-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A1DPWqeJ6stVdZvLmYA4sx/MjdPYEzs5C9bkeRhjvmrsmnTeV+CBlqsvLAlDEvQo fGoGeMVXi6Yl2ZakvqNP7w== 0000948221-01-500114.txt : 20010625 0000948221-01-500114.hdr.sgml : 20010625 ACCESSION NUMBER: 0000948221-01-500114 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010622 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONSOLIDATED GRAPHICS INC /TX/ CENTRAL INDEX KEY: 0000921500 STANDARD INDUSTRIAL CLASSIFICATION: COMMERCIAL PRINTING [2750] IRS NUMBER: 760190827 STATE OF INCORPORATION: TX FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12631 FILM NUMBER: 1665721 BUSINESS ADDRESS: STREET 1: 5858 WESTHEIMER STE 200 CITY: HOUSTON STATE: TX ZIP: 77057 BUSINESS PHONE: 7137870977 MAIL ADDRESS: STREET 1: 5858 WESTHEIMER STE 200 CITY: HOUSTON STATE: TX ZIP: 77057 10-K 1 cgx4371.txt ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------ 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, 2001 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM _____ TO ______ . COMMISSION FILE NUMBER 0-24068 ------------------------------ CONSOLIDATED GRAPHICS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) TEXAS 76-0190827 (STATE OR OTHER JURISDICTION (IRS EMPLOYER IDENTIFICATION NO.) OF INCORPORATION OR ORGANIZATION) 5858 WESTHEIMER, SUITE 200 77057 HOUSTON, TEXAS (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (713) 787-0977 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.01 PER SHARE (TITLE OF CLASS) 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 |X| No |_|. 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. |_| The aggregate market value of the voting stock held by nonaffiliates of the registrant as of May 31, 2001: COMMON STOCK, $.01 PAR VALUE -- $212,801,047 The number of shares outstanding of the issuer's common stock as of May 31, 2001: COMMON STOCK, $.01 PAR VALUE -- 13,031,295 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for the Annual Shareholders' Meeting to be held on or about July 26, 2001, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, are incorporated by reference into Part III of this Report. Such Proxy Statement, except for the parts therein which have been specifically incorporated by reference, shall not be deemed "filed" for the purposes of this report on Form 10-K. ================================================================================ CONSOLIDATED GRAPHICS, INC. ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED MARCH 31, 2001 INDEX PART I Item 1. Business...........................................................2 Item 2. Properties and Facilities..........................................8 Item 3. Legal Proceedings..................................................8 Item 4. Submission of Matters to a Vote of Security Holders................9 PART II Item 5. Market For Registrant's Common Equity And Related Shareholder Matters...........................................................9 Item 6. Selected Consolidated Financial Data..............................10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................11 Item 7A. Quantitative and Qualitative Disclosure About Market Risk.........16 Item 8. Financial Statements and Supplementary Data.......................17 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..............................................33 PART III Item 10. Directors and Executive Officers of the Registrant................33 Item 11. Executive Compensation............................................33 Item 12. Security Ownership of Certain Beneficial Owners and Management....33 Item 13. Certain Relationships and Related Transactions....................33 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................................................33 PART I ITEM 1. BUSINESS In this annual report, the words "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 63 printing businesses in 25 states. Each of our printing businesses has a well-established operating history of more than 25 years in most cases. The majority of our sales are derived from traditional 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 serve a diverse and growing base of customers in a broad cross-section of industries. As our Company has grown, we have expanded beyond our traditional strength in sheet-fed and half-web printing. Our advanced technological capabilities and expertise in digital processes enable our printing businesses to provide a variety of electronic products and services that are complementary to our traditional printing services. We also serve our customers by providing fulfillment and mailing 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. We believe the following trends have presented new challenges to commercial printing businesses in recent years: Advances in technology - 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. Building sole-source relationships - Large corporations are seeking to reduce operating costs by streamlining their purchasing process and limiting their number of suppliers. These 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. Increased demand for complementary services - The introduction of digital technology, the speed and interactive nature of the Internet and an increased focus by many businesses on their core competencies have generated demand for printing companies to provide complementary non-print services that provide additional value to their customers. Examples of such complementary services include repurposing of customers' digital assets, digital watermarking, inkjet labeling, kit packing, fulfillment and mailing. 2 A consolidation trend in the general commercial printing industry also emerged and became a significant industry factor in the 1990's as medium-sized printing business owners sought to address these 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 company to larger, better-capitalized companies. We believe there are relatively few buyers with the financial strength and management expertise who desire to acquire these medium-sized printing businesses. 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 63 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. Our current sales initiatives include: o Expand our customer base by providing superior service and high quality products, as well as aggressively pursue new business to gain market share during the current economic slowdown. o Continue to invest in new equipment and expand our capabilities to provide the faster turnaround times and complementary services demanded by our customers. o Capitalize on our national presence and wide range of capabilities to pursue sole-source national contracts. o Create additional revenue sources and generate additional print demand by providing our customers with innovative electronic products and services. Disciplined Acquisition Program. We are selectively pursuing opportunities to acquire profitable, 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. Through economies of scale, we obtain preferential pricing for printing supplies and newer, more efficient equipment. In addition, we centralize certain administrative services, such as human resources, treasury and purchasing support, 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 are also utilizing our wide area network and management information systems to benchmark financial and operational data and facilitate the sharing of information across our printing businesses. We believe that benchmarking helps our management identify and respond to changes in operating trends. Management Development. We are committed to a program designed to recruit, train and develop recent college graduates as printing sales and management professionals. Participants in our Management Development Program follow a three-year 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 Management Development Program is unique to the industry and 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 May 31, 2001, there were 147 participants in this program. 3 PRINTING OPERATIONS We currently operate 63 printing businesses in 25 states, and each business is operated as a wholly-owned subsidiary of our Company. Our printing operations 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 several electronic products and services and a variety of fulfillment/mailing services. All of our printing businesses are aggregated together to represent one reportable operating segment because, in general, they provide the same type of services and exhibit similar economic characteristics. 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. Printing plates may also be produced using "computer-to-plate" technology, whereby digitized text, graphic images and line art are transferred directly from a digital file onto printing plates, eliminating the need for film. This technology, which is currently being used by over half of our companies, 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"). As of May 31, 2001, our printing businesses operated 304 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 eight locations which also operate half-size and 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. Our finishing services include cutting, folding, binding and other operations necessary to finish the printed product according to customers' specifications. Electronic Products And Services The introduction of digital technology to the printing industry, combined with the speed and interactive nature of the Internet, has transformed the commercial printing industry into a communications business that far exceeds ink on paper. By capitalizing on our expertise in digital processes and responding to the expanded communication needs of our customers, our printing businesses offer a wide range of electronic and Internet-based products and services that are complementary to our traditional printing services. We develop and market these electronic products and services through our CGXmedia division, which includes support staff at each of our facilities, trained and able to serve our customers and enhance our sales and marketing efforts. 