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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

(Mark One)  

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2003

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 0-24068


CONSOLIDATED GRAPHICS, INC.
(Exact name of Registrant as specified in its charter)

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

5858 Westheimer Road, Suite 200
Houston, Texas

(Address of principal executive offices)

 

77057
(Zip Code)

Registrant's telephone number, including area code: (713) 787-0977

        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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 Yes ý    No o

        Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

 Yes ý    No o

        The number of shares of Common Stock, par value $.01 per share, of the Registrant outstanding at July 31, 2003 was 13,404,798.





CONSOLIDATED GRAPHICS, INC.

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003


INDEX

 
Part I—Financial Information
 
Item 1—Financial Statements
   
Consolidated Balance Sheets at June 30, 2003 and March 31, 2003
   
Consolidated Income Statements for the Three Months Ended June 30, 2003 and 2002
   
Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2003 and 2002
   
Notes to Consolidated Financial Statements
 
Item 2—Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Item 3—Quantitative and Qualitative Disclosure About Market Risk
 
Item 4—Controls and Procedures

Part II—Other Information
 
Item 1—Legal Proceedings
 
Item 2—Changes in Securities and Use of Proceeds
 
Item 3—Defaults upon Senior Securities
 
Item 4—Submission of Matters to a Vote of Security Holders
 
Item 5—Other Information
 
Item 6—Exhibits and Reports on Form 8-K

Signatures

2



PART I—FINANCIAL INFORMATION

ITEM 1. Financial Statements


CONSOLIDATED GRAPHICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)

 
  June 30,
2003

  March 31,
2003

 
  (Unaudited)

  (Audited)

ASSETS
CURRENT ASSETS            
  Cash and cash equivalents   $ 10,351   $ 9,641
  Accounts receivable, net     99,661     107,137
  Inventories     29,746     28,429
  Prepaid expenses     5,025     5,103
  Deferred income taxes     4,216     4,087
   
 
    Total current assets     148,999     154,397
PROPERTY AND EQUIPMENT, net     272,280     278,134
GOODWILL, net     72,538     72,503
OTHER ASSETS     7,105     7,549
   
 
    $ 500,922   $ 512,583
   
 
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES            
  Current portion of long-term debt   $ 20,460   $ 20,595
  Accounts payable     31,093     34,194
  Accrued liabilities     43,352     39,456
  Income taxes payable     48     48
   
 
    Total current liabilities     94,953     94,293
LONG-TERM DEBT, net of current portion     125,825     143,167
DEFERRED INCOME TAXES     55,146     53,900
COMMITMENTS AND CONTINGENCIES            
SHAREHOLDERS' EQUITY            
  Common stock, $.01 par value; 100,000,000 shares authorized; 13,361,003 and 13,346,949 issued and outstanding     133     133
  Additional paid-in capital     159,730     159,520
  Retained earnings     65,135     61,570
   
 
    Total shareholders' equity     224,998     221,223
   
 
    $ 500,922   $ 512,583
   
 

See accompanying notes to consolidated financial statements.

3



CONSOLIDATED GRAPHICS, INC.
CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share data)
(Unaudited)

 
  Three Months Ended
June 30

 
 
  2003
  2002
 
SALES   $ 165,829   $ 176,104  
COST OF SALES     126,768     132,654  
   
 
 
  Gross profit     39,061     43,450  
SELLING EXPENSES     18,160     19,452  
GENERAL AND ADMINISTRATIVE EXPENSES     13,183     12,989  
   
 
 
  Operating income     7,718     11,009  
INTEREST EXPENSE, net     1,968     2,858  
   
 
 
  Income before taxes and accounting change     5,750     8,151  
INCOME TAXES     2,185     3,097  
   
 
 
  Income before accounting change     3,565     5,054  
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, net of tax         74,376  
   
 
 
  Net income (loss)   $ 3,565   $ (69,322 )
   
 
 
BEFORE ACCOUNTING CHANGE              
  Basic earnings per share   $ .27   $ .38  
  Diluted earnings per share   $ .26   $ .37  
AFTER ACCOUNTING CHANGE              
  Basic earnings (loss) per share   $ .27   $ (5.25 )
  Diluted earnings (loss) per share   $ .26   $ (5.11 )
SHARES USED TO COMPUTE EARNINGS PER SHARE              
  Basic     13,350     13,209  
  Diluted     13,617     13,563  

See accompanying notes to consolidated financial statements.

