**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

 

**(Mark One)**

** **

**ý****        QUARTERLY REPORT PURSUANTTO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period endedSeptember 30, 2004**

 

**OR**

** **

**o****        TRANSITION REPORT PURSUANTTO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from                  to                   **

 

**Commission File Number 001-12631**

 

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**CONSOLIDATED GRAPHICS, INC.**

(Exact name of Registrant as specified in itscharter)

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

 

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

 

Indicateby check mark whether the Registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

Yes ý   No o

 

Indicate by check mark whether the Registrant is anaccelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of1934).

 

Yes ý   No o

 

Thenumber of shares of Common Stock, par value $.01 per share, of the Registrantoutstanding at October 15, 2004 was 13,644,434.

 

 

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**CONSOLIDATED GRAPHICS, INC.**

 

##### **FORM 10-Q FOR THE QUARTERLY PERIODENDED SEPTEMBER 30, 2004**

##### ** **

**INDEX**

 
| Part I — Financial Information |                                                                                                      |
|-------------------------------------|-----------------------------------------------------------------------------------------------------------|
|                                |                                                                                                      |   |   |
|                                | Item 1 — Financial Statements                                                                        |   |
|                                |                                                                                                      |   |   |
|                                |                                                                                                      | Consolidated Balance Sheets at September 30, 2004 and March 31, 2004 |   |
|                                |                                                                                                      |   |   |
|                                |                                                                                                      | Consolidated Income Statements for the Three and Six Months Ended  September 30, 2004 and 2003 |   |
|                                |                                                                                                      |   |   |
|                                |                                                                                                      | Consolidated Statements of Cash Flows for  the Six Months Ended September 30, 2004 and 2003 |   |
|                                |                                                                                                      |   |   |
|                                |                                                                                                      | Notes to Consolidated Financial Statements |   |
|                                |                                                                                                      |   |   |
|                                | Item 2 — Management’s Discussion and  Analysis of Financial Condition and Results of Operations |   |
|                                |                                                                                                      |   |   |
|                                | Item 3 — Quantitative and Qualitative  Disclosure About Market Risk                                  |   |
|                                |                                                                                                      |   |   |
|                                | Item 4 — Controls and Procedures                                                                     |   |
|                                |                                                                                                      |   |   |
| Part  II — Other Information   |                                                                                                      |
|                                |                                                                                                      |   |   |
|                                | Item  1 — Legal Proceedings                                                                          |   |
|                                |                                                                                                      |   |   |
|                                | Item 2 — Unregistered Sales of Equity  Securities and Use of Proceeds                                |   |
|                                |                                                                                                      |   |   |
|                                | Item 3 — Defaults upon  Senior Securities                                                            |   |
|                                |                                                                                                      |   |   |
|                                | Item  4 — Submission of Matters to a Vote of Security Holders                                        |   |
|                                |                                                                                                      |   |   |
|                                | Item 5 — Other Information                                                                           |   |
|                                |                                                                                                      |   |   |
|                                | Item 6 — Exhibits                                                                                    |   |
|                                |                                                                                                      |   |   |
| Signatures                          |                                                                                                      |
|                                |                                                                                                      |   |   |
| Exhibit Index                       |                                                                                                      |

 

2

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**PART I****– FINANCIAL INFORMATION**

** **

**ITEM 1.  *Financial Statements***

 

**CONSOLIDATED GRAPHICS, INC.**

**CONSOLIDATED BALANCE SHEETS**

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

 
| ** **                                                                                                      | ** ** | **September 30,  2004** | ** ** | **March 31,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|---------------------|------------|
| ** **                                                                                                      | ** ** | **(Unaudited)**         | ** ** | **(Audited)**       | ** ** |
| ASSETS                                                                                                          |       |                    |       |                |       |
|                                                                                                            |       |                    |       |                |       |
| CURRENT ASSETS                                                                                                  |       |                    |       |                |       |
| Cash and cash equivalents                                                                                       |       | $                       | 9,154      |                | $          | 10,472 |   |
| Accounts receivable, net                                                                                        |       | 123,802                 |       | 114,658             |       |
| Inventories                                                                                                     |       | 39,554                  |       | 32,728              |       |
| Prepaid expenses                                                                                                |       | 5,029                   |       | 5,874               |       |
| Deferred income taxes                                                                                           |       | 6,564                   |       | 6,159               |       |
| Total current assets                                                                                            |       | 184,103                 |       | 169,891             |       |
| PROPERTY AND EQUIPMENT, net                                                                                     |       | 278,671                 |       | 272,801             |       |
| GOODWILL, net                                                                                                   |       | 73,865                  |       | 73,658              |       |
| OTHER ASSETS                                                                                                    |       | 6,561                   |       | 5,785               |       |
|                                                                                                            |       | $                       | 543,200    |                | $          | 522,135 |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                       |       |                    |       |                |       |
|                                                                                                            |       |                    |       |                |       |
| CURRENT LIABILITIES                                                                                             |       |                    |       |                |       |
| Current portion of long-term  debt                                                                              |       | $                       | 9,515      |                | $          | 13,204 |   |
| Accounts payable                                                                                                |       | 41,812                  |       | 41,062              |       |
| Accrued liabilities                                                                                             |       | 73,724                  |       | 66,585              |       |
| Income taxes payable                                                                                            |       | 6,584                   |       | 1,552               |       |
| Total current liabilities                                                                                       |       | 131,635                 |       | 122,403             |       |
| LONG-TERM DEBT, net of current  portion                                                                         |       | 92,505                  |       | 98,265              |       |
| DEFERRED INCOME TAXES                                                                                           |       | 57,333                  |       | 55,855              |       |
| COMMITMENTS AND CONTINGENCIES                                                                                   |       |                    |       |                |       |
| SHAREHOLDERS’ EQUITY                                                                                       |       |                    |       |                |       |
| Common stock, $.01 par value;  100,000,000 shares authorized; 13,641,090 and 13,361,003 issued and  outstanding |       | 137                     |       | 135                 |       |
| Additional paid-in capital                                                                                      |       | 165,630                 |       | 163,910             |       |
| Retained earnings                                                                                               |       | 95,960                  |       | 81,567              |       |
| Total shareholders’ equity                                                                                 |       | 261,727                 |       | 245,612             |       |
|                                                                                                            |       | $                       | 543,200    |                | $          | 522,135 |   |

 

See accompanying notes to consolidated financial statements.

