 |   | 26,100 |   |
|                                       |       |                   |       |                 |       |   |   |   |   |
| INTEREST EXPENSE, net                      |       | 1,426                  |       | 1,389                |       | 2,790 |   | 2,796 |   |
|                                       |       |                   |       |                 |       |   |   |   |   |
| Income before taxes                        |       | 15,022                 |       | 12,208               |       | 29,072 |   | 23,304 |   |
|                                       |       |                   |       |                 |       |   |   |   |   |
| INCOME TAXES                               |       | 5,689                  |       | 4,639                |       | 11,010 |   | 8,911 |   |
|                                       |       |                   |       |                 |       |   |   |   |   |
| Net income                                 |       | $                      | 9,333      |                 | $          | 7,569 |   | $ | 18,062 |   | $ | 14,393 |   |
|                                       |       |                   |       |                 |       |   |   |   |   |
| BASIC EARNINGS PER SHARE                   |       | $                      | .68        |                 | $          | .56 |   | $ | 1.31 |   | $ | 1.06 |   |
| DILUTED EARNINGS PER SHARE                 |       | $                      | .66        |                 | $          | .53 |   | $ | 1.27 |   | $ | 1.01 |   |
|                                       |       |                   |       |                 |       |   |   |   |   |
| SHARES USED TO COMPUTE EARNINGS  PER SHARE |       |                   |       |                 |       |   |   |   |   |
|                                       |       |                   |       |                 |       |   |   |   |   |
| Basic                                      |       | 13,754                 |       | 13,618               |       | 13,761 |   | 13,601 |   |
| Diluted                                    |       | 14,166                 |       | 14,222               |       | 14,197 |   | 14,189 |   |

 

See accompanying notes to consolidated financialstatements.

 

4

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**CONSOLIDATED GRAPHICS, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

**(Unaudited)**

 
| ** **                                                                                | ** ** | **Six Months Ended  September 30** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                | ** ** | **2005**                                | ** ** | **2004** | ** ** |
|                                                                                      |       |                                    |       |   |   |
| OPERATING ACTIVITIES                                                                      |       |                                    |       |   |   |
| Net income                                                                                |       | $                                       | 18,062     |   | $ | 14,393 |   |
| Adjustments to reconcile net  income to net cash provided  by  operating activities: |       |                                    |       |   |   |
| Depreciation and amortization                                                             |       | 22,382                                  |       | 19,719 |   |
| Deferred income tax provision                                                             |       | (766                                    | )          | 1,073 |   |
| Changes in assets and  liabilities, net of effects of acquisitions:                       |       |                                    |       |   |   |
| Accounts receivable, net                                                                  |       | (9,906                                  | )          | (7,527 | ) |
| Inventories                                                                               |       | (2,008                                  | )          | (6,208 | ) |
| Prepaid expenses                                                                          |       | 1,151                                   |       | 856 |   |
| Other assets                                                                              |       | (523                                    | )          | (776 | ) |
| Accounts payable and accrued  liabilities                                                 |       | (3,824                                  | )          | 2,484 |   |
| Income taxes payable                                                                      |       | 6,682                                   |       | 5,588 |   |
| Net cash provided by operating  activities                                                |       | 31,250                                  |       | 29,602 |   |
|                                                                                      |       |                                    |       |   |   |
| INVESTING ACTIVITIES                                                                      |       |                                    |       |   |   |
| Acquisitions of businesses, net  of cash acquired                                         |       | (1,235                                  | )          | (2,209 | ) |
| Purchases of property and  equipment                                                      |       | (6,557                                  | )          | (6,630 | ) |
| Proceeds from asset  dispositions                                                         |       | 1,256                                   |       | 627 |   |
| Net cash used in investing  activities                                                    |       | (6,536                                  | )          | (8,212 | ) |
|                                                                                      |       |                                    |       |   |   |
| FINANCING ACTIVITIES                                                                      |       |                                    |       |   |   |
| Proceeds from bank credit  facilities                                                     |       | 23,758                                  |       | 13,077 |   |
| Payments on bank credit  facilities                                                       |       | (38,522                                 | )          | (5,445 | ) |
| Payments on term equipment  notes and other debt                                          |       | (3,681                                  | )          | (31,506 | ) |
| Payments to repurchase and retire  common stock                                           |       | (6,410                                  | )          | — |   |
| Proceeds from exercise of stock  options                                                  |       | 692                                     |       | 1,166 |   |
| Net cash used in financing  activities                                                    |       | (24,163                                 | )          | (22,708 | ) |
|                                                                                      |       |                                    |       |   |   |
| NET INCREASE (DECREASE) IN CASH  AND CASH EQUIVALENTS                                     |       | 551                                     |       | (1,318 | ) |
| CASH AND CASH EQUIVALENTS AT BEGINNING  OF PERIOD                                         |       | 7,752                                   |       | 10,472 |   |
| CASH AND CASH EQUIVALENTS AT  END OF PERIOD                                               |       | $                                       | 8,303      |   | $ | 9,154 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

5

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**CONSOLIDATEDGRAPHICS, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

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

**(Unaudited)**

 

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

 