4 CGXmedia has developed two Internet-based software solutions that have generated significant interest from our customers. These two solutions are described below. o 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. 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. o 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's software can be tailored to meet specific customer applications and utilizes sophisticated security architecture that limits access only to users authorized by the customer. CGXmedia also offers a variety of additional electronic media solutions, such as CD-ROM development and production, conversion of text in printed or digital form to eBook format, electronic journal composition and variable data and on-demand printing for short run, fast turnaround projects. By offering these electronic products and services, we are able to strengthen relationships with existing customers, as well as attract new customers. We expect that our ability to offer these electronic products and services will help drive future sales growth. Fulfillment/Mailing Services We also provide fulfillment services, which primarily include assembling, packaging, storing, and distributing 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 procurement and inventory management systems maintained by our printing businesses, including COIN sites. Many of our printing businesses 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. SALES AND MARKETING Most of the products that we produce are generated by individual orders through commissioned sales personnel and, in some cases, pursuant to long-term contracts. As of May 31, 2001, we employed 528 sales professionals, all of whom are knowledgeable about the printing industry and the extensive capabilities of our 63 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). Through our sales professionals and other management personnel, we maintain strict control of the printing process from the time a prospective customer is identified through the scheduling, prepress, printing and finishing operations. 5 Because the commercial printing business is highly service-oriented, 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 Company's size, extensive range of capabilities and nationwide coverage has created new sales channels, such as: o National Accounts. More and more large corporations are seeking to leverage their print spending and limit their number of commercial print providers. Our National Accounts sales team is actively pursuing several opportunities to obtain sole-source, multi-year printing contracts with large corporations. We have successfully gained several national accounts and expect the pursuit of these long-term contracts to be an increasing contributor to our internal sales growth. We have a team of three individuals currently assigned to pursue national account opportunities and, as necessary, these individuals draw support from available personnel at our individual printing businesses and our corporate headquarters. o Strategic Alliances. We have entered into two strategic alliances that will provide our Company with access to new sales channels. In May 2000, we entered into a joint marketing alliance agreement with The Standard Register Company ("Standard Register"), a nationwide provider of customized document management and workflow solutions for large corporations. Standard Register and CGX cooperate in pursuing national account opportunities from companies seeking to bundle their purchases of business forms and commercial printing. In March 2001, CGX entered into a strategic alliance between its financial printing operations and Merrill Corporation ("Merrill"). This alliance combines CGX's state of the art financial printing facility in Houston, Texas and reputation for high quality commercial printing with Merrill's worldwide financial typesetting and office network. o Innovative Solutions. CGXmedia develops and markets several electronic products and services to meet the growing communication management needs of our print customers. Our COIN and OPAL software solutions help companies more efficiently execute print-related transactions and manage their valuable digital assets across multiple locations via the Internet. Both COIN and OPAL provide stand-alone solutions to our customers' common business problems, as well as help our sales professionals generate additional print demand. (See also "Printing Operations - Electronic Products and Services"). CUSTOMERS Our diverse customer base includes both national and local corporations, mutual fund companies, advertising agencies, graphic design firms, catalog retailers and direct mail distributors. Due to the project-oriented nature of customers' printing requirements, sales to customers may vary significantly from year to year and oftentimes depends upon the number, size and complexity of their projects in a particular period. Furthermore, continued engagement of our Company by our customers for successive jobs primarily depends upon, among other things, the customer's satisfaction with the quality of services provided. During fiscal 2001, we served over 12,000 customers, and our top ten customers accounted for 7.2% of total sales, none of which was individually more than 2.0%. 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 reduce our exposure to an economic slowdown that may generally affect the printing industry or any one region of the country. 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 in accordance with the terms set forth in our national purchasing agreements, if applicable, or on a local basis. 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. While there are a limited number of key manufacturers of these materials, we generally purchase prepress supplies from national and regional dealers. We have obtained volume-related discounts and incentive arrangements from these manufacturers and receive periodic rebates based on the total amount of purchases from these dealers. 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: o Extent and quality of customer service o Quality and accuracy of finished products o Cost structure o Ability to meet customer deadlines 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 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 effectively in price, as well as provide faster turnaround times than our competitors may be able to provide. 7 EMPLOYEES As of May 31, 2001, we had over 4,700 employees throughout our organization. Of this total, approximately 450 were employed subject to the terms of various collective bargaining agreements. We believe that our relations with our employees are generally satisfactory. 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 the public accounting firm of Arthur Andersen LLP. Mr. Davis is 58 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 32 years with Unisource Worldwide, a leading company in sales and distribution of printing paper and supplies. While at Unisource he held a variety of sales and management positions and was most recently President and Chief Operating Officer. Mr. White is 54 years old. Wayne M. Rose joined our Company in January 2001 as Executive Vice President, Chief Financial Officer and Secretary. Mr. Rose joined CGX after 18 years with Quanex Corporation, a Houston-based manufacturer of steel and aluminum products. He was most recently President of the Quanex Engineered Products Group and previously served as Quanex's Chief Financial Officer. Mr. Rose is 55 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 May 31, 2001, 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 1.9 million square feet at an additional 61 locations. All facilities are leased from unaffiliated third parties except for certain facilities containing approximately 462,025 square feet, which are leased from the former owners and current employees of 10 of our printing businesses. We also lease approximately 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 consolidated financial position or consolidated results of operations. 8 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 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: FISCAL 2001 -- QUARTER ENDED: HIGH LOW - ------------------------------- ---- ---- June 30, 2000.......................................13.38 8.50 September 30, 2000..................................15.44 8.69 December 31, 2000...................................12.13 9.50 March 31, 2001......................................16.50 11.40 FISCAL 2000 -- QUARTER ENDED: HIGH LOW - ------------------------------- ---- --- June 30, 1999.......................................58.50 35.50 September 30, 1999..................................50.00 37.25 December 31, 1999...................................42.13 13.38 March 31, 2000......................................15.75 11.50 As of May 15, 2001, there were 176 shareholders of record representing more than 4,500 beneficial owners. We 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 revolving credit agreements include restrictions that limit our ability to pay dividends above certain levels. 9 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following historical 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." Certain reclassifications have been made to the prior year consolidated financial statements to conform to the current year presentation.
