**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**WASHINGTON, D.C.20549

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**FORM 10-K**

**(MARKONE)**

| **x**      |   | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES  EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 2002**          |
|------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                        |
|       |   | **OR**                                                                                                                                      |
|       |   |                                                                                                                                        |
| ** ̈** |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES  EXCHANGE ACT OF 1934 (NO FEE REQUIRED)**                             |
|       |   |                                                                                                                                        |
|       |   | **FOR  THE TRANSITION PERIOD FROM           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             |   | (IRS EMPLOYER  IDENTIFICATION NO.) |
| OF INCORPORATION  OR ORGANIZATION)        |   |                               |
|                                      |   |                               |
| **5858 WESTHEIMER, SUITE 200**            |   | **77057**                          |
| **HOUSTON, TEXAS**                        |   | (ZIP CODE)                         |
| (ADDRESS OF  PRINCIPAL EXECUTIVE OFFICES) |   |                               |

**(713) 787-0977**(REGISTRANT’STELEPHONE NUMBER, INCLUDING AREA CODE)

 

Securities registered pursuant to Section 12(b) of the Act:**COMMONSTOCK, PAR VALUE $.01 PER SHARE**(TITLE OF CLASS)Securities registered pursuant to Section 12(g) of the Act:NONE

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes ý No o.

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K. o

The aggregate marketvalue of the voting stock held by nonaffiliates of theregistrant as of April 30, 2002:**COMMONSTOCK, $.01 PAR VALUE  — $282,026,198**The number of shares outstanding of the issuer’s common stock as ofApril 30, 2002:**COMMONSTOCK, $.01 PAR VALUE  — 13,209,658**

 

**DOCUMENTS****INCORPORATED BY REFERENCE**

Portions of theRegistrant’s Proxy Statement for the Annual Shareholders’ Meeting to be held onor about July 24, 2002, to be filed with the Securities and Exchange Commissionpursuant to Regulation 14A under the Securities Exchange Act of 1934, asamended, are incorporated by reference into Part III of this Report. Such ProxyStatement, except for the parts therein which have been specificallyincorporated by reference, shall not be deemed “filed” for the purposes of thisreport on Form 10-K.

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**CONSOLIDATED GRAPHICS, INC.**

**ANNUAL REPORT ON FORM 10-K**

**FOR THE YEAR ENDED MARCH 31, 2002**

 

 

**INDEX**

 

 
| PART  I                                                                                                    |
|------------------------------------------------------------------------------------------------------------|
|                                                                                                       |   |
| Item 1.  Business                                                                                     |   |
| Item 2.  Properties and Facilities                                                                    |   |
| Item  3.  Legal Proceedings                                                                           |   |
| Item  4.  Submission of Matters to a Vote of  Security Holders                                        |   |
|                                                                                                       |   |
| PART  II                                                                                                   |
|                                                                                                       |   |
| Item  5.  Market For Registrant’s Common  Equity And Related Shareholder Matters                 |   |
| Item  6.  Selected Consolidated Financial  Data                                                       |   |
| Item  7.  Management’s Discussion and  Analysis of Financial Condition and Results of Operations |   |
| Item  7A.  Quantitative and Qualitative  Disclosure About Market Risk                                 |   |
| Item  8.  Financial Statements and  Supplementary Data                                                |   |
| Item  9. Changes in and Disagreements with Accountants on Accounting and Financial  Disclosure             |   |
|                                                                                                       |   |
| PART  III                                                                                                  |
|                                                                                                       |   |
| Item  10. Directors and Executive Officers of the Registrant                                               |   |
| Item 11. Executive  Compensation                                                                           |   |
| Item  12. Security Ownership of Certain Beneficial Owners and Management                                   |   |
| Item  13. Certain Relationships and Related Transactions                                                   |   |
|                                                                                                       |   |
| PART  IV                                                                                                   |
|                                                                                                       |   |
| Item  14.  Exhibits, Financial Statement  Schedules and Reports on Form 8-K                           |   |

 

 

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**PART I**

 

***Item 1.  Business***

 

*In this annual report, the words “Consolidated Graphics,”“CGX,” the “Company,” “we,” “our” and “us” refer to Consolidated Graphics, Inc,collectively with our subsidiaries. Our fiscal year is not a calendar year andends on March 31.*

**CompanyOverview**

Consolidated Graphics isa leading national provider of commercial printing services and is recognizedas the largest sheet-fed and half-web commercial printing company in the UnitedStates. Our corporate headquarters are in Houston, Texas, and our operationsinclude 65 printing businesses in 25 states. Each of our printing businesseshas a well-established operating history, more than 25 years in most cases.

The majority of our salesare derived from commercial printing services, which include electronicprepress, printing, finishing, storage and delivery of high quality,custom-designed products. Examples of such products include multicolor productand capability brochures, shareholder communications, catalogs, trainingmanuals, point-of-purchase marketing materials and direct mail pieces.  We also serve our customers by providingfulfillment and mailing services, which complement our traditional printingservices.  Additionally, using theCGXmedia brand we capitalize on our expertise in digital processes and advancedtechnological capabilities to develop and market certain print-relatede-commerce software solutions and electronic media services, which alsocomplement our printing services.

**Industry****Background**

The printing industry isone of the largest industries in the United States, with total annual salesestimated to be in excess of $100 billion. General printing services includecommercial printing, financial printing, book publishing, quick printing andthe production of business forms, greeting cards and other stationery-typeproducts. The largest segment of the industry is commercial printing services,which we estimate generates over $70 billion in annual U.S. sales based onavailable industry data. Most of the printing businesses operating in theUnited States today are privately-owned and individually generate less than $35million in annual sales.

A consolidation trend inthe general commercial printing industry emerged in the 1990’s as medium-sizedprinting business owners sought to address several new industry challenges, aswell as evaluate exit strategies. In order to limit personal financial risk,increase personal financial liquidity or facilitate plans to eventually retire,owners of printing businesses became more willing to sell their companies tolarger, better-capitalized companies. We believe that our Company is one ofonly a few potential buyers with the financial strength and managementexpertise who desire to acquire these medium-sized printing businesses.

In recent years, printingdesign and prepress workflow have shifted from art boards to a digitalenvironment. Newer, more sophisticated prepress, printing and bindery equipmentare more efficient, operate much faster and require less labor. Commercialprinting businesses must make substantial capital investments in such newerequipment in order to remain competitive.

The introduction ofdigital technology and the rapid acceptance of the Internet as a means toconduct business transactions have generated demand for printing companies tooffer complementary, value-added services to their customers. Examples of suchcomplementary services include fulfillment and inventory management, inkjetlabeling, mailing, CD-ROM production, on-line print procurement, digital assetmaintenance, digital watermarking and eBooks.

Additionally, more andmore large corporations are seeking to reduce operating costs by streamliningtheir purchasing process and limiting their number of suppliers.  These large customers want to alignthemselves with printing businesses that have a significant national presenceand a wide range of capabilities to offer both commercial print and otheressential print-related services.

In general, changes inprevailing U.S. economic conditions may significantly impact the commercialprinting industry. To the extent weakness in the U.S. economy causes local andnational corporations to reduce their spending on advertising and marketingmaterials, the demand for commercial printing services may be adverselyaffected. Further, compounding a decline in demand, competitive pricingpressures may occur and negatively impact the level of sales and profit marginsgenerated by our printing businesses.

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**BusinessStrategy**

Our overall businessstrategy is to be the market leader in the general commercial printing industryby combining the customer service and responsiveness of well-managed, localprinting businesses with the competitive advantages provided by a nationalorganization. Each of our 65 printing businesses maintains responsibility forthe day-to-day operations and profitability of their business, while continuingto strengthen and build new customer relationships in their respective markets.At the same time, each operation is supported by the management expertise,purchasing power, technology investments and other advantages that existbecause they are part of a larger company.

*Internal Sales Growth*. Our printing businesses have numerous opportunities,individually and collectively, to achieve consistent, long-term sales growth ata rate that exceeds industry averages. Currently, we have several initiatives to improve our internal salesgrowth, which include:

•                  Aggressively pursuing new business and experiencedsales professionals to gain market share in the midst of prevailing difficultindustry conditions and to strengthen our competitive position going forward.

•                  Continuing to invest in new equipment and technologythat enable us to provide better service and respond to the growing needs ofour customers.

•                  Capitalizing on our national presence and wide rangeof capabilities to pursue sole-source national contracts.

•                  Creating additional revenue sources and generatingadditional print demand by offering complementary services, such as thoseavailable through CGXmedia.

*Disciplined Acquisition Program*. We are selectively pursuingopportunities to acquire well-managed printing businesses at reasonable prices.Our management team continues to evaluate potential acquisition candidates thatfit our general criteria and believes that we will continue making acquisitionsin the future.

*Cost Savings.* Because of our size and national presence, weleverage our economies of scale to obtain preferential pricing for paper andsupplies used in the printing process and for newer, more efficientequipment.  We have several nationalpurchasing contracts in place with major suppliers and manufacturers.  Our purchasing support staff continuallymonitors market conditions and negotiates pricing and other contractual termswith these vendors to maximize the cost savings we achieve under theseagreements. In addition, we have centralized certain administrative services,such as human resources, treasury, tax and risk management, to generate costsavings.

*Best Practices/Benchmarking.* Management teams at our printing businesses haveaccess to strategic counsel and professional management techniques in suchareas as planning, organization and controls. We provide a forum for them toshare their knowledge of technical processes and their best practices with oneanother through a series of periodic national and regional meetings attended bytop management and other personnel. We utilize our wide area network andmanagement information systems to benchmark financial and operational data, andshare such information across our printing businesses to help their managementidentify and respond to changes in operating trends.

*Leadership Development*. Our highly successful program to recruit, train anddevelop recent college graduates as printing sales and management professionalsis an integral component of our growth strategy.  Participants in our Leadership Development Program follow acurriculum that provides them with the technical knowledge of printingprocesses, coupled with general business and managerial training. Certainaspects of this program are specifically tailored to fit the needs of eachoperating location. Our Leadership Development Program is unique to theindustry, and we believe it is a key factor in our ability to provide a highdegree of quality customer service, as well as provide a pool of talent forfuture management positions at our printing businesses. As of April 30, 2002,there were 161 employees of the Company who were current participants in orgraduates of this program.

**PrintingOperations**

We currently operate 65printing businesses in 25 states, and each business is operated as awholly-owned subsidiary of our Company. We produce high quality,custom-designed printed materials for a large base of customers in a broadcross-section of industries, the majority of which are located in the marketsthey serve. In addition to providing a full range of prepress, printing andfinishing services, our printing businesses offer fulfillment and mailingservices, as well as print-related e-commerce software solutions and electronicmedia services through CGXmedia.

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*CommercialPrinting Services*

In general, commercialprinting includes developing printable material through electronic prepressservices, reproducing images on paper using printing presses and providingcomprehensive finishing and delivery services. We maintain flexible productionschedules in order to react swiftly to our customers’ requirements. Manyprinting projects require fast turnaround times, from conception throughdelivery, and our printing businesses must maintain physical plant and customerservice staff as necessary to maximize workloads when called upon to do so.Consequently, our printing businesses do not always operate at full capacity.

Our electronic prepressservices include all of the steps necessary to prepare media (photographs,artwork, typed copy) for printing. This process involves converting the mediainto digital images, separating digital color images into process colors,assembling films and burning film images onto printing plates usingphotochemical processes. Most of our printing businesses now produce printingplates using “computer-to-plate” technology, whereby digitized text, graphicimages and line art are transferred directly from digital files onto printingplates, eliminating the need for film and other steps required in manualphotochemical processes. Computer-to-plate technology reduces costs, shortensturnaround time and improves product quality. We continually evaluate ourprinting operations’ existing electronic prepress capabilities and closelymonitor the development of newer technology that may be used to increaseproductivity and improve service and responsiveness to our customers.

Once printable materialhas been developed in the electronic prepress area, our printing operationsprimarily use offset lithography to reproduce images on paper. The offsetlithography process provides the highest quality, lowest cost printed productsfor most run lengths. Short-run to medium-run commercial work is generallyprinted on sheet-fed presses, while longer-run printing projects are typicallyprinted on web presses.

Our printing operationsprimarily use sheet-fed printing presses, which are generally capable ofprinting 16 pages of letter-sized finished product on a 28 by 40 inch sheet ofpaper with eight pages on each side (known as a 16-page “signature”). Currentlyour printing businesses operate a total of 297 sheet-fed presses capable ofsimultaneously printing from one to eight colors and are generally capable ofrunning at speeds of up to 15,000 impressions an hour. We have 12 locationswhich also operate half-size and/or full-size web presses which print on acontinuous roll of paper and may print up to 32-page signatures on both sidesof the paper at maximum speeds of up to 50,000 impressions an hour. Certain webpresses are also capable of folding, gluing or perforating a printed product.Additionally, 12 of our printing operations also utilize a number of smallerdigital presses that can simultaneously print from one to four colors and aretypically used to handle short-run, fast-turnaround projects, including theproduction of documents with variable data requirements.

Our finishing servicesinclude cutting, folding, binding and other operations necessary to finish theprinted product according to customers’ specifications.  Many of our printing operations also offerspecialty finishing capabilities, such as die-cutting, embossing and foilstamping.

