**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

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**FORM 10-K**
| **(MARK ONE)**                                                                                                                                                                                                | ** **                                                                                          |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------|
| x                                                                                                                                                                                                             | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934**     |
|                                                                                                                                                                                                          | ** **                                                                                          |
| **FOR THE FISCAL YEAR ENDED MARCH 31, 2006**                                                                                                                                                             |
| **OR**                                                                                                                                                                                                        |
| o                                                                                                                                                                                                             | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|                                                                                                                                                                                                          | ** **                                                                                          |
| **FOR THE TRANSITION PERIOD  FROM              TO              ** |

**COMMISSION FILE NUMBER 001-12631**

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**CONSOLIDATEDGRAPHICS, INC.**

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITSCHARTER)
| **TEXAS**                                                  | ** ** | **76-0190827**               |
|-----------------------------------------------------------------|------------|-----------------------------------|
| (STATE OR OTHER JURISDICTION  OF INCORPORATION OR ORGANIZATION) | ** ** | (IRS EMPLOYER IDENTIFICATION NO.) |
|                                                            | ** ** |                              |
| **5858 WESTHEIMER, SUITE 200  HOUSTON, TEXAS**             | ** ** | **77057**                    |
| (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                        | ** ** | (ZIP CODE)                        |
|                                                            | ** ** |                              |
| **(713) 787-0977**                                         |
| (REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)       |

 
| Securities registered pursuant to Section 12(b) of the Act: | ** ** | ** **                        |
|------------------------------------------------------------------|------------|-----------------------------------|
| **COMMON STOCK, PAR VALUE $.01 PER SHARE**                       | ** ** | **NEW YORK STOCK EXCHANGE**  |
| (TITLE OF CLASS)                                                 | ** ** | (NAME OF EACH EXCHANGE            |
| ** **                                                       | ** ** | ON WHICH REGISTERED)              |
|                                                             | ** ** | ** **                        |
| Securities registered pursuant to Section 12(g) of the Act: | ** ** | ** **                        |
| **NONE**                                                         | ** ** | ** **                        |

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Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of  Securities Act.        Yes o No x

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) of the Act.                 Yes o No x

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past90 days. Yes x  No o

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-Kis not contained 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 Form10-K. x

Indicateby check mark whether the registrant is a large accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Largeaccelerated filer o                    Accelerated filer x                             Non-acceleratedfiler o

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Act). Yes o No x

 

Theaggregate market value of the voting stock held by nonaffiliates of theregistrant as of September 30, 2005 (last business day of ConsolidatedGraphics, Inc.’s most recently completed second fiscal quarter):

**COMMON STOCK, $.01 PAR VALUE—$505,490,775**

The number of shares outstanding of theregistrant’s common stock as of April 30, 2006:

**COMMON STOCK, $.01 PAR VALUE—13,729,027**

**DOCUMENTSINCORPORATED BY REFERENCE**

Portionsof the registrant’s Proxy Statement for the Annual Shareholders’ Meeting to beheld on or about August  3, 2006, to befiled with the Securities and Exchange Commission pursuant toRegulation 14A under the Securities Exchange Act of 1934, as amended, areincorporated by reference into Part III of this Form 10-K. Such ProxyStatement, except for the parts therein which have been specificallyincorporated by reference, shall not be deemed “filed” for the purposes of thisForm 10-K.

 

 

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**CONSOLIDATED GRAPHICS, INC.**

**FORM 10-K**

**FOR THE YEAR ENDED MARCH 31, 2006**

 

**INDEX**

 
|      | PART I                                                                                                              |   |
|-----------|---------------------------------------------------------------------------------------------------------------------|--------|
| Item 1.   | Business                                                                                                            | 3      |
| Item 1A.  | Risk Factors                                                                                                        | 9      |
| Item 2A   | Unresolved Staff  Comments                                                                                          | 11     |
| Item 2.   | Properties                                                                                                          | 11     |
| Item 3.   | Legal Proceedings                                                                                                   | 11     |
| Item 4.   | Submission of  Matters to a Vote of Security Holders                                                                | 11     |
|      |                                                                                                                |   |
|      | PART II                                                                                                             |   |
| Item 5.   | Market for  Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases  of Equity Securities | 12     |
| Item 6.   | Selected  Consolidated Financial Data                                                                               | 13     |
| Item 7.   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         | 14     |
| Item 7A.  | Quantitative  and Qualitative Disclosure About Market Risk                                                          | 22     |
| Item 8.   | Financial  Statements and Supplementary Data                                                                        | 23     |
| Item 9.   | Changes in and Disagreements with  Accountants on Accounting and Financial Disclosure                               | 42     |
| Item 9A.  | Controls and Procedures                                                                                             | 42     |
| Item 9B.  | Other Information                                                                                                   | 42     |
|      |                                                                                                                |   |
|      | PART  III                                                                                                           |   |
| Item  10. | Directors  and Executive Officers of the Registrant                                                                 | 42     |
| Item  11. | Executive  Compensation                                                                                             | 42     |
| Item  12. | Security  Ownership of Certain Beneficial Owners and Management and Related Shareholder  Matters                    | 42     |
| Item  13. | Certain  Relationships and Related Transactions                                                                     | 42     |
| Item  14. | Principal  Accountant Fees and Services                                                                             | 42     |
|      |                                                                                                                |   |
|      | PART IV                                                                                                             |   |
| Item 15.  | Exhibits and  Financial Statement Schedules                                                                         | 42     |
|      | Signatures                                                                                                          | 45     |
|      | Exhibit  Index                                                                                                      | 46     |

 

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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 consolidated subsidiaries, unless the context indicatesotherwise. Our fiscal year ends on March 31st.*

 

**Company Overview**

 

ConsolidatedGraphics is a leading national provider of commercial printing services and isrecognized as the largest sheetfed and digital commercial printing company inthe United States. Our corporate headquarters are in Houston, Texas, and wecurrently operate 67 printing businesses spanning 26 states. Each of ourprinting businesses has a well-established operating history, more than25 years in most cases. Complementing the printing services we provide, we also offer (i)state-of-the-art fulfillment services from 12 fulfillment centers located at ornear one of our printing businesses and (ii) proprietary digital technologysolutions and e-commerce capabilities from two technology hubs located at our corporateheadquarters and at one of our printing businesses in the Baltimore/WashingtonD.C. area.

 

Oursales are derived from providing commercial printing and print-relatedservices. These services consist of (i) traditional print services,including electronic prepress, digital and offset printing, finishing, storageand delivery of high-quality printed documents which are custom manufactured toour customers’ design specifications; (ii) fulfillment and mailingservices for such printed materials; and (iii) digital technologysolutions and e-commerce capabilities that enable our customers to moreefficiently procure and manage printed materials and/or design, procure,distribute, track and analyze results of printing-based marketing programs andactivities. Examples of the types of documents we print for our customersinclude high-quality, multi-color marketing materials, product and capabilitybrochures, point-of-purchase displays, direct mail pieces, shareholdercommunications, catalogs and training manuals.

 

Thescope and extent of services provided to our customers typically varies foreach individual order we receive, depending on customer-specific factorsincluding the intended uses for the printed materials. Furthermore, each of ourprinting businesses generally is capable of providing the complete range of ourservices to its customers.  Accordingly,we do not operate our business in a manner that differentiates among ourrespective capabilities and services for financial or management reporting purposes,rather each of our printing businesses define a distinct reporting unit.

 

TheCompany was incorporated in Texas in 1985. Our website address is *www.cgx.com*. We make available free of charge on or throughour website our Annual Reports on Form 10-K, Quarterly Reports onForm 10-Q, Current Reports on Form 8-K, and amendments to thosereports filed or furnished pursuant to Section 13(a) or 15(d) of theSecurities and Exchange Act of 1934, as amended (“Exchange Act”) and otherfilings as soon as reasonably practicable after we electronically file suchreports with or furnish such reports to the Securities and Exchange Commission(“SEC”). In addition, the current forms of our Corporate Governance Guidelines,Corporate Code of Ethics, and the charters of the respective committees of ourBoard of Directors, and contact information for our Presiding Director forpurposes of shareholder communications, are all available on our website. Thepublic may read and copy any materials filed by us with the SEC at the SEC’spublic reference room at 450 Fifth Street, NW, Washington D.C., 20549. Thepublic may obtain information about the operation of the SEC’s public referencerooms by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at*www.sec.gov* that containsreports, proxy and information statements and other information about issuerslike us that file electronically with the SEC.

 

**Industry Background**

 

Theprinting industry is one of the largest industries in the United States, withtotal annual sales estimated to be in excess of $165 billion. The printingindustry is comprised of many segments, including general commercial printing,newspapers, directories, book and magazine publishing, financial printing,business forms, greeting cards and stationery-type products. We operate in thegeneral commercial printing segment of the industry which generates over$50 billion in annual U.S. sales based on available industry data. Most ofthe general commercial printing businesses operating in the United States todayare privately-owned and individually generate less than $35 million inannual sales.

 

Aconsolidation trend in the general commercial printing industry emerged in the1990’s as owners of medium-sized printing businesses (those with annual salesof $2 million to $35 million) sought to evaluate exit strategies andaddress new industry challenges. In order to limit personal financial risk,increase personal financial liquidity, facilitate retirement goals or obtainaccess to additional resources that would support the continued growth of theirbusinesses, owners of these printing

 

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businessesbecame more willing to sell their companies to larger, better-capitalizedcompanies. We have been an industry-leader in the consolidation trend since ourinitial public offering in 1994. We believe that there are very few companiesthat currently possess the comparable objective, financial strength andmanagement expertise necessary to acquire such printing businesses.

 

Primaryindustry challenges faced by printing business owners include the need to makeon-going investment in new technology and equipment and downturns in theeconomy. For example, most printing design and prepress activities are nowaccomplished in a digital environment. Prepress computer equipment based on acomplete digital workflow, along with more sophisticated printing presses andfinishing equipment, is more efficient, operates faster and requires lesslabor. General commercial printing businesses must make substantial capitalinvestments over time in new equipment and technology in order to remaincompetitive in the industry but they may not have the financial resources to doso.

 

Becauseof the development and on-going advancement in digital technology, print buyershave increasingly sought shorter print runs, the ability to personalize moresophisticated marketing materials to strategically target certain markets ordemographics, and e-commerce solutions for executing and controlling the printprocurement and printed materials management processes. This factor has alsocontributed substantially to the burden on companies in our industry to investin new technology and equipment to remain competitive. Additionally, largecorporations have increasingly sought to achieve a reduction in operating costsby streamlining their print-related processes and limiting their number ofsuppliers. To accomplish these objectives, these large customers frequentlyseek to align themselves with printing companies that have a significantnational presence and offer a wide range of commercial print capabilities andservices, putting additional pressure on single-location, privately-heldprinting companies.

 

Ingeneral, changes in prevailing U.S. economic conditions significantly impactthe commercial printing industry. To the extent weakness in the U.S. economycauses local and national corporations to reduce their spending on advertisingand marketing materials, the demand for commercial printing services may be adverselyaffected. Further, compounding a potential decline in demand, competitivepricing pressures may occur and negatively impact the level of sales and profitmargins throughout the industry. Beginning around 2000, industry conditions experienced a significantdownturn due in part to overcapacity caused by a high rate of investment by theoverall industry in new technology and equipment, which was subsequentlyfollowed by a broad deterioration in the U.S. economy. We believe industryconditions have generally stabilized over the last 36 months as manycompetitors failed during the downturn, prior to the subsequent strengtheningin the U.S. economy.

 

**Competition**

 

Thecommercial printing industry remains highly fragmented and most customersprocure print services from local sources. Therefore, we compete primarily withlocally-based printing companies for most print projects. Most of ourcompetitors are privately-held, single location operations; however, somecompetitors are large corporations, both publicly and privately owned.

 

Themajor competitive factors in our business are:

 

•                                          Extent andquality of customer service, including ability to meet customer deadlines

•                                          Quality offinished materials

•                                          Cost structure

•                                          Financialstrength

 

Theability to provide high-quality customer service is often dependent onproduction and distribution capabilities, along with the availability ofequipment that is appropriate in size and function for a given project. Webelieve that our broad range of printing capabilities and services, along withour ability to use our national geographic footprint to serve customers on botha regional and national level, gives us a competitive advantage over smaller,local printing companies. Furthermore, the economic advantages created by ourpurchasing power, advanced technological capabilities and ability to utilizeexcess production capacity throughout our organization, enable our printingbusinesses to compete more effectively and provide faster turnaround times thanour competitors. Our strong financial position enables us to invest in newer,more efficient technology and equipment and to make strategic acquisitions,which expands our industry-leading position in terms of locations,capabilities, and services.

 

**Business Strategy**

 

Ouroverall business strategy is to be the market leader in the commercial printingindustry by combining the customer service and responsiveness of well-managed,local printing businesses with the competitive advantages provided by

 

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anational organization. Management at each of our printing businesses maintainsresponsibility for the day-to-day operations and profitability of theirbusiness, while continuing to strengthen and build new customer relationshipsin their respective markets. At the same time, our printing businesses aresupported by the management expertise, purchasing power, technologyinvestments, national sales and marketing and other operating advantages thatexist because they are part of a large national organization.

 

*Internal Sales Growth*—Our printing businesseshave numerous opportunities, individually and collectively, to achieveconsistent, long-term sales growth at a rate that exceeds industry averages.Our current initiatives to drive internal sales growth include:

 

•                                          Aggressivelypursuing new business opportunities and experienced sales professionals to gainmarket share and strengthen our competitive position going forward.

•                                          Continuing toinvest in new equipment and technology that enables us to provide increasinglyhigher levels of service and a broader range of capabilities.

•                                          Capitalizing onour national presence and wide range of capabilities to pursue sole orpreferred -source opportunities with national accounts.

 

*Disciplined Acquisition Program*—We areactively seeking to grow our national geographic footprint through additionalacquisitions of medium and large-sized general commercial printing businesses,typically ones that are well-managed, profitable and have a generally excellentreputation and quality customer base. We may also acquire smaller and/ordistressed printing businesses whose operations can be merged into one of ourexisting locations. This type of transaction is commonly referred to as a “tuck-in”acquisition.

 

*Cost Savings—*Because of our size andnational presence, we leverage our economies of scale to obtain preferentialpricing for paper and supplies used in the printing process and for newer, moreefficient equipment. We have various national purchasing contracts in placewith major suppliers and manufacturers. Our purchasing support staffcontinually monitor market conditions and negotiate pricing and othercontractual terms with these vendors to maximize the cost savings we achieveunder these agreements. In addition, we have centralized certain administrativeservices, such as human resources, treasury, tax and risk management, togenerate cost savings.

 

*Best Practices/Benchmarking—*Management teams at ourprinting businesses have access to strategic counsel and professionalmanagement techniques in such areas as planning, organization, and controls. Weprovide a forum for them to share their knowledge of technical processes andtheir best practices with one another through periodic group meetings attendedby top management and other key 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 the managementteams identify and respond to changes in operating trends.

 

*Leadership Development*—Our program to recruit,train and develop recent college graduates as printing sales and managementprofessionals is an integral component of our growth strategy. Participants inour Leadership Development Program follow a curriculum that provides them withtechnical industry knowledge, coupled with general business, managerial andbest practices training. 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 30,2006 we had 216 employees who were current participants in or graduates of thisprogram, 14 of whom serve as the president of the printing business at whichthey are employed.

 

**Printing Operations**

 

Wecurrently operate 67 printing businesses spanning 26 states, plus 12fulfillment centers and two technology hubs. Each printing business is operated as a wholly-owned subsidiary of ourCompany. We produce high-quality, custom-designed printed materials for a largebase of customers in a broad cross-section of industries, the majority ofwhich are located in the markets our printing businesses are based. In additionto providing a full range of prepress, digital and offset printing andfinishing services, our printing businesses offer fulfillment and mailingservices, as well as e-commerce software solutions and other print-related, value-addedservices.

 

*Commercial Printing Services*

 

Ingeneral, commercial printing includes developing printable content throughelectronic prepress services, reproducing images on paper using printingpresses and providing comprehensive finishing and delivery services. Wemaintain flexible production schedules in order to react swiftly to ourcustomers’ requirements. Many printing projects

 

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requirefast turnaround times, from conception through delivery, and our printingbusinesses must be able to absorb unexpected or short-notice demands for ourservices when called upon to do so. Consequently, our printing businesses donot generally operate at full capacity.

 

Ourelectronic prepress services include all of the steps necessary to preparemedia (photographs, artwork, and typed copy) for printing. This processinvolves converting the media into digital images, separating digital colorimages into process colors, and preparing a proof for customer approval. Mostof our printing businesses produce printing plates using “computer-to-plate”technology, whereby digitized text, graphic images and line art are transferreddirectly from digital files onto printing plates. In addition, our printingbusinesses have adopted recent advances in technology that enable delivery of ahigh-quality proof for customer approval electronically via the Internet,eliminating the cost of producing and delivering a proof, or multiple rounds ofproofs, in hard copy format. Computer-to-plate and remote proofing technologyreduces costs, shortens turnaround time and improves product quality. Wecontinually evaluate our existing electronic prepress capabilities and closelymonitor the development of newer technology that may be used to increaseproductivity and improve quality to better serve our customers.

 

Weprimarily use offset lithography to reproduce images on paper, which is theprocess that provides the highest quality, lowest cost printed materials formost run lengths. Short and medium-run commercial projects are generallyprinted on sheetfed presses, while longer-run projects are typically printed onweb presses.  Digital printing is asmaller but fast-growing component of the general commercial printing industrythat enables high quality, variable data customization (such as personalizationby name, relationship or interests) on very short to medium-run projects.

 

Ourprinting businesses primarily use sheetfed printing presses, which aregenerally capable of printing up to 16 pages of letter-sized finished producton a 28 by 40 inch sheet of paper with eight pages on each side (known as a16-page “signature”). Currently our printing businesses operate a total of 277sheetfed presses capable of simultaneously printing from one to eight colorsand are capable of running at speeds of up to 15,000 impressions an hour. Weoperate 38 half and full-size web printing presses which print up to 8 colorson a continuous roll of paper, print up to 32-page signatures on both sides ofthe paper at speeds of up to 50,000 impressions an hour and are also capable offolding, gluing and/or perforating the printed material in a single pass.  We also operate a total of 30 digitalpresses, including ten state-of-the-art Xerox iGen3 and four Kodak NexPressdigital color presses with variable data processing capability.  Our finishing services include cutting,folding, binding and other operations necessary to finish printed materialsaccording to customer specifications. Many of our printing businesses alsooffer specialty finishing capabilities, such as die-cutting, embossing, andfoil stamping.