4



CONSOLIDATED GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

 
  Three Months Ended
June 30

 
 
  2003
  2002
 
OPERATING ACTIVITIES              
  Net income (loss)   $ 3,565   $ (69,322 )
  Adjustments to reconcile net income (loss) to net cash provided by operating activities—              
    Cumulative effect of accounting change, net of tax         74,376  
    Depreciation and amortization     8,842     9,134  
    Deferred income tax provision     1,117     3,540  
    Changes in assets and liabilities, net of effects of acquisitions—              
      Accounts receivable, net     7,476     14,443  
      Inventories     (1,272 )   1,268  
      Prepaid expenses     78     456  
      Other assets     (474 )   1,824  
      Accounts payable and accrued liabilities     850     (1,319 )
      Income taxes payable         1,084  
   
 
 
        Net cash provided by operating activities     20,182     35,484  
   
 
 

INVESTING ACTIVITIES

 

 

 

 

 

 

 
  Acquisitions of businesses, net of cash acquired     (416 )   (4,338 )
  Purchases of property and equipment     (2,336 )   (4,374 )
  Proceeds from asset dispositions     1,234     510  
   
 
 
        Net cash used in investing activities     (1,518 )   (8,202 )
   
 
 

FINANCING ACTIVITIES

 

 

 

 

 

 

 
  Proceeds from bank credit facilities     919     418  
  Payments on bank credit facilities     (15,300 )   (25,031 )
  Payments on long-term debt     (3,783 )   (2,145 )
  Proceeds from exercise of stock options     210     114  
   
 
 
        Net cash used in financing activities     (17,954 )   (26,644 )
   
 
 
NET INCREASE IN CASH AND CASH EQUIVALENTS     710     638  
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD     9,641     8,955  
   
 
 
CASH AND CASH EQUIVALENTS AT END OF PERIOD   $ 10,351   $ 9,593  
   
 
 

See accompanying notes to consolidated financial statements.

5



CONSOLIDATED GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

        The accompanying unaudited consolidated financial statements include the accounts of Consolidated Graphics, Inc. and subsidiaries (collectively, the "Company"). All intercompany accounts and transactions have been eliminated. Such statements have been prepared in accordance with generally accepted accounting principles and the Securities and Exchange Commission's rules and regulations for reporting interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the accompanying unaudited consolidated financial statements have been included. Operating results for the three months ended June 30, 2003 are not necessarily indicative of future operating results. Balance sheet information as of March 31, 2003 has been derived from the 2003 annual audited consolidated financial statements of the Company. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Form 10-K for the fiscal year ended March 31, 2003, filed with the Securities and Exchange Commission in June 2003.

        Earnings (Loss) Per Share—Basic earnings (loss) per share are calculated by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted earnings (loss) per share reflect net income (loss) divided by the weighted average number of common shares and dilutive stock options outstanding.

        Supplemental Cash Flow Information—The consolidated statements of cash flows provide information about the Company's sources and uses of cash and exclude the effects of non-cash transactions. The Company issued term notes payable totaling $687 (see Note 4. Long-Term Debt) during the three months ended June 30, 2003 to finance the purchase of certain new equipment. For the three months ended June 30, 2003, the Company paid (or received) cash for interest and income taxes, net of refunds, totaling $1,906 and $(3,126). For the three months ended June 30, 2002, the Company paid (or received) cash for interest and income taxes, net of refunds, totaling $2,891 and $(2,880).

        Stock-Based Compensation—The Company's only stock-based compensation plan is the Consolidated Graphics, Inc. Long-Term Incentive Plan (the "Plan"), which has been approved by the Company's shareholders. Under this Plan, employees of the Company and certain non-employee members of the Company's Board of Directors have been, or may be, granted options to purchase shares of the Company's common stock at a price not less than the market price of the stock at the date of grant. The Company has adopted the disclosure requirements of Statement of Financial Accounting Standards ("SFAS") No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, as of March 31, 2003, however as permitted under SFAS No. 123 continues to use the intrinsic value method of accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. No compensation expense or liability has been recognized by the Company in the accompanying consolidated financial statements for granted options since all were granted at the fair market value of the stock at the date of grant.

6


        Had the Company used the fair-value-based method of accounting prescribed by SFAS No. 123 and charged compensation expense against income over the vesting period for granted options at their fair value at the date of grant, net income (loss) and earnings (loss) per share as reported would have been reduced to the following pro forma amounts:

 
  Three Months Ended June 30
 
 
  2003
  2002
 
Net income (loss) as reported   $ 3,565   $ (69,322 )
  Less: pro forma compensation expense     (649 )   (623 )
   
 
 
Pro forma net income (loss)   $ 2,916   $ (69,945 )
   
 
 

Basic Earnings (Loss) Per Share:

 

 

 

 

 

 

 
Net income (loss) as reported   $ .27   $ (5.25 )
  Less: pro forma compensation expense     (.05 )   (.05 )
   
 
 
Pro forma net income (loss)   $ .22   $ (5.30 )
   
 
 

Diluted Earnings (Loss) Per Share:

 

 

 

 

 

 

 
Net income (loss) as reported   $ .26   $ (5.11 )
  Less: pro forma compensation expense     (.05 )   (.05 )
   
 
 
Pro forma net income (loss)   $ .21   $ (5.16 )
   
 
 

        The pro forma compensation expense may not be representative of future amounts because options vest over several years and generally expire upon termination of employment, and additional options may be granted in future years. For purposes of determining pro forma compensation expense, the weighted-average fair value of options on the grant date for the three months ended June 30, 2003 was $6.75, determined by the Company utilizing the Black-Scholes option-pricing model with the following key assumptions—dividend yield of 0.0%, expected volatility of 39.3%, average risk-free interest rate of 2.4% and average expected life of 5 years.

