UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(MARK ONE)

 

 

CONSOLIDATED GRAPHICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

(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
(TITLE OF CLASS)
Securities registered pursuant to Section 12(g) of the Act:
NONE

 

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of April 30, 2002:
COMMON STOCK, $.01 PAR VALUE  — $282,026,198
The number of shares outstanding of the issuer’s common stock as of April 30, 2002:
COMMON STOCK, $.01 PAR VALUE  — 13,209,658

 

DOCUMENTS INCORPORATED BY REFERENCE

1

 

CONSOLIDATED GRAPHICS, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE YEAR ENDED MARCH 31, 2002

 

 

INDEX

 

 

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

 

 

2

 

 

PART I

 

Item 1.  Business

 

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

Company Overview

Consolidated Graphics is a leading national provider of commercial printing services and is recognized as the largest sheet-fed and half-web commercial printing company in the United States. Our corporate headquarters are in Houston, Texas, and our operations include 65 printing businesses in 25 states. Each of our printing businesses has a well-established operating history, more than 25 years in most cases.

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 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 fulfillment and mailing services, which complement our traditional printing services.  Additionally, using the CGXmedia brand we capitalize on our expertise in digital processes and advanced technological capabilities to develop and market certain print-related e-commerce software solutions and electronic media services, which also complement our printing services.

Industry Background

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

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

In recent years, printing design and prepress workflow have shifted from art boards to a digital environment. Newer, more sophisticated prepress, printing and bindery equipment are more efficient, operate much faster and require less labor. Commercial printing businesses must make substantial capital investments in such newer equipment in order to remain competitive.

The introduction of digital technology and the rapid acceptance of the Internet as a means to conduct business transactions have generated demand for printing companies to offer complementary, value-added services to their customers. Examples of such complementary services include fulfillment and inventory management, inkjet labeling, mailing, CD-ROM production, on-line print procurement, digital asset maintenance, digital watermarking and eBooks.

Additionally, more and more large corporations are seeking to reduce operating costs by streamlining their purchasing process and limiting their number of suppliers.  These large customers want to align themselves with printing businesses that have a significant national presence and a wide range of capabilities to offer both commercial print and other essential print-related services.

In general, changes in prevailing U.S. economic conditions may significantly impact the commercial printing industry. To the extent weakness in the U.S. economy causes local and national corporations to reduce their spending on 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.

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Business Strategy

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

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

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

•                  Continuing to invest in new equipment and technology that enable us to provide better service and respond to the growing needs of our customers.

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

•                  Creating additional revenue sources and generating additional print demand by offering complementary services, such as those available through CGXmedia.

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

Cost Savings. Because of our size and national presence, we leverage our economies of scale to obtain preferential pricing for paper and supplies used in the printing process and for newer, more efficient equipment.  We have several national purchasing contracts in place with major suppliers and manufacturers.  Our purchasing support staff continually monitors market conditions and negotiates pricing and other contractual terms with these vendors to maximize the cost savings we achieve under these agreements. In addition, we have centralized certain administrative services, such as human resources, treasury, tax and risk management, to generate cost savings.

Best Practices/Benchmarking. Management teams at our printing businesses have access to strategic counsel and professional management techniques in such areas as planning, organization and controls. We provide a forum for them to share their knowledge of technical processes and their best practices with one another through a series of periodic national and regional meetings attended by top management and other personnel. We utilize our wide area network and management information systems to benchmark financial and operational data, and share such information across our printing businesses to help their management identify and respond to changes in operating trends.

Leadership Development. Our highly successful program to recruit, train and develop recent college graduates as printing sales and management professionals is an integral component of our growth strategy.  Participants in our Leadership Development Program follow a curriculum that provides them with the technical knowledge of printing processes, coupled with general business and managerial training. Certain aspects of this program are specifically tailored to fit the needs of each operating location. Our Leadership Development Program is unique to the industry, and we believe it is a key factor in our ability to provide a high degree of quality customer service, as well as provide a pool of talent for future management positions at our printing businesses. As of April 30, 2002, there were 161 employees of the Company who were current participants in or graduates of this program.

Printing Operations

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

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Commercial Printing Services

In general, commercial printing includes developing printable material through electronic prepress services, reproducing images on paper using printing presses and providing comprehensive finishing and delivery services. We maintain flexible production schedules in order to react swiftly to our customers’ requirements. Many printing projects require fast turnaround times, from conception through delivery, and our printing businesses must maintain physical plant and customer service staff as necessary to maximize workloads when called upon to do so. Consequently, our printing businesses do not always operate at full capacity.