Theaccompanying unaudited consolidated financial statements include the accountsof Consolidated Graphics, Inc. and subsidiaries (collectively, the “Company”).  All intercompany accounts and transactionshave been eliminated.  Such statementshave been prepared in accordance with generally accepted accounting principlesand the Securities and Exchange Commission’s (“SEC”) rules and regulationsfor reporting interim financial information. Accordingly, they do not include all of the information and footnotesrequired by generally accepted accounting principles for complete financialstatements.  In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals)considered necessary for a fair presentation of the accompanying unauditedconsolidated financial statements have been included.  Operating results for the six months endedSeptember 30, 2005 are not necessarily indicative of future operatingresults. Balance sheet information as of March 31, 2005 has been derivedfrom the 2005 annual audited consolidated financial statements of the Company.For further information, refer to the consolidated financial statements andfootnotes thereto included in the Company’s Annual Report on Form 10-K forthe fiscal year ended March 31, 2005, filed with the SEC inJune 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 of intangible assets other than goodwill. The Company evaluatesits estimates 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’sdata have been made to conform to current 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:

 
| ** **        | ** ** | **September 30,** | ** ** | **March 31,** | ** ** |
|-------------------|------------|------------------------|------------|--------------------|------------|
| ** **        | ** ** | **2005**               | ** ** | **2005**           | ** ** |
|              |       |                   |       |               |       |
| Raw  materials    |       | $                      | 11,003     |               | $          | 11,863 |   |
| Work in  progress |       | 23,861                 |       | 21,518             |       |
| Finished  goods   |       | 4,081                  |       | 3,768              |       |
|              |       | $                      | 38,945     |               | $          | 37,149 |   |

 

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

 

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 sixmonths ended September 30, 2005, $4,721 which was financed using term notes(see Note 3. Long-Term Debt) and $1,744 which was accrued as a currentliability in the accompanying consolidated balance sheet. For the six monthsended September 30, 2005, the Company paid cash for interest and incometaxes, net of refunds, totaling $2,679 and $5,117. For the six months endedSeptember 30, 2004, the Company paid cash for interest and income taxes,net of refunds, totaling $2,900 and $1,684.

 

*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 a pricenot less than the market price of the stock at the date of grant. The Companyaccounts for its stock-based compensation programs using the intrinsic valuemethod 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 forma informationregarding net income and net income per share is required by the Statement ofFinancial Accounting Standards (“SFAS”) No. 123, *Accountingfor Stock-Based Compensation*. The pro forma information has beendetermined as if the Company had accounted for its stock options under the fairvalue method. The following is a summary of the Company’s net income andearnings per share as reported and pro forma as if the fair value-based methodof accounting defined in SFAS No. 123 had been applied. For purposesof pro forma disclosures, the estimated fair value of the options is amortizedto expense over the options’ vesting period. The pro forma effects of applyingSFAS No. 123 may not be representative of the effects on reported netincome for future years since options vest over several years and additionalawards are made each year.

 

Had the Company used thefair 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 thefollowing pro forma amounts:

 
| ** **                            | ** ** | **Three Month Ended  September 30** | ** ** | **Six Months Ended  September 30** | ** ** |
|---------------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                            | ** ** | **2005**                            | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                  |       |                                |       |                               |       |   |   |   |   |
| Net income as reported                |       | $                                   | 9,333      |                               | $          | 7,569 |   | $ | 18,062 |   | $ | 14,393 |   |
| Less: Pro forma compensation  expense |       | (492                                | )          | (368                               | )          | (1,041 | ) | (658 | ) |
| Pro forma net income                  |       | $                                   | 8,841      |                               | $          | 7,201 |   | $ | 17,021 |   | $ | 13,735 |   |
|                                  |       |                                |       |                               |       |   |   |   |   |
| **Basic Earnings Per Share:**         |       |                                |       |                               |       |   |   |   |   |
| Net income as reported                |       | $                                   | .68        |                               | $          | .56 |   | $ | 1.31 |   | $ | 1.06 |   |
| Less: Pro forma compensation  expense |       | (.03                                | )          | (.03                               | )          | (.07 | ) | (.05 | ) |
| Pro forma net income                  |       | $                                   | .65        |                               | $          | .53 |   | $ | 1.24 |   | $ | 1.01 |   |
|                                  |       |                                |       |                               |       |   |   |   |   |
| **Diluted Earnings Per Share:**       |       |                                |       |                               |       |   |   |   |   |
| Net income as reported                |       | $                                   | .66        |                               | $          | .53 |   | $ | 1.27 |   | $ | 1.01 |   |
| Less: Pro forma compensation  expense |       | (.03                                | )          | (.02                               | )          | (.07 | ) | (.04 | ) |
| Pro forma net income                  |       | $                                   | .63        |                               | $          | .51 |   | $ | 1.20 |   | $ | .97 |   |

 

7

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**2.  ACQUISITIONS**

 

During the six months endedSeptember 30, 2005, the Company paid cash totaling $465 to acquire theoperations and assets of one business, which was immediately merged intoanother existing operation of the Company. Additionally, the Company paid cashtotaling $769 in connection with finalization of certain working capitaladjustments related to the Company’s fiscal 2005 acquisitions. Based on certainadditional information received regarding the fiscal 2005 acquisitions, $2,513of purchase value previously attributed to property and equipment was allocatedto goodwill and a preliminary allocation of $6,000 was made from goodwill tointangible assets other than goodwill in the six month period endedSeptember 30, 2005.  Intangibleassets other than goodwill are reflected in Other Assets in the accompanyingconsolidated balance sheet. The Company is awaiting additional informationconcerning certain asset and liability valuations in order to finalize theallocation of purchase price for certain of the Company’s fiscal 2005 and 2006acquisitions, and expects to receive such information no later than one yearfollowing the respective dates of the acquisitions.

 

On October 3, 2005, theCompany announced that it had entered into a non-binding letter of intent toacquire Graphcom, Inc. in Atlanta, Georgia. The completion of this transaction, which is subject to certainconditions, is expected to occur by December 31, 2005.