*OtherComplementary Services*

We provide a variety offulfillment services, which primarily include assembling, packaging, storing,and distributing printed promotional, educational and training documents onbehalf of our customers. Many corporations utilize our fulfillment services tohelp manage their inventories of printed products and related materials (suchas binders and product samples), as well as provide “just in time” assembly anddelivery of customized materials to end users. Orders for fulfillment servicesare frequently received via proprietary, Internet-based print procurement andinventory management systems maintained by our printing businesses, includingCOIN sites (as discussed below).

Many of our printingbusinesses also provide mailing services for large quantities of printedmaterials distributed to end-users. Our mailing services are ideal for directmail and promotional pieces. We offer a number of options for sorting, packaging,inkjet labeling and shipping of printed materials.

By capitalizing on ourexpertise in digital processes and responding to the expanded communicationneeds of our customers, we offer print-related e-commerce software solutionsand electronic media services through CGXmedia.  We have developed two Internet-based software products that havegenerated significant interest from our customers. These two products aredescribed below:

•                  COIN (Custom Ordering Interactive Network) is ourproprietary software tool that helps customers better manage the print process.COIN sites are customized for each client and are used for ordering,typesetting, proofing, workflow management and fulfillment of printedmaterials.  COIN puts control directlyon the customer’s desktop, generating instant on-line proofs and providingmulti-location organizations with the convenience of secure, Internet-basedremote ordering capability.

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•                  OPAL (On-line Private Asset Library) is used primarilyby companies to store, archive and retrieve their valuable digital assets, suchas images, logos, documents and other digital files, from any location via aweb browser. OPAL enables customers to efficiently distribute these digitalassets across multiple distribution channels, allowing groups to collaborate onprojects and share materials.  OPALutilizes sophisticated security architecture that limits access only to usersauthorized by the customer and can be tailored to meet specific customerapplications.

Through CGXmedia we alsooffer a variety of electronic media services, such as CD-ROM development andproduction, conversion of text in printed or digital form to eBook format,electronic journal composition, website hosting and other Internet services.

We utilize support staffat each of our printing businesses that are trained and able to serve ourcustomers’ needs related to our COIN and OPAL products and electronic mediaservices. By offering these complementary, yet innovative solutions throughCGXmedia, we believe that our Company has a competitive advantage that willhelp us generate additional sales to existing and potential consumers.

**SalesAnd****Marketing**

The majority of our salesare generated by individual orders through commissioned sales personnel and, insome cases, pursuant to national contracts. As of April 30, 2002, we employed570 sales professionals, all of whom are knowledgeable about the printingindustry and the capabilities of our printing businesses. In addition to solicitingbusiness from existing and prospective customers, our sales personnel act asliaisons between customers and our production departments and also providetechnical advice and assistance to customers throughout the printing process.

Commercial printingrequires a substantial amount of interaction with customers, including personalsales calls, reviews of color proofs and “press checks” (customer approval of aprinted document while it is being printed). Our sales professionals and othercustomer service personnel maintain strict control of the printing process forevery job we produce as it moves through our scheduling, prepress, printing andfinishing operations.

Our primary marketingfocus is on responding rapidly to customer requirements and producing highquality printed materials at competitive prices. Rapid responsiveness isessential because of the short lead time on most commercial printing projects.Our printing operations are designed to maintain maximum flexibility to meetcustomer needs, both on a scheduled and an emergency basis. Each of ourprinting businesses target projects which they believe will best utilize theirequipment and expertise.

Our national accountssales team actively pursues opportunities to obtain sole-source, multi-year printingcontracts and responds to “Requests for Proposals” from large corporationsseeking to leverage their print spending and limit their number of commercialprint providers. As of April 30, 2002, we served 33 customers under ournational accounts program, which represented approximately 5% of our Company’stotal sales in fiscal 2002.  We expectthe pursuit of national accounts to be an increasing contributor to our salesgrowth.

**Customers**

Our diverse customer baseincludes both national and local corporations operating in a wide range ofindustries, as well as mutual fund companies, advertising agencies, graphicdesign firms, catalog retailers and direct mail distributors. During fiscal2002, we served over 13,000 customers, and our top ten customers accounted for9% of total sales, none of which was individually more than 1.5%. We believethat our large and diverse customer base, broad geographic coverage of theUnited States and extensive range of printing capabilities and othercomplementary services may reduce our exposure to economic slowdowns that maygenerally affect the printing industry or any one region of the country.  However, because we typically produce alarge number of advertising and marketing materials for our customers, to theextent that advertising and marketing spending is reduced during an economicdownturn, our results of operations may be adversely affected.

Most of our customers arenot contractually obligated to purchase printing services from us. Ourcustomers generally place orders for individual printing projects, and ourcontinued engagement to provide additional printing services largely dependsupon, among other things, the customer’s satisfaction with the quality ofservices we provide.  Although we do notdepend on any one customer or group of customers, our sales to many of oursignificant customers may fluctuate from year to year and depends upon thenumber, size and complexity of projects in a particular period.

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**Suppliers**

We purchase raw materialsused in the printing process (such as paper, prepress supplies, ink, chemicalsand boxes) from a number of national and local suppliers and we are notmaterially dependent on any one supplier. We use a two-tiered approach to purchasingin order to maximize the economies associated with our size, while maintainingthe local efficiencies and time sensitivity required to meet customer demands.We negotiate master purchasing arrangements centrally with major suppliers andmanufacturers to obtain better pricing, then communicate the terms of thesearrangements to our individual printing businesses. Each printing businessorders goods and services as needed based on the terms set forth in ournational purchasing agreements, or on a local basis if applicable. Wecontinually monitor market conditions and product developments, as well asregularly review the contractual terms of our national purchasing agreements,to take advantage of our increasing buying power and to maximize the benefitsassociated with these agreements.

We incur significantcosts to purchase paper that is used in the printing process. The majority ofour paper supply is distributed through merchant organizations. There are asmall number of merchants that are considered national in scope, with numerousregional organizations that serve one or more of our printing operations. Wehave negotiated national purchasing agreements with the mills, which producepaper, and the merchants, who distribute most of the paper produced by themills. These agreements typically provide for volume-related discounts andadditional periodic rebates based on the total amount of purchases made by ourprinting operations from each mill and/or merchant.

We also purchase a largeamount of prepress supplies, consisting mainly of film, plates and proofingmaterials. There are a limited number of key manufacturers of these materials,and we generally purchase prepress supplies from either national or regionaldistributors. We have obtained volume-related discounts and incentivearrangements from these manufacturers and receive periodic rebates based on thetotal amount of prepress supplies we purchase through these distributors.

**Competition**

The majority of generalcommercial printing projects are purchased by print buyers from locallyavailable sources. Due to the highly fragmented nature of this industrysegment, we compete with a substantial number of other general commercialprinting companies for these jobs. Some of our competitors are owned by otherlarge, publicly owned corporations; however, the majority are privately held,single location operations.

The major competitivefactors in our business are:

•                        Extent and quality of customer service

•                        Quality and accuracy of finished products

•                        Cost structure

•                        Ability to meet customer deadlines.

The ability to providehigh quality customer service often is dependent on production and distributioncapabilities, along with the availability of equipment that is appropriate insize and function for a given project. By using our nationwide network ofprinting operations, we believe that our broad range of printing capabilitiesand complementary services, along with our ability to serve customers on both aregional and national level, gives us a competitive advantage over smaller,locally based printing companies. Furthermore, our purchasing power, advancedtechnological capabilities and ability to effectively utilize any excessproduction capacity throughout our organization enables us to compete moreeffectively in price, as well as provide faster turnaround times than ourcompetitors may be able to provide.

**Employees**

As of April 30, 2002, wehad over 4,600 employees throughout our organization. Of this total,approximately 420 were employed subject to the terms of various collectivebargaining agreements. We believe that our relations with our employees aregenerally satisfactory.

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**Executive****Officers**

*Joe R. Davis* has been the Chief Executive Officer and Chairman ofthe Board of Directors since he founded our Company in 1985. Prior to formingCGX, Mr. Davis was a Vice President for a division of International PaperCompany. He also previously served as a partner of a national public accountingfirm. Mr. Davis is 59 years old.

*Charles F. White* has been the President and Chief Operating Officersince joining our Company in July 2000. Mr. White joined CGX after retiring inJanuary 1999 from Unisource Worldwide following a 33–year career. Whileat Unisource, a leading company in sales and distribution of printing, paperand supplies, he held a variety of sales and management positions and was mostrecently President and Chief Operating Officer. Mr. White is 55 years old.

*G. Christopher Colville* has been Executive Vice President, Chief FinancialOfficer and Secretary since March 2002. From October 2000 to February 2002, Mr. Colville was Managing Directorat Murphy Noell Capital, LLC, an investment banking firm.  Mr. Colville had held various executivepositions with CGX between 1994 and September 2000, including Executive VicePresident — Mergers and Acquisitions, Chief Financial Officer and Secretarysince February 1999.  Mr. Colville is acertified public accountant and is 44 years old.

**GovernmentRegulation And Environmental Matters**

Our printing operationsare subject to the environmental laws and regulations of the United States andthe applicable state and local laws and regulations concerning emissions intothe air, discharges into waterways and the generation, handling and disposal ofwaste materials. The printing business generates substantial quantities ofinks, solvents and other waste products requiring disposal under the numerousfederal, state and local laws and regulations relating to the environment. Ourprinting operations typically recycle waste paper and contract for the removalof waste products. We believe our Company is in material compliance with allapplicable air quality, waste disposal and other environmental-related rulesand regulations, as well as with other general employee health and safety lawsand regulations. We do not anticipate any material future capital expendituresfor environmental control facilities. There can be no assurance, however, thatfuture changes in such laws and regulations will not have a material effect onour Company’s operations.

***Item 2.  Properties and Facilities***

 

As of April 30, 2002, ourprincipal facilities consisted primarily of printing facilities that containproduction, storage and office space. We own 1.3 million square feet at 30locations and lease 2.2 million square feet at an additional 65 locations. Allfacilities are leased from unaffiliated third parties except for certainfacilities containing approximately 334,025 square feet, which are leased fromthe former owners and current employees of eight of our printing businesses. Wealso lease 16,210 square feet of office space in Houston for our corporateheadquarters. We believe our facilities are suitable for their present andintended purposes and are adequate for our current level of operations.

 

***Item 3.  LegalProceedings***

 

From time to time, ourCompany is involved in litigation relating to claims arising out of ouroperations in the normal course of business. We maintain insurance coverageagainst potential claims in an amount which we believe to be adequate.Currently, we are not aware of any legal proceedings or claims pending againstour Company that our management believes will have a material adverse effect onour Company’s financial position or results of operations.

 

***Item 4.  Submission of Matters to a Vote of SecurityHolders***

 

None.

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**PART II**

 

***Item 5.  Market For Registrant’s Common Equity AndRelated Shareholder Matters***

 

Our common stock istraded on the New York Stock Exchange under the symbol “CGX”.  The following table presents the quarterlyhigh and low sales prices for our common stock for each of the last two fiscalyears:

| **Fiscal  2002  — Quarter Ended:** |   | **High** |   | **Low** |   |
|----------------------------------------------|--------|----------|--------|---------|--------|
| June 30, 2001                                |   | 17.32    |   | 11.25   |   |
| September 30,  2001                          |   | 22.10    |   | 13.95   |   |
| December 31,  2001                           |   | 19.55    |   | 15.72   |   |
| March 31, 2002                               |   | 20.80    |   | 18.20   |   |

 

| **Fiscal  2001  — Quarter Ended:** |   | **High** |   | **Low** |   |
|----------------------------------------------|--------|----------|--------|---------|--------|
| June 30, 2000                                |   | 13.38    |   | 8.50    |   |
| September 30,  2000                          |   | 15.44    |   | 8.69    |   |
| December 31,  2000                           |   | 12.13    |   | 9.50    |   |
| March 31, 2001                               |   | 16.50    |   | 11.40   |   |

As of April 30,2002, there were 148 shareholders of record representing more than 5,000beneficial owners.

We presently intend toretain all of our earnings to finance the continuing development of ourbusiness and we do not anticipate paying cash dividends on our common stock inthe foreseeable future. Any future payment of cash dividends will depend uponthe financial condition, debt covenants, capital requirements and earnings ofour Company, as well as other factors our Board of Directors may deem relevant.In addition, our bank credit agreements include restrictions that limit ourability to pay dividends above certain levels.

The only equitycompensation plan we have is the Consolidated Graphics, Inc. Long-TermIncentive Plan (the “Plan”), which has been approved by our shareholders.  Under this Plan, employees of our Companyand certain nonemployee members of our Board of Directors have been, or may be,granted options to purchase shares of our common stock at a price not less thanthe market price of the stock at the date of grant.  As of April 30, 2002, there were 1,946,734 options outstandingunder the Plan at an average exercise price of $24.92.  Further, a total of 454,366 shares of ourcommon stock were reserved for issuance of options which had not been granted.