 

3

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**CONSOLIDATED GRAPHICS, INC.**

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

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

**(Unaudited)**

 
| ** **                                 | ** ** | **Three Months Ended  September 30** | ** ** | **Six Months Ended  September 30** | ** ** |
|--------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                 | ** ** | **2004**                             | ** ** | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                       |       |                                 |       |                               |       |   |   |   |   |
| SALES                                      |       | $                                    | 191,129    |                               | $          | 174,624 |   | $ | 372,658 |   | $ | 340,453 |   |
|                                       |       |                                 |       |                               |       |   |   |   |   |
| COST OF SALES                              |       | 144,019                              |       | 133,244                            |       | 280,676 |   | 260,012 |   |
|                                       |       |                                 |       |                               |       |   |   |   |   |
| Gross profit                               |       | 47,110                               |       | 41,380                             |       | 91,982 |   | 80,441 |   |
|                                       |       |                                 |       |                               |       |   |   |   |   |
| SELLING EXPENSES                           |       | 19,705                               |       | 18,530                             |       | 39,226 |   | 36,690 |   |
|                                       |       |                                 |       |                               |       |   |   |   |   |
| GENERAL AND ADMINISTRATIVE  EXPENSES       |       | 13,808                               |       | 13,284                             |       | 26,656 |   | 26,467 |   |
|                                       |       |                                 |       |                               |       |   |   |   |   |
| Operating income                           |       | 13,597                               |       | 9,566                              |       | 26,100 |   | 17,284 |   |
|                                       |       |                                 |       |                               |       |   |   |   |   |
| INTEREST EXPENSE, net                      |       | 1,389                                |       | 1,762                              |       | 2,796 |   | 3,730 |   |
|                                       |       |                                 |       |                               |       |   |   |   |   |
| Income before taxes                        |       | 12,208                               |       | 7,804                              |       | 23,304 |   | 13,554 |   |
|                                       |       |                                 |       |                               |       |   |   |   |   |
| INCOME TAXES                               |       | 4,639                                |       | 3,044                              |       | 8,911 |   | 5,229 |   |
|                                       |       |                                 |       |                               |       |   |   |   |   |
| Net income                                 |       | $                                    | 7,569      |                               | $          | 4,760 |   | $ | 14,393 |   | $ | 8,325 |   |
|                                       |       |                                 |       |                               |       |   |   |   |   |
| BASIC EARNINGS PER SHARE                   |       | $                                    | .56        |                               | $          | .36 |   | $ | 1.06 |   | $ | .62 |   |
| DILUTED EARNINGS PER SHARE                 |       | $                                    | .53        |                               | $          | .34 |   | $ | 1.01 |   | $ | .61 |   |
|                                       |       |                                 |       |                               |       |   |   |   |   |
| SHARES USED TO COMPUTE EARNINGS  PER SHARE |       |                                 |       |                               |       |   |   |   |   |
|                                       |       |                                 |       |                               |       |   |   |   |   |
| Basic                                      |       | 13,618                               |       | 13,406                             |       | 13,601 |   | 13,378 |   |
| Diluted                                    |       | 14,222                               |       | 13,799                             |       | 14,189 |   | 13,685 |   |

 

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** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                         | ** ** | **2004**                           | ** ** | **2003** | ** ** |
|                                                                               |       |                               |       |   |   |
| OPERATING ACTIVITIES                                                               |       |                               |       |   |   |
| Net income                                                                         |       | $                                  | 14,393     |   | $ | 8,325 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                               |       |   |   |
| Depreciation                                                                       |       | 19,719                             |       | 17,793 |   |
| Deferred income tax provision                                                      |       | 1,073                              |       | 1,616 |   |
| Changes in assets and  liabilities, net of effects of acquisitions:                |       |                               |       |   |   |
| Accounts receivable, net                                                           |       | (7,527                             | )          | (1,865 | ) |
| Inventories                                                                        |       | (6,208                             | )          | (5,372 | ) |
| Prepaid expenses                                                                   |       | 856                                |       | (225 | ) |
| Other assets                                                                       |       | (776                               | )          | 432 |   |
| Accounts payable and accrued  liabilities                                          |       | 2,484                              |       | 18,025 |   |
| Income taxes payable                                                               |       | 5,032                              |       | 107 |   |
| Net cash provided by operating  activities                                         |       | 29,046                             |       | 38,836 |   |
|                                                                               |       |                               |       |   |   |
| INVESTING ACTIVITIES                                                               |       |                               |       |   |   |
| Acquisitions of businesses, net  of cash acquired                                  |       | (2,209                             | )          | (5,422 | ) |
| Purchases of property and  equipment                                               |       | (6,630                             | )          | (6,110 | ) |
| Proceeds from asset  dispositions                                                  |       | 627                                |       | 1,613 |   |
| Net cash used in investing activities                                              |       | (8,212                             | )          | (9,919 | ) |
|                                                                               |       |                               |       |   |   |
| FINANCING ACTIVITIES                                                               |       |                               |       |   |   |
| Proceeds from bank credit  facilities                                              |       | 13,077                             |       | 6,229 |   |
| Payments on bank credit  facilities                                                |       | (5,445                             | )          | (33,750 | ) |
| Payment on issuance on term  equipment note                                        |       | —                             |       | 6,117 |   |
| Payments on term equipment  notes and other debt                                   |       | (31,506                            | )          | (6,451 | ) |
| Proceeds from exercise of stock  options                                           |       | 1,722                              |       | 1,477 |   |
| Net cash used in financing  activities                                             |       | (22,152                            | )          | (26,378 | ) |
|                                                                               |       |                               |       |   |   |
| NET INCREASE (DECREASE) IN CASH  AND CASH EQUIVALENTS                              |       | (1,318                             | )          | 2,539 |   |
| CASH AND CASH EQUIVALENTS AT  BEGINNING OF PERIOD                                  |       | 10,472                             |       | 9,641 |   |
| CASH AND CASH EQUIVALENTS AT  END OF PERIOD                                        |       | $                                  | 9,154      |   | $ | 12,180 |   |

 

See accompanying notes to consolidated financial statements.

 

5

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**CONSOLIDATED GRAPHICS, INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(In thousands)**

**(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 rules and regulations forreporting interim financial information. Accordingly, they do not include all of the information and footnotesrequired by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments(consisting of normal recurring accruals) considered necessary for a fairpresentation of the accompanying unaudited consolidated financial statementshave been included.  Operating resultsfor the six months ended September 30, 2004 are not necessarily indicative offuture operating results.  Balance sheetinformation as of March 31, 2004 has been derived from the 2004 annual auditedconsolidated financial statements of the Company.  For further information, refer to theconsolidated financial statements and footnotes thereto included in the Company’sForm 10-K for the fiscal year ended March 31, 2004, filed with the Securitiesand Exchange Commission in June 2004.

 

*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 Securities and ExchangeCommission.  Losses, if any, on jobs arerecognized at the earliest date such amount is determinable.

