** **

**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

**ý                 QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended June 30,2002**

 

**OR**

 

**o                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition periodfrom                  to                  **

 

**Commission File Number 0-24068**

 

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**CONSOLIDATED GRAPHICS, INC.**

**(Exact name of Registrant as specified in its charter)**

 

| **Texas**                        |   | **76-0190827**                        |
|----------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer  Identification No.) |
| incorporation or  organization)  |   |                                  |

 

| **5858 Westheimer Road, Suite 200**       |   |       |
|-------------------------------------------|--------|------------|
| **Houston, Texas**                        |   | **77057**  |
| (Address of principal  executive offices) |   | (Zip Code) |

 

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

 

 

Indicate by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

Yes ý   No o

 

The number ofshares of Common Stock, par value $.01 per share, of the Registrant outstandingat July 31, 2002 was 13,213,395.

 

----

 

**CONSOLIDATED GRAPHICS, INC.**

 

##### **FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002**

 

 

 

**INDEX**

 

| Part I —  Financial Information                                                                      |   |   |
|-----------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                      |   |   |
| Item 1 — Financial Statements                                                                        |   |   |
|                                                                                                      |   |   |
| Consolidated Balance Sheets  at June 30, 2002 and March 31, 2002                                          |   |   |
|                                                                                                      |   |   |
| Consolidated Income  Statements for the Three Months Ended June 30, 2002 and 2001                         |   |   |
|                                                                                                      |   |   |
| Consolidated  Statements of Cash Flows for the Three Months Ended June 30, 2002 and 2001                  |   |   |
|                                                                                                      |   |   |
| Notes to Consolidated Financial Statements                                                                |   |   |
|                                                                                                      |   |   |
| Item 2 — Management’s Discussion and Analysis of  Financial Condition and Results of Operations |   |   |
|                                                                                                      |   |   |
| Item 3 — Quantitative and Qualitative Disclosure  About Market Risk                                  |   |   |
|                                                                                                      |   |   |
| Part  II — Other Information                                                                         |   |   |
|                                                                                                      |   |   |
| Item 1 — Legal Proceedings                                                                           |   |   |
|                                                                                                      |   |   |
| Item 2 — Changes in Securities and Use of Proceeds                                                   |   |   |
|                                                                                                      |   |   |
| Item 3 — Defaults upon Senior Securities                                                             |   |   |
|                                                                                                      |   |   |
| Item 4 — Submission of Matters to a Vote of  Security Holders                                        |   |   |
|                                                                                                      |   |   |
| Item 5 — Other Information                                                                           |   |   |
|                                                                                                      |   |   |
| Item 6 — Exhibits and Reports on Form 8-K                                                            |   |   |
|                                                                                                      |   |   |
| Signatures                                                                                                |   |   |
|                                                                                                      |   |   |

 

 

2

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##### **PART I** —FINANCIAL INFORMATION

 

 

**ITEM 1****.  *Financial Statements***

 

**CONSOLIDATED GRAPHICS, INC.**

##### **CONSOLIDATED BALANCE SHEETS**

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

** **
|                                                                                                           |   | **June 30,**    |    | **March 31,** |   |
|----------------------------------------------------------------------------------------------------------------|--------|-----------------|---------|---------------|--------|
|                                                                                                           |   | **2002**        |    | **2002**      |   |
| **ASSETS**                                                                                                     |   | **(Unaudited)** |    | **(Audited)** |   |
|                                                                                                           |   |            |    |          |   |
| CURRENT ASSETS                                                                                                 |   |            |    |          |   |
| Cash and cash equivalents                                                                                      |   | $               | 9,593   |          | $      | 8,955 |   |
| Accounts receivable, net                                                                                       |   | 111,468         |    | 121,981       |   |
| Inventories                                                                                                    |   | 31,962          |    | 32,771        |   |
| Prepaid expenses                                                                                               |   | 5,670           |    | 6,114         |   |
| Deferred income tax assets                                                                                     |   | 4,754           |    | 5,153         |   |
| Total current assets                                                                                           |   | 163,447         |    | 174,974       |   |
| PROPERTY AND EQUIPMENT, net                                                                                    |   | 289,985         |    | 293,831       |   |
| GOODWILL, net                                                                                                  |   | 109,914         |    | 199,331       |   |
| OTHER ASSETS                                                                                                   |   | 4,511           |    | 8,597         |   |
|                                                                                                           |   | $               | 567,857 |          | $      | 676,733 |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                  |   |            |    |          |   |
|                                                                                                           |   |            |    |          |   |
| CURRENT LIABILITIES                                                                                            |   |            |    |          |   |
| Current portion of long-term debt                                                                              |   | $               | 19,983  |          | $      | 19,877 |   |
| Accounts payable                                                                                               |   | 31,457          |    | 32,068        |   |
| Accrued liabilities                                                                                            |   | 36,237          |    | 37,382        |   |
| Income taxes payable                                                                                           |   | 1,695           |    | 611           |   |
| Total current liabilities                                                                                      |   | 89,372          |    | 89,938        |   |
| LONG-TERM DEBT, net of current portion                                                                         |   | 186,996         |    | 213,860       |   |
| DEFERRED INCOME TAX LIABILITIES                                                                                |   | 54,099          |    | 66,337        |   |
| COMMITMENTS AND CONTINGENCIES                                                                                  |   |            |    |          |   |
| SHAREHOLDERS’ EQUITY                                                                                      |   |            |    |          |   |
| Common stock, $.01 par value; 100,000,000  shares authorized; 13,213,395 and 13,205,863 issued and outstanding |   | 132             |    | 132           |   |
| Additional paid-in capital                                                                                     |   | 157,695         |    | 157,581       |   |
| Retained earnings                                                                                              |   | 79,563          |    | 148,885       |   |
| Total shareholders’ equity                                                                                |   | 237,390         |    | 306,598       |   |
|                                                                                                           |   | $               | 567,857 |          | $      | 676,733 |   |

 

 

Seeaccompanying notes to consolidated financial statements.