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***Item 6.  Selected Consolidated Financial Data***

 

The following selectedconsolidated financial data should be read in conjunction with the auditedconsolidated financial statements of our Company and the notes thereto includedin Item 8. “Financial Statements and Supplementary Data.”

 
|                                |   | **Year Ended March 31**                   |    |
|-------------------------------------|--------|-------------------------------------------|---------|
|                                |   | **2002**                                  |    | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|                                |   | **(In thousands, except per share data)** |    |
| **Income Statement Data**           |   |                                      |    |   |   |   |   |   |   |   |   |
| Sales                               |   | $                                         | 643,948 |   | $ | 683,396 |   | $ | 624,895 |   | $ | 435,961 |   | $ | 231,282 |   |
| Cost of sales                       |   | 477,147                                   |    | 494,158 |   | 437,345 |   | 298,935 |   | 157,906 |   |
| Gross profit                        |   | 166,801                                   |    | 189,238 |   | 187,550 |   | 137,026 |   | 73,376 |   |
| Selling expenses                    |   | 69,091                                    |    | 70,070 |   | 61,267 |   | 42,767 |   | 22,365 |   |
| General and administrative expenses |   | 54,766                                    |    | 54,595 |   | 48,677 |   | 33,605 |   | 17,628 |   |
| Special charge (1)                  |   | —                                    |    | 6,440 |   | — |   | — |   | — |   |
| Operating income                    |   | 42,944                                    |    | 58,133 |   | 77,606 |   | 60,654 |   | 33,383 |   |
| Interest expense, net               |   | 15,144                                    |    | 20,858 |   | 13,476 |   | 7,745 |   | 3,720 |   |
| Income before income taxes          |   | 27,800                                    |    | 37,275 |   | 64,130 |   | 52,909 |   | 29,663 |   |
| Provision for income taxes          |   | 11,120                                    |    | 15,164 |   | 25,651 |   | 20,634 |   | 11,273 |   |
| Net income                          |   | $                                         | 16,680  |   | $ | 22,111 |   | $ | 38,479 |   | $ | 32,275 |   | $ | 18,390 |   |
| Basic earnings per share            |   | $                                         | 1.27    |   | $ | 1.68 |   | $ | 2.54 |   | $ | 2.35 |   | $ | 1.46 |   |
| Diluted earnings per share          |   | $                                         | 1.25    |   | $ | 1.68 |   | $ | 2.51 |   | $ | 2.28 |   | $ | 1.40 |   |

 
|                                   |   | **March 31**       |   |
|----------------------------------------|--------|--------------------|--------|
|                                   |   | **2002**           |   | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|                                   |   | **(In thousands)** |   |
| **Balance  Sheet Data**                |   |               |   |   |   |   |   |   |   |   |   |
| Working capital                        |   | $                  | 85,036 |   | $ | 79,488 |   | $ | 65,301 |   | $ | 54,384 |   | $ | 27,869 |   |
| Property and equipment, net            |   | 293,831            |   | 299,871 |   | 310,344 |   | 230,733 |   | 135,892 |   |
| Total assets                           |   | 676,733            |   | 674,667 |   | 680,848 |   | 494,277 |   | 237,645 |   |
| Long-term debt, net of current portion |   | 213,860            |   | 246,729 |   | 261,407 |   | 170,574 |   | 73,030 |   |
| Total shareholders’ equity        |   | 306,598            |   | 287,534 |   | 272,531 |   | 214,454 |   | 105,332 |   |
|                                        |        |                    |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

(1) Relates tonon-recurring costs and impairment charges primarily associated with combiningthe operations at three small, under-performing locations into nearbyfacilities and exiting a portion of our business at a fourth location. Thisspecial charge reduced net income by $4,117 net of tax and earnings per shareby $.31.

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***Item 7.  Management’s Discussion and Analysis ofFinancial Condition 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 our ability to maintain or improve ouroperating results and acquire additional printing businesses.  Our expectations regarding future sales andprofitability assume, among other things, stability in the economy andreasonable growth in the demand for our products, the continued availability ofraw materials at affordable prices and retention of our key management andoperating personnel. In addition, our expectations regarding futureacquisitions assume, among other things, our ability to identify newacquisition opportunities and our ability to negotiate and finance suchacquisitions on acceptable terms, as well as the ability to successfully absorband manage such acquisitions. Although management believes that the assumptionsunderlying the forward looking statements are reasonable, any of theassumptions could be inaccurate and there can be no assurance that any or allof the assumptions underlying the forward-looking statements will prove to beaccurate. 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 these forward-lookingstatements, assumptions or other factors after the date this Report on Form10-K was filed to reflect the occurrence of events or circumstances or changesin expectations.*

**Overview**

Our Company is a leadingnational provider of commercial printing services with 65 printing facilitiesin 25 states and is recognized as the largest sheet-fed and half-web commercialprinting company in the United States. We are focused on adding value to our operating companies by providingthe financial and operational strengths, management support and technologicaladvantages associated with a national organization.  Our strategy currently includes the following initiatives togenerate sales and profit growth:

•                        *Internal Sales Growth —*In the midst of prevailing difficult industryconditions, we are seeking to use our competitive advantages to expand marketshare. We continue to pursue additional experienced sales professionals, investin new equipment and technology, expand our national account program anddevelop complementary, value-added services.

•                        *Disciplined Acquisition Program —*We selectively pursue opportunities to acquire well-managed printingbusinesses at reasonable prices.

•                        *Cost Savings —*Because of our size and national presence, we leverageour economies of scale to purchase supplies and equipment at preferentialprices, and centralize various administrative services to generate costsavings.

•                        *Best Practices/Benchmarking —*We provide a forum for our printingbusinesses to share their knowledge of technical processes and their bestpractices with one another, as well as benchmark financial and operational datato help our printing businesses identify and respond to changes in operatingtrends.

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

Our printing operationsmaintain their own sales, estimating, customer service, prepress, production,postpress and accounting departments. Our corporate headquarters staff provides support to our printingoperations in such areas as human resources, purchasing and managementinformation systems. We also maintain centralized treasury, risk management,tax and consolidated financial reporting activities.

The majority of our salesare derived from commercial printing services, which include electronicprepress, printing, finishing, storage and delivery of high quality,custom-designed products. Examples of such products include multicolor productand capability brochures, shareholder communications, catalogs, trainingmanuals, point-of-purchase marketing materials and direct mail pieces.  We also serve our customers by providing avariety of complementary services, including fulfillment and mailing servicesand print-related e-commerce software solutions and electronic media servicesthrough CGXmedia.

Most of our sales aregenerated by individual orders through commissioned sales personnel and, insome cases, pursuant to long-term contracts. We recognize revenue from these orders when we deliver the orderedproducts.  To a large extent, continuedengagement of our Company by our customers for successive jobs depends upon thecustomer’s satisfaction with the quality of services we provide. As such it isdifficult for us to predict the number, size and profitability of printing jobsthat we expect to produce for more than a few weeks in advance.

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Our cost of sales mainlyconsists of raw materials consumed in the printing process, as well as laborand outside services.  Paper cost is themost significant component of our materials cost; however, paper pricinggenerally does not impact our operating margins because any changes in paperpricing are generally passed on by our printing businesses.  Additionally, our cost of sales includesmaintenance, repair, rental and insurance costs associated with operating ourfacilities and equipment, along with depreciation charges.

Our selling expensesgenerally include the salary and commissions paid to our sales professionals orthird-party sales agents, along with promotional, travel and entertainmentcosts.  Our general and administrativeexpenses generally include the salary and benefits paid to support personnel atour printing businesses and our corporate staff.  These expenses also include office rent and utilities,communications expenses, professional fees and amortization of goodwill.

**Resultsof Operations**

The following table setsforth our Company’s historical consolidated income statements and certainpercentage relationships for the periods indicated: 
|                                |   |                    |   |                    |   |     |   | **As a Percentage of Sales** |   |
|-------------------------------------|--------|-------------------------|--------|-------------------------|--------|----------|--------|------------------------------|--------|
|                                |   | **Year Ended March 31** |   | **Year Ended March 31** |   |
|                                |   | **2002**                |   | **2001**                |   | **2000** |   | **2002**                     |   | **2001** |   | **2000** |   |
|                                |   | **(In millions)**       |   |                    |   |     |   |                         |   |
| Sales                               |   | $                       | 643.9  |                    | $      | 683.4    |   | $                            | 624.9  |   | 100.0 | % | 100.0 | % | 100.0 | % |
| Cost of sales                       |   | 477.1                   |   | 494.2                   |   | 437.3    |   | 74.1                         |   | 72.3 |   | 70.0 |   |
| Gross profit                        |   | 166.8                   |   | 189.2                   |   | 187.6    |   | 25.9                         |   | 27.7 |   | 30.0 |   |
| Selling expenses                    |   | 69.1                    |   | 70.1                    |   | 61.3     |   | 10.7                         |   | 10.3 |   | 9.8 |   |
| General and administrative expenses |   | 54.8                    |   | 54.6                    |   | 48.7     |   | 8.5                          |   | 8.0 |   | 7.8 |   |
| Special charge                      |   | —                  |   | 6.4                     |   | —   |   | —                       |   | 0.9 |   | — |   |
| Operating income                    |   | 42.9                    |   | 58.1                    |   | 77.6     |   | 6.7                          |   | 8.5 |   | 12.4 |   |
| Interest expense, net               |   | 15.1                    |   | 20.9                    |   | 13.5     |   | 2.4                          |   | 3.1 |   | 2.1 |   |
| Income before income taxes          |   | 27.8                    |   | 37.2                    |   | 64.1     |   | 4.3                          |   | 5.4 |   | 10.3 |   |
| Provision for income taxes          |   | 11.1                    |   | 15.1                    |   | 25.6     |   | 1.7                          |   | 2.2 |   | 4.1 |   |
| Net income                          |   | $                       | 16.7   |                    | $      | 22.1     |   | $                            | 38.5   |   | 2.6 | % | 3.2 | % | 6.2 | % |

Our sales andexpenses during the periods shown were impacted by the acquisition of threeprinting businesses in 2002 and 13 printing businesses in 2000. Because eachacquisition was accounted for using the purchase method of accounting, ourconsolidated income statements reflect sales and expenses of acquiredbusinesses only for post-acquisition periods. In each applicable fiscal year,acquisitions affected our financial results, when compared to the prior year,for the portion of the year following their respective dates of acquisition.Similarly, acquisitions in 2000 affected our comparative financial results in2001 and 2002 because the acquired businesses were under ownership for the fullyear.

*Fiscal2002 Compared With Fiscal 2001*

Sales decreased 6% to$643.9 million in 2002 from $683.4 million in 2001. This decrease primarilyreflects reduced print demand and competitive price pressures resulting fromprevailing economic conditions in the United States.  In particular, the commercial printing industry has been directlyimpacted by a reduction in advertising spending as a result of the economicweakness.  Management’s decision to exita portion of our business at one operation and combine three small,under-performing operations into nearby facilities during the quarter endedMarch 31, 2001, also contributed to the decrease.  The impact of the three printing businesses acquired late infiscal 2002 partially offset the decrease discussed above.

Gross profit decreased12% to $166.8 million in 2002 from $189.2 million in 2001. Gross profit as apercentage of sales decreased to 25.9% in 2002 from 27.7% in 2001.  While our fixed overhead costs necessary tooperate our facilities and equipment remained relatively constant, competitivepricing pressures resulting from the prevailing economic conditions discussedabove caused this percentage decrease.

Selling expenses decreased1% to $69.1 million in 2002 from $70.1 million in 2001.  Selling expenses as a percentage of salesincreased to 10.7% in 2002 from 10.3% in 2001. This percentage increase is dueto costs associated with marketing efforts

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related to ournational accounts program and other complementary services, particularly thoseavailable through CGXmedia, and our extensive recruiting efforts to hireadditional experienced sales professionals.

General and administrativeexpenses remained constant at $54.8 million in 2002 as compared to $54.6million in 2001.  As a percentage ofsales, general and administrative expenses increased to 8.5% in 2002 from 8.0%in 2001. While our fixed administrative cost structure necessary to maintainour current level of operations remained constant, the impact of the salesdecline noted above resulted in this percentage increase.

Net interest expensedecreased to $15.1 million in 2002 from $20.9 million in 2001, primarily due tolower borrowings outstanding and lower interest rates paid under our bankcredit facilities.

We provided for incometaxes of $11.1 million in 2002, as compared to $15.1 million in 2001, primarilydue to the reduction in taxable earnings for 2002 related to our operatingactivities.  Our effective tax rate was40.0% in 2002 as compared to 40.7% in 2001.

*Fiscal2001 Compared With Fiscal 2000*

Sales increased 9% to$683.4 million in 2001 from $624.9 million in 2000. Sales grew 6% as a resultof the incremental revenue contribution of the 13 businesses acquired in fiscal2000 (the “2000 Acquired Businesses”). The remaining increase was due tointernal growth generated by our focused efforts to build market share, add toour national account base and pursue our electronic media initiatives.

Gross profit increased 1%to $189.2 million in 2001 from $187.6 million in 2000. Gross profit as apercentage of sales decreased to 27.7% in 2001 from 30.0% in 2000.  This percentage decrease resulted from ageneral economic slowdown, particularly during the third and fourth quarters,which reduced print demand, forcing our businesses to aggressively pursue salesvolume and protect market share, coupled with higher depreciation expenseattributable to capital expenditures.

Selling expensesincreased 14% to $70.1 million in 2001 from $61.3 million in 2000, primarilydue to the increased sales levels noted above. Selling expenses as a percentageof sales increased to 10.3% in 2001 from 9.8% in 2000. This percentage increaseis due to higher marketing and training costs attributable to our pursuit ofnational accounts and costs to develop and market our electronic media productsand services.

General andadministrative expenses increased 12% to $54.6 million in 2001 from $48.7million in 2000.  This increase is dueprimarily to the addition of the 2000 Acquired Businesses.  General and administrative expenses as apercentage of sales increased to 8.0% in 2001 from 7.8% in 2000, due to aproportionally higher level of administrative expenses, including amortizationof goodwill, incurred as a result of the 2000 Acquired Businesses, as well asan increase in our corporate infrastructure to better manage our operations.