        The Black-Scholes model, as well as other currently accepted option valuation models, calculate the fair value of freely tradable, fully transferable options without vesting and/or trading restrictions, which significantly differ from the provisions associated with the Company's stock option awards. These models also require highly subjective assumptions, including future stock price volatility and expected time until exercise, which greatly affect the calculated values. Accordingly, management does not believe this model provides a reliable single measure of the fair value of the Company's stock option awards.

2. ACCOUNTING CHANGE

        Effective April 1, 2002, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets, which required it to discontinue amortizing goodwill, perform an initial transitional impairment test and conduct annual impairment tests to determine if the remaining balance of goodwill of each of its reporting units should be reduced to reflect its estimated fair value. Prior to its adoption of SFAS No. 142, the Company periodically evaluated whether the remaining balance of goodwill was recoverable by assessing current and future levels of income and cash flows on an undiscounted basis, as well as other factors, such as business trends and general market conditions. The Company determined that each of its individual printing businesses constitutes a stand-alone reporting unit under SFAS No. 142. The Company determines fair value under SFAS No. 142 using capitalization of

7


earnings estimates and market valuation multiples. A number of factors could cause the Company to further impair its goodwill balance at the date of its annual impairment test, which is March 31. These factors include a decline in the financial performance of an individual reporting unit due to adverse business developments and/or changes in general market conditions, as well as a decline in market valuation multiples.

        As of April 1, 2002, net goodwill balances attributable to each of the Company's reporting units were tested for impairment by comparing the fair value of each reporting unit to its carrying value. Based on these impairment tests the Company recognized a transitional impairment charge of $74,376, net of deferred tax benefit totaling $15,379, which is reflected as a cumulative effect of accounting change in the accompanying consolidated income statement.

3. ACQUISITIONS

        In July 2003, the Company acquired the business and assets of Custom Graphics of Solon, Ohio, which was immediately merged into another existing operation of the Company. To complete this acquisition, the Company paid cash totaling $3,696.

4. LONG-TERM DEBT

        The following is a summary of the Company's long-term debt as of:

 
  June 30,
2003

  March 31,
2003

 
Bank credit facilities   $ 74,659   $ 89,040  
Term equipment notes     62,231     65,317  
Other     9,395     9,405  
   
 
 
      146,285     163,762  
Less current portion     (20,460 )   (20,595 )
   
 
 
    $ 125,825   $ 143,167  
   
 
 

        The Company entered into a five-year $225,000 senior secured credit facility (the "Bank Credit Facility") with eleven banks in December 2000. The Bank Credit Facility is composed of a $50,000 five-year term loan (the "Term Loan"), of which $22,500 was outstanding at June 30, 2003, and a $175,000 five-year revolving credit line (the "Revolving Line"), of which $47,200 was outstanding at June 30, 2003. The Term Loan requires quarterly payments of $2,500 each through September 30, 2005.

        The proceeds of the Bank Credit Facility can be used to repay certain indebtedness, finance certain acquisitions, provide for working capital and general corporate purposes, and subject to certain restrictions, repurchase the Company's common stock. Borrowings outstanding under the Bank Credit Facility are secured by substantially all of the Company's assets other than real estate and certain equipment subject to term equipment notes and other financing. Borrowings under the Bank Credit Facility accrue interest, at the Company's option, at either (1) the London Interbank Offered Rate (LIBOR) plus a margin of 1.25% to 2.25%, or (2) an alternate base rate (based upon the greater of the agent bank's prime lending rate or the Federal Funds effective rate plus .50%) plus a margin of up to 1.00%. The Company is also required to pay a

8


commitment fee on available but unused amounts ranging from .275% to .375% annually. The interest rate margin and the commitment fee are based upon certain financial performance measures as set forth in the Bank Credit Facility, and are redetermined quarterly. On June 30, 2003, borrowings outstanding under the Term Loan and the Revolving Line accrued interest at a weighted average rate of 3.27%.

        The Company is subject to certain covenants and restrictions and must meet certain financial tests as defined in the Bank Credit Facility. The Company was in compliance with these covenants and financial tests at June 30, 2003.

        In addition, the Company maintains an auxiliary revolving credit facility (the "Auxiliary Bank Facility") with a commercial bank expiring in February 2004. The Auxiliary Bank Facility is unsecured and has a maximum borrowing capacity of $5,000. At June 30, 2003, borrowings outstanding under the Auxiliary Bank Facility totaled $4,959 and accrued interest at 3.07%.