YEAR ENDED MARCH 31 ---------------------------------------------------------------------------- 2001 2000 1999 1998 1997 --------- --------- -------- -------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA Sales $683,396 $624,895 $435,961 $231,282 $144,082 Cost of sales............................... 494,158 437,345 298,935 157,906 100,197 -------- -------- -------- -------- -------- Gross profit........................... 189,238 187,550 137,026 73,376 43,885 Selling expenses............................ 70,070 61,267 42,767 22,365 14,223 General and administrative expenses......... 54,595 48,677 33,605 17,628 11,330 Special charge (1) 6,440 - - - - -------- -------- -------- -------- -------- Operating income....................... 58,133 77,606 60,654 33,383 18,332 Interest expense, net....................... 20,858 13,476 7,745 3,720 2,305 -------- -------- -------- -------- -------- Income before income taxes............. 37,275 64,130 52,909 29,663 16,027 Provision for income taxes.................. 15,164 25,651 20,634 11,273 5,927 -------- -------- -------- -------- -------- Net income............................. $ 22,111 $ 38,479 $ 32,275 $ 18,390 $ 10,100 ======== ======== ======== ======== ======== Basic earnings per share (2)................ $ 1.68 $ 2.54 $ 2.35 $ 1.46 $ .83 ======== ======== ======== ======== ======== Diluted earnings per share (2).............. $ 1.68 $ 2.51 $ 2.28 $ 1.40 $ .81 ======== ======== ======== ======== ======== MARCH 31 ---------------------------------------------------------------------------- 2001 2000 1999 1998 1997 --------- --------- -------- -------- ------- (IN THOUSANDS) BALANCE SHEET DATA Working capital............................. $ 79,488 $ 65,301 $ 54,384 $ 27,869 $ 22,080 Property and equipment, net................. 299,871 310,344 230,733 135,892 85,643 Total assets................................ 674,667 680,848 494,277 237,645 135,720 Long-term debt, net of current portion...... 246,729 261,407 170,574 73,030 39,321 Total shareholders' equity.................. 287,534 272,531 214,454 105,332 66,447
- -------------------------------------------------------------------------------- (1) Relates to non-recurring costs and impairment charges primarily associated with combining the operations at three smaller, under-performing locations into nearby facilities and exiting one portion of our business at a fourth location. This special charge reduced net income by $4,117 net of tax and earnings per share by $.31. (2) Adjusted for a two-for-one stock split on January 10, 1997. 10 ITEM 7. 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, uncertainties or other factors that could cause actual results to materially differ from those included herein. The Company's expectations regarding future sales and profitability assume, among other things, stability in the economy and reasonable growth in the demand for its products, the continued availability of raw materials at affordable prices and retention of its key management and operating personnel. In addition, the Company's expectations regarding future acquisitions assume, among other things, the Company's ability to identify new acquisition opportunities and its ability to negotiate and finance such acquisitions on acceptable terms as well as the ability to successfully absorb and manage such acquisitions. There can be no assurance that any or all of the assumptions underlying the forward-looking statements will prove to be correct, and there can therefore be no assurance that such forward-looking statements will prove to be accurate. The inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. The Company expressly disclaims any duty to provide updates to these forward-looking statements, assumptions or other factors after the date of this Report on Form 10-K to reflect the occurrence of events or circumstances or changes in expectations. OVERVIEW Our Company 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 with 63 printing facilities in 25 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. All of our printing businesses represent one reportable operating segment because, in general, they provide the same type of services and exhibit similar economic characteristics. The majority of our sales are derived from traditional 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 have a diverse customer base, including national and local corporations, mutual fund companies, advertising agencies, graphic design firms, catalog retailers and direct mail distributors. Our printing operations capitalize on their advanced technological capabilities and expertise in digital processes to provide a variety of electronic products and services that are complementary to our traditional printing services. Our electronic products and services are developed and marketed to existing and potential customers through CGXmedia. Our two proprietary, Internet-based software solutions include COIN (Custom Ordering Interactive Network), our on-line print procurement and fulfillment software, and OPAL (On-line Private Asset Library), our Web-based tool used by companies to efficiently manage their valuable digital assets. CGXmedia also offers a variety of additional electronic media solutions, such as CD-ROM development and production, conversion of text in printed or digital form to eBook format, electronic journal composition and variable data and on-demand printing for short run, fast turnaround projects. Our Company offers fulfillment services, whereby we assemble, package, store and distribute promotional, educational and training documents on behalf of our customers. We help customers manage their inventory of printed products and related materials (such as binders and product samples), while also providing "just-in-time" assembly and delivery of customized materials to end users. Our convenient mailing services include a number of options for sorting, packaging, inkjet labeling and shipping of large quantities of printed materials to any number of distribution points. 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 risk management, treasury, investor relations, tax and consolidated financial reporting activities. 11 Most of the products we produce are generated by individual orders through commissioned sales personnel and, in some cases, pursuant to long-term contracts. 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 provided. As such, we are unable to accurately predict, for more than a few weeks in advance, the number, size and profitability of printing jobs that we expect to produce. Our Company's primary business strategy is to generate sales and profit growth by capitalizing on our size, extensive range of capabilities and nationwide coverage to: o Increase our local market share, o Invest in new technology and expand our capabilities, o Aggressively pursue national account opportunities, o Maximize the potential of CGXmedia to create additional revenue sources and generate additional print demand. We achieve operational improvements at our printing businesses by leveraging our economies of scale with national purchasing agreements, sharing best practices and benchmarking financial and operational data across our network of 63 companies, and providing general business and managerial training to recent college graduates through our successful Management Development Program. We also continue to selectively pursue opportunities to acquire profitable, well-managed printing companies that fit our general criteria. RESULTS OF OPERATIONS The following table sets forth our Company's historical consolidated income statements and certain percentage relationships for the periods indicated:
AS A PERCENTAGE OF SALES --------------------------------- YEAR ENDED MARCH 31 YEAR ENDED MARCH 31 -------------------------------- --------------------------------- 2001 2000 1999 2001 2000 1999 ------ ------ ------ ------ ------ ------ (In millions) Sales............................... $683.4 $624.9 $436.0 100.0% 100.0% 100.0% Cost of sales....................... 494.2 437.3 299.0 72.3 70.0 68.6 ------ ------ ------ ----- ------ ----- Gross profit................... 189.2 187.6 137.0 27.7 30.0 31.4 Selling expenses.................... 70.1 61.3 42.7 10.3 9.8 9.8 General and administrative expenses 54.6 48.7 33.6 8.0 7.8 7.7 Special charge...................... 6.4 - - 0.9 - - ------ ------ ------ ----- ------ ----- Operating income............... 58.1 77.6 60.7 8.5 12.4 13.9 Interest expense, net............... 20.9 13.5 7.8 3.1 2.1 1.8 ------ ------ ------ ----- ------ ----- Income before income taxes..... 37.2 64.1 52.9 5.4 10.3 12.1 Provision for income taxes.......... 15.1 25.6 20.6 2.2 4.1 4.7 ------ ------ ------ ----- ------ ----- Net income..................... $ 22.1 $ 38.5 $ 32.3 3.2% 6.2% 7.4% ======= ====== ====== ===== ====== =====
The absolute increases in sales and expenses during the periods indicated are due primarily to the acquisition of printing businesses. Because each acquisition was accounted for using the purchase method of accounting, our consolidated income statements reflect sales and expenses of acquired businesses only for post-acquisition periods. In each fiscal year, acquisitions affected our consolidated financial results, when compared to the prior year, for the portion of the year following their respective dates of acquisition. Similarly, acquisitions in each fiscal year affected our consolidated financial results in the years which followed their respective year of acquisition because the acquired business was under ownership for a full year. 12 Fiscal 2001 Compared With Fiscal 2000 Sales increased 9.4% to $683.4 million in 2001 from $624.9 million in 2000. Sales grew 5.8% as a result of the incremental revenue contribution of the 13 businesses acquired in fiscal 2000 (the "2000 Acquired Businesses"). The remaining increase was due to internal growth generated by our focused efforts to build market share, add to our national account base and pursue our electronic media initiatives. Gross profit increased 0.9% to $189.2 million in 2001 from $187.6 million in 2000. Gross profit as a percentage of sales decreased to 27.7% in 2001 from 30.0% in 2000. This decrease resulted from a general economic slowdown, particularly during the third and fourth quarters, which reduced print demand, forcing our businesses to aggressively pursue sales volume and protect market share, coupled with higher depreciation expense attributable to capital expenditures. Selling expenses increased 14.4% to $70.1 million in 2001 from $61.3 in 2000, primarily due to the increased sales levels noted above. Selling expenses as a percentage of sales increased to 10.3% in 2001 from 9.8% in 2000. This increase is due to higher marketing and training costs attributable to our