 

 

3

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**CONSOLIDATED GRAPHICS, INC.**

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

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

**(Unaudited)**

 

 

**                                                                                                                                                                 **
|                                                |   | **Three Months Ended****June 30** |    |
|-----------------------------------------------------|--------|-----------------------------------|---------|
|                                                |   | **2002**                          |    | **2001** |   |
|                                                |   |                              |    |   |   |
| SALES                                               |   | $                                 | 176,104 |   | $ | 164,435 |   |
|                                                |   |                              |    |   |   |
| COST OF SALES                                       |   | 132,654                           |    | 120,603 |   |
|                                                |   |                              |    |   |   |
| Gross profit                                        |   | 43,450                            |    | 43,832 |   |
|                                                |   |                              |    |   |   |
| SELLING EXPENSES                                    |   | 19,452                            |    | 17,164 |   |
|                                                |   |                              |    |   |   |
| GENERAL AND ADMINISTRATIVE EXPENSES                 |   | 12,989                            |    | 12,257 |   |
|                                                |   |                              |    |   |   |
| AMORTIZATION OF GOODWILL                            |   | —                            |    | 1,334 |   |
|                                                |   |                              |    |   |   |
| Operating income                                    |   | 11,009                            |    | 13,077 |   |
|                                                |   |                              |    |   |   |
| INTEREST EXPENSE, net                               |   | 2,858                             |    | 4,610 |   |
|                                                |   |                              |    |   |   |
| Income before taxes and accounting change           |   | 8,151                             |    | 8,467 |   |
|                                                |   |                              |    |   |   |
| INCOME TAXES                                        |   | 3,097                             |    | 3,387 |   |
|                                                |   |                              |    |   |   |
| Income before accounting change                     |   | 5,054                             |    | 5,080 |   |
|                                                |   |                              |    |   |   |
| CUMULATIVE EFFECT OF ACCOUNTING CHANGE, net of  tax |   | 74,376                            |    | — |   |
|                                                |   |                              |    |   |   |
| Net income (loss)                                   |   | $                                 | (69,322 | ) | $ | 5,080 |   |
|                                                |   |                              |    |   |   |
| BEFORE ACCOUNTING CHANGE                            |   |                              |    |   |   |
|                                                |   |                              |    |   |   |
| Basic earnings per share                            |   | $                                 | .38     |   | $ | .39 |   |
| Diluted earnings per share                          |   | $                                 | .37     |   | $ | .38 |   |
|                                                |   |                              |    |   |   |
| AFTER ACCOUNTING CHANGE                             |   |                              |    |   |   |
|                                                |   |                              |    |   |   |
| Basic earnings per share                            |   | $                                 | (5.25   | ) | $ | .39 |   |
| Diluted earnings per share                          |   | $                                 | (5.11   | ) | $ | .38 |   |
|                                                |   |                              |    |   |   |
| SHARES USED TO COMPUTE EARNINGS PER SHARE           |   |                              |    |   |   |
|                                                |   |                              |    |   |   |
| Basic                                               |   | 13,209                            |    | 13,025 |   |
| Diluted                                             |   | 13,563                            |    | 13,258 |   |

 

 

See accompanying notes to consolidated financial statements.

 

 

4

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**CONSOLIDATED GRAPHICS, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

**(Unaudited)**

 
|                                                                                              |   | **Three Months Ended****June 30** |    |
|---------------------------------------------------------------------------------------------------|--------|-----------------------------------|---------|
|                                                                                              |   | **2002**                          |    | **2001** |   |
|                                                                                              |   |                              |    |   |   |
| OPERATING ACTIVITIES                                                                              |   |                              |    |   |   |
| Net income (loss)                                                                                 |   | $                                 | (69,322 | ) | $ | 5,080 |   |
| Adjustments to reconcile net income (loss) to  net cash provided  by operating  activities — |   |                              |    |   |   |
| Cumulative effect of accounting change, net of  tax                                               |   | 74,376                            |    | — |   |
| Depreciation and amortization                                                                     |   | 9,134                             |    | 10,260 |   |
| Deferred income tax provision                                                                     |   | 3,540                             |    | 532 |   |
| Changes in assets and liabilities, net of  effects of acquisitions—                          |   |                              |    |   |   |
| Accounts receivable, net                                                                          |   | 14,443                            |    | (1,615 | ) |
| Inventories                                                                                       |   | 1,268                             |    | (513 | ) |
| Prepaid expenses                                                                                  |   | 456                               |    | (631 | ) |
| Other assets                                                                                      |   | 1,824                             |    | 3 |   |
| Accounts payable and accrued liabilities                                                          |   | (1,319                            | )       | (3,788 | ) |
| Income taxes payable                                                                              |   | 1,084                             |    | 2,852 |   |
| Net cash provided by operating activities                                                         |   | 35,484                            |    | 12,180 |   |
|                                                                                              |   |                              |    |   |   |
| INVESTING ACTIVITIES                                                                              |   |                              |    |   |   |
| Acquisitions of businesses, net of cash  acquired                                                 |   | (4,338                            | )       | (1,476 | ) |
| Purchases of property and equipment                                                               |   | (4,374                            | )       | (3,071 | ) |
| Proceeds from asset dispositions                                                                  |   | 510                               |    | 1,064 |   |
| Net cash used in investing activities                                                             |   | (8,202                            | )       | (3,483 | ) |
|                                                                                              |   |                              |    |   |   |
| FINANCING ACTIVITIES                                                                              |   |                              |    |   |   |
| Proceeds from bank credit facilities                                                              |   | 418                               |    | 1,854 |   |
| Payments on bank credit facilities                                                                |   | (25,031                           | )       | (11,313 | ) |
| Payments on long-term debt                                                                        |   | (2,145                            | )       | (2,126 | ) |
| Proceeds from exercise of stock options                                                           |   | 114                               |    | 337 |   |
| Net cash used in financing activities                                                             |   | (26,644                           | )       | (11,248 | ) |
|                                                                                              |   |                              |    |   |   |
| NET INCREASE   (DECREASE) IN CASH AND CASH EQUIVALENTS                                       |   | 638                               |    | (2,551 | ) |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF  PERIOD                                                 |   | 8,955                             |    | 8,667 |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                        |   | $                                 | 9,593   |   | $ | 6,116 |   |

 

 

See accompanyingnotes to consolidated financial statements.