 

**3.  LONG-TERM DEBT**

 

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

 
| ** **             | ** ** | **September 30,  2005** | ** ** | **March 31,   2005** | ** ** |
|------------------------|------------|------------------------------|------------|---------------------------|------------|
| Bank credit facilities |       | $                            | 55,431     |                      | $          | 70,195 |   |
| Term equipment notes   |       | 34,195                       |       | 32,295                    |       |
| Other                  |       | 16,140                       |       | 17,000                    |       |
|                   |       | 105,766                      |       | 119,490                   |       |
| Less: current portion  |       | (8,550                       | )          | (7,595                    | )          |
|                   |       | $                            | 97,216     |                      | $          | 111,895 |   |

 

The Company’s primary bankcredit facility (as amended and restated, the “Credit Agreement”) is composedof a $150,000 revolving credit facility that will mature in July 2007. AtSeptember 30, 2005, outstanding borrowings under the Credit Agreement were$46,000 and accrued interest at a weighted average rate of 5.98%.

 

The proceeds from borrowingsunder the Credit Agreement can be used to repay certain indebtedness, financecertain acquisitions, provide for working capital and general corporatepurposes and, subject to certain restrictions, repurchase the Company’s commonstock. Borrowings outstanding under the Credit Agreement are secured bysubstantially all of the Company’s assets other than real estate and certainequipment subject to term equipment notes and other financings. Borrowingsunder the Credit Agreement accrue interest, at the Company’s option, at either(1) the London Interbank Offered Rate (“LIBOR”) plus a margin of 1.25% to2.00%, or (2) an alternate base rate (based upon the greater of the agentbank’s prime lending rate or the Federal Funds effective rate plus .50%) plus amargin of up to .75%. The Company is also required to pay an annual commitmentfee ranging from .275% to .375% on available but unused amounts under theCredit Agreement. The interest rate margin and the commitment fee are basedupon certain financial performance measures as set forth in the CreditAgreement and are redetermined quarterly. At September 30, 2005, theapplicable LIBOR interest rate margin was 1.25% and the applicable commitmentfee was .275%.

 

The Company is subject tocertain covenants and restrictions and must meet certain financial tests underthe Credit Agreement. The Company was in compliance with such covenants,restrictions and financial tests at September 30, 2005.

 

8

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In addition to the CreditAgreement, the Company maintains two auxiliary revolving credit facilities(each an “Auxiliary Bank Facility” and collectively the “Auxiliary BankFacilities”) with commercial banks. Each Auxiliary Bank Facility is unsecuredand has a maximum borrowing capacity of $5,000. One facility expires inNovember 2005 while the other facility expires in November 2006. AtSeptember 30, 2005, borrowings outstanding under the Auxiliary BankFacilities totaled $9,431 and accrued interest at a weighted average rate of5.22%. Because the Company currently has the ability to refinance borrowingsoutstanding under the Auxiliary Bank Facility expiring in November 2005and plans to do so, such borrowings are classified as long-term debt in theaccompanying consolidated balance sheet at September 30, 2005. TheAuxiliary Bank Facilities cross-default to the covenants and restrictions setforth in the Credit Agreement.

 

The Company’s term equipmentnotes consist primarily of notes payable pursuant to financing agreementsbetween the Company and various lenders (the “Lender Notes”) and between theCompany and the finance affiliate of a printing equipment manufacturer (the “EquipmentNotes”). At September 30, 2005, outstanding borrowings under the LenderNotes****totaled $20,071 and accrued interestat a weighted average rate of 5.06%. The Lender Notes provide for fixed monthlyprincipal payments plus interest (at fixed rates) for defined periods of up toseven years from the date of issuance, and are secured by certain equipment ofthe Company. At September 30, 2005, outstanding borrowings under theEquipment Notes totaled $12,592 and accrued interest at a weighted average rateof 5.93%. The Equipment Notes provide for fixed payments of principal andinterest (at fixed rates) for defined periods of up to ten years from the dateof issuance and are secured by the equipment which was concurrently purchasedfrom the manufacturer. At September 30, 2005, the remaining balance ofterm equipment notes totaling $1,532 primarily consists of various secured debtobligations assumed by the Company in connection with certain prior yearacquisitions. The Company is not subject to any significant financial covenantsin connection with any of the term equipment notes; however, the CreditAgreement places certain limitations on the amount of additional term noteobligations the Company may incur in the future.

 

The Company’s remaining debtobligations consist of a mortgage totaling $4,889, a promissory note totaling$2,674, industrial revenue bonds totaling $7,495 and various other debt obligationstotaling $1,082. The Company does not have any significant financial covenantsor restrictions associated with these other debt obligations.

 

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**ITEM2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

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

 

*Thefollowing discussion of the financial condition and performance of our Companyshould be read in conjunction with the consolidated financial statementsincluded herein and the consolidated financial statements and related notes andother detailed information regarding our Company included in our Annual Reporton Form 10-K for the fiscal year ended March 31, 2005 and otherreports filed by us with the Securities and Exchange Commission. Operatingresults for the six months ended September 30, 2005 are not necessarilyindicative of the results to be expected for the entire fiscal year endingMarch 31, 2006 or any periods thereafter.*

 

**Overview**

 

*OurOrganization*

 

Our Company is a leading national provider of commercial printingservices and is recognized as the largest sheetfed and half-web commercialprinting company in the United States. We currently operate 70 printing businesses in 25 states, with each businessoperated as a wholly-owned subsidiary. Each of our printing businesses has awell-established operating history, more than 25 years in most cases, andoperates as a separate business and reporting unit, with their own management,sales, customer service, estimating and planning, prepress, production andaccounting staff. Generally, each facility substantially relies on locallybased customers; accordingly, we have a broad diversification of customers byindustry-type and geographic orientation, totaling more than 19,000. Noindividual facility nor any individual customer account for more than 10% ofour revenues.

 

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

 

*Nature of Our Services*

 

We are a service businessthat utilizes sophisticated technology and equipment to produce and deliverhigh quality printed documents, materials and products for our customers totheir specification and design, including all content. The scope and extent ofservices provided to our customers typically varies for each individual orderwe receive, depending on customer-specific factors including the intended usesfor the printed materials. Furthermore, each of our printing businessesgenerally is capable of providing the complete range of our services to theircustomers which include fulfillment, mailing or other print-related services.They may also use our Internet-based e-commerce solutions, marketed under the “CGXSolutions” trademark which are complementary to the production and delivery ofthe printed materials. Collectively, all of these discrete capabilitiescomprise a “comprehensive range of printing services” for which we typicallycharge an “all-inclusive” fee. Accordingly, for financial reporting purposes, we report our revenuesand results of operations as a single segment.