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

Once printable material has been developed in the electronic prepress area, our printing operations primarily use offset lithography to reproduce images on paper. The offset lithography process provides the highest quality, lowest cost printed products for most run lengths. Short-run to medium-run commercial work is generally printed on sheet-fed presses, while longer-run printing projects are typically printed on web presses.

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

Our finishing services include cutting, folding, binding and other operations necessary to finish the printed product according to customers’ specifications.  Many of our printing operations also offer specialty finishing capabilities, such as die-cutting, embossing and foil stamping.

Other Complementary Services

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

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

By capitalizing on our expertise in digital processes and responding to the expanded communication needs of our customers, we offer print-related e-commerce software solutions and electronic media services through CGXmedia.  We have developed two Internet-based software products that have generated significant interest from our customers. These two products are described below:

•                  COIN (Custom Ordering Interactive Network) is our proprietary software tool that helps customers better manage the print process. COIN sites are customized for each client and are used for ordering, typesetting, proofing, workflow management and fulfillment of printed materials.  COIN puts control directly on the customer’s desktop, generating instant on-line proofs and providing multi-location organizations with the convenience of secure, Internet-based remote ordering capability.

5

 

•                  OPAL (On-line Private Asset Library) is used primarily by companies to store, archive and retrieve their valuable digital assets, such as images, logos, documents and other digital files, from any location via a web browser. OPAL enables customers to efficiently distribute these digital assets across multiple distribution channels, allowing groups to collaborate on projects and share materials.  OPAL utilizes sophisticated security architecture that limits access only to users authorized by the customer and can be tailored to meet specific customer applications.

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

We utilize support staff at each of our printing businesses that are trained and able to serve our customers’ needs related to our COIN and OPAL products and electronic media services. By offering these complementary, yet innovative solutions through CGXmedia, we believe that our Company has a competitive advantage that will help us generate additional sales to existing and potential consumers.

Sales And Marketing

The majority of our sales are generated by individual orders through commissioned sales personnel and, in some cases, pursuant to national contracts. As of April 30, 2002, we employed 570 sales professionals, all of whom are knowledgeable about the printing industry and the capabilities of our printing businesses. In addition to soliciting business from existing and prospective customers, our sales personnel act as liaisons between customers and our production departments and also provide technical advice and assistance to customers throughout the printing process.

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

Our primary marketing focus is on responding rapidly to customer requirements and producing high quality printed materials at competitive prices. Rapid responsiveness is essential because of the short lead time on most commercial printing projects. Our printing operations are designed to maintain maximum flexibility to meet customer needs, both on a scheduled and an emergency basis. Each of our printing businesses target projects which they believe will best utilize their equipment and expertise.

Our national accounts sales team actively pursues opportunities to obtain sole-source, multi-year printing contracts and responds to “Requests for Proposals” from large corporations seeking to leverage their print spending and limit their number of commercial print providers. As of April 30, 2002, we served 33 customers under our national accounts program, which represented approximately 5% of our Company’s total sales in fiscal 2002.  We expect the pursuit of national accounts to be an increasing contributor to our sales growth.

Customers

Our diverse customer base includes both national and local corporations operating in a wide range of industries, as well as mutual fund companies, advertising agencies, graphic design firms, catalog retailers and direct mail distributors. During fiscal 2002, we served over 13,000 customers, and our top ten customers accounted for 9% of total sales, none of which was individually more than 1.5%. We believe that our large and diverse customer base, broad geographic coverage of the United States and extensive range of printing capabilities and other complementary services may reduce our exposure to economic slowdowns that may generally affect the printing industry or any one region of the country.  However, because we typically produce a large number of advertising and marketing materials for our customers, to the extent that advertising and marketing spending is reduced during an economic downturn, our results of operations may be adversely affected.

Most of our customers are not contractually obligated to purchase printing services from us. Our customers generally place orders for individual printing projects, and our continued engagement to provide additional printing services largely depends upon, among other things, the customer’s satisfaction with the quality of services we provide.  Although we do not depend on any one customer or group of customers, our sales to many of our significant customers may fluctuate from year to year and depends upon the number, size and complexity of projects in a particular period.