        The Company's term equipment notes consist primarily of notes payable pursuant to financing agreements between the Company and various lenders (the "Lender Notes") and between the Company and two printing equipment manufacturers (the "Equipment Notes"). At June 30, 2003 outstanding borrowings under the Lender Notes totaled $34,900 and accrued interest at a weighted average rate of 5.91%. The Lender Notes provide for fixed monthly principal payments plus interest over a five-year term, ending with a balloon payment at maturity and are secured by the purchased equipment. At June 30, 2003 outstanding borrowings under the Equipment Notes totaled $25,376 and accrued interest at a weighted average rate of 6.15%. The Equipment Notes provide for fixed payments of principal and interest for defined periods of up to ten years from the date of issuance and are secured by the purchased equipment. The remaining balance of term equipment notes totaling $1,955 primarily consists of various secured debt obligations assumed by the Company in connection with certain prior year acquisitions. The Company is not subject to any significant financial covenants in connection with any of the term equipment notes; however, the Bank Credit Facility places certain limitations on the amount of additional term note obligations the Company may incur in the future.

        The Company's other debt obligations consist of a promissory note totaling $4,356, industrial revenue bonds totaling $4,505 and various other debt obligations totaling $534. The Company does not have any significant financial covenants or restrictions associated with these other debt obligations.

5. RECENT ACCOUNTING PRONOUNCEMENTS

        SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, was issued in April 2003 and amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. Management does not believe that the adoption of SFAS No. 149 will have a material impact on its financial position or results of operations.

        SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity, was issued in May 2003 and requires issuers to classify as liabilities (or assets in some circumstances) three classes of freestanding financial instruments that embody obligations for the issuer. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. Management does not believe the adoption of SFAS No. 150 will have a material impact on its financial position or results of operations.

9


        The FASB issued Interpretation ("FIN") No. 46, Consolidation of Variable Interest Entities, in January 2003, which requires that a company that controls another entity through interests other than voting interests should consolidate such controlled entity in all cases for interim periods beginning after June 15, 2003. Management does not believe the adoption of FIN No. 46 will have a material impact on its financial position or results of operations.

10




ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

        The following discussion contains forward-looking information. Readers are cautioned that such information involves known and unknown risks and uncertainties, including those created by general market conditions, competition and the possibility that events may occur which limit the ability of our Company to maintain or improve its operating results and acquire additional printing businesses. Although we believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could be inaccurate, and there can be no assurance that the forward-looking statements included herein will prove to be accurate. The inclusion of such information should not be regarded as a representation by us or any other persons that our objectives and plans will be achieved. We expressly disclaim any duty to provide updates to these forward-looking statements, assumptions or other factors after the date of this Report on Form 10-Q to reflect the occurrence of events or circumstances or changes in expectations.

        The following discussion of the financial condition and performance of our Company should be read in conjunction with the consolidated financial statements included herein and the consolidated financial statements and related notes and other detailed information regarding our Company included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2003 and other reports filed by us with the Securities and Exchange Commission. Operating results for the three months ended June 30, 2003 are not necessarily indicative of the results to be expected for the entire fiscal year ending March 31, 2004 or any periods thereafter.

Overview

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

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

        The majority of our sales are derived from commercial printing services, which include electronic prepress, printing, finishing, storage and delivery of high quality, custom-designed products. Examples of such

11


products include multicolor product and capability brochures, shareholder communications, catalogs, training manuals, point-of-purchase marketing materials and direct mail pieces. We also serve our customers by providing a variety of print-related services, including fulfillment and mailing services and Internet-based software solutions and electronic media services through CGXmedia.

        Our sales are generated by individual orders through commissioned sales personnel and, in some cases, pursuant to national contracts. We recognize revenue from these orders when we deliver the ordered products. To a large extent, continued engagement of our Company by our customers for successive jobs depends upon the customer's satisfaction with the quality of services we provide. As such it is difficult for us to predict the number, size and profitability of printing jobs that we expect to produce for more than a few weeks in advance.

        Our cost of sales mainly consists of raw materials consumed in the printing process, as well as labor and outside services. Paper is the largest component of our materials cost; however, fluctuations in paper prices generally do not significantly impact our operating margins because any changes in paper pricing are generally passed on by our printing businesses. Additionally, our cost of sales includes maintenance, repair, rental and insurance costs associated with operating our facilities and equipment, along with depreciation charges.

        Our selling expenses generally include the salary and commissions paid to our sales professionals or third-party sales agents, along with promotional, travel and entertainment costs. Our general and administrative expenses generally include the salary and benefits paid to support personnel at our printing businesses and our corporate staff, as well as office rent, utilities and communications expenses, and various professional fees.