 

 

5

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**CONSOLIDATED GRAPHICS, INC.**

**NOTES****TOCONSOLIDATED FINANCIAL STATEMENTS**

**(In thousands)**

**(Unaudited)**

 

 

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

 

The accompanying unaudited consolidated financialstatements include the accounts of Consolidated Graphics, Inc. and subsidiaries(collectively, the “Company”).  Allintercompany accounts and transactions have been eliminated.  Such statements have been prepared inaccordance with generally accepted accounting principles and the Securities andExchange Commission’s rules and regulations for reporting interim financialinformation.  Accordingly, they do not includeall of the information and footnotes required by generally accepted accountingprinciples for complete financial statements. In the opinion of management, all adjustments (consisting of normalrecurring accruals) considered necessary for a fair presentation of theaccompanying unaudited consolidated financial statements have beenincluded.  Operating results for thethree months ended June 30, 2002 are not necessarily indicative of futureoperating results.  Balance sheetinformation as of March 31, 2002 has been derived from the 2002 annual auditedconsolidated financial statements of the Company.  For further information, refer to the consolidated financialstatements and footnotes thereto included in the Company’s Form 10-K for thefiscal year ended March 31, 2002, filed with the Securities and ExchangeCommission in May 2002.

 

Basic earnings per share are calculated by dividing netincome by the weighted average number of common shares outstanding.  Diluted earnings per share reflect netincome divided by the weighted average number of common shares and dilutivestock options outstanding.

 

Theconsolidated statements of cash flows provide information about the Company’ssources and uses of cash and exclude the effects of non-cash transactions.  The following is a summary of total cash paid(received) for interest and income taxes:

 

** **

|                        |   | **Three Months Ended****June 30** |   |
|-----------------------------|--------|-----------------------------------|--------|
|                        |   | **2002**                          |   | **2001** |   |
| *Cash Paid (Received) for:* |   |                              |   |   |   |
| Interest                    |   | $                                 | 2,891  |   | $ | 4,444 |   |
| Income taxes                |   | (2,880                            | )      | 3 |   |
|                             |        |                                   |        |  |  |  |  |

 

 

**2.  ACCOUNTING CHANGE**

 

Effective April 1, 2002, the Company adopted Statementof Financial Accounting Standards (“SFAS”) No. 142, *Goodwill and Other Intangible Assets*, which requirescompanies to discontinue amortizing goodwill and perform annual impairmenttests to determine if the remaining balance of goodwill or other intangibleassets should be reduced to estimated fair values.  * *Prior to its adoption of SFAS No. 142, the Companyperiodically evaluated whether the remaining balance of goodwill wasrecoverable by assessing current and future levels of income and cash flows onan undiscounted basis, as well as other factors, such as business trends andgeneral market conditions, in accordance with SFAS No. 121, *Accounting for the Impairment of Long-Lived Assetsand for Long-Lived Assets to be Disposed of.*

 

As of April 1, 2002, net goodwill balances attributableto each of the Company’s reporting units were tested for impairment bycomparing the fair value of each reporting unit to its carrying value.  Under SFAS No. 142, fair value wasdetermined using capitalization of earnings estimates and market valuationmultiples for each reporting unit. Based on these impairment tests as of April1, 2002, the Company recognized a transitional impairment charge of $74,376,net of tax benefit totaling $15,379, which is reflected as a cumulative effectof accounting change in the accompanying consolidated income statements.  

 

 

6

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Thefollowing unaudited pro forma financial data for the three months ended June30, 2002 and 2001, are presented as if the provisions of SFAS No. 142 had beenin effect for all periods presented:

 

|                                                    |   | **Three  Months Ended  June 30** |       |
|---------------------------------------------------------|--------|----------------------------------|------------|
|                                                    |   | **2002**                         |       | **2001** |   |
|                                                    |   |                             |       |   |   |
| Net income (loss) as reported                           |   | $                                | (69,322    | ) | $ | 5,080 |   |
| Add: cumulative effect of accounting change, net of tax |   | 74,376                           |       | — |   |
| Add: goodwill amortization                              |   | —                           |       | 1,334 |   |
| Less: tax benefit of deductible goodwill amortization   |   | —                           |       | (169 | ) |
| Adjusted pro forma net income                           |   | $                                | 5,054      |   | $ | 6,245 |   |
|                                                    |   |                             |       |   |   |
|                                                    |   |                             |       |   |   |
| **Basic  Earnings Per Share:**                          |   |                             | ** ** |   | ** ** |
| Net income (loss) as reported                           |   | $                                | (5.25      | ) | $ | .39 |   |
| Add: cumulative effect of accounting change, net of tax |   | 5.63                             |       | — |   |
| Add: goodwill amortization                              |   | —                           |       | .10 |   |
| Less: tax benefit of deductible goodwill amortization   |   | —                           |       | (.01 | ) |
| Adjusted pro forma net income                           |   | $                                | .38        |   | $ | .48 |   |
|                                                    |   |                             |       |   |   |
|                                                    |   |                             |       |   |   |
| **Diluted  Earnings Per Share:**                        |   |                             |       |   |   |
| Net income (loss) as reported                           |   | $                                | (5.11      | ) | $ | .38 |   |
| Add: cumulative effect of accounting change, net of tax |   | 5.48                             |       | — |   |
| Add: goodwill amortization                              |   | —                           |       | .10 |   |
| Less: tax benefit of deductible goodwill amortization   |   | —                           |       | (.01 | ) |
| Adjusted pro forma net income                           |   | $                                | .37        |   | $ | .47 |   |
|                                                         |        |                                  |            |  |  |  |  |  |

 

 

**3.  ACQUISITIONS**

 

During the three months ended June 30, 2002, the Company acquired theassets of S&S Graphics of Laurel, Maryland.  To complete this acquisition, the Company paid cash totaling$3,505.  The allocation of the purchaseprice of the business acquired included current assets of $3,627 and propertyand equipment of $917, less current liabilities of $1,039.  Additionally, to satisfy certain liabilitiesof acquired businesses or pursuant to earnout agreements, the Company paid cashof $833 during the three months ended June 30, 2002.