 

*Print-related Services*

 

Byoffering innovative print-related capabilities and e-commerce solutions thatrespond to the needs of our customers, we believe that our Company has acompetitive advantage that will help us generate additional sales. We provide avariety of fulfillment services, which primarily include assembling, packaging,storing, and distributing printed promotional, educational, and training documentsand materials on behalf of our customers. Many corporations utilize ourfulfillment capabilities to help manage their inventories of printed materials,as well as to provide “just in time” assembly and delivery of printed materialsto end users. Orders for fulfillment services are commonly received viaproprietary, Internet-based print procurement and inventory management systemsmaintained by our printing businesses, as discussed below. Additionally, weprovide extensive mailing services for printed materials, particularlyconsumer-direct marketing, advertising and promotional pieces produced for ourcustomers.  We also offer a number ofoptions for sorting, packaging, inkjet labeling and shipping of printed materials.

 

Utilizingour expertise in digital technology, we offer print-related e-commercesolutions that enable our customers to (i) streamline their print procurementprocess and improve their ability to manage the printed materials they orderand (ii) design, procure, distribute, track and analyze results ofprinting-based marketing programs and activities.  Most of these e-commerce solutions areInternet-based, and like the printed materials we produce, are customized tothe specific needs of our customers. For marketing purposes, we refer to oure-commerce capabilities using the “CGXSolutions” trademark. The key e-commercecapabilities we offer include:

 

•              *On-linePrint Procurement**with on-demandcustomization*

-                    Enablescustomers to prepare, order, produce, and deliver highly personalized marketingmaterials

 

•                                          *On-demanddigital printing*

-                    Variable information printing and automatic personalization of printedmaterials

 

 

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•                                           *Onlinedigital asset library management*

-                    An internet-based solution providing comprehensive outsourcing of allimage-based customer marketing materials

 

•                                           *Onlineon-demand fulfillment*

-                    Allowscustomers to order previously printed warehoused materials and have themshipped anywhere in the world

 

•                                           *CrossMediacommunication solutions*

-                    A uniquecapability to enhance the creation, distribution, tracking and analysis ofmarketing programs and activities

 

•                                        *CGXMail List*

-                    A robust,remotely hosted data warehouse and solution

 

Othere-commerce and electronic media services we offer include Internet servicessuch as designing websites and programming interactive tools, CD-ROMdevelopment and production, foreign language translation services in over 100different languages, composition and typesetting,  and database management for customer-retentionprograms.

 

Adedicated CGXSolutions sales support team and project managers assist ourprinting businesses in identifying prospective customers and marketing oursuite of CGXSolutions capabilities and services. We maintain CGXSolutions staffto design and develop customized solutions in response to the specific needs ofeach customer. We also utilize support staff at each of our printing businesseswho are trained and able to serve our customers’ needs related to ourCGXSolutions capabilities and services. In fiscal 2006, 4% of our total sales were obtained through ourCGXSolutions sales channel, an increase of 61% from the prior year.  We expect this sales channel to be asignificant component of our overall future internal sales growth.

 

**Sales and Marketing**

 

Mostof our sales are generated by individual orders through commissioned salespersonnel. As of April 30, 2006 we employed 579 sales professionals. Inaddition to soliciting business from existing and prospective customers, oursales personnel act as liaisons between customers and our productiondepartments and also provide technical advice and assistance to customersthroughout the printing process.

 

Thenature of commercial printing requires a substantial amount of interaction withcustomers, including personal sales calls, reviews of color proofs and “presschecks” (customer approval of printed materials while being printed). Our salesprofessionals and customer service personnel maintain strict control of theprinting process for every job we produce as it moves through our scheduling,prepress, printing, and finishing operations.

 

Ourprimary marketing focus is on responding rapidly to customer requirements andproducing high-quality printed materials at competitive prices. Rapid responsivenessis essential because of the short lead time on most commercial printingprojects. Our printing operations are designed to maintain maximum flexibilityto meet customer needs, both on scheduled and short-notice bases. Each of ourprinting businesses generally seek projects that it believes will best utilizeits respective equipment and expertise; however, each has access to and isencouraged to offer to its customers the broad range of capabilities we offerthroughout our organization.

 

Wealso actively pursue opportunities to establish sole- or preferred-source,printing relationships with large corporations that are seeking to leveragetheir print spending and limit their number of commercial print providers. Werefer to these customers as “national accounts” and aggregate sales to thesecustomers as “national sales.” To better position ourselves to capitalize onfuture national account opportunities, as well as to provide more salestraining and support to our printing businesses, our organization includes anexecutive level team of sales and marketing professionals who play a keysupport role to the efforts of our printing businesses to identify and developnational account opportunities. In fiscal 2006, our national sales grew by 48%and represented 8% of our total sales. We expect national accounts to be asignificant component of our overall future internal sales growth.

 

 

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**Customers**

 

Ourdiverse customer base includes both national and local corporations operatingin a wide range of industries, as well as mutual fund companies, advertisingagencies, graphic design firms, catalog retailers and direct mail marketers.During fiscal 2006, we served over 22,000 customers, and our top ten customersaccounted for approximately 7% of total sales, with none representing more than1% individually. We believe that our large and diverse customer base, broadgeographic coverage of the United States and extensive range of printing andprint-related capabilities may lessen our exposure to economic slowdowns orother adverse consequences that may generally affect any particular industry orany particular 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 consolidated financial condition or results of operations may beadversely affected.

 

Ourcustomers generally are not contractually obligated to purchase printingservices from us.  Typically, we receivediscrete orders from our customers for each printing project or service.Consequently our continued engagement to provide additional commercial printingservices largely depends upon, among other things, the customer’s satisfactionwith the quality of services we provide. Although we do not depend on any onecustomer, group of customers or type of customer, our sales to many of ourlargest customers may fluctuate from year to year depending upon the number,size and complexity of projects they initiate and award to us.

 

**Suppliers**

 

Wepurchase raw materials used in the commercial printing process (such as paper,prepress supplies, ink, and boxes) from a number of national and localsuppliers. We are not materially dependent on any one supplier and the rawmaterials we utilize are generally readily available. We use a two-tieredapproach to purchasing in order to maximize the economies associated with oursize, while maintaining the local efficiencies and time sensitivity required tomeet customer demands. We negotiate master purchasing arrangements centrallywith major suppliers and manufacturers to obtain preferential pricing terms,and then communicate the terms of these arrangements to our individual printingbusinesses. Each printing business orders goods and services through ournational vendors as needed based on the terms set forth in our nationalpurchasing agreements or, when appropriate, makes purchases locally. 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 maximize the benefitsassociated with these agreements. None of our supplier contracts obligate us tominimum purchase requirements that would result in our having to purchaseexcessive quantities of goods or incur a financial penalty.

 

Weincur significant costs to purchase paper used in the printing process.However, fluctuations in paper pricing generally do not materially impact ouroperating margins because we typically quote, and subsequently purchase, paperfor each specific printing project we are awarded. As a result, any changes inpaper pricing are effectively passed through to customers by our printingbusinesses.  The majority of our papersupply is obtained through merchant distributors. There are a relatively fewnumber of merchants that are considered national in scope, with numerousregional organizations that serve one or more of our printing businesses. Wehave negotiated national purchasing agreements with certain mills, whichproduce paper, and certain merchants, who distribute 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 businesses from each mill and/or merchant.

 

Wealso purchase a large quantity of prepress supplies, consisting mainly ofplates and proofing materials. There are a limited number of key manufacturersof these materials, and we generally purchase prepress supplies from eithernational or regional distributors. We have obtained volume-related discountsand incentive arrangements from these manufacturers and receive periodicrebates based on the total amount of prepress supplies we purchase throughthese distributors.

 

**Employees**

 

Asof April 30, 2006, we had 5,005 employees throughout our organization. Ofthis total, approximately 400 were employed subject to the terms of variouscollective bargaining agreements. We believe that our relations with ouremployees are generally satisfactory.

 

 

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**Executive Officers**

 

*Joe R. Davis* has been the ChiefExecutive Officer and Chairman of the Board of Directors since he founded ourCompany in 1985. Prior to forming CGX, Mr. Davis was a Vice President fora division of International Paper Company. He also previously served as apartner of a national public accounting firm. Mr. Davis is 63 yearsold.

 

*G. Christopher Colville* has been Executive VicePresident, Chief Financial and Accounting Officer and Secretary sinceMarch 2002. From October 2000 to February 2002,Mr. Colville was Managing Director at Murphy Noell Capital, LLC, aninvestment banking firm. Mr. Colville held various executive positionswith CGX between 1994 and September 2000, including Executive VicePresident—Mergers and Acquisitions, Chief Financial Officer and Secretary.Mr. Colville is a certified public accountant and is 48 years old.

 

**Government Regulation and Environmental Matters**

 

Ourprinting businesses are subject to the environmental laws and regulations ofthe United States and the applicable state and local laws and regulationsconcerning emissions into the air, discharges into waterways and thegeneration, handling and disposal of waste materials. The commercial printingprocess generates substantial quantities of inks, solvents and other wasteproducts requiring disposal under the numerous federal, state and local lawsand regulations relating to the environment. Our printing businesses typicallyrecycle waste paper and contract for the removal of waste products. We believeour Company is in material compliance with all applicable air quality, wastedisposal and other environmental-related rules and regulations, as well as withother general employee health and safety laws and regulations. We do notanticipate any material future capital expenditures for environmental controlfacilities. There can be no assurance, however, that future changes inenvironmental laws and regulations will not have a material effect on ourconsolidated financial condition or results of operations.

 

***Item 1A. Risk Factors***

 

**               **Our consolidated results of operations, financial condition and cash flowscan be adversely affected by various risks. These risks include, but are not limited to, the principal factorslisted below. Additional risks not presently known to us or that we currentlydeem immaterial may also adversely affect our business operations. You shouldcarefully consider all of these risks.

 

**Fluctuationsin the costs of paper, ink, energy, postage and other raw materials mayadversely impact us*.***

 

Purchases of paper, ink,energy, postage and other raw materials and goods and services represent alarge portion of our costs. Any increases in the costs of these items will alsoincrease our costs.  Depending on thetiming and severity of such increases we may not be able to pass these costs onto customers through higher prices. Increases in the costs of these items mayalso adversely impact our customers’ demand for printing and related services.

 

**Thefinancial condition of our customers may deteriorate and could affect paymentof amounts owed to us.**

 

We grant credit to substantiallyall of our customers.  A decline infinancial condition across a significant component of our customer base couldhinder our ability to collect amounts owed by customers. In addition, such adecline could result in lower demand for our services.  The potential causes of such a declineinclude national or local economic downturns, the fact that many of ourcustomers are in highly-competitive industries or markets, and the impact ofregulatory actions.

 

**We maynot be able to improve our operating efficiencies rapidly enough to meet marketconditions.**

 

Because the markets inwhich we compete are highly-competitive, we must continue to improve ouroperating efficiency in order to maintain or improve our profitability.Although we have been able to improve efficiency and reduce costs in the past,there is no assurance that we will continue to do so in the future. Inaddition, the need to reduce ongoing operating costs may result in significantup-front costs to reduce workforce, close or consolidate facilities, or upgradeequipment and technology.

 

**We maybe unable to successfully integrate the operations of acquired businesses andmay not achieve the cost savings and increased revenues anticipated as a resultof these acquisitions.**

 

Achieving the anticipatedbenefits of acquisitions will depend in part upon our ability to integratethese businesses in an efficient and effective manner. The integration ofcompanies that have previously operated independently may result in significantchallenges, and we may be unable to accomplish the integration smoothly orsuccessfully. In particular, the coordination of geographically dispersedorganizations with differences in corporate cultures and managementphilosophies may increase the difficulties of integration. The integration ofacquired businesses may also require the dedication of

 

9

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significant management resources, which maytemporarily shift senior management’s attention from the other day-to-dayoperations of the Company.  Our strategyis, in part, predicated on our ability to realize cost savings and to increaserevenues through the acquisition of businesses that add to the breadth anddepth of our capabilities and services.

 

**We maybe unable to hire and retain talented employees, including senior management.**

 

Our success depends, inpart, on our general ability to attract, develop, motivate and retain highlyskilled employees. The loss of a significant number of our employees or theinability to attract, hire, develop, train and retain additional skilledpersonnel could have a material adverse effect on us. Although our operatingplatform consists of many locations with a wide geographic dispersion,individual locations may encounter strong competition from other employers forskilled labor. In addition, many members of our management have significantindustry experience and a long track record with us that is important to ourcontinued success.  If one or moremembers of our senior management team leave and we cannot replace them with asuitable candidate quickly, we could experience difficulty in managing ourbusiness properly, which could harm our business and results of operations.

 

**Costs toprovide health care and certain other benefits to our employees may increase.**

 

We provide health careand certain other benefits to our employees. In recent years, costs for healthcare have increased more rapidly than general inflation in the U.S. economy. Ifthis trend in health care costs continues, our cost to provide such benefitscould increase, adversely impacting our business and results of operations.

 

**Declinesin general economic conditions or acts of war and terrorism may adverselyimpact our business.**

 

Demand for printingservices is highly correlated with general economic conditions. A decline inU.S. economic conditions may, therefore, adversely impact our business andresults of operations. Because such outcomes are difficult to predict, theindustry may experience excess capacity resulting in declines in prices for ourservices. The overall business climate may also be impacted by domestic andforeign wars or acts of terrorism.  Suchacts may have sudden and unpredictable adverse impacts on demand for ourservices.

 

**Thehighly competitive market for our services may create adverse pricingpressures.**

 

The markets for ourservices are highly fragmented and we have a large number of competitors,resulting in a highly competitive market and increasing the risk of adversepricing pressures in various circumstances outside of our control, includingeconomic downturns.

 

**Declinein preference for using or receiving printed materials in lieu of alternativemediums may adversely affect our business.**

 

In addition totraditional non-print based marketing and advertising channels, onlinedistribution and hosting of media content may gain broad acceptance orpreferred status relative to printed materials among consumers generally andhave an adverse affect on our business. Consumer acceptance of electronic delivery as well as the extent thatconsumers may have previously replaced traditional reading of print materialwith online hosted media contents is uncertain. We have no ability to predict the likelihood that this may occur.

 

**Changesin the rules and regulations to which we are subject may increase our costs.**

 

We are subject tonumerous rules and regulations, including, but not limited to, environmentaland health and welfare benefit regulations as well as those associated withbeing a public company. These rules and regulations may be changed by local,state or federal governments or agencies. Changes in these regulations may result in a significant increase in ourcompliance costs. Compliance with changes in rules and regulations couldrequire increases to our workforce, increased cost for services, compensationand benefits, or investments in new or upgraded equipment.

 

**Advancesin technology may reduce barriers to entry and may result in increasedcompetition.**

 

Future advances intechnology could result in certain cost and logistics barriers to entry in thegeneral commercial printing industry to be reduced or eliminated, which mayresult in an adverse affect on our business and results of operations. Currentcost barriers include the relatively large scale of equipment and real estaterequired to effectively compete in our industry, while logistics barriersinclude shipping, customer service and other costs that have historicallyprecluded competitors not having a local presence from competing effectivelyfrom outside of a particular market, particularly foreign-based competitors.

 

**We relyon our information technology infrastructure and our management informationsystems for many enterprise-critical functions. If our information systems fail to adequately perform these functions orif we experience an interruption in their operation, our business and resultsof operations could be adversely affected.**

 

10

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The efficient operationof our business depends on our information technology infrastructure and ourmanagement information systems.  We relyon our management information systems to effectively manage accounting andfinancial functions, job entry, tracking and cost accumulation and certainpurchasing functions.  Our informationtechnology infrastructure underlies both our management information systems andour CGXSolutions capabilities.  Thefailure of our information technology infrastructure and/or our managementinformation systems to perform could severely disrupt our business andadversely affect our results of operation. In addition, our information technology infrastructure and/or ourmanagement information systems are vulnerable to damage or interruption fromnatural or man-made disasters, terrorist attacks, computer viruses or hackers,power loss, or other computer systems, Internet telecommunications or datanetwork failures.  Any such interruptioncould adversely affect our business and results of operations.

 

***Item 1B. Unresolved Staff Comments***

 

**               **The Company hasno unresolved written comments from the SEC staff regarding its periodic orcurrent reports under the Exchange Act.

 

***Item 2. Properties***

 

Asof April 30, 2006, our principal facilities consisted primarily ofapproximately 4.4 million square feet that contain production, storage andoffice space, of which approximately 1.6 million square feet is owned andapproximately 2.8 million square feet is leased. Certain of the leasedfacilities, totaling approximately 258,000 square feet, are leased from formerowners and current employees of four of our printing businesses. All otherleases are with unaffiliated third parties. We also lease approximately 23,000square feet of office space in Houston from an unaffiliated third party for ourcorporate headquarters. We believe our facilities are generally suitable fortheir present and intended purposes and are adequate for our current level ofoperations.

 

***Item 3. Legal Proceedings***

 

Fromtime to time, we are involved in litigation relating to claims arising out ofour operations in the normal course of business. We maintain insurance coverageagainst certain potential claims in amounts that we believe to be adequate.Currently, we are not aware of any legal proceedings or claims pending againstthe Company that our management believes will have a material adverse effect onour consolidated financial condition or results of operations.

 

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

 

None.

 

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**PART II**

 

***Item 5. Market for Registrant’s Common Equity, Related ShareholderMatters and Issuer Purchases of Equity Securities***

 

Ourcommon stock is traded on the New York Stock Exchange under the symbol “CGX.”The following table presents the quarterly high and low sales prices for ourcommon stock for each of the last two fiscal years:

 
| **Fiscal 2006—Quarter Ended:** | ** ** | **High** | ** ** | **Low** | ** ** |
|-------------------------------------|------------|----------|------------|---------|------------|
|                                |       |     |       |    |       |
| June 30, 2005                  |       | 52.06    |       | 40.51   |       |
| September 30, 2005             |       | 45.41    |       | 37.16   |       |
| December 31, 2005              |       | 52.08    |       | 36.06   |       |
| March 31, 2006                 |       | 53.76    |       | 46.34   |       |

 
| **Fiscal 2005—Quarter Ended:** | ** ** | **High** | ** ** | **Low** | ** ** |
|-------------------------------------|------------|----------|------------|---------|------------|
|                                |       |     |       |    |       |
| June 30, 2004                  |       | 44.75    |       | 36.70   |       |
| September 30, 2004             |       | 44.50    |       | 38.55   |       |
| December 31, 2004              |       | 47.90    |       | 39.75   |       |
| March 31, 2005                 |       | 53.25    |       | 40.66   |       |

 

Asof April 30, 2006, there were 99 shareholders of record representingapproximately 1,500 beneficial owners.