 

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

 

*Supplemental Cash Flow Information*– The consolidated statements of cash flowsprovide information about the Company’s sources and uses of cash and excludethe effects of non-cash transactions. The Company issued term notes payable totaling $4,409 (see Note 3.Long-Term Debt) during the six months ended September 30, 2004 to finance thepurchase of certain new equipment.  TheCompany assumed a mortgage obligation totaling $5,116 in May 2004 in connectionwith a prior year acquisition, and it also assumed two industrial revenue bondsin August 2004 totaling $4,900 in connection with a current year acquisition(see Note 2. Acquisitions). For the six months ended September 30, 2004, theCompany paid cash for interest and income taxes, net of refunds, totaling$2,900 and $1,684.  For the six monthsended September 30, 2003, the Company paid (or received) cash for interest andincome taxes, net of refunds, totaling $3,730 and ($2,921).

 

*Stock-BasedCompensation*– The Company’s only element of stock-basedcompensation is derived pursuant to the Consolidated Graphics, Inc. Long-TermIncentive Plan (the “Plan”), which has been approved by the Company’sshareholders.  Under the Plan, employeesof the Company and certain non-employee members of the Company’s Board ofDirectors have been, or may be, granted options to purchase shares of theCompany’s common stock at a price not less than the market price of the stockat the date of grant. The Company adopted the disclosure requirements ofStatement of Financial Accounting Standards (“SFAS”) No. 148, *Accounting for Stock-Based Compensation-Transitionand Disclosure,*as of March 31, 2003; however, as permitted underSFAS No. 123, it continues to use the intrinsic value method of accountingprescribed by Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees*.  Accordingly, no compensation expense orliability is recognized for options issued under the Plan in the accompanyingconsolidated financial statements since all options were granted at the fairmarket value of the stock at the date of grant.

 

6

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Had the Company used thefair-value-based method of accounting for the Plan prescribed by SFAS No. 123and charged compensation expense against net income over the vesting periodbased on the fair value of options at the date of grant, net income andearnings per share as reported would have been reduced to the following proforma amounts:

 
| ** **                            | ** ** | **Three Months Ended  September 30** | ** ** | **Six Months Ended  September 30** | ** ** |
|---------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                            | ** ** | **2004**                             | ** ** | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                  |       |                                 |       |                               |       |   |   |   |   |
| Net income as reported                |       | $                                    | 7,569      |                               | $          | 4,760 |   | $ | 14,393 |   | $ | 8,325 |   |
| Less: Pro forma compensation  expense |       | (368                                 | )          | (507                               | )          | (658 | ) |   | (1,156 | ) |
| Pro forma net income                  |       | $                                    | 7,201      |                               | $          | 4,253 |   | $ | 13,735 |   | $ | 7,169 |   |
|                                  |       |                                 |       |                               |       |   |   |   |   |
| **Basic Earnings Per Share:**         |       |                                 |       |                               |       |   |   |   |   |
| Net income as reported                |       | $                                    | .56        |                               | $          | .36 |   | $ | 1.06 |   | $ | .62 |   |
| Less: Pro forma compensation  expense |       | (.03                                 | )          | (.04                               | )          | (.05 | ) |   | (.08 | ) |
| Pro forma net income                  |       | $                                    | .53        |                               | $          | .32 |   | $ | 1.01 |   | $ | .54 |   |
|                                  |       |                                 |       |                               |       |   |   |   |   |
| **Diluted Earnings Per Share:**       |       |                                 |       |                               |       |   |   |   |   |
| Net income as reported                |       | $                                    | .53        |                               | $          | .34 |   | $ | 1.01 |   | $ | .61 |   |
| Less: Pro forma compensation  expense |       | (.02                                 | )          | (.04                               | )          | (.04 | ) |   | (.08 | ) |
| Pro forma net income                  |       | $                                    | .51        |                               | $          | .30 |   | $ | .97 |   | $ | .53 |   |

 

The effect on pro forma netincome, basic earnings per share, and diluted earnings per share of expensingthe estimated fair value of stock options is not necessarily representative ofthe effect on reported earnings for future years due to the vesting period ofthe stock options and the potential for issuance of additional stock options.

 

**2.  ACQUISITIONS**

 

During the six months ended September 30, 2004, the Company assumeddebt totaling $4,900 and paid cash of $397 to acquire two printing businesses,one of which was merged into an existing operation of the Company. Theallocation of the purchase price of the businesses acquired include currentassets of $2,246, property and equipment of $4,116, and other assets of $138,less current liabilities of $1,203. Additionally, the Company paid cashtotaling $1,812 related to the assumption of a mortgage obligation and tosatisfy certain liabilities incurred in connection with the acquisition ofcertain businesses in prior periods.

 

**3.  LONG-TERM DEBT**

 

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

 
| ** **             | ** ** | **September 30,  2004** | ** ** | **March 31,  2004** | ** ** |
|------------------------|------------|-------------------------|------------|---------------------|------------|
| Bank credit facilities |       | $                       | 43,195     |                | $          | 35,563 |   |
| Term equipment notes   |       | 41,244                  |       | 67,772              |       |
| Other                  |       | 17,581                  |       | 8,134               |       |
|                   |       | 102,020                 |       | 111,469             |       |
| Less: current portion  |       | (9,515                  | )          | (13,204             | )          |
|                   |       | $                       | 92,505     |                | $          | 98,265 |   |

 

The Company’s bank creditfacility (as amended and restated, the “Credit Agreement”) is composed of a$150,000 revolving credit facility that will mature in July 2007. AtSeptember 30, 2004, outstanding borrowings under the Credit Agreement were$38,000 and accrued interest at a weighted average rate of 3.79%.

 

7

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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, 2004, theapplicable interest rate margin was 1.25% and the applicable commitment fee 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, 2004.

 

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. Both Auxiliary Bank Facilities areunsecured, have a maximum borrowing capacity of $5,000 and expire inNovember 2004. At September 30, 2004 borrowings outstanding under theAuxiliary Bank Facilities totaled $5,195 and accrued interest at a weightedaverage rate of 3.14%. Because the Company has the ability to refinance itsAuxiliary Bank Facilities and plans to do so annually, the borrowingsoutstanding are classified as long-term debt in the accompanying consolidatedbalance sheets.

 

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, 2004, outstanding borrowings under the LenderNotes totaled $19,780 and accrued interest at a weighted average rate of 4.86%.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, most ending with a balloon payment at maturity, and are secured bycertain equipment of the Company. At September 30, 2004, outstandingborrowings under the Equipment Notes totaled $19,900 and accrued interest at aweighted average rate of 6.13%. The Equipment Notes provide for fixed paymentsof principal and interest (at fixed rates) for defined periods of up to tenyears from the date of issuance and are secured by the equipment which wasconcurrently purchased from the manufacturer. At September 30, 2004, theremaining balance of term equipment notes totaling $1,564 primarily consists ofvarious secured debt obligations assumed by the Company in connection withcertain prior year acquisitions. The Company is not subject to any significantfinancial covenants in connection with any of the term equipment notes;however, the Credit Agreement places certain limitations on the amount ofadditional term note obligations the Company may incur in the future.