pursuit of national accounts and our electronic media initiatives as we continued to develop and market our electronic products and services available through CGXmedia. General and administrative expenses increased 12.2% to $54.6 million in 2001 from $48.7 million in 2000. This increase is due primarily to the addition of the 2000 Acquired Businesses. General and administrative expenses as a percentage of sales increased to 8.0% in 2001 from 7.8% in 2000, due to a proportionally higher level of administrative expenses, including amortization of goodwill, incurred as a result of the 2000 Acquired Businesses, as well as an increase in our corporate infrastructure to better manage our operations. The one-time special charge of $6.4 million recorded during the fourth quarter of 2001 is due to direct and incremental costs primarily associated with combining the operations at three smaller, under-performing locations into nearby facilities and exiting one portion of our business at a fourth location. We incurred $3.1 million in facility exit and other direct costs related to the combined operations, with the remaining $3.3 million related to the impairment of asset values. Interest expense increased to $20.9 million in 2001 from $13.5 million in 2000, primarily due to a net average increase in borrowings and higher interest rates paid under our revolving credit facilities, together with the addition of term equipment notes related to the purchase of printing equipment. Effective income tax rates increased to 41% in 2001 as compared to 40% in 2000. This increase is due to the effect of nondeductible goodwill that was impaired during 2001 in connection with the one-time special charge. Fiscal 2000 Compared with Fiscal 1999 Sales increased 43.3% to $624.9 million in 2000 from $436.0 million in 1999 due to the incremental revenue contribution of 19 acquisitions in 1999 and 13 acquisitions in 2000 (hereafter, we refer to these 32 acquired businesses as the "1999/2000 Acquisitions"). Gross profit increased 36.9% to $187.6 million in 2000 from $137.0 million in 1999, primarily due to the incremental profit contribution of the 1999/2000 Acquisitions. Gross profit as a percentage of sales decreased to 30.0% in 2000 from 31.4% in 1999. This decrease resulted from the effect of the overall lower operating margins of the 1999/2000 Acquisitions, higher depreciation expense attributable to capital expenditures and pricing pressures due to unfavorable industry conditions during the second half of the year. Selling expenses increased 43.6% to $61.3 million in 2000 from $42.7 million in 1999, primarily due to the increased sales levels noted above. Selling expenses as a percentage of sales remained constant at 9.8% when compared to 1999. 13 General and administrative expenses increased 44.9% to $48.7 million in 2000 from $33.6 million in 1999. This increase is due primarily to the addition of the 1999/2000 Acquisitions. General and administrative expenses as a percentage of sales increased to 7.8% in 2000 from 7.7% in 1999 due to a proportionately higher level of general and administrative expenses, including amortization of goodwill, incurred as a result of the 1999/2000 Acquisitions. Net interest expense increased 74.0% to $13.5 million in 2000 from $7.8 million in 1999, primarily due to a net increase in borrowings under our revolving credit facilities used to finance the purchase of the 1999/2000 Acquisitions and our share repurchase program, together with the addition of term equipment notes related to the purchase of printing presses and debt assumed in connection with certain acquisitions. Effective income tax rates reflect an increase to 40% in 2000 from 39% in 1999 due to the effect of nondeductible goodwill incurred in connection with certain acquisitions completed since 1998 and, to a lesser extent, our expansion into certain states with proportionately higher income tax rates. LIQUIDITY AND CAPITAL RESOURCES As of March 31, 2001, we had cash and cash equivalents of $8.7 million, working capital of $79.5 million and total debt outstanding of $265.4 million. As of March 31, 2000, we had cash and cash equivalents of $8.2 million, working capital of $65.3 million and total debt outstanding of $266.5 million. During 2001, we used cash of $4.8 million to pay certain liabilities, including earnout obligations, relating to prior year acquisitions. We used cash to complete acquisitions and certain liabilities, including earnout obligations, totaling $70.0 million in 2000 and $120.0 million in 1999. We also used cash to repurchase our common stock pursuant to our share repurchase program of $7.4 million in 2001 and $30.4 million in 2000. Cash utilized for capital expenditures was $26.4 million in 2001, $25.2 million in 2000 and $30.4 million in 1999. Our cash requirements are financed through internally generated funds and borrowings under our revolving credit facilities. During 2001, we generated cash flow from operations (net income plus depreciation, amortization, deferred tax provision and noncash portion of special charge) of $72.8 million, as compared to $86.5 million in 2000 and $55.2 million in 1999. Net incremental payments under our revolving credit facilities were $25.2 million in 2001 and net incremental borrowings were $59.9 million in 2000 and $93.5 million in 1999. We also incurred debt to finance equipment purchases totaling $31.5 million in 2001, $26.9 million in 2000 and $8.3 million in 1999. INVESTING ACTIVITIES Pursuant to earnout agreements entered into in connection with certain acquisitions, we paid $2.2 million during 2001 and, as of March 31, 2001, we were contingently obligated at certain times and under certain circumstances through fiscal 2005 to issue up to 314,400 shares of our common stock and to make additional cash payments of up to $17.2 million for all periods in the aggregate. We intend to continue pursuing acquisition opportunities at prices we believe are reasonable based upon market conditions and at returns relative to alternative opportunities to invest our available capital, including the repurchase of our common stock. There can be no assurance that we will be able to acquire additional businesses or shares of our common stock at prices and on terms acceptable to us. In addition, there can be no assurances that we will be able to establish, maintain or increase the profitability of any acquired business. We expect to fund future acquisitions through cash flow from operations, additional borrowings or the issuance of our common stock. We also expect to continue making capital expenditures using cash flow from operations, supplemented as necessary by borrowings under our revolving credit facilities or the issuance of term notes. 14 FINANCING ACTIVITIES On December 11, 2000 we entered into a new, five-year $225.0 million senior secured credit facility (the "Credit Facility") with eleven banks, which replaced an existing revolving credit agreement. The Credit Facility is composed of a $50.0 million five-year term loan (the "Term Loan"), of which $45.0 million was outstanding at March 31, 2001, and a $175.0 million five-year revolving credit line (the "Revolving Line"), of which $136.8 million was outstanding at March 31, 2001. The size of the combined facility may be increased by $50.0 million at a later date by adding additional lenders. Borrowings outstanding under the Credit Facility are secured by substantially all of our assets other than real estate and certain equipment subject to term equipment notes and other financing. Borrowings under the 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%. The interest rate margin and the commitment fee are based upon our ratio of Funded Debt to Pro Forma Consolidated EBITDA, as defined, redetermined quarterly. On March 31, 2001, borrowings outstanding under the Term Loan and the Revolving Line accrued interest at a weighted average rate of 6.74%. The Term Loan requires quarterly payments of $2.5 million each through September 30, 2005. The proceeds of the Credit Facility can be used to repay certain indebtedness, finance certain acquisitions and provide for working capital and general corporate purposes. Proceeds can also be used to repurchase our common stock, subject to a limit of $25.0 million and certain other restrictions. In addition, on December 11, 2000 we entered into a one-year auxiliary revolving credit facility (the "Auxiliary Facility") with a commercial bank. This Auxiliary Facility is unsecured and has a maximum borrowing capacity of $5.0 million. At March 31, 2001, borrowings outstanding under the Auxiliary Facility totaled $1.4 million and accrued interest at 6.90%. Our Company is subject to certain covenants and restrictions and we must meet certain financial tests as defined in the Credit Facility. We were in compliance with these covenants and financial tests at March 31, 2001. We also have agreements with two printing equipment manufacturers, pursuant to which we receive certain volume purchase incentives and long-term financing options with respect to the purchase of printing presses and other equipment. Under these agreements, we were obligated on term notes totaling $72.4 million and subject to a weighted average interest rate of 7.75% as of March 31, 2001. The agreements provide for fixed monthly payments over periods of either five or ten years and are secured by the purchased equipment. Our Company is not subject to any significant financial covenants in connection with any of these equipment notes; however, our Credit Facility places certain limitations on the amount of additional term note obligations we may incur in the future. During 2001, we purchased 730,228 shares of our common stock at a total cost of $7.4 million, and we are authorized to purchase up to an additional 700,000 shares pursuant to the share repurchase program approved by our Board of Directors on April 24, 2000. The amount and timing of any future share repurchases will depend on a number of factors, including the price and availability of our shares, general market conditions and certain provisions in our Credit Facility. 15 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Market risk generally means the risk that losses may occur in the value of certain financial instruments as a result of 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 short-term and long-term debt obligations. Our debt obligations as of March 31, 2001 include borrowings under our revolving credit facilities totaling $183.2 million, various term equipment notes totaling $75.6 million and other debt obligations totaling $6.6 million. The following table sets forth the average interest rate for the scheduled maturities of our debt obligations as of March 31, 2001 ($ in millions):