 

Wehad a common stock share repurchase program in effect through March 31, 2006,providing for the repurchase of up to one million shares of our common stock,not to exceed $40.0 million in the aggregate, in open-market or block purchasetransactions.  We repurchased 170,300shares of our common stock for a total cost of $6.7 million during fiscal 2006.During the fourth quarter of fiscal 2006 no repurchases under this program weremade.  We subsequently announced in May2006 that our Board of Directors had authorized a new one year common stockrepurchase program, providing for the repurchase of up to an aggregate of $68.3million of our common stock in open-market or block purchase transactions.

 

We have not previously paid any cash dividends onour common stock. We presently intend to retain all of our earnings to financethe continuing development of our business and do not anticipate paying cashdividends on our common stock in the foreseeable future. Any future payment ofcash dividends will depend upon the financial condition, capital requirementsand earnings of our Company, as well as other factors our Board of Directorsmay deem relevant. In addition, our primary bank credit facility containsrestrictions that limit our ability to pay dividends above certain levels.

 

The only equity compensation plan we maintain is theConsolidated Graphics, Inc. Long-Term Incentive Plan, as amended (the “Plan”),which has been approved by our shareholders. Under this Plan, employees of ourCompany and members of our Board of Directors have been, or may be, grantedoptions to purchase shares of our common stock at a price not less than themarket price of the stock at the date of grant, restricted stock unit awards orother forms of equity-based compensation. As of March 31, 2006, there were1,924,459 shares of common stock issuable upon exercise of options outstandingunder the Plan at a weighted-average exercise price of $33.88, and a total of403,679 shares of our common stock were reserved for issuance pursuant tooptions which had not yet been granted.

 

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***Item 6. Selected ConsolidatedFinancial Data***

The following selected consolidated financial datashould be read in conjunction with the audited consolidated financialstatements of our Company and the notes thereto included in *Item 8. FinancialStatements and Supplementary Data:*

 
| ** **                                              | ** ** | **Year Ended March 31**              | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                              | ** ** | **2006**                                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                              | ** ** | **(In thousands, except per share data)** | ** ** |
| **Income Statement Data**                               |       |                                      |       |   |   |   |   |   |   |   |   |
| Sales                                                   |       | $                                         | 879,023    |   | $ | 779,016 |   | $ | 708,060 |   | $ | 710,279 |   | $ | 643,948 |   |
| Cost of sales                                           |       | 661,560                                   |       | 586,615 |   | 540,080 |   | 540,586 |   | 477,147 |   |
| Gross profit                                            |       | 217,463                                   |       | 192,401 |   | 167,980 |   | 169,693 |   | 166,801 |   |
| Selling expenses                                        |       | 91,266                                    |       | 81,456 |   | 76,189 |   | 78,008 |   | 69,091 |   |
| General and administrative  expenses                    |       | 58,993                                    |       | 54,116 |   | 51,887 |   | 52,252 |   | 54,766 |   |
| Goodwill impairment(1)                                  |       | —                                    |       | — |   | — |   | 38,033 |   | — |   |
| Operating income                                        |       | 67,204                                    |       | 56,829 |   | 39,904 |   | 1,400 |   | 42,944 |   |
| Interest expense, net                                   |       | 5,514                                     |       | 5,107 |   | 7,216 |   | 10,055 |   | 15,144 |   |
| Income (loss) before income taxes and accounting change |       | 61,690                                    |       | 51,722 |   | 32,688 |   | (8,655 | ) | 27,800 |   |
| Income taxes                                            |       | 23,192                                    |       | 19,000 |   | 12,691 |   | 4,284 |   | 11,120 |   |
| Income (loss) before accounting change                  |       | 38,498                                    |       | 32,722 |   | 19,997 |   | (12,939 | ) | 16,680 |   |
| Cumulative effect of  accounting change, net of tax(2)  |       | —                                    |       | — |   | — |   | 74,376 |   | — |   |
| Net income (loss)                                       |       | $                                         | 38,498     |   | $ | 32,722 |   | $ | 19,997 |   | $ | (87,315 | ) | $ | 16,680 |   |
|                                                    |       |                                      |       |   |   |   |   |   |   |   |   |
| Earnings (loss) per share                               |       |                                      |       |   |   |   |   |   |   |   |   |
| Basic                                                   |       | $                                         | 2.81       |   | $ | 2.40 |   | $ | 1.49 |   | $ | (6.58 | ) | $ | 1.27 |   |
| Diluted                                                 |       | $                                         | 2.73       |   | $ | 2.31 |   | $ | 1.44 |   | $ | (6.58 | ) | $ | 1.25 |   |
|                                                         |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                              | ** ** | **March 31**  | ** ** |
|-----------------------------------------|------------|--------------------|------------|
| ** **                              | ** ** | **2006**           | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                              | ** ** | **(In thousands)** | ** ** |
| **Balance Sheet Data**                  |       |               |       |   |   |   |   |   |   |   |   |
| Working capital                         |       | $                  | 67,474     |   | $ | 64,225 |   | $ | 47,488 |   | $ | 53,747 |   | $ | 85,036 |   |
| Property and equipment,  net            |       | 297,308            |       | 297,600 |   | 272,801 |   | 278,134 |   | 293,831 |   |
| Total assets                            |       | 611,313            |       | 590,229 |   | 526,209 |   | 512,583 |   | 676,733 |   |
| Long-term debt, net of  current portion |       | 90,678             |       | 111,895 |   | 98,265 |   | 143,167 |   | 213,860 |   |
| Total shareholders’ equity         |       | 318,946            |       | 283,332 |   | 245,612 |   | 221,223 |   | 306,598 |   |
|                                         |            |                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)                                  Reflects theimpairment of goodwill value as of March 31, 2003 under Statement ofFinancial Accounting Standards (“SFAS”) No. 142, *Goodwill and Other Intangible Assets.*

(2)                                  Reflects atransitional impairment charge pursuant to our adoption of SFAS No. 142 asof April 1, 2002.

 

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***Item 7. Management’s Discussion andAnalysis of Financial Condition and Results of Operations***

 

*The following discussion containsforward-looking information. Readers are cautioned that such informationinvolves known and unknown risks and uncertainties, including those created bygeneral market conditions, competition and the possibility that events mayoccur beyond our control, which may limit our ability to maintain or improveour operating results or financial condition or acquire additional printing businesses.Our expectations regarding future sales and profitability assume, among otherthings, stability in the economy and reasonable growth in the demand for ourproducts, the continued availability of raw materials at affordable prices andretention of our key management and operating personnel. In addition, ourexpectations regarding future acquisitions assume, among other things, ourability to identify new acquisition opportunities and our ability to negotiateand finance such acquisitions on acceptable terms, as well as the ability tosuccessfully absorb and manage such acquisitions. Although management believesthat the assumptions underlying the forward-looking statements are reasonable,any of the assumptions could be inaccurate and there can be no assurance thatany or all of the assumptions underlying the forward-looking statements willprove to be accurate. The inclusion of such information should not be regardedas a representation by us or any other person that our objectives and planswill be achieved. We expressly disclaim any duty to provide updates to theseforward-looking statements, assumptions or other factors after the date thisForm 10-K was filed to reflect the occurrence of events or changes incircumstances or expectations.*

**Overview**

OurCompany is a leading national provider of commercial printing services with 67printing businesses spanning 26 states and is recognized as the largestsheetfed and digital commercial printing company in the United States.  Complementing the printing services weprovide, we also offer (i) state-of-the-art fulfillment services from 12fulfillment centers located at or near one of our printing businesses and (ii)proprietary digital technology solutions and e-commerce capabilities from twotechnology hubs located at our corporate headquarters and at one of ourprinting businesses in the Baltimore/Washington D.C. area.

 

 We arefocused on adding value to our printing businesses by providing the financialand operational strengths, management support and technological advantagesassociated with a national organization. Our strategy currently includes thefollowing initiatives to generate sales and profit growth:

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

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

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

•                                          *BestPractices/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.

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

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

Our sales are derived from commercial printingservices. These services consist of (i) traditional print services,including electronic prepress, printing, finishing, storage and delivery ofhigh-quality materials which are custom manufactured to our customers’ designspecifications; (ii) fulfillment and mailing services for such printedmaterials; and (iii) digital technology solutions and e-commercecapabilities that enable our customers to more efficiently procure and manageprinted materials and/or design, procure, distribute, track and analyze resultsof printing-based marketing programs and activities.  Examples of the types of documents we printfor our customers include high-quality, multi-color marketing materials,product and capability brochures, point-of-purchase displays, direct mailpieces, shareholder communications, catalogs and training manuals.

 

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Most of our sales are generated by individual ordersthrough commissioned sales personnel. We recognize revenue from these orderswhen we deliver the ordered goods and services. To a large extent, continuedengagement of our Company by our customers for successive businessopportunities depends upon the customers’ satisfaction with the quality ofservices we provide. As such, it is difficult for us to predict with any highdegree of certainty the number, size, and profitability of printing servicesthat we expect to provide for more than a few weeks in advance.

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

 

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

 

**Results of Operations**

 

Thefollowing table sets forth our Company’s historical consolidated incomestatements and certain percentage relationships for the periods indicated:

 
| ** ** | ** ** | ** ** | ** ** |
|------------|------------|------------|------------|

 
| ** **                          | ** ** | **Year Ended March 31** | ** ** | **As a Percentage of Sales  Year Ended March 31** | ** ** |
|-------------------------------------|------------|-------------------------|------------|---------------------------------------------------|------------|
| ** **                          | ** ** | **2006**                | ** ** | **2005**                                          | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                          | ** ** | ** **              | ** ** | **(In millions)**                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales                               |       | $                       | 879.0      |                                              | $          | 779.0 |   | $ | 708.1 |   | 100.0 | % | 100.0 | % | 100.0 | % |
| Cost of sales                       |       | 661.5                   |       | 586.6                                             |       | 540.1 |   | 75.3 |   | 75.3 |   | 76.3 |   |
| Gross profit                        |       | 217.5                   |       | 192.4                                             |       | 168.0 |   | 24.7 |   | 24.7 |   | 23.7 |   |
| Selling expenses                    |       | 91.3                    |       | 81.5                                              |       | 76.2 |   | 10.4 |   | 10.5 |   | 10.8 |   |
| General and administrative expenses |       | 59.0                    |       | 54.1                                              |       | 51.9 |   | 6.7 |   | 6.9 |   | 7.3 |   |
| Operating income                    |       | 67.2                    |       | 56.8                                              |       | 39.9 |   | 7.6 |   | 7.3 |   | 5.6 |   |
| Interest expense, net               |       | 5.5                     |       | 5.1                                               |       | 7.2 |   | 0.6 |   | 0.7 |   | 1.0 |   |
| Income before taxes                 |       | 61.7                    |       | 51.7                                              |       | 32.7 |   | 7.0 |   | 6.6 |   | 4.6 |   |
| Income taxes                        |       | 23.2                    |       | 19.0                                              |       | 12.7 |   | 2.6 |   | 2.4 |   | 1.8 |   |
| Net income                          |       | $                       | 38.5       |                                              | $          | 32.7 |   | $ | 20.0 |   | 4.4 | % | 4.2 | % | 2.8 | % |

 

Oursales and expenses during the periods shown were impacted by the acquisition offour printing businesses (two as tuck-ins) in fiscal 2006, eight printingbusinesses in fiscal 2005 and six printing businesses (five as tuck-ins) infiscal 2004. In accordance with the purchase method of accounting, ourconsolidated income statements reflect sales and expenses of acquiredbusinesses only for post-acquisition periods. Accordingly, acquisitions affectour financial results in any one year compared to the prior year by thefull-year impact of prior year acquisitions (as compared to the partial impactin the prior year) and the partial-year impact of current year acquisitions,and is referred to below as “incremental impact of acquisitions.”

 

*Analysis of Consolidated Income Statements for Fiscal 2006as Compared to Fiscal 2005*

 

Salesfor fiscal 2006 increased $100.0 million, or 13%, to $879.0 millionfrom $779.0 million in fiscal 2005. After taking into account the $18.0 millionsales impact in fiscal 2005 from bi-annual election-related printing, ourfiscal 2006 sales increase was $118.0 million, or 16%, reflecting $111.2million from the incremental impact of acquisitions and $6.8 million frominternal growth.  Our strategic salesinitiatives had a positive impact on revenues attributable to both theincremental impact of acquisitions and internal growth.  Individually, national sales were up 48% in2006 and accounted for 8% of total sales, sales attributable to ourCGXSolutions sales channel (including $4.0 million to national accounts) wereup 61% in 2006 and accounted for 4% of total sales, and sales attributable tocross-selling were up 17% in 2006 and accounted for 6% of total sales.

 

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Grossprofit increased by $25.1 million in fiscal 2006 to $217.5 million from $192.4million in fiscal 2005 and gross profit margin for fiscal 2006 remainedconstant at 24.7% compared to fiscal 2005, as no significant relativefluctuations in the components of cost of sales occurred.

 

Sellingexpenses for fiscal 2006 increased 12% to $91.3 million from $81.5 million infiscal 2005. The increase is directly attributable to the increased saleslevels noted above. As a percentage of sales, selling expenses for fiscal 2006decreased slightly to 10.4% from 10.5% in fiscal 2005, primarily reflectingleverage on the fixed components of our sales and marketing expenses.

 

Generaland administrative expenses for fiscal 2006 increased 9% to $59.0 million from$54.1 million in fiscal 2005, due principally to the incremental impact ofacquisitions, including the incremental amortization of identifiable intangibleassets totaling $1.2 million. Our continuing efforts to control costs, togetherwith the relatively fixed nature of corporate overhead, enabled us to offsetthe incremental amortization expense and gain additional leverage on our sales,resulting in a decrease in our general and administrative expenses as apercentage of sales to 6.7% from 6.9% in fiscal 2005.

 

Netinterest expense for fiscal 2006 increased 8% to $5.5 million from$5.1 million in fiscal 2005. Although total debt outstanding declined by$18.0 million or 15% in fiscal 2006, fluctuations in our levels of debtoutstanding during the year and a prevailing environment of rising interestrates resulted in the increase in interest expense compared to 2005.

 

Weprovided for income taxes of $23.2 million for fiscal 2006, as compared to$19.0 million in fiscal 2005, reflecting an effective tax rate of 37.6% ascompared to an effective tax rate of 36.7% in fiscal 2005, primarily reflectingthe impact of marginally higher state income tax rates.

 

*Analysis of Consolidated Income Statements for Fiscal 2005as Compared to Fiscal 2004*

 

Salesfor fiscal 2005 increased $70.9 million, or 10%, to $779.0 millionfrom $708.1 million in fiscal 2004. The $70.9 million revenue increase isattributable to $22.6 million from the incremental impact of acquisitions and$48.3 million from internal sales growth. The $48.3 million of internal salesgrowth equates to a 6.8% year-over-year internal growth rate. Approximatelyone-third of the internal sales growth was attributable to election-related printing,which recurs generally on a bi-annual basis. Excluding election-relatedprinting, internal sales growth for the year was 4.3%, which includes growth innational sales of $8.8 million or 22%. As a whole, national sales accounted for6% of revenue in both 2005 and 2004. The remainder of our 2005 internal growthis attributable to incremental cross-selling activities among our locations, aswell as improved economic and industry conditions, in our opinion based ongeneral and anecdotal information available to us.

 

Grossprofit increased by $24.4 million in fiscal 2005 to $192.4 millionand gross profit margin for fiscal 2005 increased to 24.7% from 23.7% in fiscal2004. Approximately $16.8 million of the increase is attributable to theincreased sales levels discussed above, including the incremental impact ofacquisitions. The remaining increase in gross profit of $7.6 million isattributable to margin leverage achieved primarily as a result of improvedindustry conditions.

 

Sellingexpenses for fiscal 2005 increased 7% to $81.5 million from$76.2 million in fiscal 2004. The increase is directly attributable to theincreased sales levels noted above. As a percentage of sales, selling expensesfor fiscal 2005 decreased slightly to 10.5% from 10.8% in fiscal 2004,primarily because the generation of the incremental election-related revenuediscussed above generally does not result in the same level of sales expense asdoes the generation of other revenues.

 

Generaland administrative expenses for fiscal 2005 increased to $54.1 million from$51.9 million in fiscal 2004, due principally to the incremental impact ofacquisitions. In fiscal 2005, our internal sales growth (including thebi-annual impact of election related printing) combined with continuing effortsto control costs enabled us to gain additional leverage on our sales, resultingin a decrease in our general and administrative expenses as a percentage ofsales to 6.9% from 7.3% in fiscal 2004.

 

Netinterest expense for fiscal 2005 decreased 29% to $5.1 million from$7.2 million in fiscal 2004. Interest expense for fiscal 2004 includes a$.4 million charge to write-off certain deferred financing costs, asrequired by generally accepted accounting principles in connection with anamendment to our bank credit facility in November 2003.  The remaining decrease in interest expense isprincipally due to the application of our cash flow from operations in excessof our cash needs for capital expenditures and acquisitions to reduce theaggregate borrowings outstanding under our various bank credit facilities andother long-term debt obligations throughout most of the year.

 

 

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Weprovided for income taxes of $19.0 million for fiscal 2005, as compared to$12.7 million in fiscal 2004, reflecting an effective tax rate of 36.7% ascompared to an effective tax rate of 38.8% in fiscal 2004. Due to the increasein pretax earnings, non-deductible expenses were a smaller percentage of pretaxearnings, thus lowering our effective tax rate.

 

**Liquidityand Capital Resources**

 

*Sources and Uses of Cash*

 

Ourhistorical sources of cash have primarily been cash provided by operations orborrowings under our various bank credit facilities. Our historical uses ofcash have been for acquisitions of printing businesses, capital expenditures,payment of principal and interest on outstanding debt obligations andrepurchases of our common stock. Supplemental information pertaining to ourhistorical sources and uses of cash is presented as follows and should be readin conjunction with our consolidated statements of cash flows and the notesthereto included in *Item8. Financial Statements and Supplementary Data:*

 
| ** **                                                        | ** ** | **Year Ended March 31** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                        | ** ** | **2006**                     | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                        | ** ** | **(In millions)**            | ** ** |
|                                                              |       |                         |       |   |   |   |   |
| Net cash provided by  operating activities                        |       | $                            | 79.2       |   | $ | 75.2 |   | $ | 79.3 |   |
| Acquisitions of businesses                                        |       | (28.0                        | )          | (49.0 | ) | (11.4 | ) |
| Capital expenditures, net  of proceeds from asset dispositions(1) |       | (13.9                        | )          | (13.8 | ) | (10.0 | ) |
| Net proceeds (payments)  under bank credit facilities             |       | (27.1                        | )          | 34.6 |   | (53.5 | ) |
| Net payments on term  equipment notes and other debt              |       | (8.8                         | )          | (53.2 | ) | (6.3 | ) |
| Payments to repurchase and  retire common stock                   |       | (6.7                         | )          | — |   | — |   |
|                                                                   |            |                              |            |  |  |  |  |  |  |  |

 

(1)                                  Excludescapital expenditures of $16.5 million in fiscal 2006, $13.3 million in fiscal2005 and $7.5 million in fiscal 2004, which were directly financed and/oraccrued as a current liability.