 

In the three month periodended September 30, 2004, the Company retired $25,678 of Lender Notes withborrowings from the Credit Agreement. Subsequently, the Company retired an additional $12,531 of EquipmentNotes.  The purpose of retiring thesenotes was to utilize available capacity under the Credit Agreement to effect anoverall reduction in the Company’s interest costs.  No financial penalties were incurred in connectionwith the retirement of these obligations.

 

The Company’s remaining debtobligations consist of a mortgage totaling $5,062, a promissory note totaling$3,534, industrial revenue bonds totaling $8,585 and various other debttotaling $400. The Company does not have any significant financial covenants orrestrictions associated with these other debt obligations.

 

8

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

 

*The following discussion contains forward-lookinginformation. Readers are cautioned that such information involves known andunknown risks and uncertainties, including those created by general marketconditions, competition and the possibility that events may occur beyond ourcontrol, which may limit our ability to maintain or improve our operatingresults or financial condition or acquire additional printing businesses. Ourexpectations regarding future sales and profitability assume, among other things,stability in the economy and reasonable growth in the demand for our products,the continued availability of raw materials at affordable prices and retentionof our key management and operating personnel. In addition, our expectationsregarding future acquisitions assume, among other things, our ability toidentify new acquisition opportunities and our ability to negotiate and financesuch acquisitions on acceptable terms, as well as the ability to successfullyabsorb and manage such acquisitions. Although management believes that theassumptions underlying the forward looking statements are reasonable, any ofthe assumptions could be inaccurate and there can be no assurance that any orall of the assumptions underlying the forward-looking statements will prove tobe accurate. The inclusion of such information should not be regarded as arepresentation by us or any other person that our objectives and plans will beachieved.**** ****We expressly disclaim any duty to provide updates to theseforward-looking statements, assumptions or other factors after the date of thisReport on Form 10-Q to reflect the occurrence of events or changes incircumstances or 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, 2004 and other reports filedby us with the Securities and Exchange Commission.  Operating results for the six months endedSeptember 30, 2004 are not necessarily indicative of the results to be expectedfor the entire fiscal year ending March 31, 2005 or any periods thereafter.*

 

**Overview**

 

*OurOrganization*

 

Our Company is a leading national provider of commercial printingservices.  We are organized as a holdingcompany and currently own and operate 65 printing facilities located in 25states.  Each facility operates as aseparate business and reporting unit, with its own management, sales, customerservice, production and accounting staff. Generally, each facility substantially relies on locally basedcustomers; accordingly, we have a broad diversification of customers byindustry-type and geographic orientation, totaling more than 18,000. 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 maintaincentralized treasury, risk management, tax and consolidated financial reportingactivities.

 

*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.  Examples of the types of documents, materialsand products we print for our customers include multicolor marketing materials,product and capability brochures, point-of-purchase displays, direct mailpieces, shareholder communications, catalogs and training manuals.

 

The items we print for ourcustomers are pursuant to individual orders with specific instructionsregarding printing, finishing and delivery. Our customers frequently request us to provide fulfillment, mailing orother print-related services.  They mayalso use our Internet-based software solutions and electronic media services,marketed under “CGX Solutions,” which are complementary to the production anddelivery of the printed materials. Collectively, all of these discretecapabilities comprise a “comprehensive range of printing services” for which wetypically charge an “all-inclusive” fee. Accordingly, for financial reporting purposes, we report our revenuesand results of operations as a single segment.

 

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Our sales are generated byindividual orders through commissioned sales personnel and, in some cases,pursuant to national contracts. We recognize revenue from these orders when wedeliver the ordered products, except for “bill and hold transactions,” in whichcase such revenue is recognized when all of the service delivery criteria arefully met as per Staff Accounting Bulletin 104 issued by the Securities andExchange Commission. To a large extent, continued engagement of our Company byour customers for successive jobs depends upon the customer’s satisfaction withthe quality of services we provide. As such, it is difficult for us to predictthe number, size and profitability of printing jobs that we expect to producefor more than a few weeks in advance.

 

Our cost of sales mainly consistsof raw materials consumed in the printing process, as well as labor and outsideservices, such as delivery costs. Paper cost is the most significant componentof our materials cost; however, changes in paper pricing generally do notmaterially impact our operating margins because any changes in paper pricingare generally passed directly by our printing businesses to their customers.Additionally, our cost of sales includes maintenance, repair, rental andinsurance costs associated with operating our facilities and equipment, alongwith depreciation charges.

 

Our selling expensesgenerally include the salary and commissions paid to our sales personnel orthird-party sales agents, along with promotional, travel and entertainmentcosts. Our general and administrative expenses generally include the salary andbenefits paid to support personnel at our printing businesses and our corporatestaff, as well as office rent, utilities and communications expenses, andvarious professional services.

 

*OurStrategy*

 

We are focused on addingvalue to our printing businesses by providing them with the financial andoperational strengths, management support and technological advantagesassociated with a national organization. Our strategy currently includes thefollowing initiatives to generate sales and profit growth:

 

•                                          *Internal Sales Growth—*We seek to use our competitive advantages toexpand market share. We continue to pursue hiring of additional experiencedsales professionals, invest in new equipment and technology, expand ournational sales program (referred to herein as “National Sales”), promotecross-selling among our locations and develop complementary, value-added printrelated services.

 

•                                          *Disciplined AcquisitionProgram—*We selectivelypursue opportunities to acquire well-managed, medium-sized printing businessesat reasonable prices and smaller and/or distressed printing businesses formerger into one of our existing facilities.

 

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

 

•                                          *BestPractices/Benchmarking—*Weprovide a forum for our printing businesses to share their knowledge of technicalprocesses and best practices with one another. We also benchmark financial andoperational data to help our printing businesses identify and respond tochanges in operating trends.