 

Our sales are derived fromcommercial printing services. These services consist of (i) traditionalprint services, including electronic prepress, printing, finishing, storage anddelivery of high-quality printed documents which are custom manufactured to ourcustomers’ design specifications; (ii) fulfillment and mailing servicesfor such printed materials, and (iii) e-commerce solutions that enable ourcustomers to improve their processes over the procurement and management of

 

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printedmaterials. Examples of the types of documents we print for our customersinclude high-quality, multicolor marketing materials, product and capabilitybrochures, point-of-purchase displays, direct mail pieces, shareholdercommunications, catalogs, and training manuals.

 

The substantial majority ofour sales are generated by individual orders through commissioned salespersonnel. We recognize revenue from these orders when we deliver the orderedgoods and services. To a large extent, continued engagement of our Company byour customers for successive business opportunities depends upon the customers’satisfaction with the quality of services we provide. As such, it is difficultfor us to predict the number, size, and profitability of printing services thatwe expect to provide for more than a few weeks in advance.

 

Our cost of sales mainlyconsists of raw materials consumed in the printing process, as well as laborand outside services, such as delivery costs. Paper cost is the mostsignificant component of our materials cost; however, fluctuation in paperpricing generally does not materially impact our operating margins because wetypically quote, and subsequently purchase, paper for each specific printingjob we are awarded. As a result, any changes in paper pricing are effectivelypassed through to customers by our printing businesses. Additionally, our costof sales includes salary and benefits paid to operating personnel, maintenance,repair, rental and insurance costs associated with operating our facilities andequipment and depreciation charges.

 

Our selling expensesgenerally include the compensation paid to our sales professionals, along withpromotional, travel and entertainment costs. Our general and administrativeexpenses generally include the salary and benefits paid to support personnel atour printing businesses and our corporate staff, as well as office rent,utilities and communications expenses, and various professional services.

 

*OurStrategy*

 

We are focused on addingvalue to our printing businesses by providing the financial and operationalstrengths, management support and technological advantages associated with anational organization. Our strategy currently includes the followinginitiatives to generate sales and profit growth:

 

•              *Internal Sales Growth—*We seek to use ourcompetitive advantages to expand market share. We continue to pursue additionalexperienced sales professionals, invest in new equipment and technology, expandour national accounts customer base and develop new and expanded print-relatedservices.

 

•              *Disciplined Acquisition Program—*Weselectively pursue opportunities to acquire additional printing businesses atreasonable prices. Some of these acquisitions may include smaller and/ordistressed printing businesses for merger into one of our existing businesses.

 

•              *Cost Savings—*Because of our size andnational presence, we leverage our economies of scale to purchase supplies andequipment at preferential prices, and centralize various administrativeservices to generate cost savings.

 

•              *Best Practices/Benchmarking—*We provide aforum for our printing businesses to share their knowledge of technicalprocesses and best practices with one another, as well as benchmark financialand operational data to help our printing businesses identify and respond tochanges in operating trends.

 

•              *Leadership Development—*Through our uniqueLeadership Development Program, we develop talent for future sales andmanagement positions at our printing businesses.

 

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**Results ofOperations**

 

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

 
| ** **                           | ** ** | **Three Months  Ended September 30** | ** ** | **Six Months  Ended September 30** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                           | ** ** | **2005**                             | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                           | ** ** | **(In millions)**                    | ** ** | **(In millions)**                  | ** ** |
| Sales                                |       | $                                    | 221.0      |                               | $          | 191.1 |   | $ | 430.9 |   | $ | 372.7 |   |
| Cost of sales                        |       | 166.9                                |       | 144.0                              |       | 325.0 |   | 280.7 |   |
| Gross profit                         |       | 54.1                                 |       | 47.1                               |       | 105.9 |   | 92.0 |   |
| Selling expenses                     |       | 22.5                                 |       | 19.7                               |       | 44.5 |   | 39.2 |   |
| General and administrative  expenses |       | 15.2                                 |       | 13.8                               |       | 29.5 |   | 26.7 |   |
| Operating income                     |       | 16.4                                 |       | 13.6                               |       | 31.9 |   | 26.1 |   |
| Interest expense, net                |       | 1.4                                  |       | 1.4                                |       | 2.8 |   | 2.8 |   |
| Income before taxes                  |       | 15.0                                 |       | 12.2                               |       | 29.1 |   | 23.3 |   |
| Income taxes                         |       | 5.7                                  |       | 4.6                                |       | 11.0 |   | 8.9 |   |
| Net Income                           |       | $                                    | 9.3        |                               | $          | 7.6 |   | $ | 18.1 |   | $ | 14.4 |   |

 

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

 
| ** **                           | ** ** | **As a Percentage  of Sales**        | ** ** | **As a Percentage  of Sales**      | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                           | ** ** | **Three Months  Ended September 30** | ** ** | **Six Months  Ended September 30** | ** ** |
| ** **                           | ** ** | **2005**                             | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Sales                                |       | 100.0                                | %          | 100.0                              | %          | 100.0 | % | 100.0 | % |
| Cost of sales                        |       | 75.5                                 |       | 75.4                               |       | 75.4 |   | 75.3 |   |
| Gross profit                         |       | 24.5                                 |       | 24.6                               |       | 24.6 |   | 24.7 |   |
| Selling expenses                     |       | 10.2                                 |       | 10.3                               |       | 10.3 |   | 10.5 |   |
| General and administrative  expenses |       | 6.9                                  |       | 7.2                                |       | 6.9 |   | 7.2 |   |
| Operating income                     |       | 7.4                                  |       | 7.1                                |       | 7.4 |   | 7.0 |   |
| Interest expense, net                |       | 0.6                                  |       | 0.7                                |       | 0.6 |   | 0.7 |   |
| Income before taxes                  |       | 6.8                                  |       | 6.4                                |       | 6.8 |   | 6.3 |   |
| Income taxes                         |       | 2.6                                  |       | 2.4                                |       | 2.6 |   | 2.4 |   |
| Net Income                           |       | 4.2                                  | %          | 4.0                                | %          | 4.2 | % | 3.9 | % |