Results of Operations

        The following tables set forth the Company's historical consolidated income statements for the periods indicated:

 
   
   
  As a Percentage
of Sales

 
 
  Three Months
Ended June 30

  Three Months
Ended June 30

 
 
  2003
  2002
  2003
  2002
 
 
  (In millions)

   
   
 
Sales   $ 165.8   $ 176.1   100.0 % 100.0 %
Cost of sales     126.7     132.7   76.4   75.3  
   
 
 
 
 
  Gross profit     39.1     43.4   23.6   24.7  
Selling expenses     18.2     19.5   11.0   11.0  
General and administrative expenses     13.2     12.9   7.9   7.4  
   
 
 
 
 
  Operating income     7.7     11.0   4.7   6.3  
Interest expense, net     2.0     2.9   1.2   1.7  
   
 
 
 
 
  Income before taxes and accounting change     5.7     8.1   3.5   4.6  
Income taxes     2.1     3.0   1.4   1.7  
   
 
 
 
 
  Income before accounting change   $ 3.6   $ 5.1   2.1 % 2.9 %
   
 
 
 
 

Analysis of Consolidated Income Statements for the Quarter Ended June 30, 2003 as Compared to the Quarter Ended June 30, 2002

        Sales for the current quarter decreased 6% to $165.8 million from $176.1 million in the corresponding quarter a year ago. The decrease primarily reflects reduced print demand and competitive pricing pressures as a result of the continued economic weakness in the United States.

        Gross profit margin for the current quarter declined to 23.6% from 24.7% in the corresponding quarter a year ago, reflecting continued pricing pressures and prevailing adverse industry conditions.

12


        Selling expenses for the current quarter decreased 7% to $18.2 million from $19.5 million in the corresponding quarter a year ago. This decline is directly attributable to the reduced sales levels noted above. As a percentage of sales, selling expenses for the quarter remained constant at 11.0% compared to the corresponding quarter a year ago.

        General and administrative expenses for the current quarter increased 2% to $13.2 million from $12.9 million in the corresponding quarter a year ago. As a percentage of sales, general and administrative expenses for the quarter increased to 7.9% from 7.4% in the corresponding quarter a year ago. While our fixed administrative cost structure necessary to maintain our current level of operations remained relatively constant, the impact of the sales decline noted above resulted in the percentage increase.

        Interest expense for the current quarter decreased 31% to $2.0 million from $2.9 million in the corresponding quarter a year ago. The decrease is primarily due to lower borrowings outstanding under our variable-rate bank credit facility, coupled with a more favorable interest rate environment as compared to the prior year.

        Effective April 1, 2002, we adopted Statement of Financial Accounting Standards ("SFAS") No. 142 which required us to perform a series of transitional impairment tests pertaining to the valuation of our outstanding goodwill balance, which totaled $199.3 million as of March 31, 2002. Pursuant to the adoption of SFAS No. 142, we determined that an after-tax impairment charge of $74.4 million was required, which was classified as the cumulative effect of an accounting change.

        We provided for incomes taxes of $2.1 million in the current quarter, as compared to $3.0 million in the corresponding quarter a year ago, and our effective tax rate remained constant at 38% for both periods.

Liquidity and Capital Resources

Sources and Uses of Cash

        Our historical sources of cash have primarily been cash provided by operations or borrowings under our bank credit facilities. Our historical uses of cash have been for acquisitions of printing businesses, capital expenditures, and payment of principal and interest on outstanding debt obligations. Supplemental information pertaining to our historical sources and uses of cash is presented as follows and should be read in conjunction with our consolidated statements of cash flows and notes thereto included in Item 1. Financial Statements:

 
  Three Months
Ended June 30

 
 
  2003
  2002
 
 
  (In millions)

 
Net cash provided by operating activities   $ 20.2   $ 35.5  
Acquisitions of businesses     (.4 )   (4.3 )
Capital expenditures     (2.3 )   (4.4 )
Net repayments under bank credit facilities     (14.4 )   (24.6 )
Payments on term equipment notes and other debt     (3.8 )   (2.1 )

13


        Additionally, our cash position, working capital and debt obligations are shown below for the periods indicated and should be read in conjunction with our consolidated balance sheets and notes thereto included in Item 1. Financial Statements:

 
  June 30,
2003

  March 31,
2003

 
  (In millions)

Cash and cash equivalents   $ 10.4   $ 9.6
Working capital     54.0     60.1
Total debt obligations     146.3     163.8

        We believe that our cash flow provided by operations will be adequate to cover our fiscal 2004 working capital needs, debt service requirements and planned capital expenditures to the extent such items are known or are reasonably determinable based on current business and market conditions. However, we may elect to finance certain of our capital expenditure requirements through borrowings under our bank credit facilities or the issuance of additional term notes.