 

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

 

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**Results ofOperations**

 

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

 
| ** **                           | ** ** | **Three Months  Ended September 30** | ** ** | **Six Months  Ended September 30** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                           | ** ** | **2004**                             | ** ** | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                           | ** ** | **(In millions)**                    | ** ** | **(In millions)**                  | ** ** |
| Sales                                |       | $                                    | 191.1      |                               | $          | 174.6 |   | $ | 372.7 |   | $ | 340.5 |   |
| Cost of sales                        |       | 144.0                                |       | 133.2                              |       | 280.7 |   | 260.0 |   |
| Gross profit                         |       | 47.1                                 |       | 41.4                               |       | 92.0 |   | 80.5 |   |
| Selling expenses                     |       | 19.7                                 |       | 18.5                               |       | 39.2 |   | 36.7 |   |
| General and administrative  expenses |       | 13.8                                 |       | 13.3                               |       | 26.7 |   | 26.5 |   |
| Operating income                     |       | 13.6                                 |       | 9.6                                |       | 26.1 |   | 17.3 |   |
| Interest expense, net                |       | 1.4                                  |       | 1.8                                |       | 2.8 |   | 3.7 |   |
| Income before taxes                  |       | 12.2                                 |       | 7.8                                |       | 23.3 |   | 13.6 |   |
| Income taxes                         |       | 4.6                                  |       | 3.0                                |       | 8.9 |   | 5.3 |   |
| Net Income                           |       | $                                    | 7.6        |                               | $          | 4.8 |   | $ | 14.4 |   | $ | 8.3 |   |

 

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** | ** ** |
| ** **                           | ** ** | **2004**                             | ** ** | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                           | ** ** | ** **                           | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales                                |       | 100.0                                | %          | 100.0                              | %          | 100.0 | % | 100.0 | % |
| Cost of sales                        |       | 75.4                                 |       | 76.3                               |       | 75.3 |   | 76.4 |   |
| Gross profit                         |       | 24.6                                 |       | 23.7                               |       | 24.7 |   | 23.6 |   |
| Selling expenses                     |       | 10.3                                 |       | 10.6                               |       | 10.5 |   | 10.8 |   |
| General and administrative  expenses |       | 7.2                                  |       | 7.6                                |       | 7.2 |   | 7.8 |   |
| Operating income                     |       | 7.1                                  |       | 5.5                                |       | 7.0 |   | 5.0 |   |
| Interest expense, net                |       | 0.7                                  |       | 1.0                                |       | 0.7 |   | 1.1 |   |
| Income before taxes                  |       | 6.4                                  |       | 4.5                                |       | 6.3 |   | 3.9 |   |
| Income taxes                         |       | 2.4                                  |       | 1.7                                |       | 2.4 |   | 1.5 |   |
| Net Income                           |       | 4.0                                  | %          | 2.8                                | %          | 3.9 | % | 2.4 | % |

 

Our sales and expensesduring the periods shown were impacted by the acquisition of six printingbusinesses in fiscal 2004 and two printing businesses in fiscal 2005 to date.Because each acquisition was accounted for using the purchase method ofaccounting, our consolidated income statements reflect sales and expenses ofacquired businesses only for post-acquisition periods. Accordingly,acquisitions affect our financial results in any current year period comparedto the prior year period by (i)  thefull-period impact of prior year acquisitions (as compared to the partialperiod impact in the prior year) and (ii) the partial-period impact of currentyear acquisitions, and is referred to below as “incremental contribution fromacquisitions.”

 

# ***Comparative Analysis of Consolidated Income Statementsfor the Three Months Ended September 30, 2004 and 2003***

 

Salesfor the quarter ended September 30, 2004 increased $16.5 million or 9% to$191.1 million from $174.6 million in the same period a year ago.  The $16.5 million revenue increase isattributable to $6.3 million in incremental contribution from acquisitions and$10.2 million of internal sales growth. The $10.2 million of internal sales growth resulted in a 6%year-over-year internal growth rate. Approximately one-half of the internal sales growth was attributable toelection campaign printing, which recurs on a bi-annual basis.  Excluding election campaign printing,internal sales growth for the period was 3%, which includes growth in NationalSales of $.5 million.  The remainder ofour internal growth is attributable to improved economic and industryconditions, in our opinion, based on general and anecdotal information availableto us.

 

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Forthe quarter ended September 30, 2004, gross profit increased $5.7 million andgross profit margin increased to 24.6% from 23.7% from the same period a yearago.  Approximately $3.9 million of theincrease is attributable to the increased sales levels discussed above,including incremental contribution from acquisitions.  The remaining increase is attributable to theimpact of improved industry conditions on our ability to leverage fixedoperating costs as well as schedule and price our services for improvedprofitability.

 

Selling expensesfor the quarter ended September 30, 2004 increased 6% to $19.7 million from$18.5 million in the same period a year ago. The increase for the three month period of this fiscal year is directlyattributable to the increased sales levels noted above.  As a percentage of sales, selling expensesfor the quarter ended September 30, 2004 decreased slightly to 10.3% ascompared to the 10.6% for the same period a year ago primarily because thegeneration of the incremental election campaign revenues discussed above generallydoes not incur the same level of sales expense as other sources of revenues.

 

General andadministrative expenses for the quarter ended September 30, 2004 increased 4%to $13.8 million from $13.3 million in the same period a year ago.  Nearly all of this increase is attributableto the incremental level of recurring general and administrative expenseattributable to acquired businesses. Overall, the positive results of our ability to control costs and gainadditional leverage on our costs through sales growth is reflected by theimprovement in our general and administrative expenses as a percentage ofsales, which decreased to 7.2% for the quarter ended September 30, 2004, from7.6% for the same period a year ago.

 

Interest expense for thequarter ended September 30, 2004 decreased 21% to $1.4 million from $1.8million in the same period a year ago. The decrease in interest expense for the three month period of thisfiscal year is principally due to the application of our cash flow fromoperations to reduce outstanding indebtedness.

 

# **We provided for income taxes totaling $4.6 million for thequarter ended September 30, 2004, reflecting an effective tax rate of 38% ascompared to an effective tax rate of 39% for the same period a year ago.****

 

# ***Comparative Analysis of Consolidated Income Statementsfor the Six Months Ended September 30, 2004 and 2003***

 

Salesfor the six months ended September 30, 2004 increased $32.2 million or 9% to$372.7 million from $340.5 million in the same period a year ago.  In addition to the incremental electioncampaign revenues in the September quarter discussed above, this revenueincrease is attributable to $13.7 million in incremental contribution fromacquisitions and $13.5 million, or 4%, of internal sales growth.  Growth in National Sales accounted forapproximately $1.3 million of such internal sales growth while the remainder isattributable to improved economic and industry conditions, in our opinion basedon general and anecdotal information available to us.

 

Forthe six months ended September 30, 2004, gross profit increased $11.5 millionand gross profit margin increased to 24.7% from 23.6% from the same period ayear ago.  Approximately $7.6 million ofthe increase is attributable to the increased sales levels discussed above,including incremental contribution from acquisitions.  The remaining increase is attributable to theimpact of improved industry conditions on our ability to leverage fixedoperating costs as well as schedule and price our services for improvedprofitability.

 

Selling expensesfor the six months ended September 30, 2004 increased 7% to $39.2 million from$36.7 million in the same period a year ago. The increase for the six month period of this fiscal year is directlyattributable to the increased sales levels noted above.  As a percentage of sales, selling expensesfor the six months ended September 30, 2004 decreased slightly to 10.5% ascompared to the 10.8% for the same period a year ago, with most of thisdecrease attributable to the incremental election campaign revenues as discussedabove.