 

Our sales and expensesduring the periods shown were impacted by the acquisition of eight printingbusinesses in fiscal 2005 and one printing business in fiscal 2006. Inaccordance with the purchase method of accounting, our consolidated incomestatements reflect sales and expenses of acquired businesses only forpost-acquisition periods. Accordingly, acquisitions affect our financialresults in any current year period compared to the prior year period by(i) the full-period impact of prior year acquisitions (as compared to thepartial period impact in the prior year) and (ii) the partial-periodimpact of current year acquisitions, and is referred to below as “incrementalimpact of acquisitions.”

 

# ***Comparative Analysis of Consolidated Income Statementsfor the Three Months Ended September 30, 2005 and 2004***

# ** **

Salesfor the quarter ended September 30, 2005 increased $29.9 million or 16% to$221.0 million from $191.1 million in the same period last year. After takinginto account the $5.0 million sales impact in the 2004 quarter from election-relatedprinting, our 2005 quarterly sales increase was $34.9 million, or 19%, whichreflects $30.6 million incremental impact of acquisitions and $4.3 million, or2.2%, from internal sales growth. National sales were a significant component of our overall internalsales growth for the quarter. As a whole, national sales accounted for 7% of ourrevenue in the quarter ended September 30, 2005, up from 5% in the prior year.

 

Forthe quarter ended September 30, 2005, gross profit margin decreasedslightly to 24.5% as compared to the same period last year and, coupled withour overall sales increase, resulted in a $7.0 million increase in gross profitfor the quarter.

 

Selling expensesfor the quarter ended September 30, 2005 increased $2.8 million or 14%from $19.7 million for the same period last year. The increase is directlyattributable to the increased sales levels noted above. As a percentage ofsales, selling expenses decreased slightly to 10.2% as compared to 10.3% forthe same period last year.

 

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General andadministrative expenses for the quarter ended September 30, 2005 increased$1.4 million or 9% from $13.8 million in the same period last year, dueprincipally to the incremental impact of acquisitions. Our continuing effortsto control costs, together with the relatively fixed nature of corporateoverhead, enabled us to gain additional leverage on our sales, resulting in aslight decrease in our general and administrative expenses as a percentage ofsales to 6.9% as compared to 7.2% for the same period last year.

 

Interest expense for thequarter ended September 30, 2005 remained constant at $1.4 million fromthe same period last year, as debt levels were generally comparableyear-over-year.

 

We provided for income taxesfor the quarter ended September 30, 2005 of $5.7 million, reflecting aneffective tax rate of 37.9% as compared to a slightly higher effective tax rateof 38.0% for the same period last year.

 

# ***Comparative Analysis of Consolidated Income Statementsfor the Six Months Ended September 30, 2005 and 2004***

 

Salesfor the six months ended September 30, 2005 increased $58.2 million or 16%to $430.9 million from $372.7 million in the same period last year. Aftertaking into account the $5.0 million sales impact in the prior year from election-relatedprinting, our 2005 year to date sales increase was $63.2 million, or 17%, whichreflects $59.4 million incremental impact of acquisitions and $3.8 million, or1%, 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 thesix months ended September 30, 2005, up from 5% in the prior year.

 

Forthe six months ended September 30, 2005, gross profit margin decreased slightlyto 24.6% as compared to the same period last year and, coupled with our overallsales increase, resulted in a $13.9 million increase in gross profit for the sixmonth 2005 period.

 

Selling expensesfor the six months ended September 30, 2005 increased 14% to $44.5 million from$39.2 million in the same period last year. The increase for the six monthperiod of this fiscal year is directly attributable to the increased saleslevels noted above. As a percentage of sales, selling expenses for the sixmonths ended September 30, 2005 decreased slightly to 10.3% as compared to10.5% for the same period last year.

 

General andadministrative expenses for the six months ended September 30, 2005 increased $2.8million or 11% to $29.5 million from $26.7 million in the same period lastyear, due principally to the incremental impact of acquisitions. Our continuingefforts to control costs, together with the relatively fixed nature ofcorporate overhead, enabled us to gain additional leverage on our sales,resulting in the decrease in our general and administrative expenses as apercentage of sales, which decreased to 6.9% for the six months ended September30, 2005, from 7.2% for the same period last year.

 

Interest expense for the sixmonths ended September 30, 2005 remained constant at $2.8 million from the sameperiod last year, as debt levels were generally comparable year-over-year.

 

We provided for income taxesfor the six months ended September 30, 2005 of $11.0 million, reflecting aneffective tax rate of 37.9% as compared to an effective tax rate of 38.2% forthe same period last year.