 

 

**4.  LONG-TERM DEBT**

 

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

 
|                   |   | **June 30,** |    | **March 31,** |   |
|------------------------|--------|--------------|---------|---------------|--------|
|                   |   | **2002**     |    | **2002**      |   |
| Bank credit facilities |   | $            | 124,668 |          | $      | 149,281 |   |
| Term equipment notes   |   | 71,651       |    | 73,708        |   |
| Other                  |   | 10,660       |    | 10,748        |   |
|                   |   | 206,979      |    | 233,737       |   |
| Less current portion   |   | (19,983      | )       | (19,877       | )      |
|                   |   | $            | 186,996 |          | $      | 213,860 |   |
|                        |        |              |         |               |        |  |  |  |

 

 

7

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TheCompany entered into a five-year $225,000 senior secured credit facility (the“Bank Credit Facility”) with eleven banks in December 2000.  The Bank Credit Facility is composed of a$50,000 five-year term loan (the “Term Loan”), of which $32,500 was outstandingat June 30, 2002, and a $175,000 five-year revolving credit line (the“Revolving Line”), of which $89,000 was outstanding at June 30, 2002.  The Term Loan requires quarterly payments of$2,500 each through September 30, 2005.

 

Theproceeds of the Bank Credit Facility can be used to repay certain indebtedness,finance certain acquisitions, provide for working capital and general corporatepurposes, and subject to certain restrictions, repurchase the Company’s commonstock.  Borrowings outstanding under theBank Credit Facility are secured by substantially all of the Company’s assetsother than real estate and certain equipment subject to term equipment notesand other financing.  Borrowings underthe Bank Credit Facility accrue interest, at the Company’s option, at either(1) the London Interbank Offered Rate (LIBOR) plus a margin of 1.25% to 2.25%,or (2) an alternate base rate (based upon the greater of the agent bank’s primelending rate or the Federal Funds effective rate plus .50%) plus a margin of upto 1.00%.  The Company is also requiredto pay a commitment fee on available but unused amounts ranging from .275% to..375% annually.  The interest ratemargin and the commitment fee are based upon the Company’s ratio of Funded Debtto Pro Forma Consolidated EBITDA, as defined, redetermined quarterly.  On June 30, 2002, borrowings outstandingunder the Term Loan and the Revolving Line accrued interest at a weightedaverage rate of 4.16%.

 

TheCompany is subject to certain covenants and restrictions and must meet certainfinancial tests as defined in the Bank Credit Facility.  The Company was in compliance with thesecovenants and financial tests at June 30, 2002.  The Company obtained an amendment to its Bank Credit Facilitywhich specifically provided that the goodwill impairment charge (see Note 2.Accounting Change) would not impact compliance with these covenants.

 

Inaddition, the Company entered into an auxiliary revolving credit facility (the“Auxiliary Bank Facility”) with a commercial bank expiring in February2003.  The Auxiliary Bank Facility isunsecured and has a maximum borrowing capacity of $5,000. At June 30, 2002,borrowings outstanding under the Auxiliary Bank Facility totaled $3,168 andaccrued interest at 3.84%.

 

The term equipment notes consist primarily of term notes payablepursuant to printing equipment purchase and financing agreements between theCompany and two printing equipment manufacturers. The agreements provide forfixed monthly payments over periods of either five or ten years and are securedby the purchased equipment. At June 30, 2002, outstanding borrowings underthese agreements totaled $67,020 and accrued interest at a weighted average rate of 7.76%. The remainingbalance of term equipment notes totaling $4,631 primarily consists of varioussecured debt obligations assumed by the Company in connection with certainprior year acquisitions. The Company is not subject to any significantfinancial covenants in connection with any of these equipment notes; however,the Bank Credit Facility places certain limitations on the amount of additionalterm note obligations the Company may incur in the future.

 

The Company’s remaining debt obligations consist of a promissory notetotaling $5,172, industrial revenue bonds totaling $4,810 and various otherdebt obligations totaling $678.  TheCompany does not have any significant financial covenants or restrictionsassociated with these debt obligations.

 

 

**5.  RECENT ACCOUNTING PRONOUNCEMENTS**

 

SFAS No. 145, *Rescission of FASB Statement Nos. 4, 44, and 64,Amendment of FASB Statement No. 13, and Technical Corrections,*wasissued in April 2002.  SFAS No. 145amends existing authoritative pronouncements to make various technicalcorrections, clarify meanings, and describe their applicability under changedconditions.  This statement requiresthat gains and losses from the extinguishment of debt be classified asextraordinary items only if they meet the criteria in Accounting PrinciplesBoard (“APB”) Opinion No. 30, *Reporting theResults of Operations - Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and Infrequently Occurring Events andTransactions. *SFAS No. 145is effective for fiscal years beginning after May 15, 2002.  Management does not believe that theadoption of SFAS No. 145 will have a material impact on its financial positionor results of operations.

 

 

8

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SFAS No. 146, *Accounting for Costs Associated with Exit or DisposalActivities*, was issued in July 2002 and must be adopted in fiscalyears beginning after December 29, 2002. SFAS No. 146 requires that exit or disposal costs be recorded when theyare incurred.  The exit costs may bemeasured at fair value and the liability may be adjusted for changes inestimated cash flows.  Management doesnot believe that the adoption of SFAS No. 146 will have a material impact onits financial position or results of operations.