 

Additionally,our cash position, working capital and debt obligations as of March 31,2006, 2005 and 2004 are shown below and should be read in conjunction with ourconsolidated balance sheets and the notes thereto included in *Item 8. FinancialStatements and Supplementary Data:*

 
| ** **                                               | ** ** | **March 31** | ** ** |
|----------------------------------------------------------|------------|-------------------|------------|
| ** **                                               | ** ** | **2006**          | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                               | ** ** | **(In millions)** | ** ** |
|                                                     |       |              |       |   |   |   |   |
| Cash and cash equivalents                                |       | $                 | 5.0        |   | $ | 7.8 |   | $ | 10.5 |   |
| Working capital, inclusive  of cash and cash equivalents |       | 67.5              |       | 64.2 |   | 47.5 |   |
| Total debt obligations                                   |       | 101.5             |       | 119.5 |   | 111.5 |   |
|                                                          |            |                   |            |  |  |  |  |  |  |  |

 

Netcash provided by operating activities increased by $4.0 million for fiscal 2006compared to fiscal 2005.  This increasewas the result of (i) a $5.6 million increase in net cash provided by operatingactivities excluding working capital changes and net of effects ofacquisitions, which principally resulted from the $5.8 million increase in netincome and (ii) a decrease in working capital changes of $1.6 million.  As with prior periods, we have continued ourstrategy to further strengthen our financial position by primarily usingavailable cash flow in excess of our requirements for acquisitions and capitalexpenditures to make payments on our outstanding debt obligations.  In addition, as discussed below, the Companypaid $6.7 million to repurchase and retire 170,300 shares of its common stockduring fiscal 2006.

 

Webelieve that our cash flow provided by operations will be adequate to cover ourfiscal 2007 working capital needs, debt service requirements and plannedcapital expenditures to the extent such items are known or are reasonablydeterminable based on current business and market conditions. However, we mayelect to finance certain of our capital expenditure requirements throughborrowings under our primary bank credit facility or the issuance of additionalterm equipment notes.

 

 

17

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Weintend to continue pursuing acquisition opportunities at prices we believe arereasonable based upon market conditions. However, we cannot accurately predictthe timing, size and success of our acquisition efforts or our associatedpotential capital commitments. There can be no assurance that we will be ableto acquire additional printing businesses on terms acceptable to us.

 

We expect to fundacquisitions in the foreseeable future through cash flow provided by operationsand/or additional borrowings. We have in the past issued our common stock aspurchase price consideration in some of our acquisitions.  Although we may issue common stock for suchpurposes in the future, we do not expect to do so in the near term because ofour current financial liquidity and ability to utilize available cash or makeadditional borrowings instead of issuing common stock.  The extent to which we will be willing orable to use our common stock in the future to make acquisitions will depend onits market value from time to time and the willingness of potential sellers toaccept it as full or partial payment for the acquisition price, as well as ourfinancial liquidity and available financing options.

 

In May 2004, ourBoard of Directors approved a common stock share repurchase program thatexpired March 31, 2006.  During fiscal 2006, we repurchased 170,300shares of our common stock at a total cost of $6.7 million pursuant to thisprogram. In May 2006, the Board of Directors approved a new common stock sharerepurchase program that will expire in May 2007 for repurchases of our commonstock not to exceed an aggregate of $68.3 million in open-market or blockpurchase transactions.  We expect to fundany repurchases under the program from cash flow provided by operations oradditional borrowings under our primary bank credit facility.  The amount and timing of any purchases willdepend upon a number of factors, including our liquidity and potentialalternative uses of our capital resources, the price, and availability of ourshares and general market conditions. There can be no assurance that we willdetermine to repurchase any more of our common stock, and if so, whether wewill be able to do so on terms acceptable to us.

 

*Debt Obligations*

Ourprimary bank credit facility (as amended and restated, the “Credit Agreement”)is composed of a $150.0 million revolving credit facility that will maturein July 2007. At March 31, 2006, borrowings outstanding under theCredit Agreement were $35.0 million and accrued interest at a weighted averagerate of 6.65%.

 

Theproceeds from borrowings under the Credit Agreement can be used to repaycertain indebtedness, finance certain acquisitions, provide for working capitaland general corporate purposes and, subject to certain restrictions, repurchaseour common stock. Borrowings outstanding under the Credit Agreement are securedby substantially all of our assets other than real estate and certain equipmentsubject to term equipment notes and other financings. Borrowings under theCredit Agreement accrue interest, at our option, at either (1) the LondonInterbank Offered Rate (LIBOR) plus a margin of 1.25% to 2.00%, or (2) analternate base rate (based upon the greater of the agent bank’s prime lendingrate or the Federal Funds effective rate plus .50%) plus a margin of up to .75%.We are also required to pay an annual commitment fee ranging from .275% to..375% on available but unused amounts under the Credit Agreement. The interestrate margin and the commitment fee are based upon certain financial performancemeasures as set forth in the Credit Agreement and are redetermined quarterly.At March 31, 2006, the applicable LIBOR interest rate margin was 1.25% andthe applicable commitment fee was .275%.

 

Weare subject to certain covenants and restrictions and we must meet certain financialtests as defined in the Credit Agreement. We were in compliance with thesecovenants and financial tests at March 31, 2006. In the event that we wereunable to remain in compliance with these covenants and financial tests in thefuture, our lenders would have the right to declare us in default with respectto such obligations, and consequently, certain of our other debt obligations,including substantially all of our term equipment notes, would be deemed toalso be in default. All debt obligations in default would be required to bere-classified as a current liability. In the event that we were to be unable toobtain a waiver, re-negotiate or re-finance these obligations, a materialadverse effect on our ability to conduct our operations in the ordinary courselikely would be the result. Based on our view of current market and businessconditions and our expectations regarding our future operating results and cashflows, we believe that we will be able to remain in compliance with thesecovenants and financial tests in the foreseeable future.

 

Inaddition to the Credit Agreement, we maintain two auxiliary revolving creditfacilities (each an “Auxiliary Bank Facility” and collectively the “AuxiliaryBank Facilities”) with commercial banks. Each Auxiliary Bank Facility isunsecured and has a maximum borrowing capacity of $5.0 million. Onefacility expires in November 2006 and the other facility expires inDecember 2006. At March 31, 2006, borrowings outstanding under theAuxiliary Bank Facilities totaled $8.1 million and accrued interest at aweighted average rate of 6.10%. Because we currently have the ability torefinance the borrowings

 

 

18

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outstandingunder the Auxiliary Bank Facilities expiring in November and December2006, and currently plan to do so, such borrowings are classified as long-termdebt in our consolidated balance sheet at March 31, 2006.  The Auxiliary Bank Facilities cross-defaultto the covenants and restrictions set forth in the Credit Agreement.

 

Ourterm equipment notes consist primarily of notes payable pursuant to financingagreements between us and various lenders (the “Lender Notes”) and between usand the finance affiliate of a printing equipment manufacturer (the “EquipmentNotes”). At March 31, 2006, outstanding borrowings under the Lender Notestotaled $29.6 million and accrued interest at a weighted average rate of5.56%. The Lender Notes provide for fixed monthly principal payments plusinterest (at fixed rates) for defined periods of up to eight years from thedate of issuance, and are secured by certain equipment of the Company. AtMarch 31, 2006, outstanding borrowings under the Equipment Notes totaled$11.7 million and accrued interest at a weighted average rate of 5.93%. TheEquipment Notes provide for fixed payments of principal and interest (at fixedrates) for defined periods of up to ten years from the date of issuance and aresecured by equipment which was concurrently purchased from the manufacturer. AtMarch 31, 2006, the remaining balance of term equipment notes totaling$2.7 million primarily consists of various secured debt obligationsassumed by us in connection with certain prior year acquisitions. We are notsubject to any significant financial covenants in connection with any of theterm equipment notes. The Credit Agreement places certain limitations on theamount of additional term note obligations we may incur in the future; however,we do not anticipate that these limitations will restrict our ability to makeany of our planned 2007 capital expenditures.

 

Our other debt obligations consist of a mortgage of$4.8 million, a promissory note totaling $1.8 million, industrial revenuebonds totaling $7.0 million and various other debt obligations totaling$0.8 million. We do not have any significant financial covenants orrestrictions associated with these other debt obligations.

 

**Contractual Obligations and Other Commitments**

The maturity of contractual obligations is asfollows (in millions):
| ** **                   | ** ** | **Total** | ** ** | **Less Than 1 Year** | ** ** | **1 - 3  Years** | ** ** | **3 - 5 Years** | ** ** | **More Than 5 Years** | ** ** |
|------------------------------|------------|-----------|------------|---------------------------|------------|------------------|------------|----------------------|------------|----------------------------|------------|
|                         |       |      |       |                      |       |             |       |                 |       |                       |       |
| Debt obligations             |       | $         | 101.5      |                      | $          | 18.9             |       | $                    | 55.2       |                       | $          | 18.3 |   | $ | 9.1 |   |
| Operating lease  obligations |       | 60.7      |       | 16.0                      |       | 23.1             |       | 12.7                 |       | 8.9                        |       |
|                              |            |           |            |                           |            |                  |            |                      |            |                            |            |  |  |  |  |  |

----

(1)          Aswe have both the ability and intent to refinance the $8.1 million outstandingat March 31, 2006 under the Auxiliary Bank Facilities that are due to expire inNovember and December 2006, such borrowings are classified as long-termdebt in our consolidated balance sheet at March 31, 2006, but for purposesof this table only, are included as a current debt obligation in the less thanone year category.

 

*Operating leases*—We have entered intovarious noncancelable operating leases primarily related to facilities andequipment used in the ordinary course of our business.

 

*Letters of credit*—In connection with ourassumption of obligations under outstanding industrial revenue bonds, which arereflected as debt in the accompanying consolidated financial statements, andour assumption of certain contingent liabilities related to certain of ouracquisitions, we had letters of credit outstanding as of March 31, 2006totaling $9.0 million. In addition, we had one other letter of credit totaling$0.1 million outstanding as of March 31, 2006. All of these letters of creditwere issued pursuant to the terms of our Credit Agreement, which expires inJuly 2007, and we will be required to obtain replacement letters of creditat that time.

 

*Insurance programs*— We maintain third-partyinsurance coverage in amounts and against risks we believe are reasonable underour circumstances. We are self-insured for most workers’ compensation claimsand for a significant component of our group health insurance programs. Forthese exposures, we accrue expected loss amounts which are determined using acombination of our historical loss experience and subjective assessment of ourfuture loss exposure, together with advice provided by administrators andconsulting actuaries. The estimates of expected loss amounts are subject touncertainties arising from various sources, including changes in claimsreporting patterns, claims settlement patterns, judicial decisions, legislationand economic conditions, which could result in an increase or decrease inaccrued costs in future periods for claim matters which occurred in a priorperiod. Although we believe that the accrued estimated loss amounts arereasonable under the circumstances, significant differences related to theitems noted above could materially affect our risk exposure, insurance obligations,and future expense.

 

19

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**Critical Accounting Policies**

 

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

 

*Receivables, net of valuation allowance —*Accountsreceivable at March 31, 2006 were $146.3 million, net of a $2.5 millionallowance for doubtful accounts. The valuation allowance was determined basedupon our evaluation of known requirements, aging of receivables, historicalexperience and the current economic environment. While we believe we haveappropriately considered known or expected outcomes, our customers’ ability topay their obligations could be adversely affected by contraction in the economyor other factors beyond our control. Changes in our estimates of collectibilitycould have a material adverse affect on our consolidated financial condition orresults of operations.

 

*Goodwill**—***We evaluate thecarrying value of our goodwill as of March 31st of each year, or at anytime that management becomes aware of an indication of impairment. Ourevaluation is based on certain data estimated by management to be indicators offuture cash flows at each of our facilities. Estimating future cash flowsrequires judgments regarding future economic conditions, demand for servicesand pricing. Our evaluation also makes use of estimates of market multiples ofcash flow at which transactions could be completed in the current market. Ifour estimates of future cash flows or market multiples prove to be materiallyinaccurate, an impairment charge could be necessary in future periods.

 

*Impairment of long-lived assets* — We evaluate long-livedassets, including property, plant and equipment and intangible assets otherthan goodwill whenever events or changes in conditions indicate that thecarrying value may not be recoverable. The evaluation requires us to estimatefuture undiscounted cash flows associated with an asset or group of assets. Ifthe cost of the asset or group of assets cannot be recovered by theseundiscounted cash flows, then an impairment may exist. Estimating future cashflows requires judgments regarding future economic conditions, demand forservices and pricing. Although we believe our estimates are reasonable,significant differences in the actual performance of the asset or group ofassets may materially affect our asset values and require an impairment chargein future periods.

 

*Insurance liabilities* — We are self-insured forthe majority of our workers’ compensation and group health insurance costs.Insurance claims liabilities have been accrued using a combination of ourhistorical loss experience and subjective assessment of our future lossexposure, together with advice provided by administrators and consultingactuaries. The estimates of expected loss amounts are subject to uncertaintiesarising from various sources, including changes in claims reporting patterns,claims settlement patterns, judicial decisions, legislation and economicconditions, which could result in an increase or decrease in accrued costs infuture periods for claims matters which occurred in a prior period.

 

*Accounting for income taxes* — As part of the process ofpreparing our consolidated financial statements, we are required to estimateour income taxes. This process involves estimating our actual current taxexposure, together with assessing temporary differences resulting fromdiffering treatment of items for tax and financial reporting purposes. The taxeffects of these temporary differences are recorded as deferred tax assets ordeferred tax liabilities. We must then assess the likelihood that our deferredtax assets will be recovered from future taxable income, and to the extent webelieve that recovery is not likely, we must establish a valuation allowance.Significant judgment is required in determining our provision for income taxes,our deferred tax assets and liabilities and any valuation allowance recordedagainst our net deferred tax assets. Additionally, we establish reserves when,despite our belief that our tax return positions are fully supportable, webelieve that certain positions are likely to be challenged and that we may notsucceed. We adjust these reserves in light of changing facts and circumstances.Our effective tax rate includes the impact of reserve provisions and changes toreserves that we consider appropriate.

 

*Accounting for acquisitions* — The allocations ofpurchase price to acquired assets and liabilities are initially based onestimates of fair value and are prospectively revised if and when additionalinformation we are waiting for at the time of the initial allocationsconcerning certain asset and liability valuations is obtained, provided thatsuch information is received no later than one year after the date ofacquisition.  In addition, we retain anindependent third-party valuation firm to assist in the identification,valuation and determination of useful lives of identifiable intangible assetsin connection with our acquisitions.

 

 

20

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**New Accounting Pronouncements**

 

SFAS No. 151, *Inventory Costs,* was issued inNovember 2004 and amends Chapter 4 of Accounting Research Bulletin (“ARB”)No. 43. SFAS No. 151 is required to be applied to all inventory costs occurring in fiscal years beginning afterJune 15, 2005.  Our adoptionof SFAS No. 151 effective as of April 1, 2006 is not expected to have amaterial impact on our consolidated financial condition or results ofoperations.

 

SFASNo. 123(R), *Share-Based Payment*, was issued inDecember 2004 and replaces SFAS No. 123, and supersedes AccountingPrinciples Board (“APB”) Opinion No. 25. SFAS No. 123(R) will require compensation costs related to share-basedpayment transactions to be recognized in our consolidated financial statements.With limited exceptions, the amount of compensation cost will be measured basedon the grant date fair value of the equity or liability instruments issued. Inaddition, liability awards will be remeasured each reporting period.Compensation costs will be recognized over the period that an employee providesservices in exchange for the award.  SFASNo. 123(R) allows companies to adopt its provisions using either of thefollowing transition alternatives:

 

(i)                                     The modified prospectivemethod, which results in the recognition of compensation expense usingSFAS 123(R) for all share-based awards granted or modified after theeffective date and the recognition of compensation expense using SFAS 123for all previously granted share-based awards that remain unvested at theeffective date; or

 

(ii)                                  The modified retrospectivemethod, which results in applying the modified prospective method and restatingprior periods by recognizing the financial statement impact of share-basedpayments in a manner consistent with the pro forma disclosure requirements ofSFAS No. 123. The modified retrospective method may be applied to allprior periods presented or previously reported interim periods of the year ofadoption.

 

We adopted SFAS No.123(R) on April 1, 2006 using the modified prospective method. The impact ofour adoption of SFAS No. 123(R) is expected to be materially consistent withthe pro forma expense, as adjusted for future vesting occurrences, grants,cancellations and exercises of stock options, which we have disclosed inaccordance with SFAS No. 123 in the Notes to Consolidated Financial Statementsincluded herein in Item 8. Financial Statements and Supplemental Data.

 

SFAS No. 154, *Accounting Changes and Error Corrections,*wasissued in May 2005 and replaces APBOpinion No. 20 and SFAS No. 3. SFAS No. 154 requires retrospective application for voluntary changes inaccounting principle in most instances and is required to be applied to all accounting changes made in fiscal years beginning afterDecember 15, 2005.  Ouradoption of SFAS No. 154 effective as of April 1, 2006 is not expected to havea material impact on our consolidated financial condition or results ofoperations.