6

 

Suppliers

We purchase raw materials used in the printing process (such as paper, prepress supplies, ink, chemicals and boxes) from a number of national and local suppliers and we are not materially dependent on any one supplier. We use a two-tiered approach to purchasing in order to maximize the economies associated with our size, while maintaining the local efficiencies and time sensitivity required to meet customer demands. We negotiate master purchasing arrangements centrally with major suppliers and manufacturers to obtain better pricing, then communicate the terms of these arrangements to our individual printing businesses. Each printing business orders goods and services as needed based on the terms set forth in our national purchasing agreements, or on a local basis if applicable. We continually monitor market conditions and product developments, as well as regularly review the contractual terms of our national purchasing agreements, to take advantage of our increasing buying power and to maximize the benefits associated with these agreements.

We incur significant costs to purchase paper that is used in the printing process. The majority of our paper supply is distributed through merchant organizations. There are a small number of merchants that are considered national in scope, with numerous regional organizations that serve one or more of our printing operations. We have negotiated national purchasing agreements with the mills, which produce paper, and the merchants, who distribute most of the paper produced by the mills. These agreements typically provide for volume-related discounts and additional periodic rebates based on the total amount of purchases made by our printing operations from each mill and/or merchant.

We also purchase a large amount of prepress supplies, consisting mainly of film, plates and proofing materials. There are a limited number of key manufacturers of these materials, and we generally purchase prepress supplies from either national or regional distributors. We have obtained volume-related discounts and incentive arrangements from these manufacturers and receive periodic rebates based on the total amount of prepress supplies we purchase through these distributors.

Competition

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

The major competitive factors in our business are:

•                        Extent and quality of customer service

•                        Quality and accuracy of finished products

•                        Cost structure

•                        Ability to meet customer deadlines.

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

Employees

As of April 30, 2002, we had over 4,600 employees throughout our organization. Of this total, approximately 420 were employed subject to the terms of various collective bargaining agreements. We believe that our relations with our employees are generally satisfactory.

7

 

Executive Officers

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

Charles F. White has been the President and Chief Operating Officer since joining our Company in July 2000. Mr. White joined CGX after retiring in January 1999 from Unisource Worldwide following a 33–year career. While at Unisource, a leading company in sales and distribution of printing, paper and supplies, he held a variety of sales and management positions and was most recently President and Chief Operating Officer. Mr. White is 55 years old.

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

Government Regulation And Environmental Matters

Our printing operations are subject to the environmental laws and regulations of the United States and the applicable state and local laws and regulations concerning emissions into the air, discharges into waterways and the generation, handling and disposal of waste materials. The printing business generates substantial quantities of inks, solvents and other waste products requiring disposal under the numerous federal, state and local laws and regulations relating to the environment. Our printing operations typically recycle waste paper and contract for the removal of waste products. We believe our Company is in material compliance with all applicable air quality, waste disposal and other environmental-related rules and regulations, as well as with other general employee health and safety laws and regulations. We do not anticipate any material future capital expenditures for environmental control facilities. There can be no assurance, however, that future changes in such laws and regulations will not have a material effect on our Company’s operations.

Item 2.  Properties and Facilities

 

As of April 30, 2002, our principal facilities consisted primarily of printing facilities that contain production, storage and office space. We own 1.3 million square feet at 30 locations and lease 2.2 million square feet at an additional 65 locations. All facilities are leased from unaffiliated third parties except for certain facilities containing approximately 334,025 square feet, which are leased from the former owners and current employees of eight of our printing businesses. We also lease 16,210 square feet of office space in Houston for our corporate headquarters. We believe our facilities are suitable for their present and intended purposes and are adequate for our current level of operations.

 

Item 3.  Legal Proceedings

 

From time to time, our Company is involved in litigation relating to claims arising out of our operations in the normal course of business. We maintain insurance coverage against potential claims in an amount 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 Company’s financial position or results of operations.

 

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

 

None.

8

 

 

PART II

 

Item 5.  Market For Registrant’s Common Equity And Related Shareholder Matters

 

Our common 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 our common stock for each of the last two fiscal years:

 

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

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

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

9

 

Item 6.  Selected Consolidated Financial Data

 

The following selected consolidated financial data should be read in conjunction with the audited consolidated financial statements of our Company and the notes thereto included in Item 8. “Financial Statements and Supplementary Data.”

 

		Year Ended March 31
		2002			2001			2000			1999			1998
		(In thousands, except per share data)
Income Statement Data
Sales		$	643,948		$	683,396		$	624,895		$	435,961		$	231,282
Cost of sales		477,147			494,158			437,345			298,935			157,906
Gross profit		166,801			189,238			187,550			137,026			73,376
Selling expenses		69,091			70,070			61,267			42,767			22,365
General and administrative expenses		54,766			54,595			48,677