 

 

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

 

*The following discussion contains forward-lookinginformation.  Readers are cautioned thatsuch information involves known and unknown risks and uncertainties, includingthose created by general market conditions, competition and the possibilitythat events may occur which limit the ability of the Company to maintain orimprove its operating results and acquire additional printing businesses.  Although the Company believes that theassumptions underlying the forward-looking statements are reasonable, any ofthe assumptions could be inaccurate, and there can be no assurance that theforward-looking statements included herein will prove to be accurate.  The inclusion of such information should notbe regarded as a representation by the Company or any other person that theobjectives and plans of the Company will be achieved**.** The Company expressly disclaims any duty to provide updates to theseforward-looking statements, assumptions or other factors after the date of thisReport  on Form 10-Q to reflect theoccurrence of events or circumstances or changes in expectations.*

*The following discussion of the financial condition andperformance of the Company should be read in conjunction with the consolidatedfinancial statements included herein and the consolidated financial statementsand related notes and other detailed information regarding the Company includedin the Company’s Annual Report on Form 10-K for the fiscal year ended March 31,2002 and other reports filed by the Company with the Securities and ExchangeCommission.  Operating results for thethree months ended June 30, 2002 are not necessarily indicative of the resultsto be expected for the entire fiscal year ending March 31, 2003 or any periodsthereafter.*

 

 

**Overview**

 

Our Company is a leading national provider of commercial printingservices with 66 printing facilities in 25 states and is recognized as thelargest sheet-fed and half-web commercial printing company in the UnitedStates.  We are focused on adding valueto our operating companies by providing the financial and operationalstrengths, management support and technological advantages associated with anational organization.  Our strategycurrently includes the following initiatives to generate sales and profit growth:

 

·     *Internal Sales Growth —*Inthe midst of prevailing difficult industry conditions, we are seeking to useour competitive advantages to expand market share. We continue to pursueadditional experienced sales professionals, invest in new equipment andtechnology, expand our national accounts program and develop complementary,value-added services.

·      *Disciplined Acquisition Program —*Weselectively pursue opportunities to acquire well-managed printing businesses atreasonable prices.

·      *Cost Savings —*Because ofour size and national presence, we leverage our economies of scale to purchasesupplies and equipment at preferential prices, and centralize variousadministrative services to generate cost savings.

·      *Best Practices/Benchmarking —*Weprovide a forum for our printing businesses to share their knowledge oftechnical processes and their best practices with one another, as well asbenchmark financial and operational data to help our printing businessesidentify and respond to changes in operating trends.

·      *Leadership Development —*Throughour unique Leadership Development Program, we develop talent for future salesand management positions at our printing businesses.

 

Our printing operations maintain their own sales,estimating, customer service, prepress, production, postpress and accounting departments.  Our corporate headquarters staff providessupport to our printing 

 

 

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operations in such areas as human resources,purchasing and management information systems. We also maintain centralized treasury,risk management, tax and consolidated financial reporting activities.

 

The majority of our sales are derived from commercialprinting services, which include electronic prepress, printing, finishing,storage and delivery of high quality, custom-designed products. Examples ofsuch products include multicolor product and capability brochures, shareholdercommunications, catalogs, training manuals, point-of-purchase marketingmaterials and direct mail pieces.   We  also serve  our  customers by  providing  a variety of  complementary  services, including fulfillment and mailingservices and print-related e-commerce software solutions and electronic mediaservices through CGXmedia.

 

Most of our sales are generated by individual orders through commissionedsales personnel and, in some cases, pursuant to long-term contracts.  We recognize revenue from these orders whenwe deliver the ordered products.  To alarge extent, continued engagement of our Company by our customers forsuccessive jobs depends upon the customer’s on-going satisfaction with thequality of services we provide. As such it is difficult for us to predict thenumber, size and profitability of printing jobs that we expect to produce formore than a few weeks in advance.

 

Our cost of sales mainly consists of raw materials consumed in theprinting process, as well as labor and outside services.  Paper cost is the largest component of ourmaterials cost; however, fluctuations in paper prices generally do notsignificantly impact our operating margins because any changes in paper pricingare generally passed on by our printing businesses.  Additionally, our cost of sales includes maintenance, repair,rental and insurance costs associated with operating our facilities andequipment, along with depreciation charges.

 

Our selling expenses generally include the salary andcommissions paid to our sales professionals or third-party sales agents, alongwith promotional, travel and entertainment costs.  Our general and administrative expenses generally include thesalary and benefits paid to support personnel at our printing businesses andour corporate staff.  These expensesalso include office rent and utilities, communications expenses andprofessional fees.

 

 

**Results ofOperations**

 

The following table sets forth the Company’s historicalconsolidated income statements for the periods indicated:

 

                                                                                                                                       
|                                      |   |                              |   |                              |   | **As a Percentage****of Sales** |   |
|-------------------------------------------|--------|-----------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                      |   | **Three  Months   Ended June 30** |   | **Three Months****Ended June 30** |   |
|                                      |   | **2002**                          |   | **2001**                          |   | **2002**                        |   | **2001** |   |
|                                      |   | **(In millions)**                 |   |                              |   |                            |   |
| Sales                                     |   | $                                 | 176.1  |                              | $      | 164.4                           |   | 100.0 | % | 100.0 | % |
| Cost of sales                             |   | 132.7                             |   | 120.6                             |   | 75.3                            |   | 73.3 |   |
| Gross profit                              |   | 43.4                              |   | 43.8                              |   | 24.7                            |   | 26.7 |   |
| Selling expenses                          |   | 19.5                              |   | 17.1                              |   | 11.0                            |   | 10.4 |   |
| General and administrative expenses       |   | 12.9                              |   | 12.3                              |   | 7.4                             |   | 7.5 |   |
| Amortization of goodwill                  |   | —                            |   | 1.3                               |   | —                          |   | .8 |   |
| Operating income                          |   | 11.0                              |   | 13.1                              |   | 6.3                             |   | 8.0 |   |
| Interest expense, net                     |   | 2.9                               |   | 4.6                               |   | 1.7                             |   | 2.8 |   |
| Income before taxes and accounting change |   | 8.1                               |   | 8.5                               |   | 4.6                             |   | 5.2 |   |
| Income taxes                              |   | 3.0                               |   | 3.4                               |   | 1.7                             |   | 2.1 |   |
| Income before accounting change           |   | $                                 | 5.1    |                              | $      | 5.1                             |   | 2.9 | % | 3.1 | % |