 

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***Item 7A. Quantitative and QualitativeDisclosure About Market Risk***

 

Marketrisk generally means the risk that losses may occur in the value of certainfinancial instruments as a result of movements in interest rates, foreigncurrency exchange rates and commodity prices. We do not currently hold orutilize derivative financial instruments that could expose us to market risk.However, we are exposed to market risk for changes in interest rates relatedprimarily to our debt obligations, which as of March 31, 2006 includeborrowings under our bank credit facilities totaling $43.1 million,various term equipment notes totaling $44.0 million and other debtobligations totaling $14.4 million. A 1% increase in the interest rate on our fixed and variable rate debtwould change our interest expense by approximately $1.0 million on an annualbasis. The following table sets forth the average interest rate for thescheduled maturities of our debt obligations as of March 31, 2006 ($ inmillions):

 
| ** **              | ** ** | **2007**   | ** ** | **2008**   | ** ** | **2009**   | ** ** | **2010**   | ** ** | **2011**   | ** ** | **Thereafter** | ** ** | **Total**  | ** ** | **Estimated  Fair Value At March 31,  2006** | ** ** |
|-------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|------------|------------|---------------------------------------------------|------------|
| **Fixed Rate Debt:**    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** | ** **                                        | ** ** |
| Amount                  |       | $          | 9.1        |       | $          | 8.7        |       | $          | 8.9        |       | $          | 10.5           |       | $          | 6.5        |                                              | $          | 5.9 | ** ** | **$** | **49.6** | ** ** | **$** | **41.3** | ** ** |
| Average   interest rate |       | 4.64       | %          | 4.30       | %          | 4.35       | %          | 2.57       | %          | 4.20       | %          | 2.08           | **%**      | **5.26**   | **%**      | ** **                                        | ** ** |
| **Variable Rate Debt:** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** | ** **                                        | ** ** |
| Amount                  |       | $          | 9.8        | (1)   | $          | 36.7       |       | $          | 0.9        |       | $          | 0.9            |       | $          | 0.4        |                                              | $          | 3.2 | ** ** | **$** | **51.9** | ** ** | **$** | **51.9** | ** ** |
| Average   interest rate |       | 5.77       | %          | 6.53       | %          | 3.46       | %          | 3.33       | %          | 3.33       | %          | 3.33           | **%**      | **6.06**   | **%**      | ** **                                        | ** ** |

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(1)                       Asthe Company has both the ability and intent to refinance the $8.1 millionoutstanding at March 31, 2006 under the Auxiliary Bank Facilities, which isvariable rate debt and is due to expire in November andDecember 2006, such borrowings are classified as long-term debt in ourconsolidated balance sheet at March 31, 2006, but for purposes of thistable only, are included as a current debt obligation for 2007.

 

22

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

 

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 
| Management’s  Annual Report on Internal Control Over Financial Reporting                                 | 24     |
|---------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                          |   |
| Reports of  Independent Registered Public Accounting Firm                                                     | 25     |
|                                                                                                          |   |
| Consolidated Balance  Sheets at March 31, 2006 and 2005                                                  | 27     |
|                                                                                                          |   |
| Consolidated Income  Statements for the Years Ended March 31, 2006, 2005 and 2004                        | 28     |
|                                                                                                          |   |
| Consolidated  Statements of Shareholders’ Equity for the Years Ended March 31, 2006,  2005 and 2004 | 29     |
|                                                                                                          |   |
| Consolidated Statements of Cash Flows  for the Years Ended March 31, 2006, 2005 and 2004                 | 30     |
|                                                                                                          |   |
| Notes to  Consolidated Financial Statements                                                                   | 31     |

 

 

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**MANAGEMENT’SANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING**

 

Management is responsible for establishing andmaintaining adequate internal control over financial reporting, as such term isdefined in Securities Exchange Act Rule 13a-15(f) or 15d-15(f). Ourinternal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. Our internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the Company;(2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that receipts and expenditures ofthe Company are being made only in accordance with authorizations of managementand directors of the Company; and (3) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use, ordisposition of the Company’s assets that could have a material effect on theconsolidated financial statements.

 

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

 

The scope of management’s assessment of theeffectiveness of our internal control over financial reporting includes theCompany’s consolidated subsidiaries, except for certain businesses acquired bythe Company on November 18, 2005 and February 8, 2006, respectively, aspermitted by the rules and regulations of the Securities and ExchangeCommission.  The Company’s consolidatednet sales for the year ended March 31, 2006 were $879.0 million, of whichthe certain businesses acquired by the Company on November 18, 2005 andFebruary 8, 2006, respectively, represented $5.2 million.  The Company’s consolidated total assets as ofMarch 31, 2006 were $611.3 million, of which the certain businessesacquired by the Company on November 18, 2005 and February 8, 2006,respectively, represented $27.3 million.

 

Management assessed the effectiveness of our internalcontrol over financial reporting based on the framework in *InternalControl* — *Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO). Based on our evaluation under the framework in *InternalControl — Integrated Framework*, our management concluded that ourinternal control over financial reporting was effective as of March 31,2006. Our management’s assessment of the effectiveness of our internal controlover financial reporting as of March 31, 2006 has been audited by KPMGLLP, an independent registered public accounting firm, as stated in theirreport which is included on page 26.

 

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**Report ofIndependent Registered Public Accounting Firm**

 

TheBoard of Directors and Stockholders

ConsolidatedGraphics, Inc.:

 

Wehave audited the accompanying consolidated balance sheets of ConsolidatedGraphics, Inc. and subsidiaries as of March 31, 2006 and 2005, andthe related consolidated statements of income, shareholders’ equity, and cashflows for each of the years in the three-year period ended March 31, 2006.These consolidated financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan 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 asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of ConsolidatedGraphics, Inc. and subsidiaries as of March 31, 2006 and 2005, and theresults of their operations and their cash flows for each of the years in thethree-year period ended March 31, 2006, in conformity with U.S. generallyaccepted accounting principles.

 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness of ConsolidatedGraphics, Inc.’s internal control over financial reporting as of March 31,2006, based on criteria established in *InternalControl-Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO), and our report datedJune 7, 2006 expressed an unqualified opinion on management’s assessmentof, and the effective operation of, internal control over financial reporting.

 

 
| /s/  KPMG LLP      |   |
|--------------------|--------|
|               |
| Houston,  Texas    |
| June 7,  2006 |

 

 

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**Report of Independent Registered Public Accounting Firm**

 

TheBoard of Directors and Stockholders

ConsolidatedGraphics, Inc.:

 

Wehave audited management’s assessment, included in the accompanying *Management’s Annual Report on Internal Control OverFinancial Reporting,*that Consolidated Graphics, Inc. (the “Company”)maintained effective internal control over financial reporting as ofMarch 31, 2006, based on criteria established in *Internal Control—Integrated Framework*issuedby the Committee of Sponsoring Organizations of the Treadway Commission (COSO).The Company’s management is responsible for maintaining effective internalcontrol over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting. Our responsibility is to express anopinion on management’s assessment and an opinion on the effectiveness of theCompany’s internal control over financial reporting based on our audit.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internalcontrol over financial reporting, evaluating management’s assessment, testingand evaluating the design and operating effectiveness of internal control, andperforming such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinion.

 

Acompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that(1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assetsof the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

In ouropinion, management’s assessment that the Company maintained effective internalcontrol over financial reporting as of March 31, 2006, is fairly stated,in all material respects, based on criteria established in *Internal Control—Integrated Framework*issuedby COSO. Also, in our opinion, the Company maintained, in all materialrespects, effective internal control over financial reporting as ofMarch 31, 2006, based on criteria established in *Internal Control—Integrated Framework*issuedby COSO.

 

TheCompany acquired certain businesses on November 18, 2005 and February 8, 2006,and management excluded from its assessment of the effectiveness of itsinternal control over financial reporting as of March 31, 2006, the certainbusinesses’ internal control over financial reporting associated with the totalassets of $27.3 million, and total revenues of $5.2 million included in theconsolidated financial statements of the Company and subsidiaries as of and forthe year ended March 31, 2006.  Our audit of internal control overfinancial reporting of the Company also excluded an evaluation of the internalcontrol over financial reporting of the certain businesses.

 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheets ofthe Company and its subsidiaries as of March 31, 2006 and 2005, and therelated consolidated statements of income, shareholders’ equity, and cash flowsfor each of the years in the three-year period ended March 31, 2006, andour report dated June 7, 2006, expressed an unqualified opinion on thoseconsolidated financial statements.

 

 
| /s/  KPMG LLP     |   |
|-------------------|--------|
|              |
| Houston,  Texas   |
| June 7, 2006 |

 

26

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**CONSOLIDATED GRAPHICS, INC.**

**CONSOLIDATEDBALANCE SHEETS**

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

 
| ** **                                                                                                          | ** ** | **March 31** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                                                                          | ** ** | **2006**          | ** ** | **2005** | ** ** |
|                                                                                                                |       |              |       |   |   |
| ASSETS                                                                                                              |       |              |       |   |   |
| CURRENT ASSETS                                                                                                      |       |              |       |   |   |
| Cash and cash equivalents                                                                                           |       | $                 | 4,993      |   | $ | 7,752 |   |
| Accounts receivable, net                                                                                            |       | 146,296           |       | 136,824 |   |
| Inventories                                                                                                         |       | 38,430            |       | 37,149 |   |
| Prepaid expenses                                                                                                    |       | 6,799             |       | 5,913 |   |
| Deferred income taxes                                                                                               |       | 8,356             |       | 7,843 |   |
| Total current assets                                                                                                |       | 204,874           |       | 195,481 |   |
| PROPERTY AND EQUIPMENT,  net                                                                                        |       | 297,308           |       | 297,600 |   |
| GOODWILL AND INTANGIBLES,  net                                                                                      |       | 100,035           |       | 85,755 |   |
| OTHER ASSETS                                                                                                        |       | 9,096             |       | 11,393 |   |
|                                                                                                                |       | $                 | 611,313    |   | $ | 590,229 |   |
|                                                                                                                |       |              |       |   |   |
| LIABILITIES  AND SHAREHOLDERS’ EQUITY                                                                          |       |              |       |   |   |
| CURRENT LIABILITIES                                                                                                 |       |              |       |   |   |
| Current portion of long-term debt                                                                                   |       | $                 | 10,821     |   | $ | 7,595 |   |
| Accounts payable                                                                                                    |       | 54,666            |       | 46,705 |   |
| Accrued liabilities                                                                                                 |       | 68,436            |       | 75,143 |   |
| Income taxes payable                                                                                                |       | 3,477             |       | 1,813 |   |
| Total current liabilities                                                                                           |       | 137,400           |       | 131,256 |   |
| LONG-TERM DEBT, net of  current portion                                                                             |       | 90,678            |       | 111,895 |   |
| DEFERRED INCOME TAXES                                                                                               |       | 64,289            |       | 63,746 |   |
| COMMITMENTS AND  CONTINGENCIES                                                                                      |       |              |       |   |   |
| SHAREHOLDERS’ EQUITY                                                                                           |       |              |       |   |   |
| Common stock, $.01 par value; 100,000,000 shares authorized;  13,714,121 and 13,760,042 issued and outstanding |       | 138               |       | 138 |   |
| Additional paid-in capital                                                                                          |       | 170,581           |       | 168,905 |   |
| Retained earnings                                                                                                   |       | 148,227           |       | 114,289 |   |
| Total shareholders’ equity                                                                                     |       | 318,946           |       | 283,332 |   |
|                                                                                                                |       | $                 | 611,313    |   | $ | 590,229 |   |
|                                                                                                                     |            |                   |            |  |  |  |  |  |  |  |

 

See accompanying notes to consolidated financial statements.

 

27

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**CONSOLIDATED GRAPHICS, INC.**

**CONSOLIDATEDINCOME STATEMENTS**

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

 
| ** **                                 | ** ** | **Year Ended March 31** | ** ** |
|--------------------------------------------|------------|------------------------------|------------|
| ** **                                 | ** ** | **2006**                     | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                       |       |                         |       |   |   |   |   |
| SALES                                      |       | $                            | 879,023    |   | $ | 779,016 |   | $ | 708,060 |   |
| COST OF SALES                              |       | 661,560                      |       | 586,615 |   | 540,080 |   |
| Gross profit                               |       | 217,463                      |       | 192,401 |   | 167,980 |   |
| SELLING EXPENSES                           |       | 91,266                       |       | 81,456 |   | 76,189 |   |
| GENERAL AND ADMINISTRATIVE  EXPENSES       |       | 58,993                       |       | 54,116 |   | 51,887 |   |
| Operating income                           |       | 67,204                       |       | 56,829 |   | 39,904 |   |
| INTEREST EXPENSE                           |       | 5,692                        |       | 5,306 |   | 7,337 |   |
| INTEREST INCOME                            |       | (178                         | )          | (199 | ) | (121 | ) |
| Income before taxes                        |       | 61,690                       |       | 51,722 |   | 32,688 |   |
| INCOME TAXES                               |       | 23,192                       |       | 19,000 |   | 12,691 |   |
| Net income                                 |       | $                            | 38,498     |   | $ | 32,722 |   | $ | 19,997 |   |
|                                       |       |                         |       |   |   |   |   |
| BASIC EARNINGS PER SHARE                   |       | $                            | 2.81       |   | $ | 2.40 |   | $ | 1.49 |   |
| DILUTED EARNINGS PER SHARE                 |       | $                            | 2.73       |   | $ | 2.31 |   | $ | 1.44 |   |
|                                       |       |                         |       |   |   |   |   |
| SHARES USED TO COMPUTE EARNINGS  PER SHARE |       |                         |       |   |   |   |   |
| Basic                                      |       | 13,719                       |       | 13,649 |   | 13,439 |   |
| Diluted                                    |       | 14,127                       |       | 14,160 |   | 13,896 |   |

 

See accompanying notes to consolidated financial statements.

 

28

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**CONSOLIDATED GRAPHICS, INC.**

**CONSOLIDATEDSTATEMENTS OF SHAREHOLDERS’ EQUITY**

**(In thousands)**

 
| ** **                                       | ** ** | **Common Stock** | ** ** | **Additional  Paid-In** | ** ** | **Retained** | ** ** | ** **   | ** ** |
|--------------------------------------------------|------------|------------------|------------|-------------------------|------------|--------------|------------|--------------|------------|
| ** **                                       | ** ** | **Shares**       | ** ** | **Amount**              | ** ** | **Capital**  | ** ** | **Earnings** | ** ** | **Total** | ** ** |
|                                             |       |             |       |                    |       |         |       |         |       |   |   |
| BALANCE, March 31,  2003                    |       | 13,347           |       | $                       | 133        |         | $          | 159,520      |       | $ | 61,570 |   | $ | 221,223 |   |
| Exercise of stock options, including tax benefit |       | 227              |       | 2                       |       | 4,390        |       | —       |       | 4,392 |   |
| Net income                                       |       | —           |       | —                  |       | —       |       | 19,997       |       | 19,997 |   |
| BALANCE, March 31,  2004                    |       | 13,574           |       | 135                     |       | 163,910      |       | 81,567       |       | 245,612 |   |
| Exercise of stock options, including tax benefit |       | 186              |       | 3                       |       | 4,995        |       | —       |       | 4,998 |   |
| Net income                                       |       | —           |       | —                  |       | —       |       | 32,722       |       | 32,722 |   |
| BALANCE, March 31,  2005                    |       | 13,760           |       | 138                     |       | 168,905      |       | 114,289      |       | 283,332 |   |
| Exercise of stock options, including tax benefit |       | 124              |       | 1                       |       | 3,770        |       | —       |       | 3,771 |   |
| Repurchase and retire common stock               |       | (170             | )          | (1                      | )          | (2,094       | )          | (4,560       | )          | (6,655 | ) |
| Net income                                       |       | —           |       | —                  |       | —       |       | 38,498       |       | 38,498 |   |
| BALANCE, March 31,  2006                    |       | 13,714           |       | $                       | 138        |         | $          | 170,581      |       | $ | 148,227 |   | $ | 318,946 |   |
|                                                  |            |                  |            |                         |            |              |            |              |            |  |  |  |  |  |  |  |  |

 

See accompanying notes to consolidated financial statements.

 

 

29

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**CONSOLIDATED GRAPHICS, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(In thousands)**

 
| ** **                                                                              | ** ** | **Year Ended March 31** | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                              | ** ** | **2006**                     | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                    |       |                         |       |   |   |   |   |
| OPERATING ACTIVITIES                                                                    |       |                         |       |   |   |   |   |
| Net income                                                                              |       | $                            | 38,498     |   | $ | 32,722 |   | $ | 19,997 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities— |       |                         |       |   |   |   |   |
| Depreciation and amortization                                                           |       | 45,663                       |       | 42,063 |   | 35,793 |   |
| Deferred income tax provision                                                           |       | 137                          |       | 3,957 |   | 6,240 |   |
| Changes in assets and  liabilities, net of effects of acquisitions—                |       |                         |       |   |   |   |   |
| Accounts receivable, net                                                                |       | (3,969                       | )          | (5,024 | ) | (5,160 | ) |
| Inventories                                                                             |       | 157                          |       | 37 |   | (3,188 | ) |
| Prepaid expenses                                                                        |       | (833                         | )          | 1,160 |   | (740 | ) |
| Other assets                                                                            |       | (279                         | )          | (695 | ) | 2,750 |   |
| Accounts payable and accrued liabilities                                                |       | (3,101                       | )          | (885 | ) | 20,938 |   |
| Income taxes payable                                                                    |       | 2,976                        |       | 1,904 |   | 2,629 |   |
| Net cash provided by operating activities                                               |       | 79,249                       |       | 75,239 |   | 79,259 |   |
| INVESTING ACTIVITIES                                                                    |       |                         |       |   |   |   |   |
| Acquisitions of  businesses, net of cash acquired                                       |       | (27,983                      | )          | (48,961 | ) | (11,376 | ) |
| Purchases of property and  equipment                                                    |       | (16,382                      | )          | (15,566 | ) | (12,336 | ) |
| Proceeds from asset  dispositions                                                       |       | 2,517                        |       | 1,811 |   | 2,296 |   |
| Net cash used in investing activities                                                   |       | (41,848                      | )          | (62,716 | ) | (21,416 | ) |
| FINANCING ACTIVITIES                                                                    |       |                         |       |   |   |   |   |
| Proceeds from bank credit  facilities                                                   |       | 52,916                       |       | 73,862 |   | 61,165 |   |
| Payments on bank credit  facilities                                                     |       | (80,060                      | )          | (39,230 | ) | (114,642 | ) |
| Payments for financing  costs on amendment of bank credit facility                      |       | —                       |       | — |   | (480 | ) |
| Proceeds from issuance of  term equipment note                                          |       | —                       |       | — |   | 6,117 |   |
| Payments on term equipment  notes and other debt                                        |       | (8,820                       | )          | (53,230 | ) | (12,439 | ) |
| Payments to repurchase and  retire common stock                                         |       | (6,655                       | )          | — |   | — |   |
| Proceeds from exercise of  stock options                                                |       | 2,459                        |       | 3,355 |   | 3,267 |   |
| Net cash used in financing activities                                                   |       | (40,160                      | )          | (15,243 | ) | (57,012 | ) |
| NET INCREASE (DECREASE) IN  CASH AND CASH EQUIVALENTS                                   |       | (2,759                       | )          | (2,720 | ) | 831 |   |
| CASH AND CASH EQUIVALENTS  AT BEGINNING OF PERIOD                                       |       | 7,752                        |       | 10,472 |   | 9,641 |   |
| CASH AND CASH EQUIVALENTS  AT END OF PERIOD                                             |       | $                            | 4,993      |   | $ | 7,752 |   | $ | 10,472 |   |

 

See accompanying notes to consolidated financial statements.