The special charge of$6.4 million recorded during the fourth quarter of 2001 is due to direct andincremental costs primarily associated with combining the operations at threesmall, under-performing locations into nearby facilities and exiting a portionof our business at a fourth location. We incurred $3.1 million in facility exitand other direct costs related to the combined operations, with the remaining$3.3 million related to the impairment of asset values.

Interest expenseincreased to $20.9 million in 2001 from $13.5 million in 2000, primarily due toa net average increase in borrowings and higher interest rates paid under ourbank credit facilities, together with the addition of term equipment notesrelated to the purchase of printing equipment.

We provided for incometaxes of $15.1 million in 2001, as compared to $25.6 million in 2000, primarilydue to the reduction in taxable earnings for 2001 related to our operatingactivities and the special charge noted above. Effective income tax rates increased to 40.7% in 2001 as compared to40.0% in 2000 due to the effect of nondeductible goodwill that was impairedduring 2001 in connection with the special charge.

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**Liquidity and Capital Resources**

*Sources and Uses of Cash*

Our Company’s historicalsources of cash have primarily been cash provided by operations or borrowingsunder our bank credit facilities.  OurCompany’s historical uses of cash have been for capital expenditures,acquisitions of printing businesses and payment of principal and interest onoutstanding debt obligations.  Cashprovided by operations is defined as net income plus depreciation andamortization, deferred income tax provision, noncash portion of special chargeand changes in working capital.

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 8.  Financial Statementsand Supplementary Data:***

|                                                      |   | **Year Ended March 31** |   |
|-----------------------------------------------------------|--------|-------------------------|--------|
|                                                      |   | **2002**                |   | **2001** |   | **2000** |   |
|                                                      |   | **(In millions)**       |   |
| Net  cash provided by operations                          |   | $                       | 69.8   |   | $ | 68.1 |   | $ | 68.3 |   |
| Acquisitions  of businesses                               |   | (14.6                   | )      | (4.8 | ) | (70.0 | ) |
| Other  capital expenditures                               |   | (16.3                   | )      | (26.4 | ) | (25.2 | ) |
| Net  borrowings (repayments) under bank credit facilities |   | (33.9                   | )      | (25.2 | ) | 59.9 |   |
| Payments  on term equipment notes and other debt          |   | (8.8                    | )      | (7.4 | ) | (4.5 | ) |
|                                                           |        |                         |        |  |  |  |  |  |  |  |

 

Additionally, ourcash position, working capital and short-term and long-term debt obligations asof March 31, 2002, 2001 and 2000 are shown below and should be read in conjunctionwith our consolidated balance sheets and notes thereto included in ***Item 8.  Financial Statements and Supplementary Data:***

|                       |   | **As of March 31** |   |
|----------------------------|--------|--------------------|--------|
|                       |   | **2002**           |   | **2001** |   | **2000** |   |
|                       |   | **(In millions)**  |   |
| Cash  and cash equivalents |   | $                  | 9.0    |   | $ | 8.7 |   | $ | 8.2 |   |
| Working  capital           |   | 85.0               |   | 79.5 |   | 65.3 |   |
| Total  debt obligations    |   | 233.7              |   | 265.4 |   | 266.5 |   |
|                            |        |                    |        |  |  |  |  |  |  |  |

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 make acquisitionswill depend on its market value from time to time and the willingness ofpotential sellers to accept it as full or partial payment.

*DebtObligations*

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 $35.0 million was outstanding at March 31,2002, and a $175.0 million five-year revolving credit line (the “RevolvingLine”), of which $111.0 million was outstanding at March 31, 2002.  The Term Loan requires quarterly payments of$2.5 million each through September 30, 2005.

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) theLondon Interbank Offered Rate (LIBOR) plus a margin of 1.25% to 2.25%, or (2)an alternate base rate 

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(based upon thegreater of the agent bank’s prime lending rate or the Federal Funds effectiverate plus .50%) plus a margin of up to 1.00%. We are also required to pay acommitment fee on available but unused amounts ranging from .275% to .375%annually.  The interest rate margin andthe commitment fee are based upon our ratio of Funded Debt to Pro FormaConsolidated EBITDA, as defined, redetermined quarterly. On March 31, 2002,borrowings outstanding under the Term Loan and the Revolving Line accruedinterest at a weighted average rate of 4.26%.

The proceeds of the BankCredit Facility can be used to repay certain indebtedness, finance certainacquisitions, provide for working capital and general corporate purposes and,subject to certain restrictions, repurchase our common stock.  Our Company is subject to certain covenantsand restrictions and we must meet certain financial tests as defined in theBank Credit Facility. We were in compliance with these covenants and financialtests at March 31, 2002.

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 March 31,2002, borrowings outstanding under the Auxiliary Facility totaled $3.3 millionand accrued interest at a rate of 3.87%.

We have agreements withtwo printing equipment manufacturers, pursuant to which we receive certainvolume purchase incentives and long-term financing options with respect to ourpurchases of printing presses and other equipment. Under these agreements, wewere obligated on term notes totaling $68.8 million and subject to a weightedaverage interest rate of 7.76% as of March 31, 2002.  The agreements provide for fixed monthly payments over periods ofeither five or ten years and are secured by the purchased equipment.  We have additional term equipment notestotaling $4.9 million, which primarily consist of various secured debtobligations we assumed in connection with certain prior year acquisitions. Weare not subject to any significant financial covenants in connection with theseterm equipment notes; however, the Bank Credit Facility places certainlimitations on the amount of additional term note obligations we may incur inthe future.

Our other debtobligations consist of a promissory note totaling $5.1 million, industrialrevenue bonds totaling $4.9 million and various other debt obligations totaling$.7 million.  We do not have anysignificant financial covenants or restrictions associated with these debtobligations.

The principal paymentrequirements by fiscal year under our debt obligations are as follows (in millions):  2003 — $19.9; 2004 — $20.3; 2005 — $21.5;2006 — $129.8; 2007 — $11.1; thereafter — $31.1.

**OtherCommitments**

We have entered into various noncancelable operatingleases primarily related to facilities and equipment used in the ordinary course of our business.

 

Our future contractualobligations by fiscal year are as follows:
|                         |   | **2003**           |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **Thereafter** |   | **Total** |   |
|------------------------------|--------|--------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------------|--------|-----------|--------|
|                         |   | **(In  millions)** |   |
| Operating lease  obligations |   | 11.2               |   | 8.8      |   | 6.7      |   | 4.8      |   | 3.5      |   | 6.4            |   | 41.4      |   |

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 ofMarch 31, 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 March 31, 2002, we were contingently obligated through fiscal 2005 toissue up to 58,291 shares of our common stock and make additional cash paymentsof up to $10.9 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.

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**Factors Which May Affect Future Results**

Our future operatingresults may be impacted by a number of factors, including general economicconditions and competitive factors in our industry, seasonal and cyclicalvariations in commercial printing demand, reasonable growth in the demand forour products and retention of key management and operating personnel. Themagnitude and timing of any future acquisitions, as well as our ability toabsorb and manage such businesses,  willalso impact our future results.  Becauseof these and other factors, there can be no assurance that we will notexperience material fluctuations in our future operating results or cash flowson a quarterly or 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.  Weare required to make certain estimates and assumptions in determining thereported amounts of assets and liabilities, disclosure of contingentliabilities and the reported amounts of revenues and expenses. We evaluate ourestimates and assumptions on an ongoing basis and rely on historical experienceand various other factors that we believe to be reasonable under thecircumstances to determine such estimates. Because uncertainties with respectto estimates and assumptions are inherent in the preparation of financialstatements, actual results could differ from these estimates.

We maintain an allowancefor doubtful accounts as deemed necessary based upon expected collectibility ofaccounts receivable.  We exercisejudgment in determining the valuation and useful lives of our long-livedassets, primarily property and equipment. We also determine the realization of long-lived assets, includinggoodwill (pending adoption of SFAS No. 142), by assessing the future cash flowsand income from such assets on an undiscounted basis, as well as other factorssuch as business trends and general economic conditions.  We are self-insured for the majority of ourworkers’ compensation costs and group health insurance costs, and we rely onclaims experience and the advice of our administrators and consulting actuariesin determining an adequate liability for self-insurance claims.  Finally, we utilize certain estimates andassumptions in our determination and allocation of the purchase price foracquisitions and in determining accruals for current and deferred income taxes.

**NewAccounting Pronouncements**

Statement of Financial AccountingStandards (“SFAS”) No. 141, *Business Combinations*, and SFAS No. 142, *Goodwill andOther Intangible Assets,*were issued in July 2001.  SFAS No. 141 requires that all acquisitionscompleted after June 30, 2001, be accounted for using the purchase method ofaccounting.  SFAS No. 142 requiresthat companies discontinue amortizing goodwill and perform annual impairmenttests to determine if the remaining balance of goodwill or other intangibleassets should be reduced to their estimated fair values. SFAS No. 141 alsorequires companies to separately report more specifically identifiableintangible assets and SFAS No. 142 requires the amortization of such intangibleassets over their useful life, if determinable.

SFAS No. 141 waseffective immediately upon its issuance and SFAS No. 142 is effective forfiscal years beginning after December 15, 2001.  We will adopt SFAS No. 142 during our fiscal 2003 first quarter,which ends June 30, 2002.  We will showany impairment loss recognized in accordance with SFAS No. 142 as thecumulative effect of a change in accounting principle in our consolidatedincome statement. At March 31, 2002, the Company’s net goodwill was $199.3million and pre-tax amortization expense for the year ended March 31, 2002,totaled $5.4 million under the prior accounting standards. We are currentlyreviewing the impact of SFAS No. 142 on our financial position and results ofoperation. On the basis of our preliminary review and currently availableinformation, we believe that we will record a non-cash, after-tax goodwillimpairment charge, reflected as the cumulative effect of a change in accountingprinciple, of up to $75.0 million during our fiscal 2003 first quarter.  We have obtained an amendment to our BankCredit Facility, which specifically provides that this impairment charge willhave no impact on our compliance with the financial covenants of that facility.

SFAS No. 143, A*ccountingfor Asset Retirement Obligations*and SFAS No. 144*, Accountingfor the Impairment or Disposal of Long-Lived Assets*were issued inAugust 2001.  SFAS No. 143 requiresthat a liability for an asset retirement obligation be recognized in the periodin which the obligation arises if a reasonable estimate of fair value can be made.  The associated asset retirement costs arecapitalized as part of the carrying amount of the asset.  SFAS No. 143 is effective for fiscalyears beginning after June 15, 2002. SFAS No. 144**addresses the financial accounting andreporting for the impairment or disposal of long-lived assets and supersedesSFAS No. 121.* *SFAS No. 144is effective for fiscal years beginning after December 15, 2001.  Management does not believe that theadoption of SFAS Nos. 143 and 144 will have a material impact on its financialposition or results of operations.

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***Item 7A. Quantitative and Qualitative Disclosure About Market Risk***

Market risk generallymeans the risk that losses may occur in the value of certain financialinstruments as a result of movements in interest rates, foreign currencyexchange rates and commodity prices. We do not hold or utilize derivativefinancial instruments which could expose our Company to significant marketrisk. However, we are exposed to market risk for changes in interest ratesrelated primarily to our debt obligations. Our debt obligations as of March 31,2002, include borrowings under our bank credit facilities totaling $149.3million, various term equipment notes totaling $73.7 million and other debtobligations totaling $10.7 million.

The followingtable sets forth the average interest rate for the scheduled maturities of ourdebt obligations as of March 31, 2002 ($ in millions):
|                     |   | **2003** |       | **2004** |       | **2005** |       | **2006** |       | **2007** |       | **Thereafter** |       | **Total** |       | **Estimated Fair Value At March 31, 2002** |       |
|--------------------------|--------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|-----------|------------|--------------------------------------------|------------|
| **Fixed  Rate Debt:**    |   |     |       |     |       |     |       |     |       |     |       |           |       |      |       |                                       |       |
| Amount                   |   | $        | 8.5        |     | $          | 8.9      |       | $        | 10.0       |     | $          | 9.1            |       | $         | 9.6        |                                       | $          | 28.1 | ** ** | **$** | **74.2** | ** ** | **$** | **75.0** | ** ** |
| Average  interest rate   |   | 7.82     | %          | 7.79     | %          | 7.86     | %          | 7.72     | %          | 7.77     | %          | 7.72           | %          | **7.76**  | **%**      |                                       | ** ** |
| **Variable  Rate Debt:** |   |     | ** ** |     | ** ** |     | ** ** |     | ** ** |     | ** ** |           | ** ** |      | ** ** |                                       | ** ** |
| Amount.                  |   | $        | 11.4       |     | $          | 11.4     |       | $        | 11.5       |     | $          | 120.7          |       | $         | 1.5        |                                       | $          | 3.0 | ** ** | **$** | **159.5** | ** ** | **$** | **159.5** | ** ** |
| Average  interest rate   |   | 4.09     | %          | 4.08     | %          | 4.08     | %          | 4.28     | %          | 3.64     | %          | 3.26           | %          | **4.21**  | **%**      |                                       | ** ** |

 

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***Item 8.  Financial Statements and Supplementary Data***

 

 

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 
|                                                                                                     |   |
|----------------------------------------------------------------------------------------------------------|--------|
| Report of  Independent Public Accountants                                                                |   |
|                                                                                                     |   |
| Consolidated Balance Sheets  at March 31, 2002 and 2001                                                  |   |
|                                                                                                     |   |
| Consolidated Income  Statements for the Years Ended March 31, 2002, 2001 and 2000                        |   |
|                                                                                                     |   |
| Consolidated  Statements of Shareholders’ Equity for the Years Ended March 31, 2002, 2001 and  2000 |   |
|                                                                                                     |   |
| Consolidated  Statements of Cash Flows for the Years Ended March 31, 2002, 2001 and 2000                 |   |
|                                                                                                     |   |
| Notes to  Consolidated Financial Statements                                                              |   |

 

 

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**REPORTOF INDEPENDENT PUBLIC ACCOUNTANTS**

To the Shareholders ofConsolidated Graphics, Inc.:

We have audited the accompanying consolidated balancesheets of Consolidated Graphics, Inc. (a Texas corporation) and subsidiaries asof March 31, 2002 and 2001, and the related consolidated statements of income,shareholders’ equity and cash flows for each of the three years in the periodended March 31, 2002. These financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.