 

 

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# ***Quarter Ended June 30, 2002 Compared with Quarter EndedJune 30, 2001***

 

Oursales increased 7% to $176.1 million primarily due to the incremental impact ofthree businesses acquired during the quarter ended March 31, 2002 and onebusiness acquired during the quarter ended June 30, 2002.  Further, our sales increase demonstrates theinitial return on our efforts to expand market share through our recruitingprogram for experienced sales professionals.

 

Ourgross profit margin decreased to 24.7% from 26.7% a year ago, reflectingcontinued pricing pressures caused by the current economic weakness andprevailing negative industry conditions. Further, the profit margins of acquired businesses generally are lowerthan our Company’s historical average and typically improve over time as wework with the management of the acquired businesses to implement cost savingsstrategies and other operating best practices.

 

The increase in selling expenses to 11.0% of sales, as compared to10.4% last year, is attributable to our continued investments in recruiting andhiring new sales professionals, coupled with our ongoing marketing efforts topromote our extensive printing capabilities and complementary services,particularly those available through CGXmedia.

 

Our general and administrative costs increased 6% to $13.0 million dueprimarily to the incremental impact of the recently acquired businesses.  However, as a percentage of sales, generaland administrative costs for the current quarter improved slightly to 7.4% ascompared to 7.5% last year (excluding amortization of goodwill recorded in theprior comparable period).

 

Our interest expensehas declined 38% to $2.9 million and reflects lower borrowings outstandingunder our variable-rate bank credit facility, coupled with a more favorableinterest rate environment as compared to the same period a year ago.

 

Effective April 1, 2002, weadopted Statement of Financial Accounting Standards (“SFAS) No. 142 whichrequired us to perform a series of transitional impairment tests pertaining tothe valuation of our outstanding goodwill balance, which totaled $199.3 millionas of March 31, 2002.  Pursuant to theadoption of SFAS No. 142, we determined that an after-tax impairment charge of$74.4 million was required, and such charge has been classified as thecumulative effect of an accounting change as provided for by the new accountingstandard.  Further, under SFAS No. 142,we are no longer required to amortize the remaining outstanding goodwillbalance, but are required to perform annual impairment tests to determine ifthe remaining balance of goodwill should be reduced to estimated fairvalues.  As a result of discontinuinggoodwill amortization, we reduced our overall effective tax rate to 38% in thecurrent quarter from 40% in the prior year. The higher tax rate of 40% in fiscal 2002 was necessary to provide forthe effect of the portion of goodwill amortization that was not deductible fortax purposes.

 

 

**Liquidity andCapital Resources**

 

*Sourcesand Uses of Cash*

 

Our Company’s historical sources of cash have primarily been cashprovided by operations or borrowings under our bank credit facilities.  Our Company’s historical uses of cash havebeen for capital expenditures, acquisitions of printing businesses and paymentof principal and interest on outstanding debt obligations.  Supplemental information pertaining to ourhistorical sources and uses of cash is presented as follows and should be readin conjunction with our consolidated statements of cash flows and notes theretoincluded in ***Item 1.  Financial Statements:***

 

 

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|                                            |   | **Three  Months Ended June 30** |   |
|-------------------------------------------------|--------|---------------------------------|--------|
|                                            |   | **2002**                        |   | **2001** |   |
|                                            |   | **(In  millions)**              |   |
| Net cash provided by operating activities       |   | $                               | 35.5   |   | $ | 12.2 |   |
| Acquisitions of businesses                      |   | (4.3                            | )      | (1.5 | ) |
| Other capital expenditures                      |   | (4.4                            | )      | (3.1 | ) |
| Net repayments under bank credit facilities     |   | (24.6                           | )      | (9.5 | ) |
| Payments on term equipment notes and other debt |   | (2.1                            | )      | (2.1 | ) |
|                                                 |        |                                 |        |  |  |  |  |

 

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. Financial Statements:***
|                      |   | **June 30,**       |   | **March 31,** |   |
|---------------------------|--------|--------------------|--------|---------------|--------|
|                      |   | **2002**           |   | **2002**      |   |
|                      |   | **(In  millions)** |   |
| Cash and cash equivalents |   | $                  | 9.6    |          | $      | 9.0 |   |
| Working capital           |   | 74.1               |   | 85.0          |   |
| Total debt obligations    |   | 207.0              |   | 233.7         |   |
|                           |        |                    |        |               |        |  |  |

We believe thatour cash flow from operations will be adequate to cover our fiscal 2003 workingcapital needs, debt service requirements and planned capital expenditures.However, we may elect to supplement our capital expenditure requirementsthrough borrowings under our bank credit facilities or the issuance ofadditional term notes.

We intend to continuepursuing acquisition opportunities at prices we believe are reasonable basedupon market conditions.  However, wecannot accurately predict the timing, size and success of our acquisitionefforts or our associated potential capital commitments.  There can be no assurance that we will beable to acquire additional businesses on terms acceptable to us.

We expect to fund futureacquisitions through cash flow from operations, additional borrowings or theissuance 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 from time to time and thewillingness of potential sellers to accept it as full or partial payment.