 

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**Liquidityand Capital Resources**

 

*Sourcesand Uses of Cash*

 

Our historical sources ofcash have primarily been cash provided by operations or borrowings undervarious bank credit facilities. Our historical uses of cash have been foracquisitions of printing businesses, capital expenditures, 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:*

 
| ** **                                                         | ** ** | **Six Months Ended   September 30** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                         | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| ** **                                                         | ** ** | **(In millions)**                        | ** ** |
| Net cash  provided by operating activities                         |       | $                                        | 31.3       |   | $ | 29.6 |   |
| Acquisitions  of businesses                                        |       | (1.2                                     | )          | (2.2 | ) |
| Capital  expenditures, net of proceeds from asset dispositions (1) |       | (5.3                                     | )          | (6.0 | ) |
| Net proceeds  (payments) under bank credit facilities              |       | (14.8                                    | )          | 7.6 |   |
| Net payments  on term equipment notes and other debt               |       | (3.7                                     | )          | (31.5 | ) |
| Payments to  repurchase and retire common stock                    |       | (6.4                                     | )          | — |   |
|                                                                    |            |                                          |            |  |  |  |  |

 

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(1)*Excludes capital expenditures of $6.5 million inthe six month period ended September 30, 2005 and $4.4 million in the six monthperiod ended September 30, 2004, which were directly financed and/or accrued asa current liability in such periods.*

 

Additionally, our cashposition, working capital and debt obligations are shown below and should beread in conjunction with our consolidated balance sheets and notes theretoincluded in *Item 1.****Financial Statements:*

 
| ** **                                               | ** ** | **September 30,****2005** | ** ** | **March 31,   2005** | ** ** |
|----------------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                                               | ** ** | **(In millions)**         | ** ** |
| Cash and cash equivalents                                |       | $                         |  8.3  |                      | $          |  7.8 |   |
| Working capital, inclusive of cash and cash  equivalents |       | 70.8                      |       | 64.2                      |       |
| Total debt obligations                                   |       | 105.8                     |       | 119.5                     |       |
|                                                          |            |                           |            |                           |            |  |  |

 

During the six months endedSeptember 30, 2005, net cash provided by operating activities increased by$1.7 million as compared to the same period last year. This increase was theresult of a $4.5 million relative increase in net cash provided by operatingactivities excluding working capital changes, net of effects of acquisitions,offset by a relative decrease in working capital changes of $2.8 million.  As with prior periods, we have continued ourstrategy to further strengthen our financial position by primarily using cashflow in excess of our requirements for acquisitions and capital expenditures tomake payments on outstanding debt obligations. In addition, as discussed below, the Company paid $6.4 million torepurchase and retire 164,100 shares of its common stock in the second quarterof the current fiscal year.

 

We believe that our cashflow provided by operations will be adequate to cover our fiscal 2006 workingcapital needs, debt service requirements and planned capital expenditures tothe extent such items are known or are reasonably determinable based on currentbusiness and market conditions. However, we may elect to finance certain of ourcapital expenditure requirements through borrowings under our primary bankcredit facility or the issuance of additional term equipment notes.

 

We intend to continuepursuing acquisition opportunities at prices we believe are reasonable basedupon market conditions. However, we cannot accurately predict the timing, sizeand success of our acquisition efforts or our associated potential capitalcommitments. There can be no assurance that we will be able to acquire additionalprinting businesses on terms acceptable to us. On October 3, 2005, the Companyannounced that it had entered into a non-binding letter of intent to acquireGraphcom, Inc. in Atlanta, Georgia.  Thecompletion of this transaction, which is subject to certain conditions, isexpected to occur by December 31, 2005.

 

We expect to fund futureacquisitions, including Graphcom, through cash flow provided by operationsand/or additional borrowings. We have on occasion in the past issued our commonstock as purchase price consideration in our acquisitions.  Although we may issue common stock for suchpurposes in the future, we do not expect to do so in the near term because ofour current financial liquidity and capability to utilize cash or make additionalborrowings instead of issuing common stock. The extent to which we will be willing or able to use our common stock inthe future to make acquisitions will depend on its market value from time totime and the willingness of

 

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potential sellers to accept it as full or partialpayment for the acquisition price, as well as our financial liquidity andavailable financing options.

 

In May 2004, ourBoard of Directors approved a common stock share repurchase program, providingfor the repurchase of up to one million shares of our stock, not to exceed$40.0 million in the aggregate, in open-market or block purchase transactionsthrough March 31, 2006. We expect to fund any repurchases under theprogram through cash flow provided by operations or additional borrowings underour primary bank credit facility. Theamount and timing of any purchases will depend upon a number of factors,including the Company’s liquidity and potential alternative uses of our capitalresources, the price and availability of our shares, general market conditionsand certain repurchase restrictions in our primary bank credit facility, whichlimit us to repurchases not to exceed $75.0 million in the aggregate. Duringthe quarter ended September 30, 2005, we repurchased 164,100 shares of ourcommon stock at a total cost of $6.4 million. There can be no assurance that wewill continue to repurchase any of our common stock, and if so, whether we willbe able to do so on terms acceptable to us.

 

*DebtObligations*

 

Our primary bank creditfacility (as amended and restated, the “Credit Agreement,”) is composed of a$150.0 million revolving credit facility that will mature inJuly 2007. At September 30, 2005, borrowings outstanding under theCredit Agreement were $46.0 million and accrued interest at a weightedaverage rate of 5.98%.

 

The proceeds from borrowingsunder the Credit Agreement can be used to repay certain indebtedness, financecertain acquisitions, provide for working capital and general corporatepurposes and, subject to certain restrictions, repurchase our common stock.Borrowings outstanding under the Credit Agreement are secured by substantiallyall of our assets other than real estate and certain equipment subject to termequipment notes and other financings. Borrowings under the Credit Agreementaccrue interest, at our option, at either (1) the London Interbank OfferedRate (LIBOR) plus a margin of 1.25% to 2.00%, or (2) an alternate baserate (based upon the greater of the agent bank’s prime lending rate or theFederal Funds effective rate plus .50%) plus a margin of up to .75%. We arealso required to pay an annual commitment fee ranging from .275% to .375% onavailable but unused amounts under the Credit Agreement. The interest rate marginand the commitment fee are based upon certain financial performance measures asset forth in the Credit Agreement and are redetermined quarterly. AtSeptember 30, 2005, the applicable LIBOR interest rate margin was 1.25%and the applicable commitment fee was .275%.