We conducted our audits in accordance with auditingstandards generally accepted in the United States. Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluatingthe overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion.

In our opinion, the financial statements referred toabove present fairly, in all material respects, the financial position ofConsolidated Graphics, Inc. and subsidiaries as of March 31, 2002 and 2001, andthe results of their operations and their cash flows for each of the threeyears in the period ended March 31, 2002, in conformity with accountingprinciples generally accepted in the United States.

ARTHUR ANDERSEN LLPHouston, TexasMay 17, 2002

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**CONSOLIDATEDGRAPHICS, INC.**

**CONSOLIDATEDBALANCE SHEETS**

**(In thousands, except share and per share data)**
|                                                                                                           |   | **March 31** |    |
|----------------------------------------------------------------------------------------------------------------|--------|--------------|---------|
|                                                                                                           |   | **2002**     |    | **2001** |   |
| ASSETS                                                                                                         |   |         |    |   |   |
| CURRENT ASSETS                                                                                                 |   |         |    |   |   |
| Cash and cash equivalents                                                                                      |   | $            | 8,955   |   | $ | 8,667 |   |
| Accounts receivable, net                                                                                       |   | 121,981      |    | 116,095 |   |
| Inventories                                                                                                    |   | 32,771       |    | 31,536 |   |
| Prepaid expenses                                                                                               |   | 6,114        |    | 4,605 |   |
| Deferred income tax assets                                                                                     |   | 5,153        |    | 4,023 |   |
| Total current assets                                                                                           |   | 174,974      |    | 164,926 |   |
| PROPERTY AND EQUIPMENT, net                                                                                    |   | 293,831      |    | 299,871 |   |
| GOODWILL, net                                                                                                  |   | 199,331      |    | 203,030 |   |
| OTHER ASSETS                                                                                                   |   | 8,597        |    | 6,840 |   |
|                                                                                                           |   | $            | 676,733 |   | $ | 674,667 |   |
| LIABILITIES AND SHAREHOLDERS’  EQUITY                                                                     |   |         |    |   |   |
|                                                                                                           |   |         |    |   |   |
| CURRENT LIABILITIES                                                                                            |   |         |    |   |   |
| Current portion of long-term debt                                                                              |   | $            | 19,877  |   | $ | 18,711 |   |
| Accounts payable                                                                                               |   | 32,068       |    | 33,865 |   |
| Accrued liabilities                                                                                            |   | 37,382       |    | 32,609 |   |
| Income taxes payable                                                                                           |   | 611          |    | 253 |   |
| Total current liabilities                                                                                      |   | 89,938       |    | 85,438 |   |
| LONG-TERM DEBT, net of current portion                                                                         |   | 213,860      |    | 246,729 |   |
| DEFERRED INCOME TAX LIABILITIES                                                                                |   | 66,337       |    | 54,966 |   |
| COMMITMENTS AND CONTINGENCIES                                                                                  |   |         |    |   |   |
| SHAREHOLDERS’ EQUITY                                                                                      |   |         |    |   |   |
| Common stock, $.01 par value; 100,000,000 shares authorized; 13,205,863  and 13,018,795 issued and outstanding |   | 132          |    | 130 |   |
| Additional paid-in capital                                                                                     |   | 157,581      |    | 155,199 |   |
| Retained earnings                                                                                              |   | 148,885      |    | 132,205 |   |
| Total shareholders’ equity                                                                                |   | 306,598      |    | 287,534 |   |
|                                                                                                           |   | $            | 676,733 |   | $ | 674,667 |   |

See accompanying notes to consolidated financialstatements.

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**CONSOLIDATEDGRAPHICS, INC.**

**CONSOLIDATEDINCOME STATEMENTS**

**(In thousands, except per share data)**
|                                       |   | **Year Ended March 31** |    |
|--------------------------------------------|--------|-------------------------|---------|
|                                       |   | **2002**                |    | **2001** |   | **2000** |   |
| SALES                                      |   | $                       | 643,948 |   | $ | 683,396 |   | $ | 624,895 |   |
| COST OF SALES                              |   | 477,147                 |    | 494,158 |   | 437,345 |   |
| Gross profit                               |   | 166,801                 |    | 189,238 |   | 187,550 |   |
| SELLING EXPENSES                           |   | 69,091                  |    | 70,070 |   | 61,267 |   |
| GENERAL AND ADMINISTRATIVE EXPENSES        |   | 54,766                  |    | 54,595 |   | 48,677 |   |
| SPECIAL CHARGE                             |   | —                  |    | 6,440 |   | — |   |
| Operating income                           |   | 42,944                  |    | 58,133 |   | 77,606 |   |
| INTEREST EXPENSE                           |   | 15,229                  |    | 21,005 |   | 13,584 |   |
| INTEREST INCOME                            |   | (85                     | )       | (147 | ) | (108 | ) |
| Income before income taxes                 |   | 27,800                  |    | 37,275 |   | 64,130 |   |
| PROVISION FOR INCOME TAXES                 |   | 11,120                  |    | 15,164 |   | 25,651 |   |
| NET INCOME                                 |   | $                       | 16,680  |   | $ | 22,111 |   | $ | 38,479 |   |
| BASIC EARNINGS PER SHARE                   |   | $                       | 1.27    |   | $ | 1.68 |   | $ | 2.54 |   |
| DILUTED EARNINGS PER SHARE                 |   | $                       | 1.25    |   | $ | 1.68 |   | $ | 2.51 |   |
| SHARES USED TO COMPUTE EARNINGS PER SHARE: |   |                    |    |   |   |   |   |
| Basic                                      |   | 13,107                  |    | 13,142 |   | 15,155 |   |
| Diluted                                    |   | 13,380                  |    | 13,186 |   | 15,336 |   |

See accompanying notes to consolidated financialstatements.

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**CONSOLIDATED GRAPHICS, INC.**

**CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY**

**(In thousands)**
|                                      |   | **Common Stock** |   |       |   |                             |   |                  |   |
|-------------------------------------------|--------|------------------|--------|------------|--------|----------------------------------|--------|-----------------------|--------|
|                                      |   | **Shares**       |   | **Amount** |   | **Additional  Paid-In  Capital** |   | **Retained Earnings** |   | **Total** |   |
| BALANCE, March 31, 1999                   |   | 14,649           |   | $          | 146    |                             | $      | 136,488               |   | $ | 77,820 |   | $ | 214,454 |   |
| Common stock issuance — acquisitions |   | 1,046            |   | 11         |   | 48,839                           |   | —                |   | 48,850 |   |
| Exercise of stock options                 |   | 83               |   | 1          |   | 1,118                            |   | —                |   | 1,119 |   |
| Retirement of common stock                |   | (2,070           | )      | (21        | )      | (24,461                          | )      | (5,889                | )      | (30,371 | ) |
| Net income                                |   | —           |   | —     |   | —                           |   | 38,479                |   | 38,479 |   |
| BALANCE, March 31, 2000                   |   | 13,708           |   | 137        |   | 161,984                          |   | 110,410               |   | 272,531 |   |
| Exercise of stock options                 |   | 40               |   | —     |   | 246                              |   | —                |   | 246 |   |
| Retirement of common stock                |   | (730             | )      | (7         | )      | (7,031                           | )      | (316                  | )      | (7,354 | ) |
| Net income                                |   | —           |   | —     |   | —                           |   | 22,111                |   | 22,111 |   |
| BALANCE, March 31, 2001                   |   | 13,018           |   | 130        |   | 155,199                          |   | 132,205               |   | 287,534 |   |
| Exercise of stock options                 |   | 188              |   | 2          |   | 2,382                            |   | —                |   | 2,384 |   |
| Net income                                |   | —           |   | —     |   | —                           |   | 16,680                |   | 16,680 |   |
| BALANCE, March 31, 2002                   |   | 13,206           |   | $          | 132    |                             | $      | 157,581               |   | $ | 148,885 |   | $ | 306,598 |   |

See accompanying notes to consolidated financialstatements.

 

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**CONSOLIDATED****GRAPHICS, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(In thousands)**
|                                                                              |   | **Year Ended  March 31** |   |
|-----------------------------------------------------------------------------------|--------|--------------------------|--------|
|                                                                              |   | **2002**                 |   | **2001** |   | **2000** |   |
| OPERATING  ACTIVITIES:                                                            |   |                     |   |   |   |   |   |
| Net income                                                                        |   | $                        | 16,680 |   | $ | 22,111 |   | $ | 38,479 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities |   |                     |   |   |   |   |   |
| Depreciation and  amortization                                                    |   | 41,312                   |   | 38,783 |   | 32,881 |   |
| Deferred income  tax provision                                                    |   | 10,241                   |   | 7,334 |   | 15,135 |   |
| Noncash portion  of special charge                                                |   | —                   |   | 4,615 |   | — |   |
| Changes in  assets and liabilities, net of effects of acquisitions                |   |                     |   |   |   |   |   |
| Accounts  receivable                                                              |   | 2,947                    |   | (1,048 | ) | (6,070 | ) |
| Inventories                                                                       |   | 1,485                    |   | 826 |   | (1,633 | ) |
| Prepaid expenses                                                                  |   | (1,554                   | )      | 213 |   | (561 | ) |
| Other assets                                                                      |   | (1,806                   | )      | 45 |   | 512 |   |
| Accounts payable  and accrued liabilities                                         |   | (275                     | )      | (1,420 | ) | (11,351 | ) |
| Income taxes  payable                                                             |   | 726                      |   | (3,341 | ) | 927 |   |
| Net cash  provided by operating activities                                        |   | 69,756                   |   | 68,118 |   | 68,319 |   |
| INVESTING  ACTIVITIES:                                                            |   |                     |   |   |   |   |   |
| Acquisitions of  businesses, net of cash acquired                                 |   | (14,645                  | )      | (4,782 | ) | (70,005 | ) |
| Purchases of  property and equipment                                              |   | (16,270                  | )      | (26,434 | ) | (25,172 | ) |
| Proceeds from  asset dispositions                                                 |   | 2,118                    |   | 3,279 |   | 2,597 |   |
| Net cash used in  investing activities                                            |   | (28,797                  | )      | (27,937 | ) | (92,580 | ) |
|                                                                              |   |                     |   |   |   |   |   |
| FINANCING  ACTIVITIES:                                                            |   |                     |   |   |   |   |   |
| Proceeds from  bank credit facilities                                             |   | 29,822                   |   | 359,200 |   | 678,800 |   |
| Payments on bank  credit facilities                                               |   | (63,719                  | )      | (384,359 | ) | (618,860 | ) |
| Payments on  long-term debt                                                       |   | (8,790                   | )      | (7,431 | ) | (4,506 | ) |
| Payments to  repurchase common stock                                              |   | —                   |   | (7,354 | ) | (30,371 | ) |
| Proceeds from  exercise of stock options and other                                |   | 2,016                    |   | 233 |   | 857 |   |
| Net cash (used  in) provided by financing activities                              |   | (40,671                  | )      | (39,711 | ) | 25,920 |   |
| NET INCREASE IN  CASH AND CASH EQUIVALENTS                                        |   | 288                      |   | 470 |   | 1,659 |   |
| CASH AND CASH  EQUIVALENTS AT BEGINNING OF YEAR                                   |   | 8,667                    |   | 8,197 |   | 6,538 |   |
| CASH AND CASH  EQUIVALENTS AT END OF YEAR                                         |   | $                        | 8,955  |   | $ | 8,667 |   | $ | 8,197 |   |

See accompanying notes to consolidated financialstatements.

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**CONSOLIDATED GRAPHICS, INC.NOTES TO CONSOLIDATED FINANCIALSTATEMENTS(In thousands, except share and per share data and percentages)**

**1.  BUSINESS**

Consolidated Graphics,Inc. (collectively with its subsidiaries referred to as “the Company”) is thelargest sheet-fed and half-web commercial printing company in the United Stateswith 65 printing facilities in 25 states. The Company is focused on addingvalue to its operating companies by providing the financial and operationalstrengths, management support and technological advantages associated with anational organization.

The majority of theCompany’s sales are derived from commercial printing services, which includeelectronic prepress, printing, finishing, storage and delivery of high quality,custom-designed products. Examples of such products include multicolor productand capability brochures, shareholder communications, catalogs, trainingmanuals, point-of-purchase marketing materials and direct mail pieces.  The Company also provides a variety ofcomplementary services, including fulfillment and mailing services andprint-related e-commerce software solutions and electronic media services thatare developed and marketed using the CGXmedia brand.

**2.  SIGNIFICANT ACCOUNTING POLICIES AND OTHERINFORMATION**

**AccountingPolicies**

The accounting policiesof the Company reflect industry practices and conform to accounting principlesgenerally accepted in the United States. The more significant of suchaccounting policies are described below.