*Debt Obligations*

 

We entered into afive-year $225.0 million senior secured credit facility (the “Bank CreditFacility”) with eleven banks in December 2000. The Bank Credit Facility is composed of a $50.0 million five-year termloan (the “Term Loan”), of which $32.5 million was outstanding at June 30, 2002,and a $175.0 million five-year revolving credit line (the “Revolving Line”), ofwhich $89.0 million was outstanding at June 30, 2002.  The Term Loan requires quarterly payments of $2.5 million eachthrough September 30, 2005.

The proceeds of the Bank Credit Facility can be used to repay certainindebtedness, finance certain acquisitions, provide for working capital andgeneral corporate purposes and, subject to certain restrictions, repurchase ourcommon stock.  Borrowings outstandingunder the Bank Credit Facility are secured by substantially all of our assetsother than real estate and certain equipment subject to term equipment notesand other financings.  Borrowings underthe Bank Credit Facility accrue interest, at our option, at either (1) the LondonInterbank Offered Rate (LIBOR) plus a margin of 1.25% to 2.25%, or (2) analternate base rate (based upon the greater of the agent bank’s prime lendingrate or the Federal Funds effective rate plus .50%) plus a margin of up to1.00%. We are also required to pay a commitment fee on available but unusedamounts ranging from .275% to .375% annually. The interest rate margin and the commitment fee are based upon our ratioof Funded Debt to Pro Forma Consolidated EBITDA, as defined, redeterminedquarterly. On June 30, 

 

 

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2002, borrowingsoutstanding under the Term Loan and the Revolving Line accrued interest at aweighted average rate of 4.16%.

Our Company is subject tocertain covenants and restrictions and we must meet certain financial tests asdefined in the Bank Credit Facility. We were in compliance with these covenantsand financial tests at June 30, 2002. The Company obtained an amendment to its Bank Credit Facility whichspecifically provided that the goodwill impairment charge (see Note 2.Accounting Change) would not impact compliance with these covenants.

In addition, we enteredinto an auxiliary revolving credit facility (the “Auxiliary Bank Facility”)with a commercial bank expiring in February 2003. This Auxiliary Bank Facilityis unsecured and has a maximum borrowing capacity of $5.0 million. At June 30,2002, borrowings outstanding under the Auxiliary Facility totaled $3.2 millionand accrued interest at a rate of 3.84%.

We have agreements with two printing equipment manufacturers, pursuantto which we receive certain volume purchase incentives and long-term financingoptions with respect to our purchases of printing presses and other equipment.At June 30, 2002, outstanding borrowings under these agreements totaled $67.0million and accrued interest at a weighted average rate of 7.76%.  The agreements provide for fixed monthlypayments over periods of either five or ten years and are secured by the purchasedequipment.  We have additional termequipment notes totaling $4.6 million, which primarily consist of varioussecured debt obligations we assumed in connection with certain prior yearacquisitions. We are not subject to any significant financial covenants inconnection with these term equipment notes; however, the Bank Credit Facilityplaces certain limitations on the amount of additional term note obligations wemay incur in the future.

 

Our other debt obligations consist of a promissory note totaling $5.2million, industrial revenue bonds totaling $4.8 million and various other debtobligations totaling $.7 million.  We donot have any significant financial covenants or restrictions associated withthese debt obligations.

 

 

**Other Commitments**

 

We have entered intovarious noncancelable operating leases primarily related to facilities andequipment used in the ordinary course of our business. Our future contractualobligations under such operating leases total approximately $40.0 million as ofJune 30, 2002.

In connection withour assumption of obligations under outstanding industrial revenue bondsrelated to the acquisition of two printing businesses, which are reflected asoutstanding debt obligations in our consolidated financial statements, we hadtwo letters of credit outstanding for a combined total of $5.5 million as ofJune 30, 2002.  These letters of creditwere issued pursuant to the terms of our Bank Credit Facility, which expires inDecember 2005, and we may be required to obtain replacement letters of creditat that time.

We have entered intoearnout agreements in connection with certain prior year acquisitions.  If the acquired printing businesses generateoperating profits in excess of pre-determined targets, we may be obligated toissue additional shares of our common stock or make additional cash payments.As of June 30, 2002, we were contingently obligated through fiscal 2005 toissue up to 61,053 shares of our common stock and make additional cash paymentsof up to $7.0 million for all periods in the aggregate.  Based on current operating levels, we expectthat the issuance of shares and actual payments pursuant to these obligationswill be substantially less than the maximum amounts indicated.

 

**FactorsWhich May Affect Future Results**

 

Our future operating results may be impacted by a number of factors,including general economic conditions and competitive factors in our industry,seasonal and cyclical variations in commercial printing demand, reasonablegrowth in the demand for our products and retention of key management and operating

 

 

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personnel. The magnitude and timing of any futureacquisitions, as well as our ability to absorb and manage such businesses,  will also impact our future results.  Because of these and other factors, therecan be no assurance that we will not experience material fluctuations in ourfuture operating results or cash flows on a quarterly or annual basis.

 

 

**Critical Accounting Policies**

 

We have identified our critical accounting policies based on thefollowing factors — significance to our overall financial statementpresentation, complexity of the policy and its use of estimates andassumptions.  We are required to makecertain estimates and assumptions in determining the reported amounts of assetsand liabilities, disclosure of contingent liabilities and the reported amountsof revenues and expenses. We evaluate our estimates and assumptions on anongoing basis and rely on historical experience and various other factors thatwe 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.

 

We maintain an allowance for doubtful accounts as deemed necessarybased upon expected collectibility of accounts receivable.  We exercise judgment in determining thevaluation and useful lives of our long-lived assets, primarily property/equipmentand goodwill.  We also determine therealization of long-lived assets by assessing the future cash flows and incomefrom such assets on an undiscounted basis, as well as other factors such asbusiness trends and general economic conditions.  We are self-insured for the majority of our workers’ compensationcosts and group health insurance costs, and we rely on claims experience andthe advice of our administrators and consulting actuaries in determining anadequate liability for self-insurance claims. Finally, we utilize certain estimates and assumptions in ourdetermination and allocation of the purchase price for acquisitions and indetermining accruals for current and deferred income taxes.