 

We are subject to certaincovenants and restrictions and we must meet certain financial tests as definedin the Credit Agreement. We were in compliance with these covenants andfinancial tests at September 30, 2005. In the event that we are unable toremain in compliance with these covenants and financial tests in the future,our lenders would have the right to declare us in default with respect to suchobligations, and consequently, certain of our other debt obligations, includingsubstantially all of our term equipment notes, would be deemed to also be indefault. All debt obligations in default would be required to be re-classifiedas a current liability. In the event that we were to be unable to obtain awaiver, re-negotiate or re-finance these obligations, a material adverse effecton our ability to conduct our operations in the ordinary course likely would bethe result. Based on our view of current market and business conditions and ourexpectations regarding our future operating results and cash flows, we believethat we will be able to remain in compliance with these covenants and financialtests in the foreseeable future.

 

In addition to the CreditAgreement, we maintain two auxiliary revolving credit facilities (each an “AuxiliaryBank Facility” and collectively the “Auxiliary Bank Facilities”) withcommercial banks. Each Auxiliary Bank Facility is unsecured and has a maximumborrowing capacity of $5.0 million. One facility expires inNovember 2005 while the other facility expires in November 2006. AtSeptember 30, 2005, borrowings outstanding under the Auxiliary BankFacilities totaled

$9.4 million and accrued interest at aweighted average rate of 5.22%. Because we currently have the ability torefinance the borrowings outstanding under the Auxiliary Bank Facility expiringin November 2005 and plan to do so, such borrowings are classified aslong-term debt in our consolidated balance sheet at September 30, 2005.The Auxiliary Bank Facilities cross-default to the covenants and restrictionsset forth in the Credit Agreement.

 

Our term equipment notesconsist primarily of notes payable pursuant to financing agreements between usand various lenders (the “Lender Notes”) and between us and the financeaffiliate of a printing equipment manufacturer (the “Equipment Notes”). AtSeptember 30, 2005, outstanding borrowings under the Lender Notes totaled$20.1 million and accrued interest at a weighted average rate of 5.06%.The Lender Notes provide for fixed monthly principal payments plus interest (atfixed rates) for defined periods of up to seven years from the date ofissuance, and are secured by certain equipment of the Company. AtSeptember 30, 2005, outstanding borrowings under the Equipment Notestotaled $12.6 million and accrued interest at a weighted average rate of 5.93%.The Equipment Notes provide for fixed payments of principal and interest (atfixed rates) for defined periods of up to ten years from the date of issuanceand are secured by

 

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equipmentwhich was concurrently purchased from the manufacturer. At September 30,2005, the remaining balance of term equipment notes totaling $1.5 millionprimarily consist of various secured debt obligations assumed by us inconnection with certain prior year acquisitions. We are not subject to anysignificant financial covenants in connection with any of the term equipmentnotes. The Credit Agreement places certain limitations on the amount ofadditional term note obligations we may incur in the future; however, we do notanticipate that these limitations will restrict our ability to make any of ourremaining planned 2006 capital expenditures.

 

Our other debt obligationsconsist of a mortgage of $4.9 million, a promissory note totaling$2.7 million, industrial revenue bonds totaling $7.5 million andvarious other debt obligations totaling $1.1 million. We do not have anysignificant financial covenants or restrictions associated with these otherdebt obligations.

 

**ContractualObligations and Other Commitments**

 

*Operating Leases*— We have entered into various noncancelable operating leases primarily relatedto facilities and equipment used in the ordinary course of our business. Ourfuture contractual obligations under such operating leases total approximately$58.2 million as of September 30, 2005.

 

*Lettersof Credit* — In connection with our assumption of obligationsunder outstanding industrial revenue bonds related to certain prior yearacquisitions of printing businesses, which are reflected as debt in theaccompanying consolidated financial statements, we had four letters of creditoutstanding as of September 30, 2005 for a combined total of $7.8 million.  In addition, we had two other letters ofcredit totaling $0.6 million outstanding as of September 30, 2005. All of theseletters of credit were issued pursuant to the terms of our Credit Agreement,which expires in July 2007, and we may be required to obtain replacementletters of credit at that time.

 

*Insurance Programs*— We maintain third-party insurance coverage in amounts and againstrisks we believe are reasonable under our circumstances. We are self-insuredagainst most workers’ compensation claims and for a significant component ofour group health insurance programs. For these exposures, we accrue expectedloss amounts which are determined using a combination of our historical lossexperience and subjective assessment of our future loss exposure, together withadvice provided by administrators and consulting actuaries. The estimates ofexpected loss amounts are subject to uncertainties arising from varioussources, including changes in claims reporting patterns, claims settlementpatterns, judicial decisions, legislation and economic conditions, which couldresult in an increase or decrease in accrued costs in future periods for claimmatters which occurred in a prior period. Although we believe that the accruedestimated loss amounts are reasonable under the circumstances, significantdifferences related to the items noted above could materially affect our riskexposure, insurance obligations, and future expense.

 

**FactorsWhich May Affect Future Results**

 

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

 

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**CriticalAccounting Policies**

 

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

 

*Receivables, net of valuation allowance –*Accounts receivable at September 30,2005 were $146.4 million, net of a $3.7 million allowance for doubtfulaccounts. The valuation allowance was determined based upon our evaluation ofknown requirements, aging of receivables, historical experience and the currenteconomic environment. While we believe we have appropriately considered knownor expected outcomes, our customers’ ability to pay their obligations could beadversely affected by contraction in the economy or other factors beyond ourcontrol. Changes in our estimates of collectibility could have a materialadverse affect on our consolidated financial condition or results ofoperations.