        In July 2003, we acquired the business and assets of Custom Graphics of Solon, Ohio, which was immediately merged into another one of our existing operations. To complete this acquisition, we paid cash totaling $3.7 million.

        We intend to continue pursuing acquisition opportunities at prices we believe are reasonable based upon market conditions. However, we cannot accurately predict the timing, size and success of our acquisition efforts or our associated potential capital commitments. There can be no assurance that we will be able to acquire additional businesses on terms acceptable to us.

        We expect to fund future acquisitions through cash flow provided by operations, additional borrowings or the issuance of our common stock. The extent to which we will be willing or able to use our common stock to make acquisitions will depend on its market value from time to time and the willingness of potential sellers to accept it as full or partial payment.

Debt Obligations

        We entered into a five-year $225.0 million senior secured credit facility (the "Bank Credit Facility") with eleven banks in December 2000. The Bank Credit Facility is composed of a $50.0 million five-year term loan (the "Term Loan"), of which $22.5 million was outstanding at June 30, 2003, and a $175.0 million five-year revolving credit line (the "Revolving Line"), of which $47.2 million was outstanding at June 30, 2003. The Term Loan requires quarterly payments of $2.5 million each through September 30, 2005.

        The proceeds of the Bank Credit Facility can be used to repay certain indebtedness, finance certain acquisitions, provide for working capital and general corporate purposes and, subject to certain restrictions, repurchase our common stock. Borrowings outstanding under the Bank Credit Facility are secured by substantially all of our assets other than real estate and certain equipment subject to term equipment notes and other financings. Borrowings under the Bank Credit Facility accrue interest, at our option, at either (1) the London Interbank Offered Rate (LIBOR) plus a margin of 1.25% to 2.25%, or (2) an alternate base rate (based upon the greater of the agent bank's prime lending rate or the Federal Funds effective rate plus .50%) plus a margin of up to 1.00%. We are also required to pay a commitment fee on available but unused amounts ranging from .275% to .375% annually. The interest rate margin and the commitment fee are based upon certain financial performance measures as set forth in the Bank Credit Facility, and are redetermined quarterly. On June 30, 2003, borrowings outstanding under the Term Loan and the Revolving Line accrued interest at a weighted average rate of 3.27%.

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        We are subject to certain covenants and restrictions and we must meet certain financial tests as defined in the Bank Credit Facility. We were in compliance with these covenants and financial tests at June 30, 2003.

        In addition, we maintain an auxiliary revolving credit facility (the "Auxiliary Bank Facility") with a commercial bank expiring in February 2004. This Auxiliary Bank Facility is unsecured and has a maximum borrowing capacity of $5.0 million. At June 30, 2003, borrowings outstanding under the Auxiliary Facility totaled $5.0 million and accrued interest at a rate of 3.07%.

        Our term equipment notes consist primarily of notes payable pursuant to financing agreements between us and various lenders (the "Lender Notes") and between us and two printing equipment manufacturers (the "Equipment Notes"). At June 30, 2003 outstanding borrowings under the Lender Notes totaled $34.9 million and accrued interest at a weighted average rate of 5.91%. The Lender Notes provide for fixed monthly principal payments plus interest over a five-year term, ending with a balloon payment upon maturity and are secured by the purchased equipment. At June 30, 2003 outstanding borrowings under the Equipment Notes totaled $25.3 million and accrued interest at a weighted average rate of 6.15%. The Equipment Notes provide for fixed payments of principal and interest for defined periods of up to ten years from the date of issuance and are secured by the purchased equipment. The remaining balance of term equipment notes totaling $2.0 million primarily consists of various secured debt obligations assumed by us in connection with certain prior year acquisitions. We are not subject to any significant financial covenants in connection with any of the term equipment notes; however, the Bank Credit Facility places certain limitations on the amount of additional term note obligations we may incur in the future.

        Our other debt obligations consist of a promissory note totaling $4.4 million, industrial revenue bonds totaling $4.5 million and various other debt obligations totaling $.5 million. We do not have any significant financial covenants or restrictions associated with these other debt obligations.

Contractual Obligations and Other Commitments

        Operating Leases—We have entered into various noncancelable operating leases primarily related to facilities and equipment used in the ordinary course of our business. Our future contractual obligations under such operating leases total approximately $41.5 million as of June 30, 2003.

        Contingent Transaction Consideration—We have entered into earnout agreements in connection with certain prior year acquisitions of printing businesses. If the acquired printing businesses generate operating profits in excess of pre-determined targets, we may be obligated to make additional cash payments. As of June 30, 2003, we were contingently obligated through fiscal 2005 to make additional cash payments of up to $3.5 million. Based on current operating levels, we expect that the actual cash payments pursuant to these contractual obligations will be substantially less than the maximum amount indicated.