ESTIMATED FAIR VALUE AT MARCH 31, 2002 2003 2004 2005 2006 THEREAFTER TOTAL 2001 ----- ----- ----- ---- ---- ---------- ----- ---------- FIXED RATE DEBT: Amount........................$8.2 $.9.2 $9.8 $8.9 $8.9 $31.5 $76.5 $76.0 Average interest rate.........7.68% 7.90% 7.90% 7.74% 7.69% 7.76% 7.78% VARIABLE RATE DEBT: Amount.......................$10.5 $10.6 $10.6 $10.6 $143.8 $2.8 $188.9 $188.9 Average interest rate.........6.45% 6.44% 6.44% 6.43% 6.81% 3.94% 6.69%
16 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE ---- Report of Independent Public Accountants.....................................18 Consolidated Balance Sheets at March 31, 2001 and 2000.......................19 Consolidated Income Statements for the Years Ended March 31, 2001, 2000 and 1999..............................................................20 Consolidated Statements of Shareholders' Equity for the Years Ended March 31, 2001, 2000 and 1999........................................21 Consolidated Statements of Cash Flows for the Years Ended March 31, 2001, 2000 and 1999........................................................22 Notes to Consolidated Financial Statements...................................23 17 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Consolidated Graphics, Inc.: We have audited the accompanying consolidated balance sheets of Consolidated Graphics, Inc. (a Texas corporation) and subsidiaries as of March 31, 2001 and 2000, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended March 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Consolidated Graphics, Inc. and subsidiaries as of March 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2001, in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Houston, Texas May 14, 2001 18 CONSOLIDATED GRAPHICS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
MARCH 31 ----------------------------- 2001 2000 --------- --------- ASSETS CURRENT ASSETS Cash and cash equivalents......................................... $ 8,667 $ 8,197 Accounts receivable, net.......................................... 116,095 115,646 Inventories....................................................... 31,536 32,670 Prepaid expenses.................................................. 4,605 4,947 Deferred income tax assets........................................ 4,023 3,571 -------- -------- Total current assets......................................... 164,926 165,031 PROPERTY AND EQUIPMENT, net............................................ 299,871 310,344 GOODWILL, net.......................................................... 203,030 198,588 OTHER ASSETS........................................................... 6,840 6,885 -------- -------- $674,667 $680,848 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt................................ $ 18,711 $ 5,083 Accounts payable.................................................. 33,865 55,780 Accrued liabilities............................................... 32,609 35,260 Income taxes payable.............................................. 253 3,607 ------- ------- Total current liabilities.................................... 85,438 99,730 LONG-TERM DEBT, net of current portion................................. 246,729 261,407 DEFERRED INCOME TAX LIABILITIES........................................ 54,966 47,180 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Common stock, $.01 par value; 100,000,000 shares authorized; 13,018,795 and 13,708,396 issued and outstanding................ 130 137 Additional paid-in capital........................................ 155,199 161,984 Retained earnings................................................. 132,205 110,410 -------- -------- Total shareholders' equity................................... 287,534 272,531 -------- -------- $674,667 $680,848 ======== ========
See accompanying notes to consolidated financial statements. 19 CONSOLIDATED GRAPHICS, INC. CONSOLIDATED INCOME STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED MARCH 31 --------------------------------------- 2001 2000 1999 ------- -------- -------- SALES.......................................................................$683,396 $624,895 $435,961 COST OF SALES................................................................494,158 437,345 298,935 -------- -------- -------- Gross profit............................................................189,238 187,550 137,026 SELLING EXPENSES..............................................................70,070 61,267 42,767 GENERAL AND ADMINISTRATIVE EXPENSES...........................................54,595 48,677 33,605 SPECIAL CHARGE.................................................................6,440 - - -------- -------- -------- Operating income.........................................................58,133 77,606 60,654 INTEREST EXPENSE..............................................................21,005 13,584 7,841 INTEREST INCOME................................................................(147) (108) (96) -------- -------- -------- Income before income taxes...............................................37,275 64,130 52,909 PROVISION FOR INCOME TAXES....................................................15,164 25,651 20,634 -------- -------- -------- NET INCOME...................................................................$22,111 $38,479 $32,275 ======== ========= ======== BASIC EARNINGS PER SHARE.......................................................$1.68 $2.54 $2.35 ======== ========= ======== DILUTED EARNINGS PER SHARE.....................................................$1.68 $2.51 $2.28 ======== ========= ======== SHARES USED TO COMPUTE EARNINGS PER SHARE: Basic 13,142 15,155 13,762 ======== ========= ======== Diluted 13,186 15,336 14,126 ======== ========= ========
See accompanying notes to consolidated financial statements. 20 CONSOLIDATED GRAPHICS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
COMMON STOCK ADDITIONAL --------------------------- PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS TOTAL -------- ------- ----------- --------- --------- BALANCE, March 31, 1998..................................... 12,960 $129 $ 59,658 $ 45,545 $105,332 Common stock issuance -- acquisitions.................. 1,518 15 75,224 - 75,239 Exercise of stock options.............................. 171 2 1,606 - 1,608 Net income............................................. - - - 32,275 32,275 ------ ------ -------- -------- -------- BALANCE, March 31, 1999..................................... 14,649 146 136,488 77,820 214,454 Common stock issuance -- acquisitions.................. 1,046 11 48,839 - 48,850 Exercise of stock options.............................. 83 1 1,118 - 1,119 Retirement of common stock............................. (2,070) (21) (24,461) (5,889) (30,371) Net income............................................. - - - 38,479 38,479 ------ ------ -------- -------- -------- BALANCE, March 31, 2000..................................... 13,708 137 161,984 110,410 272,531 Exercise of stock options.............................. 40 - 246 - 246 Retirement of common stock............................. (730) (7) (7,031) (316) (7,354) Net income............................................. - - - 22,111 22,111 ------ ------ -------- -------- -------- BALANCE, March 31, 2001..................................... 13,018 $130 $155,199 $132,205 $287,534 ====== ====== ======== ======== ========
See accompanying notes to consolidated financial statements. 21 CONSOLIDATED GRAPHICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED MARCH 31 -------------------------------------- 2001 2000 1999 --------- -------- -------- OPERATING ACTIVITIES: Net income.................................................................$ 22,111 $38,479 $32,275 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization.......................................... 38,783 32,881 20,209 Deferred income tax provision.......................................... 7,334 15,135 2,697 Noncash portion of special charge...................................... 4,615 - - Changes in assets and liabilities, net of effects of acquisitions Accounts receivable.............................................. (1,048) (6,070) 665 Inventories...................................................... 826 (1,633) 2,747 Prepaid expenses................................................. 213 (561) (594) Other assets..................................................... 45 512 1,729 Accounts payable and accrued liabilities......................... (1,420) (11,351) (2,964) Income taxes payable............................................. (3,341) 927 3,632 ------ ------- -------- Net cash provided by operating activities.................. 68,118 68,319 60,396 ------ ------- -------- INVESTING ACTIVITIES: Acquisitions of businesses, net of cash acquired........................... (4,782) (70,005) (119,986) Purchases of property and equipment........................................ (26,434) (25,172) (30,429) Proceeds from asset dispositions........................................... 3,279 2,597 1,094 ------ ------ ------ Net cash used in investing activities...................... (27,937) (92,580) (149,321) ------ ------- -------- FINANCING ACTIVITIES: Proceeds from revolving credit facilities................................. 359,200 678,800 306,165 Payments on revolving credit facilities................................... (384,359) (618,860) (212,649) Payments on long-term debt................................................ (7,431) (4,506) (4,202) Payments to repurchase common stock....................................... (7,354) (30,371) - Proceeds from exercise of stock options and other......................... 233 857 881 ------ ------- -------- Net cash (used in) provided by financing activities....... (39,711) 25,920 90,195 ------ ------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS................................. 470 1,659 1,270 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............................ 8,197 6,538 5,268 ------ ------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR.................................. $ 8,667 $ 8,197 $6,538 ======== ======= ========