 

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

 

*Impairmentof long-lived assets* –We evaluate long-lived assets, including property, plant and equipment andintangible assets other than goodwill whenever events or changes in conditionsindicate that the carrying value may not be recoverable. The evaluationrequires us to estimate future undiscounted cash flows associated with an assetor group of assets. If the cost of the asset or group of assets cannot berecovered by these undiscounted cash flows, then an impairment may exist.Estimating future cash flows requires judgments regarding future economicconditions, demand for services and pricing. Although we believe our estimatesare reasonable, significant differences in the actual performance of the assetor group of assets may materially affect our asset values and require animpairment charge in future periods.

 

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

 

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

 

*Accountingfor acquisitions* –The allocations of purchase price to acquired assets and liabilities areinitially based on estimates of fair value and is prospectively revised if andwhen 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.

 

17

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***ITEM 3. Quantitative and Qualitative 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 are exposedto market risk for changes in interest rates related primarily to our debtobligations, which as of September 30, 2005 include borrowings under ourbank credit facilities, various term equipment notes and other debtobligations. As of September 30, 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***

 

**Disclosure Controls andProcedures**

 

The Company’s management,with the participation of the Company’s Chief Executive Officer (“CEO”) andChief Financial Officer (“CFO”), has evaluated the effectiveness of the Company’sdisclosure controls and procedures (as such term is defined inRules 13a-15(e) and 15d-15(e) under the Securities Exchange Actof 1934, as amended (the “Exchange Act”)) as of the end of the period coveredby this report. Based on such evaluation, the Company’s CEO and CFO haveconcluded that, as of the end of such period, the Company’s disclosure controlsand procedures were effective to ensure that information required to bedisclosed by the Company in reports that it files or submits under the ExchangeAct is recorded, processed, summarized and reported within the time periodsspecified in the Securities and Exchange Commission’s rules and forms.

 

**Internal Control Over FinancialReporting**

 

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

 

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**CONSOLIDATED GRAPHICS, INC.**

**PART II– OTHER INFORMATION**

 

**ITEM1.  *Legal Proceedings***

 

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

 

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

 

The Company has a common stock share repurchase program, providing forthe repurchase of up to one million shares of its common stock, not to exceed$40.0 million in the aggregate, in open-market or block purchase transactionsthrough March 31, 2006.  The followingare details of repurchases under this program for the period covered by thisreport:

 
| ** **                                                     | ** ** | ** **          | ** ** | ** **     | ** ** | **Total Number** | ** ** | ** **           | ** ** |
|----------------------------------------------------------------|------------|---------------------|------------|----------------|------------|------------------|------------|----------------------|------------|
| ** **                                                     | ** ** | ** **          | ** ** | ** **     | ** ** | **of Shares**    | ** ** | **Maximum**          | ** ** |
| ** **                                                     | ** ** | ** **          | ** ** | ** **     | ** ** | **Repurchased**  | ** ** | **Number of Shares** | ** ** |
| ** **                                                     | ** ** | ** **          | ** ** | ** **     | ** ** | **as Part of**   | ** ** | **that May Yet Be**  | ** ** |
| ** **                                                     | ** ** | **Total Number of** | ** ** | **Average**    | ** ** | **Publicly**     | ** ** | **Repurchased**      | ** ** |
| ** **                                                     | ** ** | **Shares**          | ** ** | **Price Paid** | ** ** | **Announced**    | ** ** | **Under the**        | ** ** |
| **Period**                                                     | ** ** | **Repurchased (a)** | ** ** | **per Share**  | ** ** | **Plans**        | ** ** | **Announced Plans**  | ** ** |
|                                                           |       |                |       |           |       |             |       |                 |       |
| Repurchases from July 1, 2005 through July  31, 2005           |       | —              |       | —         |       | —           |       | 1,000,000            |       |
|                                                           |       |                |       |           |       |             |       |                 |       |
| Repurchases from August 1, 2005 through  August 31, 2005       |       | 22,200              |       | $              | 39.85      |             | 22,200     |                 | 977,800    |   |
|                                                           |       |                |       |           |       |             |       |                 |       |
| Repurchases from September 1, 2005 through  September 30, 2005 |       | 141,900             |       | $              | 38.94      |             | 141,900    |                 | 835,900    |   |
|                                                           |       |                |       |           |       |             |       |                 |       |
| Total                                                          |       | 164,100             |       | $              | 39.07      |             | 164,100    |                 |       |   |

 

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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 its commonstock, not to exceed $40.0 million in the aggregate. The share repurchaseprogram expires on March 31, 2006.

 

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

#### ** **

None.

 

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

 

OnJuly 28, 2005, the Company held its Annual Meeting of Shareholders. Thefollowing item was submitted to a vote of shareholders through the solicitationof proxies:

 

*Electionof Class III Directors*

 

The following persons wereelected to serve as Class III directors on the Company’s Board of Directorsuntil the 2008 Annual Meeting of Shareholders or until their successors havebeen duly elected and qualified or until the earlier of their resignation orremoval. Voting results were as follows:

 

19

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| ** **          | ** ** | **For**   | ** ** | **Against (1)** | ** ** |
|---------------------|------------|-----------|------------|-----------------|------------|
|                |       |      |       |            |       |
| Joe R. Davis        |       | 9,441,188 |       | 4,282,465       |       |
| Hugh N.  West, M.D. |       | 8,045,987 |       | 5,677,666       |       |

 

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(1)   Indetermining the results of voting, abstentions or authorizations withheld andbroker nonvotes have the same effect as a vote against the nominated director.

 

Directors continuing inoffice as Class I directors are Larry J. Alexander and Brady F. Carruth and asClass II directors are Gary L. Forbes and James H. Limmer.

 

**ITEM 5. * OtherInformation***

 

None.

 

**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 byreference

 

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**SIGNATURES**

 

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

 

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

 

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***Exhibit Index***

 
| * 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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