        Letters of Credit—In connection with our assumption of obligations under outstanding industrial revenue bonds related to certain prior year acquisitions of printing businesses, which are reflected as debt in the accompanying consolidated financial statements, we had two letters of credit outstanding as of June 30, 2003 for a combined total of $4.6 million. These letters of credit were issued pursuant to the terms of our Bank Credit Facility, which expires in 2005, and we may be required to obtain replacement letters of credit at that time.

        Insurance Programs—We maintain third-party insurance coverage in amounts and against risks we believe are reasonable under our circumstances. Pursuant to certain components of our insurance program, we share the risk of loss with our insurance underwriters by maintaining high deductibles subject to aggregate annual loss limitations. For these components, we accrue expected loss amounts which are determined using a combination of our historical loss experience and subjective assessment of our future loss exposure, along with advice provided by administrators and consulting actuaries. The estimates of expected loss amounts are subject to uncertainties arising from various sources, including changes in claims reporting patterns, claims settlement patterns, judicial decisions, legislation and economic conditions. Although we believe that the accrued estimated loss amounts are reasonable under the circumstances, significant differences related to the

15


items noted above could materially affect our Company's risk exposure, insurance obligations and future expense.

Factors Which May Affect Future Results

        Our future operating results may be impacted by a number of factors, including general economic conditions and competitive factors in our industry, seasonal and cyclical variations in commercial printing demand, reasonable growth in the demand for our products and retention of key management and operating personnel. To the extent an economic slowdown causes businesses to reduce their spending on printed advertising and marketing materials, the demand for commercial printing services may be adversely affected. Further, compounding a decline in demand, competitive pricing pressures may occur and negatively impact the level of sales and profit margins generated by our printing businesses. Also, the magnitude and timing of any future acquisitions, as well as our ability to absorb and manage such businesses, will impact our future results. Because of these and other factors, there can be no assurance that we will not experience material fluctuations in our future operating results or cash flows on a quarterly or annual basis.

Critical Accounting Policies

        We have identified our critical accounting policies based on the following factors—significance to our overall financial statement presentation, complexity of the policy and its use of estimates and assumptions. We are required to make certain estimates and assumptions in determining the reported amounts of assets and liabilities, disclosure of contingent liabilities and the reported amounts of revenues and expenses. We evaluate our estimates and assumptions on an ongoing basis and rely on historical experience and various other factors that we believe to be reasonable under the circumstances to determine such estimates. Because uncertainties with respect to estimates and assumptions are inherent in the preparation of financial statements, actual results could differ from these estimates.

        Asset Valuations—We maintain an allowance for doubtful accounts as deemed necessary based upon expected collectibility of accounts receivable. We exercise judgment in determining the valuation and useful lives of our long-lived assets and in the allocation of the purchase price for acquisitions. We determine the realization of property and equipment by assessing the future cash flows and income from such assets on an undiscounted basis, as well as other factors such as business trends and general economic conditions. Pursuant to the requirements of SFAS No. 142, as of the end of each fiscal year we are required to determine the realizability of goodwill by comparing the fair value of each reporting unit to its carrying value. The fair value is determined by using capitalization of earnings estimates and market valuation multiples for each reporting unit.

        Accruals—We are self-insured up to specified limits for the majority of the costs of our workers' compensation obligations and our group health insurance programs. We use a combination of our Company's historical loss experience and a subjective assessment of future loss exposure, along with advice provided by administrators and consulting actuaries, in determining an adequate liability for claims against which we are self-insured. We also utilize certain estimates and assumptions to determine adequate accruals for current and deferred income taxes.

Recent Accounting Pronouncements

        SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, was issued in April 2003 and amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. Management does not believe that the adoption of SFAS No. 149 will have a material impact on our financial position or results of operations.

        SFAS No.150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity, was issued in May 2003 and requires issuers to classify as liabilities (or assets in some

16


circumstances) three classes of freestanding financial instruments that embody obligations for the issuer. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. Management does not believe the adoption of SFAS No. 150 will have a material impact on its financial position or results of operations.

        The FASB issued Interpretation ("FIN") No. 46, Consolidation of Variable Interest Entities, in January 2003, which requires that a company that controls another entity through interests other than voting interests should consolidate such controlled entity in all cases for interim periods beginning after June 15, 2003. Management does not believe the adoption of FIN No. 46 will have a material impact on its financial position or results of operations.


ITEM 3. Quantitative and Qualitative Disclosure About Market Risk

        Market risk generally means the risk that losses may occur in the estimated fair value of certain financial instruments as a result of adverse movements in interest rates, foreign currency exchange rates and commodity prices. We do not hold or utilize derivative financial instruments which could expose our Company to significant market risk. However, we are exposed to market risk for changes in interest rates related primarily to our debt obligations, which includes borrowings under our bank credit facilities, various term equipment notes and other debt obligations. As of June 30, 2003, there were no material changes in our market risk or the estimated fair value of our debt obligations relative to their recorded value, as reported in our Annual Report on Form 10-K for the fiscal year ended March 31, 2003.