 

General andadministrative expenses for the six months ended September 30, 2004 increased1% to $26.7 million from $26.5 million in the same period a year ago, asincremental general and administrative expense of approximately $1 millionattributable to acquired businesses was substantially offset through other costreductions pursuant to cost control initiatives.  Accordingly, we gained additional leverage onour sales, resulting in the decrease in our general and administrative expensesas a percentage of sales, which decreased to 7.2% for the six months endedSeptember 30, 2004, from 7.8% for the same period a year ago.

 

Interest expense for the sixmonths ended September 30, 2004 decreased 24% to $2.8 million from $3.7 millionin the same period a year ago.  Thedecrease in interest expense for the six months ended September 30, 2004 isprincipally due to the application of our cash flow from operations to reducethe aggregate borrowings outstanding under our various bank credit facilities.

 

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We provided for income taxesfor the six months ended September 30, 2004 of $8.9 million, reflecting aneffective tax rate of 38.2% as compared to an effective tax rate of 38.6% forthe same period a year ago.

 

**Liquidityand Capital Resources**

 

*Sourcesand Uses of Cash*

 

Our historical sources ofcash have primarily been cash provided by operations or borrowings undervarious bank credit facilities.  Ourhistorical uses of cash have been for acquisitions of printing businesses,capital expenditures, and payment of principal and interest on outstanding debtobligations.  Supplemental informationpertaining to our historical sources and uses of cash is presented as followsand should be read in conjunction with our consolidated statements of cashflows and notes thereto included in ***Item 1.  Financial Statements:***

 
| ** **                                            | ** ** | **Six Months Ended  September 30** | ** ** |
|-------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                            | ** ** | **2004**                           | ** ** | **2003** | ** ** |
| ** **                                            | ** ** | **(In millions)**                  | ** ** |
| Net cash provided by operating activities             |       | $                                  | 29.0       |   | $ | 38.8 |   |
| Acquisitions of businesses                            |       | (2.2                               | )          | (5.4 | ) |
| Capital expenditures                                  |       | (6.6                               | )          | (6.1 | ) |
| Net proceeds (payments) under bank credit  facilities |       | 7.6                                |       | (27.5 | ) |
| Net payments on term equipment notes and  other debt  |       | (31.5                              | )          | (.3 | ) |
|                                                       |            |                                    |            |  |  |  |  |

 

Additionally, our cashposition, working capital and debt obligations are shown below for the periodsindicated and should be read in conjunction with our consolidated balancesheets and notes thereto included in ***Item 1. FinancialStatements:***

 
| ** **                                            | ** ** | **September 30,****2004** | ** ** | **March 31,  2004** | ** ** |
|-------------------------------------------------------|------------|---------------------------|------------|---------------------|------------|
| ** **                                            | ** ** | **(In millions)**         | ** ** |
| Cash and cash equivalents                             |       | $                         | 9.2        |                | $          | 10.5 |   |
| Working capital, excluding cash and cash  equivalents |       | 43.3                      |       | 37.0                |       |
| Total debt obligations                                |       | 102.0                     |       | 111.5               |       |
|                                                       |            |                           |            |                     |            |  |  |

 

During the six monthsended September 30, 2004, net cash provided by operating activities decreased$9.8 million or 25% as compared to the same period last year.  This decrease in operating cash flowprincipally resulted from the relative difference in working capital changes ineach period.  In the current year,working capital (excluding cash and cash equivalents) has increased as a resultof growth in our business.  In the prioryear, working capital (excluding cash and cash equivalents) was favorablyimpacted by the implementation of tighter working capital management practices.  Consistent with recent prior quarters, wehave continued our strategy to further strengthen our financial position byprimarily using available cash flow to make payments on outstanding debtobligations.

 

We believe that our cashflow provided by operations will be adequate to cover our fiscal 2005 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 our capital expenditure requirements throughborrowings under our bank credit facilities or the issuance of additional termnotes.

 

  We intend to continue pursuing acquisitionopportunities at prices we believe are reasonable based upon marketconditions.  However, we cannotaccurately predict the timing, size and success of our acquisition efforts orour associated potential capital commitments. There can be no assurance that we will be able to acquire additionalprinting businesses on terms acceptable to us.

 

We expect to fund futureacquisitions through cash flow provided by operations, additional borrowings orthe issuance of our common stock.  Theextent to which we will be willing or able to use our common stock to makeacquisitions will depend on its market value and the willingness of potentialsellers to accept it as full or partial payment for the acquisition price.

 

In May 2004, our Board of Directors approveda common stock share repurchase program, providing for the repurchase of up toone million shares of our stock in open-market purchases or in privatelynegotiated block purchase transactions. We expect to fund any repurchases underthe program through cash flow provided by operations or additional borrowingsunder our

 

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primary bank creditfacility. The amount and timing of any purchases will depend upon a number offactors, including the Company’s liquidity and potential alternative uses ofour capital resources, the price and availability of our shares, general marketconditions and certain repurchase restrictions in our existing bank creditfacility, which limit us to repurchases not to exceed $75.0 million in theaggregate as of September 30, 2004.  Asof October 15, 2004, we have not repurchased any shares of stock under thisprogram.  There can be no assurance thatwe will be able to repurchase any of our common stock on terms acceptable tous.

 

*DebtObligations*

 

Our bank credit facility (asamended and restated, the “Credit Agreement”) is composed of a$150.0 million revolving credit facility that will mature inJuly 2007. At September 30, 2004, borrowings outstanding under theCredit Agreement were $38.0 million and accrued interest at a weightedaverage rate of 3.79%.

 

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 ratemargin and the commitment fee are based upon certain financial performancemeasures as set forth in the Credit Agreement and are redetermined quarterly.At September 30, 2004, the applicable interest rate margin was 1.25% and theapplicable 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 incompliance with these covenants and financial tests at September 30,2004.  In the event that we were unableto remain 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 eventthat we were to be unable to obtain a waiver, re-negotiate or re-finance theseobligations, a material adverse effect on our ability to conduct our operationsin the ordinary course likely would be the result.  Based on our view of current market andbusiness conditions and our expectations regarding our future operating resultsand cash flows, we believe that we will be able to remain in compliance withthese covenants and financial tests in the 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. Both Auxiliary Bank Facilities are unsecured, have a maximumborrowing capacity of $5.0 million and expire in November 2004. AtSeptember 30, 2004, borrowings outstanding under the Auxiliary BankFacilities totaled $5.2 million and accrued interest at a weighted averagerate of 3.14%. Because we have the ability to refinance our Auxiliary BankFacilities and plan to do so annually, the borrowings outstanding areclassified as long-term debt in the accompanying consolidated balance sheets.