 

 

**RecentAccounting Pronouncements**

 

SFAS No. 145, *Rescission of FASB Statement Nos. 4, 44, and 64,Amendment of FASB Statement No. 13, and Technical Corrections,*wasissued in April 2002.  SFAS No. 145amends existing authoritative pronouncements to make various technicalcorrections, clarify meanings, and describe their applicability under changedconditions.  This statement requiresthat gains and losses from the extinguishment of debt be classified asextraordinary items only if they meet the criteria in Accounting PrinciplesBoard (“APB”) Opinion No. 30, *Reporting theResults of Operations - Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and Infrequently Occurring Events andTransactions. *SFAS No. 145is effective for fiscal years beginning after May 15, 2002.  Management does not believe that theadoption of SFAS No. 145 will have a material impact on its financial positionor results of operations.

 

SFAS No. 146, *Accounting for Costs Associated with Exit or DisposalActivities*, was issued in July 2002 and must be adopted in fiscalyears beginning after December 29, 2002. SFAS No. 146 requires that exit or disposal costs be recorded when theyare incurred.  The exit costs may bemeasured at fair value and the liability may be adjusted for changes inestimated cash flows.  Management doesnot believe that the adoption of SFAS No. 146 will have a material impact onits financial position or results of operations.

 

 

***ITEM 3******.  Quantitative and QualitativeDisclosure About Market Risk***

 

Marketrisk generally means the risk that losses may occur in the value of certainfinancial instruments as a result of movements in interest rates, foreigncurrency exchange rates and commodity prices. We do not hold or utilize derivative financial instruments which couldexpose our Company to significant market risk. However, we are exposed to market risk for changes in interest ratesrelated primarily to our bank credit facilities.  As of June 30, 2002, there were no material changes in our marketrisk or the estimated fair value of our debt obligations relative to their recorded value, as reported in ourAnnual Report on Form 10-K for the fiscal year ended March 31, 2002.

 

 

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**CONSOLIDATEDGRAPHICS, INC.**

 

**PART II****— OTHERINFORMATION**

 

 

**ITEM 1****.  *Legal Proceedings***

 

From time to time, our Company is involved inlitigation relating to claims arising out of its operations in the normalcourse of business. We maintain insurance coverage against potential claims inan amount which we believe to be adequate. Currently, we are not aware of any legal proceedings or claims pendingagainst our Company that our management believes will have a material adverseeffect on our financial position or results of operations.

 

#### **ITEM 2**.  *Changes in Securities and Use of Proceeds*

 

None.

 

#### **ITEM 3**.  *Defaults uponSenior Securities*

 

None.

 

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

 

Previously reported on Form 8-K, filed July 29, 2002.

 

**ITEM5****. * Other Information***

 

None.

 

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

 

***(a)     Exhibits:***

 

** *** 3.1                    Restated Articles of Incorporation of the Company filed with theSecretary of State of the State of Texas on July 27, 1994 (ConsolidatedGraphics, Inc. Form 10-Q (June 30, 1994) SEC File No. 0-24068, Exhibit 4(a)).

 * 3.2                    Articles of Amendment to the Restated Articles of Incorporation of theCompany dated as of July 29, 1998 (Consolidated Graphics, Inc. Form 10-Q (June30, 1998) SEC File No. 0-24068, Exhibit 3.1).

 * 3.3                    Restated By-Laws of the Company, dated as of November 2, 1998(Consolidated Graphics, Inc. Form 10-Q (September 30, 1998) SEC File No.0-24068, Exhibit 3.2).

 * 3.4                    Restated By-Laws of the Company, as amended on June 23, 1999  (Consolidated Graphics, Inc. Form 10-Q (June30, 1999) SEC File No. 0-24068, Exhibit 3.4).

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

8-K (December 15, 1999) SEC File No. 0-24068, Exhibit3.2).

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

 * 4.2                    Rights Agreement dated as of December 15, 1999 between ConsolidatedGraphics, Inc and American Stock Transfer and Trust Company, as Rights Agent,which includes as Exhibit A the Certificate of Designations of Series APreferred Stock, as Exhibit B the form of Rights Certificate and as Exhibit Cthe form of summary of Rights to Purchase Shares (Consolidated Graphics, IncForm 8-K (December 15, 1999) SEC File No. 0-24068, Exhibit 4.1).

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* Incorporated byreference

 

 

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***(b)******           ******Reportson Form 8-K:***

 

1)              Form 8-K, filed April 24, 2002 inconnection with the press release announcing the Company’s fiscal 2002 fourthquarter and year end results.

2)              Form 8-K, filed May 31, 2002 inconnection with the press release announcing the Company’s signing a definitiveagreement to acquire S & S Graphics.

3)              Form 8-K, filed June 26, 2002 inconnection with the press release announcing the completion of the acquisitionof S & S Graphics and the resignation of Charles F. White, President andChief Operating Officer.

4)              Form 8-K, filed July 16, 2002 inconnection with the announcement of a change in the Company’s independentpublic accountant.

5)              Form 8-K, filed July 29, 2002 inconnection with the press release announcing the Company’s fiscal 2003 firstquarter results and the announcement of the results of the Company’s AnnualMeeting of Shareholders.

 

 

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**SIGNATURES**

 

**Pursuant to the requirements of the Securities Exchange Actof 1934, the Registrant, Consolidated Graphics, Inc., has duly caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.**

 

 

 

|                          | **CONSOLIDATED  GRAPHICS, INC.** |
|-------------------------------|----------------------------------|
|                          |                             |   |
|                          |                             |   |
|                          |                             |   |
|                          |                             |   |
| Dated:  August  14, 2002 | By:                              |   /s/ G. Christopher  Colville |
|                          |                             | G. Christopher Colville |
|                          |                             | Executive Vice President, |
|                          |                             | Chief Financial and Accounting |
|                          |                             | Officer and Secretary |
|                               |                                  |  |  |

 

 

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