*Principles of Consolidation*  — Theaccompanying consolidated financial statements include the accounts of theCompany and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated.  Under Statement of Financial AccountingStandards (“SFAS”) No. 131, “*Disclosures About Segments of an Enterprise andRelated Information*,” the Company’s operations constitute onereportable operating segment.

*Use of Estimates*  — The preparationof financial statements in conformity with generally accepted accountingprinciples requires the use of certain estimates and assumptions by managementin determining the reported amounts of assets and liabilities, disclosure ofcontingent liabilities as of the date of the financial statements and thereported amounts of revenues and expenses during the reporting period. Weevaluate our estimates and assumptions on an ongoing basis and rely onhistorical experience and various other factors that we believe to bereasonable under the circumstances to determine such estimates. Becauseuncertainties with respect to estimates and assumptions are inherent in thepreparation of financial statements, actual results could differ from theseestimates.  The most significantestimates used in the Company’s consolidated financial statements relate to theallowance for doubtful accounts, useful lives and realization of long-livedassets, determination and allocation of the purchase price for acquisitions,accruals for self-insurance claims, and accruals for current and deferredincome taxes and other liabilities.

*Cash and Cash Equivalents*  — The Companyconsiders all highly liquid investments purchased with original maturities ofthree months or less to be cash equivalents.

*Revenue Recognition and Accounts Receivable* — The Company recognizes revenue upon delivery of each job. Losses, ifany, on jobs are recognized at the earliest date such amount is determinable.The Company derives the majority of its revenues from sales and services to abroad and diverse group of customers with no individual customer accounting formore than 10% of the Company’s revenues during the years ended March 31, 2002,2001 and 2000. The Company maintains an allowance for doubtful accounts basedupon the expected collectibility of accounts receivable. Accounts receivable inthe accompanying consolidated balance sheets are reflected net of allowance fordoubtful accounts of $1,847 and $2,698 at March 31, 2002 and 2001.

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

|             |   | **March 31,** |   |
|------------------|--------|---------------|--------|
|             |   | **2002**      |   | **2001** |   |
| Raw materials    |   | $             | 11,076 |   | $ | 11,314 |   |
| Work in progress |   | 18,543        |   | 18,128 |   |
| Finished goods   |   | 3,152         |   | 2,094 |   |
|             |   | $             | 32,771 |   | $ | 31,536 |   |

*Goodwill* - Goodwill represents the excess of costover the fair value of identifiable assets of businesses acquired. Goodwill isstated at cost, net of accumulated amortization, and is being amortized over 40years using the straight-line method. At March 31, 2002 and 2001, accumulatedamortization of goodwill was $17,232 and $11,859.  See also *“Recent Accounting Pronouncements”*below.

*Impairment of Long-Lived Assets* — In accordance with SFAS No. 121, *Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to be Disposed of*, theCompany periodically evaluates whether the remaining balances of property andequipment, goodwill or other long-lived assets are recoverable by assessingcurrent and future levels of income and cash flows on an undiscounted basis, aswell as other factors, such as business trends and general market conditions.The Company recorded an impairment loss totaling $3,346 related to theconsolidation of three facilities and exiting a portion of its business at afourth location during fiscal 2001. See also Significant Accounting Policiesand Other Information*— “Special Charge”* below.

*Recent Accounting Pronouncements* — SFAS No. 141, *Business Combinations*, and SFAS No. 142, *Goodwill andOther Intangible Assets,*were issued in July 2001.  SFAS No. 141 requires that all acquisitionscompleted after June 30, 2001, be accounted for using the purchase method ofaccounting.  SFAS No. 142 requires thatcompanies discontinue amortizing goodwill and perform annual impairment teststo determine if the remaining balance of goodwill or other intangible assetsshould be reduced to their estimated fair values. SFAS No. 141 also requirescompanies to separately report more specifically identifiable intangible assetsand SFAS No. 142 requires the amortization of such intangible assets over theiruseful life, if determinable.

SFAS No. 141 waseffective immediately upon its issuance and SFAS No. 142 is effective forfiscal years beginning after December 15, 2001.  We will adopt SFAS No. 142 during our fiscal 2003 first quarter,which ends June 30, 2002.  We will showany impairment loss recognized in accordance with SFAS No. 142 as thecumulative effect of a change in accounting principle in our consolidatedincome statement. At March 31, 2002, the Company’s net goodwill was$199,331 and pre-tax amortization expense for the year ended March 31, 2002,totaled $5,373 under the prior accounting standards. We are currently reviewingthe impact of SFAS No. 142 on our financial position and results of operation.On the basis of our preliminary review and currently available information, webelieve that we will record a non-cash, after-tax goodwill impairment charge,reflected as the cumulative effect of a change in accounting principle, of upto $75,000 (unaudited) during our fiscal 2003 first quarter.  We have obtained an amendment to our BankCredit Facility, which specifically provides that this impairment charge willhave no impact on our compliance with the financial covenants of that facility.

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SFAS No. 143, A*ccountingfor Asset Retirement Obligations*and SFAS No. 144*, Accountingfor the Impairment or Disposal of Long-Lived Assets*were issued inAugust 2001.  SFAS No. 143 requires thata liability for an asset retirement obligation be recognized in the period inwhich the obligation arises if a reasonable estimate of fair value can bemade.  The associated asset retirementcosts are capitalized as part of the carrying amount of the asset.  SFAS No. 143 is effective for fiscal yearsbeginning after June 15, 2002.  SFAS No.144**addressesthe financial accounting and reporting for the impairment or disposal oflong-lived assets and supersedes SFAS No. 121.* *SFAS No. 144 is effective for fiscal years beginning afterDecember 15, 2001.  Management does notbelieve that the adoption of SFAS Nos. 143 and 144 will have a material impacton its financial position or results of operations.

**OtherInformation**

*Supplemental Cash Flow Information* — The consolidated statements of cash flows provide information about theCompany’s sources and uses of cash and exclude the effects of non-cashtransactions. Significant non-cash transactions primarily include the issuanceof common stock, the assumption of debt related to the acquisition of certainprinting businesses (see Note 3. Acquisitions) and the issuance of termequipment notes payable related to the purchase of printing equipment (see Note5. Long-Term Debt). The Company issued term equipment notes payable to purchaseprinting equipment totaling $5,855, $31,540 and $26,907 during the years endedMarch 31, 2002, 2001 and 2000.

The following is asummary of the total cash paid for interest and income taxes (net of refunds):

|             |   | **Year Ended  March 31** |   |
|------------------|--------|--------------------------|--------|
|             |   | **2002**                 |   | **2001** |   | **2000** |   |
| *Cash Paid For:* |   |                     |   |   |   |   |   |
| Interest         |   | $                        | 14,767 |   | $ | 22,164 |   | $ | 12,846 |   |
| Income taxes     |   | 64                       |   | 11,121 |   | 9,850 |   |
|                  |        |                          |        |  |  |  |  |  |  |  |

*Accrued Liabilities* — The significant components of accrued liabilities are as follows:

|                              |   | **March 31** |   |
|-----------------------------------|--------|--------------|--------|
|                              |   | **2002**     |   | **2001** |   |
| Compensation and  benefits        |   | $            | 18,934 |   | $ | 13,996 |   |
| Sales and  property taxes payable |   | 2,743        |   | 2,915 |   |
| Accrued  purchases                |   | 3,998        |   | 2,955 |   |
| Other.                            |   | 11,707       |   | 12,743 |   |
|                              |   | $            | 37,382 |   | $ | 32,609 |   |

*Earnings Per Share* — Basic earnings per share are calculated by dividing net income by theweighted average number of common shares outstanding. Diluted earnings pershare reflect net income divided by the weighted average number of commonshares outstanding and include the effect of dilutive stock optionsoutstanding.

*Related Party Transactions*  — In thenormal course of business, the Company leases, under terms it believes arecomparable to market rates, certain real estate from individuals who formerlyowned an acquired business and are now employed by the Company.

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*Special Charge* — The Company recorded a one-time special charge of$6,440 ($4,117 after tax) during the fourth quarter of fiscal 2001 related todirect and incremental costs primarily associated with combining the operationsat three small, under-performing locations into nearby facilities and exiting aportion of its business at a fourth location. The components of the specialcharge are impairment of property and equipment values totaling $2,272,impairment of goodwill totaling $1,074, facility exit costs totaling $1,504 andother direct costs totaling $1,590.

Impairment losses werecalculated based on the excess of the recorded value of property and equipmentover each asset’s respective fair value using recent comparable market data.Other direct costs included primarily payroll-related expenses, incrementalcosts necessary to maintain buildings and equipment after the shutdown of eachfacility, costs incurred for work-in-process unable to be completed and billeddue to the closings, and professional service fees.  Additionally, costs totaling $235 and $1,048 related to itemsincurred but not yet paid were reflected in accrued liabilities as of March 31,2002 and 2001.

*Fair Value of Financial Instruments* — The Company’s financial instruments consist of cash, tradereceivables, trade payables and debt obligations. The Company does notcurrently hold or issue derivative financial instruments. The Company believesthat the fair value of its variable rate debt obligations, which totaled$159,552 and $188,852 at March 31, 2002 and 2001, approximated their recordedvalues. The Company estimates that the fair value of its fixed rate debtobligations totaling $74,185 at March 31, 2002 was $74,998. The Companyestimates that the fair value of its fixed rate debt obligations totaling$76,588 at March 31, 2001 was $76,043. Estimates of fair value are based on interest rates for the same orsimilar debt offered to the Company having the same or similar maturities andcollateral requirements.

*Concentrations of Credit Risk*  — Financialinstruments that potentially subject the Company to concentrations of creditrisk are primarily cash deposits and trade accounts receivable. The Company’scash deposits are held in large, national financial institutions.Concentrations of credit risk with respect to trade accounts receivable arelimited because the Company’s printing businesses provide services to a large,diverse group of customers in various geographical regions. Management performsongoing credit evaluations of its customers and generally does not require collateralfor the extension of credit.

**3.  ACQUISITIONS**

All acquisitions havebeen accounted for using the purchase method of accounting. Revenues andexpenses of the acquired businesses have been included in the accompanyingconsolidated financial statements from their respective dates of acquisition.The allocation of purchase price to the acquired assets and liabilities isbased on estimates of fair market value. The allocation of purchase price in connection with certain acquisitionsin fiscal 2002 may be prospectively revised if and when additional informationthe Company is awaiting concerning certain asset and liability valuations,other than contingent transaction consideration, is obtained, provided thatsuch information is received no later than one year after the date ofacquisition.  The Company does notexpect that such additional information will result in a material adjustment tothe preliminary purchase price allocations. Contingent transaction consideration is accrued as an additional cost ofthe transaction when payment thereof is deemed to be probable by the Company.

During fiscal 2002, theCompany acquired the assets of three printing businesses — AmericanLithographers — Hayward and Sacramento, California; Carqueville Graphics —Chicago, Illinois; and Regent Printing and Imaging — Tulsa, Oklahoma.  To complete these acquisitions, in theaggregate, the Company paid cash totaling $11,231 and issued debt totaling$5,129. The allocation of the purchase price of the businesses acquired in fiscal2002 included current assets of $11,704 and property and equipment of $9,990,less current liabilities of $5,334.

 

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During fiscal 2000, theCompany acquired 13 printing businesses. To complete these acquisitions, in theaggregate, the Company paid****cash of $42,044, issued 1,032,407 sharesof its common stock and discharged debt and paid other liabilities of theacquired businesses totaling $24,477. Additionally, debt of the acquiredbusinesses totaling $10,706 remained outstanding following the acquisitions.

The following table setsforth unaudited pro forma information and assumes that each of the acquisitionsin fiscal 2002 occurred at the beginning (April 1) of the fiscal years endedMarch 31, 2002 and 2001.

|                        |   | **Year Ended  March 31,** |       |
|-----------------------------|--------|---------------------------|------------|
|                        |   | **2002**                  |       | **2001** |   |
|                        |   | **(Unaudited)**           | ** ** |
| Sales                       |   | $                         | 689,040    |   | $ | 750,396 |   |
| Net income                  |   | 18,180                    |       | 25,190 |   |
| Diluted earnings  per share |   | 1.36                      |       | 1.91 |   |
|                             |        |                           |            |  |  |  |  |

The preceding proforma financial information does not purport to be indicative of the Company’sfinancial position or results of operations that would have occurred had thetransactions been completed at the beginning of the period presented, nor doessuch pro forma information purport to indicate the Company’s results ofoperations at any future date or for any future period. Certain acquisitionsinvolve contingent consideration typically payable only in the event that thefinancial results of an acquired business improve by an equal amount or moreafter the acquisition; accordingly, such contingent consideration has beenexcluded from the preceding pro forma financial information.

Additionally, to satisfycertain liabilities of acquired businesses or pursuant to earnout agreements,the Company paid cash of $3,414, $4,782 and $3,484 during fiscal 2002, 2001 and2000, respectively, and issued 13,332 shares of its common stock in fiscal2000.

**4.  PROPERTY AND EQUIPMENT**

Property and equipmentare stated at cost, net of accumulated depreciation. The costs of majorrenewals and betterments are capitalized; repairs and maintenance costs areexpensed when incurred. Depreciation of property and equipment is computedusing the straight-line method over the estimated useful lives of the variousclasses of assets.