See accompanying notes to consolidated financial statements. 22 CONSOLIDATED GRAPHICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA AND PERCENTAGES) 1. BUSINESS Consolidated Graphics, Inc. (collectively with its subsidiaries referred to as "the Company") is the largest sheet-fed and half-web commercial printing company in the United States with 63 printing facilities in 25 states. The Company is focused on adding value to its operating companies by providing the financial and operational strengths, management support and technological advantages associated with a national organization. The majority of the Company's sales are derived from traditional 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. The Company has a diverse customer base, including national and local corporations, mutual fund companies, advertising agencies, graphic design firms, catalog retailers and direct mail distributors. The Company's advanced technological capabilities and expertise in digital processes enable its printing businesses to provide a variety of electronic products and services that can be separate from, or complementary to, its traditional printing services. The Company also serves its customers by providing fulfillment and mailing services. 2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER INFORMATION ACCOUNTING POLICIES The accounting policies of the Company reflect industry practices and conform to accounting principles generally accepted in the United States. The more significant of such accounting policies are described below. Principles of Consolidation -- The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated. Certain reclassifications have been made to the prior year consolidated financial statements to conform to the current year presentation. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires the use of certain estimates and assumptions by management in determining the reported amounts of assets and liabilities, disclosure of contingent liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Because uncertainties with respect to such estimates and assumptions are inherent in the preparation of financial statements, actual results could differ from these estimates. Cash and Cash Equivalents -- The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Revenue Recognition and Accounts Receivable -- The Company recognizes revenue upon delivery of each job. Losses, if any, on jobs are recognized at the earliest date such amount is determinable. The Company derives the majority of its revenues from sales and services to a broad and diverse group of customers with no individual customer accounting for more than 10% of the Company's revenues during the years ended March 31, 2001, 2000 and 1999. The Company maintains an allowance for doubtful accounts based upon the expected collectibility of accounts receivable. The Company adopted Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB No. 101") during the fourth quarter of fiscal 2001, which did not have a material impact on the Company's consolidated financial statements. Accounts receivable in the accompanying consolidated balance sheets are reflected net of allowance for doubtful accounts of $2,698 and $2,763 at March 31, 2001 and 2000. 23 CONSOLIDATED GRAPHICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA AND PERCENTAGES) Inventories -- Inventories are valued at the lower of cost or market utilizing the first-in, first-out method for raw materials and the specific identification method for work in progress and finished goods. The carrying values of inventories are set forth below: MARCH 31 --------------------- 2001 2000 ------- ------- Raw materials...................... $11,314 $11,130 Work in progress................... 18,128 19,382 Finished goods..................... 2,094 2,158 ------- ------- $31,536 $32,670 ======= ======= Goodwill -- Goodwill represents the excess of cost over the estimated fair value of identifiable assets of businesses acquired. Goodwill is stated at cost, net of accumulated amortization, and is being amortized over forty years using the straight-line method. Accumulated amortization of goodwill was $11,859 and $6,580 at March 31, 2001 and 2000. Impairment of Long-Lived Assets -- The Company periodically evaluates whether the remaining balances of property and equipment, goodwill or other long-lived assets may be 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 recorded an impairment loss totaling $3,346 related to the consolidation of three facilities and exiting one portion of its business at a fourth location during fiscal 2001 (See Other Information - Special Charge). Recent Accounting Pronouncements -- Statement of Financial Accounting Standards ("SFAS") No. 131, Disclosures about Segments of an Enterprise and Related Information, was issued in June 1997. It requires a company to report separately information about each operating segment. Management believes that all the Company's subsidiaries operate in the commercial printing industry and exhibit similar economic characteristics. Accordingly, the Company's subsidiaries are aggregated into a single reportable segment. SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, was issued in June 2000, and amends certain provisions of SFAS No. 133. This statement is effective for all fiscal years beginning after June 15, 2000. Management does not believe that the adoption of SFAS No. 138 will have a material impact on its consolidated financial position or consolidated results of operations since it does not currently engage in such activities. OTHER INFORMATION 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. Significant non-cash transactions primarily include the issuance of common stock and the assumption of debt related to the acquisition of certain printing businesses (see Note 3. Acquisitions), as well as the issuance of term equipment notes payable related to the purchase of printing equipment. The Company issued term equipment notes payable totaling $31,540, $26,907, and $8,278 for the years ended March 31, 2001, 2000 and 1999 (See Note 5. Long-Term Debt). Such notes were issued to satisfy certain accounts payable totaling $21,123, $10,716 and $5,073 as of March 31, 2001, 2000 and 1999, related to the purchase of printing equipment, and to acquire additional printing equipment for $10,417, $16,191 and $3,205 during the years ended March 31, 2001, 2000 and 1999. 24 CONSOLIDATED GRAPHICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA AND PERCENTAGES) The following is a summary of the total cash paid for interest and income taxes (net of refunds):
YEAR ENDED MARCH 31 ----------------------------------- 2001 2000 1999 ------- -------- ------- Cash Paid For: Interest........................................................ $22,164 $12,846 $ 7,237 Income taxes.................................................... 11,121 9,850 12,931
Accrued Liabilities -- The significant components of accrued liabilities are as follows: MARCH 31 ------------------------ 2001 2000 -------- -------- Compensation and benefits...................................... $13,996 $14,426 Taxes payable.................................................. 2,915 3,293 Accrued purchases.............................................. 2,955 2,759 Other.......................................................... 12,743 14,782 ------- ------- $32,609 $35,260 ======= =======
Earnings Per Share -- Basic earnings per share are calculated by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share reflect net income divided by the weighted average number of common shares and include the effect of dilutive stock options outstanding. Related Party Transactions -- The Company leases, under terms it believes are comparable to market rates, certain real estate from individuals who formerly owned an acquired business and are now employed by the Company. Special Charge -- The Company recorded a one-time special charge of $6,440 ($4,117 after tax) during the fourth quarter of fiscal 2001 related to direct and incremental costs primarily associated with combining the operations at three smaller, under-performing locations into nearby facilities and exiting one portion of its business at a fourth location. The components of the special charge are as follows: Impairment of property and equipment values............ $2,272 Impairment of goodwill................................. 1,074 Facility exit costs.................................... 1,504 Other direct costs..................................... 1,590 ------ $6,440 ====== Impairment losses were calculated based on the excess of the recorded value of property and equipment over each asset's respective fair values using recent comparable market data. Costs totaling $1,048 related to items incurred but not yet paid were reflected in accrued liabilities as of March 31, 2001. Fair Value of Financial Instruments -- The Company's financial instruments consist of cash, trade receivables, trade payables and debt obligations. The Company does not hold or issue derivative financial instruments. The Company believes that the fair value of its financial instruments, other than fixed rate debt obligations totaling $76,588 at March 31, 2001, approximates their recorded values. The Company estimates that the fair value of its fixed rate debt obligations at March 31, 2001 is $76,043. Such estimate of fair value is based on interest rates for the same or similar debt offered to the Company having the same or similar maturities and collateral requirements. 