 

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, 2004, outstanding borrowings under the Lender Notes totaled$19.8 million and accrued interest at a weighted average rate of 4.86%.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, most ending with a balloon payment at maturity, and are secured bycertain equipment of the Company. At September 30, 2004, outstandingborrowings under the Equipment Notes totaled $19.9 million and accruedinterest at a weighted average rate of 6.13%. The Equipment Notes provide forfixed payments of principal and interest (at fixed rates) for defined periodsof up to ten years from the date of issuance and are secured by equipment whichwas concurrently purchased from the manufacturer. At September 30, 2004, theremaining balance of term equipment notes totaling $1.6 million primarilyconsists of various secured debt obligations assumed by us in connection withcertain prior year acquisitions. We are not subject to any significantfinancial covenants in connection with any of the term equipment notes and wedo not anticipate that our term equipment note limits will restrict our abilityto finance any planned capital expenditures; however, the Credit Agreementplaces certain limitations on the amount of additional term note obligations wemay incur in the future.

 

In the three month periodended September 30, 2004, we retired $25.7 million of Lender Notes withborrowings from the Credit Agreement. Subsequently, we have retired an additional $12.5 million of EquipmentNotes.  The purpose of retiring thesenotes was to utilize available capacity under the Credit Agreement to effect anoverall reduction in our interest costs. No financial penalties were incurred in connection with the retirementof these obligations.

 

Our other debt obligationsconsist of a mortgage totaling $5.1 million, a promissory note totaling$3.5 million, industrial

 

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revenuebonds totaling $8.6 million and various other debt obligations totaling$.4 million. We do not have any significant financial covenants orrestrictions associated with these other debt 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. Our futurecontractual obligations under such operating leases total approximately $54.2million as of September 30, 2004.

 

*ContingentTransaction Consideration* — We entered into an earnoutagreement in connection with the prior year acquisition of one of our printingbusinesses.  If this business generatesoperating profits in excess of pre-determined targets, we are obligated to makean additional cash payment.  As ofSeptember 30, 2004, we were contingently obligated through fiscal 2005 to makeadditional cash payments of up to $.8 million. Based on current operating levels, we expect that the actual cashpayment pursuant to this contractual obligation will be less than the maximumamount indicated.  The Company’saccounting policy for amounts payable pursuant to earnout agreements that arealso contingent upon continuity of employment provides for such amounts to beexpensed as the liability is incurred.

 

*Lettersof Credit* — In connection with our assumption of obligationsunder outstanding industrial revenue bonds related to certain current and prioryear acquisitions of printing businesses, which are reflected as debt in theaccompanying consolidated financial statements, we had four letters of creditoutstanding as of September 30, 2004 for a combined total of $9.0 million.These letters of credit were issued pursuant to the terms of our CreditAgreement, which expires in July 2007, and we may be required to obtainreplacement letters of credit at that time.

 

*InsurancePrograms*— We maintain third-party insurance coverage inamounts and against risks we believe are reasonable under our circumstances. Weare self-insured against most workers compensation claims and for a significantcomponent of our group health insurance programs.  For these exposures, we accrue expected lossamounts 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 of expected loss amounts aresubject to uncertainties arising from various sources, including changes inclaims reporting patterns, claims settlement patterns, judicial decisions,legislation and economic conditions. Although we believe that the accrued estimated loss amounts arereasonable under the circumstances, significant differences related to theitems noted above could materially affect our risk exposure, insuranceobligations and future expense.

 

**FactorsWhich May Affect Future Results**

 

Our future operating resultsmay be impacted by a number of factors, including general economic conditionsand competitive factors in our industry, seasonal and cyclical variations incommercial printing demand, reasonable growth in the demand for our servicesand retention of key management and operating personnel. To the extent aneconomic 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 of a decline in demand,competitive pricing pressures may occur and could negatively impact the levelof sales and profit margins generated by our printing businesses. Also, themagnitude and timing of any future acquisitions, as well as our ability toabsorb and manage such businesses, will impact our future results. Because ofthese and other factors, there can be no assurance that we will not experiencematerial fluctuations in our future operating results or cash flows on a quarterlyor annual basis.

 

**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 arerequired to make certain estimates and assumptions in determining the reportedamounts of assets and liabilities, disclosure of contingent liabilities and thereported amounts of revenues and expenses. We evaluate our estimates and assumptionson an ongoing basis and rely on historical experience and various other factorsthat we believe to be reasonable under the circumstances to determine suchestimates. Because uncertainties with respect to estimates and assumptions areinherent in the preparation of financial statements, actual results coulddiffer from these estimates.

 

*Receivables,net of valuation allowance –*Accounts receivable at September 30, 2004 were $123.8 million, net of a$2.3 million allowance for doubtful accounts. The valuation allowance wasdetermined based upon our evaluation of known requirements, aging ofreceivables, historical experience and the economic environment. While webelieve we have appropriately considered known or expected outcomes, ourcustomers’ ability to pay their obligations could be adversely affected bycontraction in the economy or other factors beyond our control. Changes in ourestimates of collectability could have a material adverse affect on ourearnings.

 

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*Goodwill****–*We evaluate the carrying value of ourgoodwill as 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 flowsrequires judgments regarding future economic conditions, product demand andpricing.  Our evaluation also makes useof estimates of market multiples of cash flow at which transactions could becompleted in the current market.  If ourestimates of future cash flows or market multiples prove to be inaccurate, animpairment charge could be necessary in future periods.

 

*Impairmentof long-lived assets*– We evaluate long-lived assets, including property, plant and equipment andother intangible assets whenever events or changes in conditions indicate thatthe carrying value may not be recoverable. The evaluation requires us to estimatefuture undiscounted cash flows associated with an asset or group of assets. Ifthe cost of the asset or group of assets cannot be recovered by theseundiscounted cash flows, then an impairment may exist. Estimating future cashflows requires judgments regarding future economic conditions, product demandand pricing. Although we believe our estimates are appropriate, significantdifferences in the actual performance of the asset or group of assets maymaterially affect our asset values and require an impairment charge in futureperiods.

 

*Insuranceliabilities* – We areself-insured for the majority of our workers’ compensation costs and grouphealth insurance costs.  Insurance claimsliabilities have been accrued using actuarial principles and industry standardrates on an undiscounted basis. Third party administrators estimate theultimate potential cost for individual claims. Actual development of individualclaims could vary from the estimated amounts due to severity of injuries, thepotential for damage awards and future changes in medical costs, which couldresult in an increase or decrease in accrued costs in future periods for claimmatters which occured in a prior period.