The following is asummary of the Company’s property and equipment and their estimated usefullives:

|                                       |   | **March 31** |    |     |   |
|--------------------------------------------|--------|--------------|---------|----------|--------|
| **Description**                            |   | **2002**     |    | **2001** |   | **Estimated  Life in Years** |   |
| Land                                       |   | $            | 7,982   |     | $      | 7,507 |   | — |   |
| Buildings and  leasehold improvements      |   | 53,720       |    | 53,361   |   | 15-40 |   |
| Printing presses  and equipment            |   | 318,377      |    | 297,435  |   | 7-20 |   |
| Computer  equipment and software           |   | 22,057       |    | 19,479   |   | 2-5 |   |
| Furniture,  fixtures and other             |   | 9,438        |    | 9,555    |   | 5-7 |   |
|                                       |   | 411,574      |    | 387,337  |   |   |   |
| Less  — accumulated depreciation |   | (117,743     | )       | (87,466  | )      |   |   |
|                                       |   | $            | 293,831 |     | $      | 299,871 |   |   |   |

 

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**5.  LONG-TERM DEBT**

The following is asummary of the Company’s long-term debt as of:

|                              |   | **March 31** |    |
|-----------------------------------|--------|--------------|---------|
|                              |   | **2002**     |    | **2001** |   |
| Bank credit  facilities           |   | $            | 149,281 |   | $ | 183,178 |   |
| Term equipment  notes             |   | 73,708       |    | 75,665 |   |
| Other                             |   | 10,748       |    | 6,597 |   |
|                              |   | 233,737      |    | 265,440 |   |
| Less  — current portion |   | (19,877      | )       | (18,711 | ) |
|                              |   | $            | 213,860 |   | $ | 246,729 |   |

The Companyentered into a five-year $225,000 senior secured credit facility (the “BankCredit Facility”) with eleven banks in December 2000.  The Bank Credit Facility is composed of a $50,000 five-year termloan (the “Term Loan”), of which $35,000 was outstanding at March 31, 2002, anda $175,000 five-year revolving credit line (the “Revolving Line”), of which$111,000 was outstanding at March 31, 2002. The Term Loan requires quarterly payments of $2,500 each throughSeptember 30, 2005.

Borrowings outstandingunder the Bank Credit Facility are secured by substantially all of theCompany’s assets other than real estate and certain equipment subject to termequipment notes and other financings. Borrowings under the Bank Credit Facility accrue interest, at theCompany’s option, at either (1) the London Interbank Offered Rate (LIBOR) plusa margin of 1.25% to 2.25%, or (2) an alternate base rate (based upon thegreater of the agent bank’s prime lending rate or the Federal Funds effectiverate plus .50%) plus a margin of up to 1.00%. The Company is also required to pay a commitment fee on available butunused amounts ranging from .275% to .375% annually.  The interest rate margin and the commitment fee are based uponthe Company’s ratio of Funded Debt to Pro Forma Consolidated EBITDA, asdefined, redetermined quarterly.  OnMarch 31, 2002 borrowings outstanding under the Term Loan and the RevolvingLine accrued interest at a weighted average rate of 4.26%.

The proceeds of the BankCredit Facility can be used to repay certain indebtedness, finance certainacquisitions, provide for working capital and general corporate purposes, andsubject to certain restrictions, repurchase its common stock.

The covenants containedin the Agreement, among other things, limit the Company’s ability to (i) incursecured and unsecured debt beyond specific amounts or based upon financialratios, (ii) pledge its assets beyond specific amounts, (iii) merge,consolidate with or acquire other companies where the total consideration paidis above certain levels, (iv) change its primary business, (v) pay cashdividends, (vi) make capital expenditures and dispose of assets beyond certainlevels. The Company must also meet certain financial tests relating to itsleverage ratio, interest coverage ratio, fixed charge coverage ratio andconsolidated net worth.

In addition, the Companyentered into an auxiliary revolving credit facility (the “Auxiliary BankFacility”) with a commercial bank expiring in February 2003. This AuxiliaryBank Facility is unsecured and has a maximum borrowing capacity of $5,000. AtMarch 31, 2002, borrowings outstanding under the Auxiliary Bank Facility totaled$3,281 and accrued interest at a rate of 3.87%.

 

29

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The term equipment notesconsist primarily of term notes payable pursuant to printing equipment purchaseand financing agreements between the Company and two printing equipmentmanufacturers. The agreements provide for fixed monthly payments over periodsof either five or ten years and are secured by the purchased equipment. AtMarch 31, 2002, outstanding borrowings under these agreements totaled $68,830and were subject to a weighted average interest rate of 7.76%. The remainingbalance of term equipment notes totaling $4,878 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 remainingdebt obligations consist of a promissory note totaling $5,129, industrialrevenue bonds totaling $4,885 and various other debt obligations totaling$734.  The Company does not have anysignificant financial covenants or restrictions associated with these debtobligations.

The principal paymentrequirements by fiscal year under the Company’s debt obligations are asfollows: 2003 — $19,877;  2004 —$20,290;  2005 — $21,463;  2006 — $129,850;  2007 — $11,103;  thereafter — $31,154.

**6.  INCOME TAXES**

The provision for incometaxes is comprised of the following:

|     |   | **Year Ended  March 31** |   |
|----------|--------|--------------------------|--------|
|     |   | **2002**                 |   | **2001** |   | **2000** |   |
| Current  |   | $                        | 1,590  |   | $ | 7,830 |   | $ | 10,516 |   |
| Deferred |   | 9,530                    |   | 7,334 |   | 15,135 |   |
|     |   | $                        | 11,120 |   | $ | 15,164 |   | $ | 25,651 |   |

The provision forincome taxes differs from an amount computed at the statutory rates as follows:

|                                                    |   | **Year Ended  March 31** |   |
|---------------------------------------------------------|--------|--------------------------|--------|
|                                                    |   | **2002**                 |   | **2001** |   | **2000** |   |
| Provision at the  statutory rate                        |   | $                        | 9,730  |   | $ | 13,046 |   | $ | 22,446 |   |
| State income  taxes, net of federal  income tax benefit |   | 363                      |   | 583 |   | 1,965 |   |
| Non-deductible  expenses:                               |   |                     |   |   |   |   |   |
| Amortization of  goodwill                               |   | 1,458                    |   | 1,205 |   | 900 |   |
| Other                                                   |   | (431                     | )      | 330 |   | 340 |   |
|                                                    |   | $                        | 11,120 |   | $ | 15,164 |   | $ | 25,651 |   |

 

30

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Deferred income taxesreflect the future tax consequences of differences between the tax bases ofassets and liabilities and their financial reporting amounts as measured basedon enacted tax laws and regulations. The components of the net deferred incometax assets and liabilities are as follows:
|                                   |   | **March 31** |   |
|----------------------------------------|--------|--------------|--------|
|                                   |   | **2002**     |   | **2001** |   | **2000** |   |
| Deferred income  tax liabilities:      |   |         |   |   |   |   |   |
| Property and  equipment                |   | $            | 54,234 |   | $ | 44,683 |   | $ | 36,493 |   |
| Goodwill and  other                    |   | 12,103       |   | 10,283 |   | 10,687 |   |
| Total deferred  income tax liabilities |   | $            | 66,337 |   | $ | 54,966 |   | $ | 47,180 |   |
| Deferred income  tax assets:           |   |         |   |   |   |   |   |
| Accounts  receivable and inventory     |   | $            | 1,356  |   | $ | 1,379 |   | $ | 1,463 |   |
| Accruals not  currently deductible     |   | 3,797        |   | 2,644 |   | 2,108 |   |
| Total deferred  income tax assets      |   | $            | 5,153  |   | $ | 4,023 |   | $ | 3,571 |   |

**7.  COMMITMENTS ANDCONTINGENCIES**

The Company has enteredinto various noncancelable operating leases primarily related to facilities andequipment used in the ordinary course of its business.  The Company incurred total operating leaseexpense of $11,252, $10,202 and $9,574 for the years ended March 31, 2002,2001 and 2000.

The Company’s operatinglease obligations by fiscal year are as follows:

|                         |   | **2003** |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **Thereafter** |   |
|------------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------------|--------|
|                         |   |     |   |     |   |     |   |     |   |     |   |           |   |
| Operating lease  obligations |   | $        | 11,195 |     | $      | 8,773    |   | $        | 6,685  |     | $      | 4,817          |   | $ | 3,450 |   | $ | 6,402 |   |
|                              |        |          |        |          |        |          |        |          |        |          |        |                |        |  |  |  |  |  |  |

In connection withour assumption of obligations under outstanding industrial revenue bondsrelated to the acquisition of two printing businesses, which are reflected asdebt in the accompanying consolidated financial statements, the Company had twoletters of credit outstanding for a combined total of $5,488 as of March 31,2002. These letters of credit were issued pursuant to the terms of our BankCredit Facility, which expires in 2005, and we may be required to obtainreplacement letters of credit at that time.

The Company has enteredinto earnout agreements in connection with certain prior yearacquisitions.  If the acquired printingbusinesses generate operating profits in excess of pre-determined targets, theCompany may be obligated to issue additional shares of its common stock or makeadditional cash payments. As of March 31, 2002, the Company was contingentlyobligated through fiscal 2005 to issue up to 58,291 shares of its common stockand make additional cash payments of up to $10,887 for all periods in theaggregate.

From time to time, theCompany is subject to legal proceedings and claims that arise in the ordinarycourse of its business. Currently, there are no legal proceedings or claimspending against the Company that management believes will have a materialadverse effect upon the Company’s financial position or results of operations.

 

31

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**8.  STOCK OPTIONS**

Employees of the Companyand certain nonemployee members of the Company’s Board of Directors have beenor may be granted rights to purchase shares of the Company’s common stockpursuant to the Consolidated Graphics, Inc. Long-Term Incentive Plan (the“Plan”). Options granted pursuant to the Plan may either be incentive stockoptions within the meaning of Section 422 of the Internal Revenue Code of 1986,as amended, or non-qualified stock options. Options granted under the Plan areat a price not less than the market price of the stock at the date of grant andperiodically vest over a fixed period of up to ten years. Unvested optionsexpire upon termination of employment and vested options expire six monthsafter termination of employment. Otherwise, options expire after final vesting at the end of a fixedperiod not in excess of five years.  AtMarch 31, 2002, a total of 2,404,895 shares were reserved for issuance pursuantto the Plan, of which 444,094 shares were reserved for options which had notbeen granted.

The Company accounts forthe Plan under the provisions and related interpretations of AccountingPrinciples Board No. 25, “Accounting for Stock Issued to Employees.” Nocompensation expense or liability is recognized for such options in theaccompanying consolidated financial statements since all options were granted atthe fair market value of the stock at the date of grant.

The following table setsforth option transactions under the Plan:
|                          |   | **For the  Years Ended March 31** |   |
|-------------------------------|--------|-----------------------------------|--------|
|                          |   | **2002**                          |   | **2001** |   | **2000** |   |
|                          |   |                              |   | **Weighted** |   |   |   | **Weighted** |   |   |   | **Weighted** |   |
|                          |   |                              |   | **Average** |   |   |   | **Average** |   |   |   | **Average** |   |
|                          |   |                              |   | **Exercise** |   |   |   | **Exercise** |   |   |   | **Exercise** |   |
|                          |   | **Shares**                        |   | **Price** |   | **Shares** |   | **Price** |   | **Shares** |   | **Price** |   |
| Outstanding at  April 1  |   | 2,160,386                         |   | $ | 25.83 |   | 1,236,660 |   | $ | 38.36 |   | 1,363,927 |   | $ | 40.54 |   |
| Granted                       |   | 461,112                           |   | 19.19 |   | 1,116,069 |   | 11.18 |   | 205,641 |   | 24.32 |   |
| Exercised                     |   | (217,087                          | )      | 12.12 |   | (55,250 | ) | 7.62 |   | (83,766 | ) | 10.40 |   |
| Forfeited or  expired         |   | (443,610                          | )      | 29.61 |   | (137,093 | ) | 27.15 |   | (249,142 | ) | 47.58 |   |
|                          |   |                              |   |   |   |   |   |   |   |   |   |   |   |
| Outstanding at  March 31 |   | 1,960,801                         |   | 25.02 |   | 2,160,386 |   | 25.83 |   | 1,236,660 |   | 38.36 |   |
|                          |   |                              |   |   |   |   |   |   |   |   |   |   |   |
| Exercisable at  March 31      |   | 382,132                           |   | $ | 31.50 |   | 398,289 |   | $ | 29.50 |   | 323,891 |   | $ | 23.53 |   |

Had the Companyused the fair-value-based method of accounting for the Plan prescribed by SFASNo. 123, “Accounting for Stock-Based Compensation,” and charged compensationexpense against income over the vesting period based on the fair value ofoptions at the date of grant, net income and earnings per share would have beenreduced to the following pro forma amounts:
|                        |   | **For the  Years Ended March 31** |   |
|-----------------------------|--------|-----------------------------------|--------|
|                        |   | **2002**                          |   | **2001** |   | **2000** |   |
|                        |   | **As  Reported**                  |   | **Pro Forma** |   | **As  Reported** |   | **Pro Forma** |   | **As  Reported** |   | **Pro Forma** |   |
| Net income                  |   | $                                 | 16,680 |   | $ | 14,454 |   | $ | 22,111 |   | $ | 19,328 |   | $ | 38,479 |   | $ | 35,847 |   |
| Basic earnings  per share   |   | 1.27                              |   | 1.06 |   | 1.68 |   | 1.49 |   | 2.54 |   | 2.23 |   |
| Diluted earnings  per share |   | 1.25                              |   | 1.04 |   | 1.68 |   | 1.48 |   | 2.51 |   | 2.21 |   |
|                             |        |                                   |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

The pro formacompensation expense may not be representative of future amounts becauseoptions vest over several years and additional options may be granted in futureyears.