25 CONSOLIDATED GRAPHICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA AND PERCENTAGES) Concentrations of Credit Risk -- Financial instruments which potentially subject the Company to concentrations of credit risk are primarily cash deposits and trade accounts receivable. Concentrations of credit risk with respect to trade accounts receivable are limited because the Company's printing businesses provide services to a large, diverse group of customers in various geographical regions. Management performs ongoing credit evaluations of its customers and generally does not require collateral for the extension of credit. Additionally, the Company provides an allowance for doubtful accounts as deemed necessary based upon expected collectibility. 3. ACQUISITIONS All acquisitions have been accounted for using the purchase method of accounting. Revenues and expenses of the acquired businesses have been included in the accompanying consolidated financial statements from their respective dates of acquisition. The allocation of purchase price to the acquired assets and liabilities is based on estimates of fair market value. During fiscal 2001, the Company paid cash of $4,782 to satisfy certain liabilities of acquired businesses that existed at March 31, 2000 or pursuant to earnout agreements entered into in connection with certain prior year acquisitions. During fiscal 2000, the Company acquired 13 printing businesses. To complete these acquisitions, in the aggregate, the Company paid cash of $42,044, issued 1,032,407 shares of its common stock and discharged debt and paid other liabilities of the acquired businesses totaling $24,477. Additionally, debt of the acquired businesses totaling $10,706 remained outstanding following the acquisitions. During fiscal 2000, the Company also issued 13,332 shares of its common stock and paid cash of $3,484 pursuant to earnout agreements entered into in connection with certain prior year acquisitions. During fiscal 1999, the Company acquired 19 printing businesses. To complete these acquisitions, in the aggregate, the Company paid cash of $61,824, issued 1,493,673 shares of its common stock and discharged debt and paid other liabilities of the acquired businesses totaling $54,295. Additionally, debt of the acquired businesses totaling $476 remained outstanding following the acquisitions. During fiscal 1999, the Company issued 23,861 shares of its common stock and paid cash of $700 pursuant to earnout agreements entered into in connection with certain prior year acquisitions. The Company also paid cash of $3,167 in fiscal 1999 to satisfy a liability for the purchase of certain printing presses in connection with a prior year acquisition. The following table sets forth unaudited pro forma information assuming that for the year ended March 31, 2000, each of the acquisitions in 2000 occurred on April 1, 1999. YEAR ENDED -------------- MARCH 31, 2000 (UNAUDITED) Sales.................................................... $669,086 Net income............................................... 40,675 Diluted earnings per share............................... 2.62 The preceding pro forma financial information does not purport to be indicative of the Company's consolidated financial position or consolidated results of operations that would have occurred had the transactions been completed at the beginning of the period presented, nor does such pro forma information purport to indicate the Company's consolidated results of operations at any future date or for any future period. Certain of the Company's acquisitions involve contingent consideration typically payable only in the event that the financial results of an acquired business improve by an equal amount or more after the acquisition; accordingly, such contingent consideration has been excluded from the preceding pro forma financial information. 26 CONSOLIDATED GRAPHICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA AND PERCENTAGES) 4. PROPERTY AND EQUIPMENT Property and equipment are stated at cost, net of accumulated depreciation. The costs of major renewals and betterments are capitalized; repairs and maintenance costs are expensed when incurred. Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the various classes of assets. The following is a summary of the Company's property and equipment and their estimated useful lives:
MARCH 31 ------------------- ESTIMATED DESCRIPTION 2001 2000 LIFE IN YEARS ----------- ------- ------- -------------- Land.............................................................. $ 7,507 $ 7,615 -- Buildings and leasehold improvements.............................. 53,361 49,669 15-40 Printing presses and equipment.................................... 297,435 292,583 7-20 Computer equipment and software................................... 19,479 16,192 2-5 Furniture, fixtures and other..................................... 9,555 9,090 5-7 ------- -------- 387,337 375,149 Less -- accumulated depreciation................................. (87,466) (64,805) -------- ------- $299,871 $310,344 ======== ========
5. LONG-TERM DEBT The following is a summary of the Company's long-term debt as of:
MARCH 31 2001 2000 --------- --------- Revolving credit facilities.................................... $183,178 $208,337 Term equipment notes........................................... 75,665 50,974 Other.......................................................... 6,597 7,179 -------- -------- 265,440 266,490 Less -- current portion....................................... (18,711) (5,083) -------- -------- $246,729 $261,407 ======== ========
On December 11, 2000, the Company entered into a new, five-year $225,000 senior secured credit facility (the "Credit Facility") with eleven banks, which replaced an existing revolving credit agreement. The Credit Facility is composed of a $50,000 five-year term loan (the "Term Loan"), of which $45,000 was outstanding at March 31, 2001, and a $175,000 five-year revolving credit line (the "Revolving Line"), of which $136,800 was outstanding at March 31, 2001. The size of the combined facility may be increased by $50,000 at a later date by adding additional lenders. 27 CONSOLIDATED GRAPHICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA AND PERCENTAGES) Borrowings outstanding under the 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 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 commitment fee on available but unused amounts ranging from .275% to .375%. The interest rate margin and the commitment fee are based upon the Company's ratio of Funded Debt to Pro Forma Consolidated EBITDA, as defined, redetermined quarterly. On March 31, 2001 borrowings outstanding under the Term Loan and the Revolving Line accrued interest at a weighted average rate of 6.74%. The Term Loan requires quarterly payments of $2,500 each through September 30, 2005. The proceeds of the Credit Facility can be used to repay certain indebtedness, finance certain acquisitions and provide for working capital and general corporate purposes. Proceeds can also be used by the Company to repurchase its common stock, subject to a limit of $25,000 and certain other restrictions. The covenants contained in the Agreement, among other things, limit the Company's ability to (i) incur secured and unsecured debt beyond specific amounts or based upon financial ratios, (ii) pledge its assets beyond specific amounts, (iii) merge, consolidate with or acquire other companies where the total consideration paid is above certain levels, (iv) change its primary business, (v) pay cash dividends, (vi) make capital expenditures and dispose of assets beyond certain levels. The Company must also meet certain financial tests relating to its leverage ratio, interest coverage ratio, fixed charge coverage ratio and consolidated net worth. In addition, on December 11, 2000 the Company entered into a one-year auxiliary revolving credit facility (the "Auxiliary Facility") with a commercial bank. This Auxiliary Facility is unsecured and has a maximum borrowing capacity of $5,000. At March 31, 2001, borrowings outstanding under the Auxiliary Facility totaled $1,378 and accrued interest at 6.90%. The term equipment notes consist primarily of term notes payable pursuant to printing equipment purchase and financing agreements between the Company and two printing equipment manufacturers. The agreements provide for fixed monthly payments over periods of either five or ten years and are secured by the purchased equipment. At March 31, 2001, outstanding borrowings under these agreements totaled $72,464 and were subject to a weighted average interest rate of 7.75%. The remaining balance of term equipment notes totaling $3,201 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 these equipment notes; however, the Credit Facility places certain limitations on the amount of additional term note obligations the Company may incur in the future. 28 CONSOLIDATED GRAPHICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA AND PERCENTAGES) The Company's remaining debt obligations generally consist of mortgages, capital leases, promissory notes and industrial revenue bonds, some of which contain financial covenants and restrictions. The most significant of these restrictions place certain limits on future borrowings and acquisitions above specified levels. The Company believes these restrictions do not adversely affect its acquisition or operating strategies. The principal payment requirements by fiscal year under the Company's debt agreements are as follows, 2002 -- $18,711; 2003 -- $19,741; 2004 -- $20,358; 2005 -- $19,555; 2006 -- $152,668; thereafter -- $34,407. 6. INCOME TAXES The provision for income taxes is composed of the following:
YEAR ENDED MARCH 31 -------------------------------------- 2001 2000 1999 -------- ------- ------ Current...............................................$ 7,830 $10,516 $17,936 Deferred.............................................. 7,334 15,135 2,698 -------- ------- ------- $15,164 $25,651 $20,634 ======== ======= =======