ITEM 4. Controls and Procedures

Disclosure Controls and Procedures

        The Company's management, with the participation of the Company's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, the Company's CEO and CFO have concluded that, as of the end of such period, the Company's disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.

Internal Control Over Financial Reporting

        There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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CONSOLIDATED GRAPHICS, INC.
PART II—OTHER INFORMATION

ITEM 1. Legal Proceedings

        From time to time, our Company is involved in litigation relating to claims arising out of its operations in the normal course of business. We maintain insurance coverages against certain potential claims in amounts which we believe to be adequate. Currently, we are not aware of any legal proceedings or claims pending against our Company that our management believes will have a material adverse effect on our financial position or results of operations.


ITEM 2. Changes in Securities and Use of Proceeds

        None.


ITEM 3. Defaults upon Senior Securities

        None.


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

        On July 24, 2003 the Company held its Annual Meeting of Shareholders. The following item was submitted to a vote of shareholders through the solicitation of proxies:

        The following persons were elected to serve as Class I directors on the Company's Board of Directors until the 2006 Annual Meeting of Shareholders or until their successors have been duly elected and qualified or until the earlier of their resignation or removal. Voting results were as follows:

 
  For

  Against(1)

   
Larry J. Alexander   12,555,704   709,639    
Brady F. Carruth   12,727,397   537,946    

        Directors continuing in office as Class II directors are Gary L. Forbes and James H. Limmer and as Class III directors are Joe R. Davis and Hugh N. West, M.D.


ITEM 5. Other Information

        None.


ITEM 6. Exhibits and Reports on Form 8-K

(a)   Exhibits:

*3.1

 

Restated Articles of Incorporation of the Company filed with the Secretary of State of the State of Texas on July 27, 1994 (Consolidated Graphics, Inc. Form 10-Q (June 30, 1994) SEC File No. 0-24068, Exhibit 4(a) ).
*3.2   Articles of Amendment to the Restated Articles of Incorporation of the Company dated as of July 29, 1998 (Consolidated Graphics, Inc. Form 10-Q (June 30, 1998) SEC File No. 0-24068, Exhibit 3.1).
*3.3   Restated By-Laws of the Company, dated as of November 2, 1998 (Consolidated Graphics, Inc. Form
     

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    10-Q (September 30, 1998) SEC File No. 0-24068, Exhibit 3.2).
*3.4   Restated By-Laws of the Company, as amended on June 23, 1999 (Consolidated Graphics, Inc. Form 10-Q (June 30, 1999) SEC File No. 0-24068, Exhibit 3.4).
*3.5   Amendments to the Restated By-Laws of the Company effective as of December 15, 1999 (Consolidated Graphics, Inc. Form8-K (December 15, 1999) SEC File No. 0-24068, Exhibit 3.2).
*3.6   Amendment to the Restated By-Laws of the Company approved by the Board of Directors and effective as of December 2, 2002 (Consolidated Graphics, Inc. Form 10-Q (December 31, 2002) SEC File No. 0-24068, Exhibit 3.6).
*4   Specimen Common Stock Certificate (Consolidated Graphics, Inc. Form 10-K (March 31, 1998) SEC File No. 0-24068, Exhibit 4.1).
*4.1   Rights Agreement dated as of December 15, 1999 between Consolidated Graphics, Inc and American Stock Transfer and Trust Company, as Rights Agent, which includes as Exhibit A the Certificate of Designations of Series A Preferred Stock, as Exhibit B the form of Rights Certificate and as Exhibit C the form of summary of Rights to Purchase Shares (Consolidated Graphics, Inc Form 8-K (December 15, 1999) SEC File No. 0-24068, Exhibit 4.1).
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

Reports on Form 8-K:

1)
Form 8-K, filed April 23, 2003 in connection with the press release announcing the Company's fiscal 2003 fourth quarter results.

2)
Form 8-K, filed June 13, 2003 in connection with the press release announcing the signing of a letter of intent to acquire Solon, Ohio based Custom Graphics, Inc.

3)
Form 8-K, filed July 17, 2003 in connection with the press release announcing the completion of the acquisition of Custom Graphics of Solon, Ohio, which was immediately merged into another existing operation of the Company.

4)
Form 8-K, filed July 23, 2003 in connection with the press release announcing the Company's fiscal 2004 first quarter results.

5)
Form 8-K, filed July 30, 2003 in connection with the Company's conference call and web cast to discuss its fiscal 2004 first quarter results.

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SIGNATURES

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

    CONSOLIDATED GRAPHICS, INC.

Dated: August 14, 2003

 

By:

/s/  
G. CHRISTOPHER COLVILLE      
G. Christopher Colville
Executive Vice President,
Chief Financial and Accounting
Officer and Secretary

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