32

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The weighted-averagegrant date fair value of options granted during fiscal 2002, 2001 and 2000 was$10.96, $7.50 and $15.96. The weighted-average grant date fair value of optionswas determined by utilizing the Black-Scholes option-pricing model with thefollowing key assumptions:

|                             |   | **2002** |   | **2001** |   | **2000** |   |
|----------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Dividend yield                   |   | —   |   | —   |   | —   |   |
| Expected  volatility             |   | 41.3     | %      | 60.4     | %      | 74.9     | %      |
| Average  risk-free interest rate |   | 5.0      | %      | 5.8      | %      | 6.3      | %      |
| Average expected  life           |   | 9.0 yrs. |   | 7.6 yrs. |   | 5.0 yrs. |   |

The Black-Scholesmodel used by the Company to calculate the fair value of options granted, aswell as other currently accepted option valuation models, were developed toestimate the fair value of freely tradable, fully transferable options withoutvesting and/or trading restrictions, which significantly differ from theprovisions associated with the Company’s stock option awards. These models alsorequire highly subjective assumptions, including future stock price volatilityand expected time until exercise, which greatly affect the calculated values.Accordingly, management does not believe this model provides a reliable singlemeasure of the fair value of the Company’s stock option awards.

**9.  UNAUDITED QUARTERLY FINANCIAL DATA**

The following tablecontains selected unaudited quarterly financial data from the consolidatedincome statements for each quarter of fiscal 2002 and 2001. The Companybelieves this information reflects all normal recurring adjustments necessaryfor a fair presentation of the information for the periods presented. Theoperating results for any quarter are not necessarily indicative of results forany future period.
|                        |   | **1st  Quarter** |    | **2nd  Quarter** |   | **3rd  Quarter** |   | **4th  Quarter (1)** |    |
|-----------------------------|--------|------------------|---------|------------------|--------|------------------|--------|----------------------|---------|
| **Fiscal 2002:**            |   |             |    |             |   |             |   |                 |    |
| Sales                       |   | $                | 164,435 |             | $      | 160,157          |   | $                    | 153,750 |   | $ | 165,606 |   |
| Gross profit                |   | 43,832           |    | 41,878           |   | 39,375           |   | 41,716               |    |
| Net income                  |   | 5,080            |    | 4,300            |   | 3,574            |   | 3,726                |    |
| Basic earnings  per share   |   | .39              |    | .33              |   | .27              |   | .28                  |    |
| Diluted earnings  per share |   | .38              |    | .32              |   | .27              |   | .28                  |    |
| **Fiscal 2001:**            |   |             |    |             |   |             |   |                 |    |
| Sales                       |   | $                | 173,486 |             | $      | 172,503          |   | $                    | 171,211 |   | $ | 166,196 |   |
| Gross profit                |   | 49,428           |    | 49,259           |   | 45,617           |   | 44,934               |    |
| Net income                  |   | 8,036            |    | 7,914            |   | 5,496            |   | 665                  |    |
| Basic earnings  per share   |   | .59              |    | .61              |   | .42              |   | .05                  |    |
| Diluted earnings  per share |   | .59              |    | .61              |   | .42              |   | .05                  |    |

----

(1)    Reflects a special charge of $4,117 net oftax or $.31 per share in fiscal 2001. (See Note 2. Significant AccountingPolicies and Other Information — *Special Charge*).

Earnings per share arecomputed independently for each of the quarters presented; therefore, the sumof the quarterly earnings per share may not equal annual earnings per share.

 

33

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***Item 9***. ***Changes in and Disagreements with Accountants on Accounting andFinancial Disclosure***

 

None.

**PART III**

 

The informationcalled for by “Item 10. Directorsand Executive Officers of the Registrant“ (except for certain informationregarding executive officers which is included in Part I hereof as “Item 1.Business  — Executive Officers”), “Item 11. Executive Compensation,” “Item 12. Security Ownership ofCertain Beneficial Owners and Management,” and “Item 13. Certain Relationships andRelated Transactions,” is hereby incorporated by reference to the Company’sProxy Statement for its Annual Meeting of Shareholders (presently scheduled tobe held July 24, 2002) to be filed with the Securities and Exchange Commissionpursuant to Regulation 14A under the Securities Exchange Act of 1934, asamended.

 

**PART IV**

 

***Item 14*****.  *Exhibits, Financial Statement Schedules and Reportson Form 8-K***

 

(a)           **Index toFinancial Statements**

(a)(1)       **FinancialStatements (included under Item 8):**

The index to theFinancial Statements is included on page 18 of this report and is incorporatedherein by reference.

(a)(2)       **FinancialStatement Schedules:**

Report of IndependentPublic Accountants on Supplementary Data.

Schedule II — Valuationand Qualifying Accounts.

All other schedules havebeen omitted since the required information is not significant or is includedin the Financial Statements or notes thereto or is not applicable.

(a)(3)       **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) SEC File No. 0-24068,  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) 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 |   | —Amendment to Restated By-Laws of the Company dated  June 23, 1999 (Consolidated Graphics, Inc. Form 10-Q (June 30, 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, Exhibit 3.2).                                                                                                                                                                                                                                                                                            |
| *4   |   | —Specimen Common Stock Certificate (Consolidated  Graphics, Inc. Form 10-K (March 31, 1998) SEC File No. 0-24068, Exhibit 4.1).                                                                                                                                                                                                                                                                                                                                |
| *4.1 |   | —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 Right  Certificate and as Exhibit C the form of summary of Rights to Purchase Shares  (Consolidated Graphics, Inc. Form 8-K (December 15, 1999) SEC File No. 0-  24068, Exhibit 4.1). |
| *10  |   | —Credit Agreement among the Company and First Union  Bank as Administrative Agent and First Union  Securities, Inc. as Sole  Arranger and Book Runner and Bank One, N. A., as Documentation Agent, dated  as                                                                                                                                                                                                                                              |

 

 

34

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|   |   | of  December 11, 2000 (Consolidated Graphics,  Inc. Form 8-K (December 28, 2000) SEC File No. 001-  12631,   Exhibit 10).                                                                                                                                                                      |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1   |   | —First Amendment to Credit Agreement among the  Company and Wachovia Bank, N.A (formerly known as First Union National Bank)  as Administrative Agent, dated as of April 1, 2002.                                                                                                                                  |
| *10.2  |   | —1994 Consolidated Graphics, Inc. Long-Term  Incentive Plan (Consolidated Graphics, Inc. Registration Statement on Form  S-1 (Reg. No. 33-77468), Exhibit 10.14).                                                                                                                                                  |
| *10.3  |   | —First Amendment to Consolidated Graphics, Inc.  Long-Term Incentive Plan (reflecting an increase in the number of shares of  Common Stock authorized to be issued thereunder from 367,500 to 967,500)  (Consolidated Graphics, Inc. Registration Statement on Form S-8 (Reg. No.  333-66019), Exhibit 4.2).       |
| *10.4  |   | —Second Amendment to Consolidated Graphics, Inc.  Long-Term Incentive Plan, (reflecting an increase in the number of shares of  Common Stock authorized to be issued thereunder from 1,935,000 to 3,435,000)  (Consolidated Graphics, Inc. Registration Statement on Form S-8 (Reg. No.  333-66019), Exhibit 4.3). |
| 10.5   |   | —Employment Agreement between the Company and G.  Christopher Colville dated as of March 1, 2002.                                                                                                                                                                                                                  |
| 10.6   |   | —Change in Control Agreement between the Company and  G. Christopher Colville dated as of March 1, 2002.                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                    |   |   |   |   |   |   |
| 21     |   | —List of Subsidiaries.                                                                                                                                                                                                                                                                                             |
| 23.1   |   | —Consent of Arthur Andersen LLP.                                                                                                                                                                                                                                                                                   |
| 24     |   | —Powers of Attorney.                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                    |   |   |   |   |   |   |
| 99.1   |   | —Representation Letter of Arthur Andersen LLP.                                                                                                                                                                                                                                                                     |

 

* Incorporated byreference.

 

(b)           **Reports onForm 8-K**:

1) Form 8-K, filedJanuary 23, 2002, in connection with the press release announcing the Company’sfiscal 2002 third quarter results.

 

2) Form 8-K, filedFebruary 7, 2002, in connection with the press release announcing thecompletion of the acquisitions of American Lithographers and CarquevilleGraphics.

 

3) Form 8-K, filedMarch 4, 2002, in connection with the press release announcing that G.Christopher Colville has rejoined the company as Executive Vice President,Chief Financial Officer and Secretary.

 

4) Form 8-K, filedMarch 27, 2002, in connection with the press release announcing the Company’sacquisition of the assets of Regent Printing and Imaging.

 

5) Form 8-K, filedApril 24, 2002, in connection with the press release announcing the Company’sfiscal 2002 fourth quarter results.

 

35

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**REPORT OF INDEPENDENT PUBLICACCOUNTANTSON SUPPLEMENTARY DATA**

To the Shareholders of Consolidated Graphics, Inc.:

We have audited inaccordance with auditing standards generally accepted in the United States, theconsolidated financial statements of Consolidated Graphics, Inc. andsubsidiaries included in this Annual Report on Form 10-K and have issued ourreport thereon dated May 17, 2002. Our audits were made for the purpose offorming an opinion on the basic financial statements taken as a whole. TheValuation and Qualifying Accounts Schedule (Schedule II) listed in the index atItem 14(a)(2) is the responsibility of the Company’s management and ispresented for purposes of complying with the Securities and ExchangeCommission’s rules and is not part of the basic financial statements.Schedule II has been subjected to the auditing procedures applied in theaudits of the basic financial statements and, in our opinion, fairly states, inall material respects, the financial data required to be set forth therein inrelation to the basic financial statements taken as a whole.

ARTHUR ANDERSEN LLP

Houston, Texas

May 17, 2002

**SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS**
|                                |   |           |   |           |   | **Utilization**    |   |           |   |
|-------------------------------------|--------|----------------|--------|----------------|--------|--------------------|--------|----------------|--------|
|                                |   | **Balance at** |   | **Amount**     |   | **of Reserve**     |   | **Balance at** |   |
|                                |   | **Beginning**  |   | **Charged to** |   | **(Net of**        |   | **End of**     |   |
| **Description**                     |   | **of Year**    |   | **Expense**    |   | **Recoveries)(1)** |   | **Year**       |   |
| **Allowance for Doubtful Accounts** |   |           |   |           |   |               |   |           |   |
| Year Ended March  31, 2002          |   | $              | 2,698  |           | $      | 1,373              |   | $              | (2,224 | ) | $ | 1,847 |   |
| Year Ended March  31, 2001          |   | 2,763          |   | 1,467          |   | (1,532             | )      | 2,698          |   |
| Year Ended March  31, 2000          |   | 4,968          |   | —         |   | (2,205             | )      | 2,763          |   |
|                                     |        |                |        |                |        |                    |        |                |        |  |  |  |  |

----

Note (1):  Reflects areclassification of amounts for the year ended March 31, 2000.

 

36

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**SIGNATURES**

**Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunder duly authorized, in theCity of Houston, State of Texas on the 23rd day of May 2002.**
|   | CONSOLIDATED GRAPHICS, INC.                                                        |
|--------|------------------------------------------------------------------------------------|
|   |                                                                               |
| By:    | /s/:  JOE R. DAVIS                                                            |
|   | **Joe R. Davis   Chief Executive Officer and  Chairman of the Board of Directors** |

**Pursuant to the requirements of the Securities Exchange Actof 1934, this report has been signed by the following persons on behalf of theregistrant and in the capacities and on the dates indicated.**
|                               | **Signature**                                       |         |   | **Title** |   |   | **Date** |   |
|------------------------------------|-----------------------------------------------------|--------------|--------|-----------|--------|--------|----------|--------|
|                               |                                                |         |
| /s/:  JOE R. DAVIS            | Chief Executive                                     |         |
| **Joe R. Davis**                   | Officer and Director                                |         |
|                               | (Principal Executive Officer)                       | May 23, 2002 |
|                               |                                                |         |
| /s/:  G. CHRISTOPHER COLVILLE | Executive Vice  President,                          |         |
| **G. Christopher Colville**        | Chief Financial Officer  and Secretary              | May 23, 2002 |
|                               | (Principal Financial  and  Accounting Officer) |         |
|                               |                                                |         |
| LARRY J. ALEXANDER*                | Director                                            |         |
| **Larry J. Alexander**             |                                                |         |
|                               |                                                |         |
| BRADY F. CARRUTH*                  | Director                                            |         |
| **Brady F. Carruth**               |                                                |         |
|                               |                                                |         |
| CLARENCE C. COMER*                 | Director                                            |         |
| **Clarence C. Comer**              |                                                |         |
|                               |                                                |         |
| GARY L. FORBES*                    | Director                                            |         |
| **Gary L. Forbes**                 |                                                |         |
|                               |                                                |         |
| JAMES H. LIMMER*                   | Director                                            |         |
| **James H. Limmer**                |                                                |         |
|                               |                                                |         |
| HUGH N. WEST*                      | Director                                            |         |
| **Hugh N. West**                   |                                                |         |
|                               |                                                |         |
| * By: /s/:  JOE R. DAVIS      |                                                |         |
| **Joe R. Davis**                   |                                                | May 23, 2002 |
| Attorney-in-Fact                   |                                                |         |

 

 

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