 

30

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**CONSOLIDATEDGRAPHICS, INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

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

 

**1. BUSINESS**

 

ConsolidatedGraphics, Inc. (collectively with its consolidated subsidiaries referredto as “the Company”) is a leading national provider of commercial printingservices and is recognized as the largest sheetfed and digital commercialprinting company in the United States. The Company is focused on adding valueto its printing businesses by providing the financial and operationalstrengths, management support and technological advantages associated with anational organization.

 

TheCompany’s printing businesses maintain their own sales, customer service,estimating and planning, prepress, production and accounting departments. TheCompany’s corporate headquarters staff provides support to its printingbusinesses in such areas as human resources, purchasing and managementinformation systems. The Company also maintains centralized treasury, riskmanagement, tax and consolidated financial reporting activities.

 

TheCompany’s sales are derived from commercial printing services. These servicesconsist of (i) traditional print services, including electronic prepress,digital and offset printing, finishing, storage and delivery of high-qualityprinted documents which are custom manufactured to the design specifications ofthe Company’s customers; (ii) fulfillment and mailing services for suchprinted materials, and (iii)  digital technology solutions and e-commercecapabilities that enable the Company’s customers to more efficiently procureand manage printed materials and/or design, procure, distribute, track andanalyze results of printing-based marketing programs and activities.

 

Thescope and extent of services provided to the Company’s customers typicallyvaries for each individual order it receives, depending on customer-specificfactors including the intended uses for the printed materials. Furthermore,each of the Company’s locations generally is capable of providing a completerange of services to its customers. Accordingly, the Company does not operate its business in a manner thatdifferentiates among its respective capabilities and services for financial ormanagement reporting purposes, rather each of its printing businesses define adistinct reporting unit.

 

**2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER INFORMATION**

 

**Accounting Policies**

 

Theaccounting policies of the Company reflect industry practices and conform togenerally accepted accounting principles in the United States. The moresignificant of such accounting policies are described below.

 

*Principles of Consolidation*—The accompanyingconsolidated financial statements include the accounts of the Company and itswholly-owned subsidiaries. All intercompany accounts and transactions have beeneliminated. Under Statement of Financial Accounting Standards (“SFAS”)No. 131, *Disclosures About Segments ofan Enterprise and Related Information,* the Company’s operationsconstitute one reportable segment because all of its printing businessesoperate in the commercial printing industry and exhibit similar economiccharacteristics.

 

*Use of Estimates*—The preparation offinancial 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 includingdepreciation of property and equipment and amortization or impairment ofintangible assets. The Company evaluates its estimates and assumptions on anongoing basis and relies on historical experience and various other factorsthat it believes to be reasonable under the circumstances to determine suchestimates. Because uncertainties with respect to estimates and assumptions areinherent in the preparation of financial statements, actual results coulddiffer from these estimates.

 

*Reclassification*—Certain reclassificationsof prior periods’ data have been made to conform to the current periodreporting.

 

*Cash and Cash Equivalents*—The Company considers allhighly liquid investments purchased with original maturities of three months orless to be cash equivalents.

 

 

31

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**CONSOLIDATED GRAPHICS, INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

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

 

*Revenue Recognition and Accounts Receivable*—The Companyrecognizes revenue upon delivery of each job, except for “bill and holdtransactions,” in which case such revenue is recognized when all the servicedelivery criteria are fully met as per Staff Accounting Bulletin 104 issued bythe Securities and Exchange Commission (“SEC”). Losses, if any, on jobs arerecognized at the earliest date such amount is determinable. The Companyderives the majority of its revenues from sales and services to a broad anddiverse group of customers with no individual customer accounting for more than10% of the Company’s revenues in any of the years ended March 31, 2006,2005 or 2004. 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 $2,514 and $2,465 at March 31, 2006 and 2005.

 

*Inventories*—Inventories are valued atthe lower of cost or market utilizing the first-in, first-out method for rawmaterials and the specific identification method for work in progress andfinished goods. The carrying values of inventories are set forth below:

 

 
| ** **       | ** ** | **March 31** | ** ** |
|------------------|------------|--------------|------------|
| ** **       | ** ** | **2006**     | ** ** | **2005** | ** ** |
|             |       |         |       |   |   |
| Raw materials    |       | $            | 11,485     |   | $ | 11,863 |   |
| Work in progress |       | 21,951       |       | 21,518 |   |
| Finished goods   |       | 4,994        |       | 3,768 |   |
|             |       | $            | 38,430     |   | $ | 37,149 |   |

 

*Goodwill and Other Intangible Assets,net —* Goodwill totaled $86,640 at March 31, 2006 and represents the excessof the Company’s purchase cost over the fair value of the net assets ofacquired businesses, net of previously recorded amortization and impairmentexpense.  The net book value of otherintangible assets at March 31, 2006 was $13,395.  Other intangible assets consist primarily ofthe value assigned to such items as customer lists and tradenames in connectionwith the allocation of purchase price for acquisitions under SFAS No. 142.Other intangible assets are generally amortized on a straight-line basis overperiods of up to ten years.  Amortizationexpense totaled $1,321 in 2006 and $155 in 2005.

 

*Other Assets*—Other assets areprincipally comprised of deferred tax assets and non-current cash invested inrestricted money-market funds. None of the individual items in other assets atMarch 31, 2006 and 2005 were individually greater than 5% of total assetsin those years.

 

*Impairment of Long-Lived Assets*—The Companydetermines the realization of goodwill in accordance with SFAS No. 142, *Goodwill and Other Intangible Assets,* andits other long-lived assets, including property, plant and equipment, andintangible assets other than goodwill in accordance with SFAS No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets.* Under SFAS No. 142, the Company determinesfair value using capitalization of earnings estimates and market valuationmultiples for each reporting unit. Under SFAS No. 144, the Companycompares the carrying value of long-lived assets to its projection of futureundiscounted cash flows attributable to such assets, and evaluates other factorssuch as business trends and general economic conditions. In the event that thecarrying value exceeds the future undiscounted cash flows, the Company recordsan impairment charge against income equal to the excess of the carrying valueover the asset’s fair value.

 

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

 
| ** **                            | ** ** | **March 31** | ** ** |
|---------------------------------------|------------|-------------------|------------|
| ** **                            | ** ** | **2006**          | ** ** | **2005** | ** ** |
|                                  |       |              |       |   |   |
| Compensation and benefits             |       | $                 | 25,988     |   | $ | 31,304 |   |
| Manufacturing materials  and services |       | 6,843             |       | 6,336 |   |
| Sales, property and other  taxes      |       | 18,781            |       | 18,719 |   |
| Other                                 |       | 16,824            |       | 18,784 |   |
|                                  |       | $                 | 68,436     |   | $ | 75,143 |   |

 

 

32

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**CONSOLIDATED GRAPHICS, INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

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

 

Otheraccrued liabilities are principally comprised of customer advances and accruedself-insurance claims for certain insurance programs. None of the individualitems in other accrued liabilities at March 31, 2006 and 2005 were individuallygreater than 5% of total current liabilities in those years.

 

*Income Taxes—*Income taxes are accountedfor under the asset and liability method. Deferred tax assets and liabilitiesare recognized for the future tax consequences attributable to differencesbetween the financial statement carrying amounts of existing assets andliabilities and their respective tax bases and operating loss and tax creditcarryforwards. Deferred tax assets and liabilities are measured using enactedtax rates expected to apply to taxable income in the years in which thosetemporary differences are expected to be recovered or settled. The effect ondeferred tax assets and liabilities of a change in tax rates is recognized inincome in the period that includes the enactment date.

 

*RecentAccounting Pronouncements—*

 

The Financial AccountingStandards Board (“FASB”) issued SFAS No. 151, *Inventory Costs,* in November 2004 which amends Chapter4 of the Accounting Research Bulletin (“ARB”) No. 43. SFAS No. 151 isrequired to be applied to all inventory costs occurring infiscal years beginning after June 15, 2005.  The Company’s April 1, 2006 adoption ofSFAS No. 151 is not expected to have a material impact on the Company’sconsolidated financial condition or results of operations.

 

SFASNo. 123(R), *Share-Based Payment*, was issued inDecember 2004 and replaces SFAS No. 123, and supersedes the AccountingPrinciples Board (“APB”) Opinion No. 25. SFAS No. 123(R) will require compensation costs related to share-basedpayment transactions to be recognized in the consolidated financial statements.With limited exceptions, the amount of compensation cost will be measured basedon the grant date fair value of the equity or liability instruments issued. Inaddition, liability awards will be remeasured each reporting period.Compensation cost will be recognized over the period that an employee providesservices in exchange for the award.  SFASNo. 123(R) allows companies to adopt its provisions using either of thefollowing transition alternatives:

 

(i)                                     The modified prospectivemethod, which results in the recognition of compensation expense usingSFAS 123(R) for all share-based awards granted or modified after theeffective date and the recognition of compensation expense using SFAS 123for all previously granted share-based awards that remain unvested at theeffective date; or

 

(ii)                                  The modified retrospectivemethod, which results in applying the modified prospective method and restatingprior periods by recognizing the financial statement impact of share-basedpayments in a manner consistent with the pro forma disclosure requirements ofSFAS No. 123. The modified retrospective method may be applied to allprior periods presented or previously reported interim periods of the year of adoption.

 

The Company adopted SFASNo. 123(R) on April 1, 2006 using the modified prospective method. The impactof this adoption is expected to be materially consistent with the pro formaexpense (discussed below under “*Stock-Based Compensation*”),as adjusted for future vesting occurrences, grants, cancellations and exercisesof stock options.

 

SFAS No. 154, *Accounting Changes and Error Corrections,*wasissued in May 2005 and replaces APBOpinion No. 20 and SFAS No. 3. SFAS No. 154 requires retrospective application for voluntary changes inaccounting principle in most instances and is required to be applied to all accounting changes made in fiscal years beginning afterDecember 15, 2005.   TheCompany’s April 1, 2006 adoption of SFAS No. 154 is not expected to have amaterial impact on the Company’s consolidated financial condition or results ofoperations.

 

*Supplemental Cash Flow Information*—Theconsolidated statements of cash flows provide information about the Company’ssources and uses of cash and exclude the effects of non-cash transactions. TheCompany issued term notes payable totaling $16,508 and $13,252 (see Note 5.Long-Term Debt) in the years ended March 31, 2006 and 2005 to finance thepurchase of certain new equipment.  Inaddition, in the year ended March 31, 2005, the Company assumed a mortgageobligation totaling $5,116 in connection with a prior year acquisition and alsoassumed two industrial revenue bonds totaling $4,900 and other long-term debtof $3,351 in connection with acquisitions completed in that year.

 

 

33

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**CONSOLIDATED GRAPHICS, INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

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

 

**Other Information**

 

TheCompany paid (or received) cash for interest and income taxes, net of refunds,totaling $5,373 and $18,952 in 2006, $4,877 and $13,680 in 2005, and$7,227 and ($2,460) in 2004.

 

*Earnings Per Share —* Basic earnings per share are calculated by dividing net income by theweighted average number of common shares outstanding.  Diluted earnings per share reflect net incomedivided by the weighted average number of common shares and dilutive stockoptions outstanding.

 

*Related Party Transactions*—In the normal course ofbusiness, the Company leases certain real estate from individuals who formerlyowned an acquired printing business and are now employed by the Company.

 

*Fair Value of Financial Instruments*—The Company’sfinancial instruments consist of cash, trade receivables, trade payables anddebt obligations. The Company does not currently hold or issue derivativefinancial instruments. The Company believes that the fair value of its variablerate debt obligations, which totaled $51,937 and $81,072 at March 31, 2006and 2005, respectively, approximated their recorded values. The Companyestimates that the fair value of its fixed rate debt obligations totaling $49,562at March 31, 2006 was $41,280 and that the fair value of its fixed ratedebt obligations totaling $38,418 at March 31, 2005 was $33,961. Estimatesof fair value are based on interest rates for the same or similar debt offeredto the Company having the same or similar maturities and collateralrequirements.

 

*Concentrations of Credit Risk*—Financial instruments thatpotentially subject the Company to concentrations of credit risk are primarilytrade accounts receivable. Concentrations of credit risk with respect to tradeaccounts receivable are limited because the Company’s printing businessesprovide services to a large, diverse group of customers in various geographicalregions. Management performs ongoing credit evaluations of its customers andgenerally does not require collateral for extensions of credit. The Company’scash deposits are held in large, national financial institutions.

 

*Stock-Based Compensation—*Pending the adoption of SFASNo. 123(R) effective April 1, 2006 (discussed above under “*Recent Accounting Pronouncements*”), theCompany accounts for its stock-based compensation programs using the intrinsicvalue method of accounting established by APB Opinion No. 25, *Accounting for Stock Issued to Employees* and relatedinterpretations. Under APB Opinion No. 25, no compensation expense isrecognized when the exercise price of an employee stock option is equal to themarket price of common stock on the grant date and all other provisions of thegrant are fixed. The Company’s only element of stock-based compensation isderived pursuant to the Consolidated Graphics, Inc. Long-Term IncentivePlan, as amended (the “Plan”), which has been approved by the Company’sshareholders. Under the Plan, employees of the Company and members of theCompany’s Board of Directors have been, or may be, granted options to purchaseshares of the Company’s common stock at a price not less than the market priceof the stock at the date of grant.

 

Pro forma information regarding net income and net income per share isrequired by SFAS No. 123, *Accounting for Stock-BasedCompensation* for companiesaccounting for stock-based compensation programs under APB Opinion No. 25.The pro forma information has been determined as if the Company had accountedfor its stock options under the fair value method set forth in SFAS No. 123.The following is a summary of the Company’s net income and net income per shareas reported and pro forma as if the fair value method of accounting had beenapplied. For purposes of the pro forma disclosures, the estimated fair value ofthe options is amortized to expense over the options’ vesting period. The proforma effects of applying SFAS No. 123 may not be representative ofthe effects on reported net income for future years since options vest overseveral years and additional awards are made each year.

 

 

34

----

 

 

**CONSOLIDATED GRAPHICS, INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

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

 

Proforma information applying the fair value method follows:

 
| ** **                            | ** ** | **Year Ended March 31** | ** ** |
|---------------------------------------|------------|------------------------------|------------|
| ** **                            | ** ** | **2006**                     | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                  |       |                         |       |   |   |   |   |
| Net income as reported                |       | $                            | 38,498     |   | $ | 32,722 |   | $ | 19,997 |   |
| Less: pro forma  compensation expense |       | (5,936                       | )          | (2,815 | ) | (2,879 | ) |
| Pro forma net income                  |       | $                            | 32,562     |   | $ | 29,907 |   | $ | 17,118 |   |
|                                  |       |                         |       |   |   |   |   |
| **Basic Earnings Per Share:**         | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income as reported                |       | $                            | 2.81       |   | $ | 2.40 |   | $ | 1.49 |   |
| Less: pro forma  compensation expense |       | (.40                         | )          | (.19 | ) | (.20 | ) |
| Pro forma net income                  |       | $                            | 2.41       |   | $ | 2.21 |   | $ | 1.29 |   |
|                                  |       |                         |       |   |   |   |   |
| **Diluted Earnings Per Share:**       | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income as reported                |       | $                            | 2.73       |   | $ | 2.31 |   | $ | 1.44 |   |
| Less: pro forma  compensation expense |       | (.39                         | )          | (.19 | ) | (.19 | ) |
| Pro forma net income                  |       | $                            | 2.34       |   | $ | 2.12 |   | $ | 1.25 |   |

 

Forpurposes of determining pro forma compensation expense, the Company determinedthe weighted average fair value of options on the grant date ($17.92 for theyear ended March 31, 2006, $13.65 for the year ended March 31, 2005and $9.44 for the year ended March 31, 2004) by utilizing theBlack-Scholes option-pricing model with the following key assumptions:

 
| ** **                       | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|----------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Dividend yield                   |       | —     |       | —     |       | —     |       |
| Expected volatility              |       | 33.8       | %          | 30.4       | %          | 33.9       | %          |
| Average risk-free interest  rate |       | 4.2        | %          | 3.7        | %          | 3.2        | %          |
| Average expected life            |       | 5.0  yrs.  |       | 5.0  yrs.  |       | 5.0  yrs.  |       |

 

The Black-Scholes model usedby the Company to calculate the fair value of options granted, as well as othercurrently accepted option valuation models, were developed to estimate the fairvalue of freely tradable, fully transferable options without vesting and/ortrading restrictions, which significantly differ from the provisions associatedwith the Company’s stock option awards. These models also require highlysubjective assumptions, including future stock price volatility and expectedtime until exercise, which greatly affect the calculated values. Accordingly,management does not believe this model provides a reliable single measure ofthe fair value of the Company’s stock option awards.

 

**3. ACQUISITIONS**

 

Allof the Company’s acquisitions have been accounted for using the purchase methodof accounting. Revenues and expenses of the acquired businesses have beenincluded in the accompanying consolidated financial statements beginning ontheir respective dates of acquisition. The allocation of purchase price to theacquired assets and liabilities is based on estimates of fair value and may beprospectively revised if and when additional information the Company isawaiting concerning certain asset and liability valuations is obtained,provided that such information is received no later than one year after thedate of acquisition. Contingent transaction consideration pursuant to earnoutagreements is accrued as an additional cost of the transaction when paymentthereof is deemed to be probable by the Company.

 

Duringfiscal 2006, the Company assumed debt totaling $1,465 and paid cash totaling$27,198 to acquire the operations and assets of four businesses, two of whichwere immediately merged into other existing operations of the Company. Thepreliminary allocation of the purchase price of the businesses acquired includecurrent assets of $7,283, property and equipment of $13,046, goodwill and intangibleassets of $13,275 and other assets of $55 less current liabilities of $4,996.Additionally, the Company paid cash totaling $785 in connection withfinalization of certain working capital adjustments related to the Company’sfiscal 2005 acquisitions. Based on certain additional information receivedregarding the

 

35

----

 

**CONSOLIDATED GRAPHICS, INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

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

 

fiscal2005 acquisitions, $2,513 and $6,331 of purchase price previously attributed toproperty and equipment and goodwill was allocated to intangible assets otherthan goodwill during fiscal 2006.  TheCompany is awaiting additional information concerning certain asset andliability valuations in order to finalize the allocation of purchase price forcertain of the Company’s 2006 acquisitions, and expects to receive suchinformation no later than one year following the respective dates of theacquisitions.

 

Duringfiscal 2005, the Company assumed debt totaling $8,251 and acquired for cashtotaling $45,524 the operations and assets of eight printing businesses. Theinitial allocation of the purchase price of the businesses acquired includecurrent assets of $22,799, property and equipment of $33,116, goodwill andintangibles of $11,521 and other assets of $2,678 less current liabilities of$16,339. The initial purchase price allocation was adjusted in fiscal 2006 forcertain additional cash paid in connection with the fiscal 2005 acquisitionsand certain other valuation adjustments, as described in the precedingparagraphs. Additionally, in connection with the acquisition of certainprinting businesses in prior periods, the Company paid cash totaling $3,299 andassumed a related mortgage obligation totaling $5,116 to acquire certain realproperty and paid cash of $138 to satisfy certain liabilities or pursuant toearnout agreements.