 

*Accountingfor income taxes* – Aspart of the process of preparing our consolidated financial statements, we arerequired to estimate our income taxes. This process involves estimating our actual current tax exposure,together with assessing temporary differences resulting from differingtreatment of items for tax and financial reporting purposes.  The tax effects of these temporary differencesare recorded as deferred tax assets or deferred tax liabilities.  We must then assess the likelihood that ourdeferred tax assets will be recovered from future taxable income, and to theextent we believe that recovery is not likely, we must establish a valuationallowance.  Significant judgment isrequired in determining our provision for income taxes, our deferred tax assetsand liabilities and any valuation allowance recorded against our net deferredtax assets.  Additionally, we establishreserves when, despite our belief that our tax return positions are fullysupportable, we believe that certain positions are likely to be challenged andthat we may not succeed.  We adjust thesereserves in light of changing facts and circumstances.  Our effective tax rate includes the impact ofreserve provisions and changes to reserves that we consider appropriate.

 

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

 

Market risk generally meansthe risk that losses may occur in the value of certain financial instruments asa result of movements in interest rates, foreign currency exchange rates andcommodity prices.  We do not hold orutilize derivative financial instruments that could expose our Company tomarket risk.  However, we are exposed tomarket risk for changes in interest rates related primarily to our debtobligations, which includes borrowings under our bank credit facilities,various term equipment notes and other debt obligations.  As of September 30, 2004, there were nomaterial changes in our market risk or the estimated fair value of our debtobligations relative to their recorded value, as reported in our Annual Reporton Form 10-K for the fiscal year ended March 31, 2004.

 

***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 in Rules 13a-15(e)and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”)) as of the end of the period covered by this report. Based on suchevaluation, the Company’s CEO and CFO have concluded that, as of the end ofsuch period, the Company’s disclosure controls and procedures were effective toensure that information required to be disclosed by the Company in reports thatit files or submits under the Exchange Act is recorded, processed, summarizedand reported within the time periods specified in the Securities and ExchangeCommission’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 the Exchange Act) duringthe fiscal quarter to which this report relates that have materially affected,or are reasonably likely to materially affect, the Company’s internal controlover financial reporting.

 

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**CONSOLIDATED GRAPHICS, INC.**

**PART II – OTHER INFORMATION**

 

**ITEM 1.  *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 ofany legal proceedings or claims pending against the Company that our managementbelieves will have a material adverse effect on our financial position orresults of operations.

 

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

 

None.

 

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

 

None.

 

**ITEM 4.  *Submission of Matters to aVote of Security Holders***

 

OnJuly 22, 2004, the Company held its Annual Meeting of Shareholders. The onlymatter acted upon at such shareholders’ meeting was a vote for the election oftwo Class II Directors.  The shareholdervoting results were reported in the Company’s Form 10-Q for the period endedJune 30, 2004. 

 

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

 

The Company has issued apress release announcing its fiscal 2005 second quarter results.  A copy of the press release is attachedhereto as Exhibit 99.1.  The attachedpress release may contain forward-looking information.  Readers are cautioned that such informationinvolves known and unknown risks, uncertainties and other factors that couldcause actual results to materially differ from the results, performance orother expectations implied by these forward looking statements.

 

The Company will hold aconference call today at 10:00 a.m. Central Time/11:00 a.m. Eastern Time todiscuss the Company’s financial results for the second quarter ended September30, 2004.  A live webcast and subsequentarchive of the conference call, as well as a copy of the attached pressrelease, can be accessed at www.consolidatedgraphics.com under the InvestorRelations page.

 

During such conference call,management may make references to certain non-GAAP financial measures used bythe Company, such as EBITDA, for various fiscal periods.  Attached hereto as Exhibit 99.2 is a schedulethat reconciles such non-GAAP financial measures for the indicated periods to themost directly comparable financial measure calculated and presented inaccordance with GAAP.

 

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**ITEM 6.  *Exhibits***

 
| *3.1 |   | Restated  Articles of Incorporation of the Company filed with the Secretary of State of  the State of Texas on July 27, 1994 (Consolidated Graphics, Inc. Form 10-Q  (June 30, 1994), Exhibit 4(a)).                                                                                                                                                                                                                                   |
|------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *3.2 |   | Articles  of Amendment to the Restated Articles of Incorporation of the Company dated  as of July 29, 1998 (Consolidated Graphics, Inc. Form 10-Q (June 30, 1998),  Exhibit 3.1).                                                                                                                                                                                                                                                      |
| *3.3 |   | Second  Amended and Restated By-Laws of the Company adopted as of June 30, 2004  (Consolidated Graphics, Inc. Form 10-Q  (June 30, 2004), Exhibit 3.3).                                                                                                                                                                                                                                                                           |
| *4.1 |   | Specimen  Common Stock Certificate (Consolidated Graphics, Inc. Form 10-K (March 31,  1998), Exhibit 4.1).                                                                                                                                                                                                                                                                                                                             |
| *4.2 |   | Rights  Agreement dated as of December 15, 1999 between Consolidated Graphics, Inc  and American Stock Transfer and Trust Company, as Rights Agent, which  includes as Exhibit A the Certificate of Designations of Series A Preferred  Stock, as Exhibit B the form of Rights Certificate and as Exhibit C the form  of summary of Rights to Purchase Shares (Consolidated Graphics, Inc Form 8-K  (December 15, 1999), Exhibit 4.1). |
| 31.1 |   | Certification  of Joe R. Davis pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                              |
| 31.2 |   | Certification  of G. Christopher Colville pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.                                                                                                                                                                                                                                                                                                                                  |
| 32.1 |   | Certification  of Joe R. Davis pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                              |
| 32.2 |   | Certification  of G. Christopher Colville pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002.                                                                                                                                                                                                                                                                                                                                  |
| 99.1 |   | Press  release dated October 27, 2004, in connection with the press release  announcing the Company’s fiscal 2005 second quarter results.                                                                                                                                                                                                                                                                                         |
| 99.2 |   | Reconciliations  regarding Non-GAAP Financial Measures.                                                                                                                                                                                                                                                                                                                                                                                |

 

----

|   |   | *Incorporated  by reference |
|--------|--------|-----------------------------|

 

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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 report to besigned on its behalf by the undersigned, thereunto duly authorized.**

 
| ** **                    | ** ** | **CONSOLIDATED  GRAPHICS, INC.** |
|-------------------------------|------------|----------------------------------|
|                          |       |                             |
|                          |       |                             |
| Dated:  October 27, 2004 | By:        | /s/  G. Christopher Colville     |   |
|                          |       | G. Christopher Colville          |
|                          |       | Executive Vice President,        |
|                          |       | Chief Financial and Accounting   |
|                          |       | Officer and Secretary            |

 

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***Exhibit Index***

 

***Description of 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.                                                                                                                                                                                                                                                                                                                                  |
| 99.1 |   | Press  release dated October 27, 2004, in connection with the press release  announcing the Company’s fiscal 2005 second quarter results.                                                                                                                                                                                                                                                                                         |
| 99.2 |   | Reconciliations  regarding Non-GAAP Financial Measures.                                                                                                                                                                                                                                                                                                                                                                                |

 

----

|   |   | *Incorporated  by reference |
|--------|--------|-----------------------------|

 

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