 

Duringfiscal 2004, the Company acquired for cash totaling $10,042 the operations andassets of six printing businesses, five of which were immediately merged intoother existing operations of the Company. The allocation of the purchase priceof the businesses acquired include current assets of $3,503, property andequipment of $8,063, goodwill of $1,764 and other assets of $533, less currentliabilities of $3,821. Additionally, in connection with the acquisition ofcertain printing businesses in prior periods, the Company paid cash of $1,334to satisfy certain liabilities or pursuant to earnout agreements.

 

**4. PROPERTYAND EQUIPMENT**

 

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

 

Thefollowing is a summary of the Company’s property and equipment and theirestimated useful lives:

 
| ** **                            | ** ** | **March 31** | ** ** | **Estimated  Life** | ** ** |
|---------------------------------------|------------|-------------------|------------|---------------------|------------|
| **Description**                       | ** ** | **2006**          | ** ** | **2005**            | ** ** | **in Years** | ** ** |
|                                  |       |              |       |                |       |   |   |
| Land                                  |       | $                 | 11,355     |                | $          | 8,481 |   | — |   |
| Buildings and leasehold  improvements |       | 79,290            |       | 72,716              |       | 5-30 |   |
| Machinery and equipment               |       | 393,730           |       | 383,970             |       | 5-20 |   |
| Computer equipment and  software      |       | 21,116            |       | 21,518              |       | 2-5 |   |
| Furniture, fixtures and  other        |       | 9,328             |       | 9,538               |       | 5-7 |   |
|                                  |       | 514,819           |       | 496,223             |       |   |   |
| Less—accumulated  depreciation   |       | (217,511          | )          | (198,623            | )          |   |   |
|                                  |       | $                 | 297,308    |                | $          | 297,600 |   |   |   |
|                                       |            |                   |            |                     |            |  |  |  |  |  |

 

 

36

----

 

 

**CONSOLIDATED GRAPHICS, INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

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

 

**5. LONG-TERM DEBT**

 

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

 
| ** **                | ** ** | **March 31** | ** ** |
|---------------------------|------------|-------------------|------------|
| ** **                | ** ** | **2006**          | ** ** | **2005** | ** ** |
|                      |       |              |       |   |   |
| Bank credit facilities    |       | $                 | 43,051     |   | $ | 70,195 |   |
| Term equipment notes      |       | 44,037            |       | 32,295 |   |
| Other                     |       | 14,411            |       | 17,000 |   |
|                      |       | 101,499           |       | 119,490 |   |
| Less—current portion |       | (10,821           | )          | (7,595 | ) |
|                      |       | $                 | 90,678     |   | $ | 111,895 |   |

 

TheCompany’s primary bank credit facility (as amended and restated, the “CreditAgreement”) is composed of a $150,000 revolving credit facility that willmature in July 2007. At March 31, 2006, outstanding borrowings underthe Credit Agreement were $35,000 and accrued interest at a weighted averagerate of 6.65%.

 

Theproceeds from borrowings under the Credit Agreement can be used to repaycertain indebtedness, finance certain acquisitions, provide for working capitaland general corporate purposes and, subject to certain restrictions, repurchasethe Company’s common stock. Borrowings outstanding under the Credit Agreementare secured by substantially all of the Company’s assets other than real estateand certain equipment subject to term equipment notes and other financings.Borrowings under the Credit Agreement accrue interest, at the Company’s option,at either (1) the London Interbank Offered Rate (LIBOR) plus a margin of1.25% to 2.00%, or (2) an alternate base rate (based upon the greater ofthe agent bank’s prime lending rate or the Federal Funds effective rate plus..50%) plus a margin of up to .75%. The Company is also required to pay anannual commitment fee ranging from .275% to .375% on available but unusedamounts under the Credit Agreement. The interest rate margin and the commitmentfee are based upon certain financial performance measures as set forth in theCredit Agreement and are redetermined quarterly. At March 31, 2006, theapplicable LIBOR interest rate margin was 1.25% and the applicable commitmentfee was .275%.

 

TheCompany is subject to certain covenants and restrictions and must meet certainfinancial tests under the Credit Agreement. The Company was in compliance withsuch covenants, restrictions and financial tests at March 31, 2006.

 

Inaddition to the Credit Agreement, the Company maintains two auxiliary revolvingcredit facilities (each an “Auxiliary Bank Facility” and collectively the “AuxiliaryBank Facilities”) with commercial banks. Each Auxiliary Bank Facility isunsecured and has a maximum borrowing capacity of $5,000. One facility expiresin November 2006 and the other facility expires in December 2006. AtMarch 31, 2006, borrowings outstanding under the Auxiliary Bank Facilitiestotaled $8,051 and accrued interest at a weighted average rate of 6.10%.Because the Company currently has the ability to refinance borrowingsoutstanding under the Auxiliary Bank Facilities expiring in November andDecember 2006, and currently plans to do so, such borrowings are classified aslong-term debt in the accompanying consolidated balance sheet at March 31,2006.  The Auxiliary Bank Facilitiescross-default to the covenants and restrictions set forth in the CreditAgreement.

 

TheCompany’s term equipment notes consist primarily of notes payable pursuant tofinancing agreements between the Company and various lenders (the “Lender Notes”)and between the Company and the finance affiliate of a printing equipmentmanufacturer (the “Equipment Notes”). At March 31, 2006, outstandingborrowings under the Lender Notes totaled $29,559 and accrued interest at aweighted average rate of 5.56%. The Lender Notes provide for fixed monthlyprincipal payments plus interest (at fixed rates) for defined periods of up toeight years from the date of issuance, and are secured by certain equipment ofthe Company. At March 31, 2006, outstanding borrowings under the EquipmentNotes totaled $11,756 and accrued interest at a weighted average rate of 5.93%.The Equipment Notes provide for fixed payments of principal and interest (atfixed rates) for defined periods of up to ten years from the date of issuanceand are secured by the equipment which was concurrently purchased from themanufacturer. At March 31, 2006, the remaining balance of term equipmentnotes totaling $2,722 primarily consists of various secured debt obligationsassumed by the Company in connection with certain prior year acquisitions. TheCompany is not subject to any significant financial covenants in connectionwith any of the term equipment notes; however, the Credit Agreement placescertain limitations on the amount of additional term note obligations theCompany may incur in the future.

 

37

----

 

**CONSOLIDATED GRAPHICS, INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

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

 

TheCompany’s remaining debt obligations consist of a mortgage totaling $4,797, apromissory note totaling $1,783, industrial revenue bonds totaling $6,995 andvarious other debt totaling $836. The Company does not have any significantfinancial covenants or restrictions associated with these other debtobligations.

 

Theprincipal payment requirements by fiscal year under the Company’s debtobligations referenced above are: 2007—$10,821; 2008—$53,501; 2009—$9,740;2010—$11,384; 2011—$6,924; and thereafter—$9,129. As the Company has both theability and intent to refinance the $8,051 outstanding at March 31, 2006under the Auxiliary Bank Facilities due to expire in November and December2006, such borrowings are classified as long-term debt in our consolidatedbalance sheet at March 31, 2006, and also classified above as fiscal 2008principal payment requirements in conjunction with the maturity of the CreditAgreement.

 

**6. INCOME TAXES**

 

Theprovision for income taxes is comprised of the following:

 
| ** ** | ** ** | **Year Ended March 31** | ** ** |
|------------|------------|------------------------------|------------|
| ** ** | ** ** | **2006**                     | ** ** | **2005** | ** ** | **2004** | ** ** |
| Current    |       |                         |       |   |   |   |   |
| Federal    |       | 21,162                       |       | $ | 15,953 |   | $ | 6,629 |   |
| State      |       | 1,893                        |       | (910 | ) | (178 | ) |
|       |       | 23,055                       |       | 15,043 |   | 6,451 |   |
| Deferred   |       |                         |       |   |   |   |   |
| Federal    |       | 689                          |       | 1,860 |   | 5,522 |   |
| State      |       | (552                         | )          | 2,097 |   | 718 |   |
|       |       | 137                          |       | 3,957 |   | 6,240 |   |
|       |       | $                            | 23,192     |   | $ | 19,000 |   | $ | 12,691 |   |
|            |            |                              |            |  |  |  |  |  |  |  |

 

Theprovision for income taxes differs from an amount computed at the federalstatutory rate as follows:

 
| ** **                                             | ** ** | **Year Ended March 31** | ** ** |
|--------------------------------------------------------|------------|------------------------------|------------|
| ** **                                             | ** ** | **2006**                     | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                   |       |                         |       |   |   |   |   |
| Provision at the federal  statutory rate               |       | $                            | 21,592     |   | $ | 18,103 |   | $ | 11,441 |   |
| State income taxes, net of  federal income tax benefit |       | 872                          |       | 771 |   | 351 |   |
| Non-deductible expenses                                |       | 1,314                        |       | 126 |   | 899 |   |
| Benefit of domestic  production deduction              |       | (586                         | )          | — |   | — |   |
|                                                   |       | $                            | 23,192     |   | $ | 19,000 |   | $ | 12,691 |   |

 

 

38

----

 

**CONSOLIDATED GRAPHICS, INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

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

 

Deferredincome taxes reflect the future tax consequences of differences between the taxbases of assets and liabilities and their financial reporting amounts asmeasured based on enacted tax laws and regulations. The Company records avaluation allowance, when appropriate, to adjust deferred tax asset balances tothe amount the Company expects to realize. The Company considers the amount oftaxable income available in carryback years and future taxable income, amongother factors, in assessing the potential need for a valuation allowance. Thecomponents of deferred income tax assets and liabilities are as follows:

 
| ** **                            | ** ** | **March 31** | ** ** |
|---------------------------------------|------------|-------------------|------------|
| ** **                            | ** ** | **2006**          | ** ** | **2005** | ** ** |
|                                  |       |              |       |   |   |
| Deferred income tax  liabilities:     |       |              |       |   |   |
| Property and equipment                |       | $                 | 62,829     |   | $ | 63,025 |   |
| Other                                 |       | 1,460             |       | 721 |   |
| Total deferred income tax liabilities |       | $                 | 64,289     |   | $ | 63,746 |   |
|                                  |       |              |       |   |   |
| Deferred income tax  assets:          |       |              |       |   |   |
| Accounts receivable and inventory     |       | $                 | 888        |   | $ | 746 |   |
| Accruals not currently deductible     |       | 5,376             |       | 5,753 |   |
| Other                                 |       | 4,235             |       | 3,594 |   |
| Total deferred income tax assets      |       | $                 | 10,499     |   | $ | 10,093 |   |
|                                       |            |                   |            |  |  |  |  |  |  |

 

Long-term deferred tax assets included in otherassets are $2,143 and $2,250 at March 31, 2006 and 2005.

 

**7. COMMITMENTS AND CONTINGENCIES**

 

*Operating Leases*—The Company has enteredinto various noncancelable operating leases primarily related to facilities andequipment used in the ordinary course of its business. The Company incurredtotal operating lease expense of

$18,089,$15,213 and $14,748 for the years ended March 31, 2006, 2005 and 2004.

 

TheCompany’s operating lease obligations by fiscal year are as follows:

 
| ** **                   | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **Thereafter** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|
|                         |       |     |       |     |       |     |       |     |       |     |       |           |       |
| Operating lease  obligations |       | $        | 16,040     |     | $          | 13,165   |       | $        | 9,937      |     | $          | 7,729          |       | $ | 4,941 |   | $ | 8,873 |   |
|                              |            |          |            |          |            |          |            |          |            |          |            |                |            |  |  |  |  |  |  |

 

*Letters of Credit*—In connection with theassumption of obligations under outstanding industrial revenue bonds, which arereflected as debt in the accompanying consolidated financial statements, andthe Company’s assumption of certain contingent liabilities related to certainof its acquisitions, the Company had letters of credit outstanding as ofMarch 31, 2006 totaling $8,982. In addition, the Company had one otherletter of credit totaling $100 outstanding as of March 31, 2006. All of theseletters of credit were issued pursuant to the terms of the Company’s CreditAgreement, which expires in July 2007, and the Company will be required toobtain replacement letters of credit at that time.

 

*Insurance Programs—*The Company maintainsthird-party insurance coverage in amounts and against risks it believes arereasonable in its circumstances. The Company is self-insured for most workerscompensation claims and for a significant component of its group healthinsurance programs. For these exposures, the Company accrues expected lossamounts which are determined using a combination of its historical lossexperience and subjective assessment of its future loss exposure, together withadvice provided by administrators and consulting actuaries. The estimates ofexpected loss amounts are subject to uncertainties arising from varioussources, including changes in claims reporting patterns, claims settlementpatterns, judicial decisions, legislation and economic conditions. Although theCompany believes that the accrued estimated loss amounts are reasonable underthe circumstances, significant differences related to the items noted above couldmaterially affect our risk exposure, insurance obligations and future expense.

 

*Legal Matters*—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 consolidated financial condition or resultsof operations.

 

 

39

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**CONSOLIDATED GRAPHICS, INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

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

 

*Tax Matters*—The Company is subject toexamination by tax authorities for varying periods in various taxingjurisdictions.  During the course of suchexaminations disputes occur as to matters of fact and/or law.  Also, in most taxing jurisdictions thepassage of time without examination will result in the expiration of applicablestatutes of limitations thereby precluding the taxing authority from conductingan examination of the tax period for which such statute of limitation hasexpired.  The Company believes that ithas adequately provided for its tax liabilities.

 

**8. STOCK OPTIONS**

 

Pursuantto the Plan, employees of the Company and members of the Company’s Board ofDirectors have been, or may be, granted options to purchase shares of theCompany’s common stock, restricted stock unit awards or other forms ofequity-based compensation. Options granted pursuant to the Plan may either beincentive stock options within the meaning of Section 422 of the InternalRevenue Code of 1986, as amended or non-qualified stock options. Optionsgranted under the Plan are at a price not less than the market price of thestock at the date of grant and periodically vest over a fixed period of up toten years. Unvested options generally are cancelled upon termination ofemployment and vested options generally expire shortly after termination ofemployment. Otherwise, options expire after final vesting at the end of a fixedperiod generally not in excess of an additional five years. At March 31,2006, a total of 2,328,138 shares were reserved for issuance pursuant to thePlan, of which 403,679 shares of the Company’s common stock were reserved foroptions which had not been granted.

 

Thefollowing table sets forth option transactions under the Plan in terms ofunderlying shares of the Company’s common stock:

 
| ** **                    | ** ** | **For the Years Ended March 31** | ** ** |
|-------------------------------|------------|---------------------------------------|------------|
| ** **                    | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                    | ** ** | **Shares**                            | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| Outstanding at  April 1  |       | 1,700,786                             |       | $ | 27.93 |   | 1,804,732 |   | $ | 26.08 |   | 1,973,819 |   | $ | 24.67 |   |
| Granted                       |       | 500,318                               |       | 48.13 |   | 270,000 |   | 39.96 |   | 194,964 |   | 27.06 |   |
| Exercised                     |       | (123,035                              | )          | 19.74 |   | (186,078 | ) | 18.00 |   | (227,215 | ) | 14.51 |   |
| Forfeited or expired          |       | (153,610                              | )          | 26.71 |   | (187,868 | ) | 34.85 |   | (136,836 | ) | 22.84 |   |
| Outstanding at  March 31 |       | 1,924,459                             |       | 33.88 |   | 1,700,786 |   | 27.93 |   | 1,804,732 |   | 26.08 |   |
| Exercisable at  March 31 |       | 1,369,402                             |       | 32.92 |   | 651,444 |   | 21.49 |   | 567,543 |   | 26.57 |   |
|                               |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Outstanding and exercisable stock options atMarch 31, 2006 were as follows:

 
| ** **                    | ** ** | **Outstanding** | ** ** | **Exercisable**     | ** ** |
|-------------------------------|------------|-----------------|------------|---------------------|------------|
| ** **                    | ** ** | ** **      | ** ** | **Weighted**        | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                    | ** ** | ** **      | ** ** | **Average**         | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| **Range of Exercise Prices**  | ** ** | **Shares**      | ** ** | **Exercise  Price** | ** ** | **Remaining  Years** | ** ** | **Shares** | ** ** | **Exercise  Price** | ** ** |
| $10.37 - $20.00               |       | 747,225         |       | $                   | 15.16      |   | 4.6 |   | 624,405 |   | $ | 14.70 |   |
| $20.01 - $30.00               |       | 103,167         |       | 23.04               |       | 5.1 |   | 63,257 |   | 22.85 |   |
| $30.01 - $40.00               |       | 214,840         |       | 37.79               |       | 7.6 |   | 29,258 |   | 37.37 |   |
| $40.01 - $50.00               |       | 146,220         |       | 42.11               |       | 6.0 |   | 57,482 |   | 41.68 |   |
| $50.01 - $53.26               |       | 713,007         |       | 52.10               |       | 5.9 |   | 595,000 |   | 52.06 |   |
| Outstanding at  March 31 |       | 1,924,459       |       | 33.88               |       | 5.5 |   | 1,369,402 |   | 32.92 |   |
|                               |            |                 |            |                     |            |  |  |  |  |  |  |  |  |

 

 

40

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**CONSOLIDATED GRAPHICS, INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

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

 

**9. UNAUDITED QUARTERLY FINANCIAL DATA**

 

Thefollowing table contains selected unaudited quarterly financial data from theconsolidated income statements for each quarter of fiscal 2006 and 2005. TheCompany believes this information reflects all normal recurring adjustmentsnecessary for a fair presentation of the information for the periods presented.The operating results for any quarter are not necessarily indicative of resultsfor any future period.

 
| ** **                 | ** ** | **1st  Quarter** | ** ** | **2nd  Quarter** | ** ** | **3rd  Quarter** | ** ** | **4th  Quarter** | ** ** |
|----------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
|                       |       |             |       |             |       |             |       |             |       |
| **Fiscal 2006:**           | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Sales                      |       | $                | 209,915    |             | $          | 220,993          |       | $                | 226,204    |   | $ | 221,911 |   |
| Gross profit               |       | 51,803           |       | 54,065           |       | 55,732           |       | 55,863           |       |
| Net income                 |       | 8,729            |       | 9,333            |       | 9,941            |       | 10,495           |       |
| Basic earnings per share   |       | .63              |       | .68              |       | .73              |       | .77              |       |
| Diluted earnings per share |       | .61              |       | .66              |       | .71              |       | .74              |       |
|                       |       |             |       |             |       |             |       |             |       |
| **Fiscal 2005:**           | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Sales                      |       | $                | 181,529    |             | $          | 191,129          |       | $                | 208,640    |   | $ | 197,718 |   |
| Gross profit               |       | 44,872           |       | 47,110           |       | 51,563           |       | 48,856           |       |
| Net income                 |       | 6,824            |       | 7,569            |       | 9,744            |       | 8,585            |       |
| Basic earnings per share   |       | .50              |       | .56              |       | .71              |       | .63              |       |
| Diluted earnings per share |       | .48              |       | .53              |       | .68              |       | .60              |       |
|                            |            |                  |            |                  |            |                  |            |                  |            |  |  |  |  |  |  |

 

Earningsper share are computed independently for each of the quarters presented;therefore, the sum of the quarterly earnings per share may not equal annualearnings per share.

 

 

41

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***Item 9. Changes in and Disagreements with Accountants onAccounting and Financial Disclosure***

 

None.

 

***Item 9A. Controls and Procedures***

 

*Evaluationof Disclosure Controls and Procedures*

 

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

 

*Management’sAnnual Report on Internal Control Over Financial Reporting*

 

Management’s Report is included in Item 8 of this AnnualReport on Form 10-K on page 24 and is incorporated herein by reference.

 

*Changesin Internal Controls Over Financial Reporting*

 

Therehave been no changes in our internal control over financial reporting that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

***Item 9B. Other Information***

 

*None.*

 

**PART III**

 

The informationcalled for by “Item 10. Directors and Executive Officers of the Registrant”(except for certain information regarding executive officers which is includedin Part I hereof as “Item 1. Business—Executive Officers”), “Item 11.Executive Compensation,” “Item 12. Security Ownership of Certain BeneficialOwners and Management and Related Shareholder Matters”  “Item 13. Certain Relationships and RelatedTransactions,” and “Item 14. Principal Accountant Fees and Services” is herebyincorporated by reference to the Company’s Proxy Statement for its AnnualMeeting of Shareholders (presently scheduled to be held August 3, 2006) to befiled with the Securities and Exchange Commission pursuant toRegulation 14A under the Securities Exchange Act of 1934, as amended.

 

**PART IV**

 

***Item 15*****. *Exhibitsand Financial Statement Schedules***

 
| (a)        | ** ** | **Index  to Financial Statements**                                                                                                         |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                 |
| (a)(1)     | ** ** | **Financial  Statements (included under Item 8):**                                                                                         |
|       |       |                                                                                                                                       |
|       |       | The index to the  Financial Statements is included on page 23 of this Annual Report on Form  10-K and is incorporated herein by reference. |

 
| (a)(2) | ** ** | **Financial  Statement Schedules:**                       |
|--------|------------|-----------------------------------------------------------|
|   |       |                                                      |
|   |       | Schedule II—Valuation  and Qualifying Accounts. |

 

 

42

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|   |   |                                                                                                                                                                                                      |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   | Report of Independent  Registered Public Accounting Firm with respect to Schedule II –  Valuation and Qualifying Accounts is included in Item 8 of this Annual Report  on Form 10-K on page 44. |

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), Exhibit 4(a)).                                                                                                                                                                                                                                     |
| *      |       | 3.2           | — |   | Articles of Amendment  to the Restated Articles of Incorporation of the Company dated as of  July 29, 1998 (Consolidated Graphics, Inc. Form 10- Q (June 30,  1998), Exhibit 3.1).                                                                                                                                                                                                                                                       |
| *      |       | 3.3           | — |   | Second Amended and  Restated By-Laws of the Company, adopted as of May 25, 2004 (Consolidated  Graphics, Inc. Form 10-Q (June 30, 2004), Exhibit 3.3).                                                                                                                                                                                                                                                                                        |
| *      |       | 4.1           | — |   | Specimen Common Stock  Certificate (Consolidated Graphics, Inc. Form 10-K (March 31, 1998),  Exhibit 4.1).                                                                                                                                                                                                                                                                                                                                    |
| *      |       | 4.2           | — |   | Rights Agreement dated  as of December 15, 1999 between Consolidated Graphics, Inc. and American  Stock Transfer and Trust Company, as Rights Agent, which includes as Exhibit  A the Certificate of Designations of Series A Preferred Stock, as Exhibit B  the form of Rights Certificate and as Exhibit C the form of summary of Rights  to Purchase Shares (Consolidated Graphics, Inc. Form 8-K (December 15,  1999), Exhibit 4.1). |
| *      |       | 10.1          | — |   | 1994 Consolidated  Graphics, Inc. Long-Term Incentive Plan (Consolidated Graphics, Inc. Registration  Statement on Form S-1 (Reg. No. 33-77468), Exhibit 10.14). +                                                                                                                                                                                                                                                                                 |
| *      |       | 10.2          | — |   | 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). +                                                                                                                                      |
| *      |       | 10.3          | — |   | 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). +                                                                                                                          |
| *      |       | 10.4          | — |   | Third 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 3,435,000 to 4,035,000) (Consolidated Graphics, Inc. Form 10-K  (March 31, 2003), Exhibit 10.5). +                                                                                                                                                        |
| *      |       | 10.5          | — |   | Employment Agreement  between the Company and Joe R. Davis dated as of February 13, 2006  (Consolidated Graphics, Inc. Form 8-K (February 14, 2006),  Exhibit 10.1).                                                                                                                                                                                                                                                                          |
| *      |       | 10.6          | — |   | Change in Control  Agreement between the Company and Joe R. Davis dated as of July 25, 2000  (Consolidated Graphics, Inc. Form 10-K (March 31, 2001), Exhibit 10.8).                                                                                                                                                                                                                                                                     |
| *      |       | 10.7          | — |   | Amendment to Change in  Control Agreement between the Company and Joe R. Davis dated as of  February 13, 2006 (Consolidated Graphics, Inc. Form 8-K (February 14,  2006), Exhibit 10.2).                                                                                                                                                                                                                                                      |
| *      |       | 10.8          | — |   | Employment Agreement  between the Company and G. Christopher Colville dated as of March 1,  2002 (Consolidated Graphics, Inc. Form 10-K (March 31, 2002), Exhibit  10.5).                                                                                                                                                                                                                                                                |
| *      |       | 10.9          | — |   | Change in Control  Agreement between the Company and G. Christopher Colville dated as of  March 1, 2002 (Consolidated Graphics, Inc. Form 10-K (March 31,  2002), Exhibit 10.6).                                                                                                                                                                                                                                                         |
| *      |       | 10.10         | — |   | Credit Agreement among  the Company and Bank One, NA, as Administrative Agent and Bank One Capital  Markets, Inc., as Lead Arranger and Sole Book Runner and Wells Fargo Bank  Texas, National Association, as Syndication Agent, dated as of  November 10, 2003 (Consolidated Graphics, Inc. Form 8-K  (November 14, 2003), Exhibit 10).                                                                                                |
| *      |       | 10.11         | — |   | Form of Indemnification  Agreement for directors and officers (Consolidated Graphics, Inc.  Form 10-Q (June 30, 2004), Exhibit 10.1).                                                                                                                                                                                                                                                                                                    |
| *      |       | 10.12         | — |   | Amended  Schedule identifying the directors and officers parties to  Indemnification Agreements with the Company. (Consolidated Graphics, Inc.  Form 10-K (March 31, 2005), Exhibit 10.11).                                                                                                                                                                                                                                                   |
| *      |       | 10.13         | — |   | Form of Employee and  Director Stock Option Agreement (Consolidated Graphics, Inc. Form 10-Q (June  30, 2005), Exhibit 10.1). +                                                                                                                                                                                                                                                                                                                    |
|   |       | 21            | — |   | List of Subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |       | 23            | — |   | Consent of KPMG LLP.                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |       | 24            | — |   | Powers of Attorney.                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |       | 31.1          | — |   | Certification of Joe R.  Davis pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                     |
|   |       | 31.2          | — |   | Certification of G.  Christopher Colville pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.                                                                                                                                                                                                                                                                                                                                         |
|   |       | 32.1          | — |   | Certification of Joe R.  Davis pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                     |
|   |       | 32.2          | — |   | Certification of G.  Christopher Colville pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002.                                                                                                                                                                                                                                                                                                                                         |
|        |            |               |        |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |        |  |  |

----

*              Incorporated by reference.

+              Compensatory plan or arrangementunder which executive officers or directors of the Company may participate.

 

 

43

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**SCHEDULE II—VALUATIONAND QUALIFYING ACCOUNTS**

 
| **Description**                     | ** ** | **Balance at  Beginning  of Year** | ** ** | **Amount  Charged  to Expense** | ** ** | **Utilization  of Reserve  (Net of  Recoveries)** | ** ** | **Balance  at End  of Year** | ** ** |
|-------------------------------------|------------|------------------------------------|------------|---------------------------------|------------|---------------------------------------------------|------------|------------------------------|------------|
|                                |       |                               |       |                            |       |                                              |       |                         |       |
| **Allowance for Doubtful Accounts** |       |                               |       |                            |       |                                              |       |                         |       |
| Year Ended  March 31, 2006     |       | $                                  | 2,465      |                            | $          | 1,676                                             |       | $                            | (1,627     | ) | $ | 2,514 |   |
| Year Ended  March 31, 2005     |       | 2,448                              |       | 588                             |       | (571                                              | )          | 2,465                        |       |
| Year Ended  March 31, 2004     |       | 1,637                              |       | 2,321                           |       | (1,510                                            | )          | 2,448                        |       |
|                                     |            |                                    |            |                                 |            |                                                   |            |                              |            |  |  |  |  |

 

**Reportof Independent Registered Public Accounting Firm**

 

The Board of Directorsand Stockholders

ConsolidatedGraphics, Inc.:

 

Under date of June 7,2006, we reported on the consolidated balance sheets of ConsolidatedGraphics, Inc. and subsidiaries as of March 31, 2006 and 2005, andthe related consolidated statements of income, shareholders’ equity, and cashflows for each of the years in the three-year period ended March 31, 2006,which are included in this Annual Report on Form 10-K. In connection withour audits of the aforementioned consolidated financial statements, we alsoaudited the Valuation and Qualifying Accounts Schedule (Schedule II)listed in the index at Item 15(a)(2), for the period indicated above. Thisschedule is the responsibility of the Company’s management. Ourresponsibility is to express an opinion on this schedule based on ouraudits.

 

In our opinion, thefinancial information presented in Schedule II for the years endedMarch 31, 2006 and 2005, when considered in relation to the basicconsolidated financial statements taken as a whole, presents fairly, in allmaterial respects, the information set forth therein.

 

/s/ KPMG LLP

 

Houston, Texas

June 7, 2006

 

 

44

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**SIGNATURES**

 

**Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Actof 1934, the registrant has duly caused this report to be signed on its behalfby the undersigned, thereunder duly authorized, in the City of Houston, Stateof Texas on the 8th day of June, 2006.**

 
|       |       | CONSOLIDATED GRAPHICS,  INC. |
|------------|------------|------------------------------|
|       |       |                         |
|       |       | By:                          | /s/ JOE R. DAVIS |   |
| ** ** | ** ** |                         | **Joe  R. Davis  Chief Executive Officer and  Chairman of the Board of Directors** |   |

 

**Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.**

 

 
| **Signature**               | ** ** | **Title**                                             | ** ** | **Date**           |
|-----------------------------|------------|-------------------------------------------------------|------------|--------------------|
|                        |       |                                                  |       |               |
| /s/ JOE. R.  DAVIS          |       | Chief Executive                                       |       |               |
| Joe R. Davis                |       | Officer and  Director                                 |       |               |
|                        |       | (Principal  Executive Officer)                        |       | June 8,  2006 |
|                        |       |                                                  |       |               |
|                        |       |                                                  |       |               |
| /s/  G.CHRISTOPHER COLVILLE |       | Executive Vice  President,                            |       |               |
| G. Christopher  Colville    |       | Chief Financial  and Accounting Officer and Secretary |       |               |
|                        |       | (Principal  Financial and Accounting Officer)         |       | June 8,  2006 |
|                        |       |                                                  |       |               |
|                        |       |                                                  |       |               |
| /s/ LARRY J. ALEXANDER*     |       | Director                                              |       |               |
| Larry J.  Alexander         |       |                                                  |       |               |
|                        |       |                                                  |       |               |
| /s/ BRADY F.  CARRUTH*      |       | Director                                              |       |               |
| Brady F. Carruth            |       |                                                  |       |               |
|                        |       |                                                  |       |               |
| /s/ GARY L.  FORBES*        |       | Director                                              |       |               |
| Gary L. Forbes              |       |                                                  |       |               |
|                        |       |                                                  |       |               |
| /s/ JAMES H.  LIMMER*       |       | Director                                              |       |               |
| James H. Limmer             |       |                                                  |       |               |
|                        |       |                                                  |       |               |
| /s/ HUGH N.  WEST*          |       | Director                                              |       |               |
| Hugh N. West                |       |                                                  |       |               |

 
| *By:   | /s/ JOE. R. DAVIS              |   |
|--------|--------------------------------|--------|
|   | Joe R. Davis  Attorney-in-Fact |   | June 8,  2006 |

 

 

45

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** **

**Exhibit Index**

** **
| *      |   | 3.1   |   | — |   | Restated Articles of  Incorporation of the Company filed with the Secretary of State of the State  of Texas on July 27, 1994 (Consolidated Graphics, Inc. Form 10-Q  (June 30, 1994), Exhibit 4(a)).                                                                                                                                                                                                                                     |
|--------|--------|-------|--------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *      |   | 3.2   |   | — |   | Articles of Amendment  to the Restated Articles of Incorporation of the Company dated as of  July 29, 1998 (Consolidated Graphics, Inc. Form 10- Q (June 30,  1998), Exhibit 3.1).                                                                                                                                                                                                                                                       |
| *      |   | 3.3   |   | — |   | Second Amended and  Restated By-Laws of the Company, adopted as of May 25, 2004 (Consolidated  Graphics, Inc. Form 10-Q (June 30, 2004), Exhibit 3.3).                                                                                                                                                                                                                                                                                        |
| *      |   | 4.1   |   | — |   | Specimen Common Stock  Certificate (Consolidated Graphics, Inc. Form 10-K (March 31, 1998),  Exhibit 4.1).                                                                                                                                                                                                                                                                                                                                    |
| *      |   | 4.2   |   | — |   | Rights Agreement dated  as of December 15, 1999 between Consolidated Graphics, Inc. and American  Stock Transfer and Trust Company, as Rights Agent, which includes as Exhibit A  the Certificate of Designations of Series A Preferred Stock, as Exhibit B the  form of Rights Certificate and as Exhibit C the form of summary of Rights to  Purchase Shares (Consolidated Graphics, Inc. Form 8-K (December 15,  1999), Exhibit 4.1). |
| *      |   | 10.1  |   | — |   | 1994 Consolidated  Graphics, Inc. Long-Term Incentive Plan (Consolidated Graphics, Inc.  Registration Statement on Form S-1 (Reg. No. 33-77468), Exhibit 10.14). +                                                                                                                                                                                                                                                                                 |
| *      |   | 10.2  |   | — |   | 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). +                                                                                                                                      |
| *      |   | 10.3  |   | — |   | 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). +                                                                                                                          |
| *      |   | 10.4  |   | — |   | Third 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 3,435,000 to 4,035,000) (Consolidated Graphics, Inc. Form 10-K  (March 31, 2003), Exhibit 10.5). +                                                                                                                                                        |
| *      |   | 10.5  |   | — |   | Employment Agreement  between the Company and Joe R. Davis dated as of February 13, 2006  (Consolidated Graphics, Inc. Form 8-K (February 14, 2006),  Exhibit 10.1).                                                                                                                                                                                                                                                                          |
| *      |   | 10.6  |   | — |   | Change in Control  Agreement between the Company and Joe R. Davis dated as of July 25, 2000  (Consolidated Graphics, Inc. Form 10-K (March 31, 2001), Exhibit 10.8).                                                                                                                                                                                                                                                                     |
| *      |   | 10.7  |   | — |   | Amendment to Change in  Control Agreement between the Company and Joe R. Davis dated as of February 13,  2006 (Consolidated Graphics, Inc. Form 8-K (February 14, 2006), Exhibit  10.2).                                                                                                                                                                                                                                                      |
| *      |   | 10.8  |   | — |   | Employment Agreement  between the Company and G. Christopher Colville dated as of March 1,  2002 (Consolidated Graphics, Inc. Form 10-K (March 31, 2002), Exhibit  10.5).                                                                                                                                                                                                                                                                |
| *      |   | 10.9  |   | — |   | Change in Control  Agreement between the Company and G. Christopher Colville dated as of  March 1, 2002 (Consolidated Graphics, Inc. Form 10-K (March 31,  2002), Exhibit 10.6).                                                                                                                                                                                                                                                         |
| *      |   | 10.10 |   | — |   | Credit Agreement among  the Company and Bank One, NA, as Administrative Agent and Bank One Capital  Markets, Inc., as Lead Arranger and Sole Book Runner and Wells Fargo Bank  Texas, National Association, as Syndication Agent, dated as of  November 10, 2003 (Consolidated Graphics, Inc. Form 8-K (November 14,  2003), Exhibit 10).                                                                                                |
| *      |   | 10.11 |   | — |   | Form of Indemnification  Agreement for directors and officers (Consolidated Graphics, Inc.  Form 10-Q (June 30, 2004), Exhibit 10.1).                                                                                                                                                                                                                                                                                                    |
| *      |   | 10.12 |   | — |   | Amended  Schedule identifying the directors and officers parties to Indemnification  Agreements with the Company. (Consolidated Graphics, Inc. Form 10-K (March  31, 2005), Exhibit 10.11).                                                                                                                                                                                                                                                   |
| *      |   | 10.13 |   | — |   | Form of Employee and  Director Stock Option Agreement (Consolidated Graphics, Inc. Form 10-Q (June  30, 2005), Exhibit 10.1). +                                                                                                                                                                                                                                                                                                                    |
|   |   | 21    |   | — |   | List of Subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   | 23    |   | — |   | Consent of KPMG LLP.                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   | 24    |   | — |   | Powers of Attorney.                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   | 31.1  |   | — |   | Certification of Joe R.  Davis pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                     |
|   |   | 31.2  |   | — |   | Certification of G.  Christopher Colville pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.                                                                                                                                                                                                                                                                                                                                         |
|   |   | 32.1  |   | — |   | Certification of Joe R.  Davis pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                     |
|   |   | 32.2  |   | — |   | Certification of G.  Christopher Colville pursuant to Section 906 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                                                                                                                                                                                         |

----

*              Incorporated by reference.

+              Compensatory plan or arrangementunder which executive officers or directors of the Company may participate.

 

46

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