The provision for income taxes differs from an amount computed at the statutory rates as follows:
YEAR ENDED MARCH 31 ---------------------------------------- 2001 2000 1999 -------- -------- ------- Provision at the statutory rate.................. $13,046 $22,446 $18,518 State income taxes, net of federal income tax benefit............................. 583 1,965 1,279 Non-deductible expenses: Amortization of goodwill.................... 1,205 900 532 Other....................................... 330 340 305 -------- ------- ------- $15,164 $25,651 $20,634 ======== ======== =======
Deferred income taxes reflect the future tax consequences of differences between the tax bases of assets and liabilities and their financial reporting amounts as measured based on enacted tax laws and regulations. The components of the net deferred income tax assets and liabilities are as follows:
MARCH 31 ------------------------------------------ 2001 2000 1999 ------ ------ ------- Deferred income tax liabilities: Property and equipment.................................... $44,683 $36,493 $27,103 Goodwill and other........................................ 10,283 10,687 1,388 ------- ------- ------- Total deferred income tax liabilities.................. $54,966 $47,180 $28,491 ======= ======= ======= Deferred income tax assets: Accounts receivable and inventory......................... $ 1,379 $ 1,463 $ 2,533 Accruals not currently deductible......................... 2,644 2,108 2,090 ------- ------- ------- Total deferred income tax assets....................... $ 4,023 $ 3,571 $ 4,623 ======= ======= ========
29 CONSOLIDATED GRAPHICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA AND PERCENTAGES) 7. COMMITMENTS AND CONTINGENCIES The Company's minimum payments each fiscal year under its noncancelable operating lease agreements for facilities and equipment are as follows: 2002-- $10,028; 2003-- $8,289; 2004-- $6,320; 2005-- $4,687; 2006-- $3,817; thereafter-- $5,420. Total rent expense was $10,202, $9,574 and $5,234 for the years ended March 31, 2001, 2000 and 1999. In connection with certain acquisitions, the Company has agreed to issue additional shares of its common stock or make additional cash payments contingent upon the acquired printing businesses improving operating profits in excess of certain pre-determined targets. At March 31, 2001, the Company was contingently obligated through fiscal 2005 to issue up to a total of 314,400 shares of its common stock and make additional cash payments of up to $17,175 for all periods in the aggregate. From time to time, the Company is subject to legal proceedings and claims that arise in the ordinary course of its business. Currently, there are no legal proceedings or claims pending against the Company that management believes will have a material adverse effect upon the Company's consolidated financial position or consolidated results of operations. 8. STOCK OPTIONS Employees of the Company and certain nonemployee members of the Company's Board of Directors have been, or may be granted rights to purchase shares of its common stock pursuant to the Consolidated Graphics, Inc. Long-Term Incentive Plan (the "Plan"). Options granted pursuant to the Plan may either be incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, or non-qualified stock options. Options granted under the Plan are at a price not less than the market price of the stock at the date of grant and periodically vest over a term of up to ten years. Options granted under the Plan generally expire six months after the vesting period or termination of employment. At March 31, 2001, a total of 2,621,982 shares were reserved for issuance pursuant to the Plan, of which 461,596 shares were reserved for options which had not been granted. The Company accounts for the Plan under the provisions and related interpretations of Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees." No compensation expense or liability is recognized for such options in the accompanying consolidated financial statements since all options were granted at the fair market value of the stock at the date of grant. The following table sets forth option transactions under the Plan:
FOR THE YEARS ENDED MARCH 31 --------------------------------------------------------------------------------- 2001 2000 1999 ------------------------- ------------------------- --------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ------ ----- ------ ------ ------ ----- Outstanding at April 1................... 1,236,660 $38.36 1,363,927 $40.54 808,048 $19.10 Granted............................. 1,116,069 11.18 205,641 24.32 793,985 55.12 Exercised........................... (55,250) 7.62 (83,766) 10.40 (170,392) 11.28 Forfeited........................... (137,093) 27.15 (249,142) 47.58 (67,714) 29.62 --------- --------- --------- Outstanding at March 31.................. 2,160,386 25.83 1,236,660 38.36 1,363,927 40.54 ========= ========= ========= Shares exercisable at March 31........... 398,289 $29.50 323,891 $23.53 217,842 $14.94 ========= ========= =========
30 CONSOLIDATED GRAPHICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA AND PERCENTAGES) Had the Company used the fair-value-based method of accounting for the Plan prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation," and charged compensation expense against income over the vesting period based on the fair value of options at the date of grant, net income and earnings per share would have been reduced to the following pro forma amounts:
FOR THE YEARS ENDED MARCH 31 --------------------------------------------------------------------------- 2001 2000 1999 --------------------- --------------------- --------------------- AS PRO AS PRO AS PRO REPORTED FORMA REPORTED FORMA REPORTED FORMA --------- -------- --------- ------- -------- ----- Net income............................ $22,111 $19,328 $38,479 $35,847 $32,275 $30,129 Basic earnings per share.............. 1.68 1.49 2.54 2.23 2.35 2.19 Diluted earnings per share............ 1.68 1.48 2.51 2.21 2.28 2.13
The pro forma compensation expense may not be representative of future amounts because options vest over several years and additional options may be granted in future years. The weighted-average grant date fair value of options granted during fiscal 2001, 2000 and 1999 was $7.50, $15.96 and $34.64, respectively. The weighted-average grant date fair value of options was determined by utilizing the Black-Scholes option-pricing model with the following key assumptions:
2001 2000 1999 ---- ---- ---- Dividend yield.............................. -- -- -- Expected volatility......................... 60.4% 74.9% 51.5% Average risk-free interest rate............. 5.8% 6.3% 5.4% Average expected life....................... 7.6.yrs. 5.0.yrs. 8.5.yrs.
The Black-Scholes model used by the Company to calculate the fair value of options granted, as well as other currently accepted option valuation models, were developed to estimate 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. 31 CONSOLIDATED GRAPHICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA AND PERCENTAGES) 9. UNAUDITED QUARTERLY FINANCIAL DATA The following table contains selected quarterly financial data from the consolidated income statements for each quarter of fiscal 2001 and 2000. The Company believes this information reflects all normal recurring adjustments necessary for a fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period.
1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER (1) --------- -------- ---------- ------------ FISCAL 2001: Sales....................................... $173,486 $172,503 $171,211 $166,196 Gross profit................................ 49,428 49,259 45,617 44,934 Net income.................................. 8,036 7,914 5,496 665 Basic earnings per share.................... .59 .61 .42 .05 Diluted earnings per share.................. .59 .61 .42 .05 FISCAL 2000: Sales....................................... $145,829 $152,886 $158,408 $167,772 Gross profit................................ 45,677 47,592 46,213 48,068 Net income.................................. 10,693 10,763 8,855 8,168 Basic earnings per share.................... .71 .69 .56 .58 Diluted earnings per share.................. .70 .68 .56 .58
(1) Reflects a one-time special charge of $4,117 net of tax or $.31 per share in fiscal 2001. (See Note 2. Other Information - Special Charge). Earnings per share are computed independently for each of the quarters presented; therefore, the sum of the quarterly earnings per share may not equal annual earnings per share. 32 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III The information called for by "Item 10. Directors and Executive Officers of the Registrant" (except for certain information regarding executive officers which is included in Part I hereof as "Item 1. Business -- Executive Officers"), "Item 11. Executive Compensation", "Item 12. Security Ownership of Certain Beneficial Owners and Management", and "Item 13. Certain Relationships and Related Transactions", is hereby incorporated by reference to the Company's Proxy Statement for its Annual Meeting of Shareholders (presently scheduled to be held July 26, 2001) to be filed with the SEC pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) INDEX TO FINANCIAL STATEMENTS (a)(1) FINANCIAL STATEMENTS (INCLUDED UNDER ITEM 8): The index to the Financial Statements is included on page 17 of this report and is incorporated herein by reference. (a)(2) FINANCIAL STATEMENT SCHEDULES: Report of Independent Public Accountants on Supplementary Data. Schedule II - Valuation and Qualifying Accounts. All other schedules have been omitted since the required information is not significant or is included in the Consolidated Financial Statements or notes thereto or is not applicable. (a)(3) EXHIBITS: *3.1 --Restated Articles of Incorporation of the Company filed with the Secretary of State of the State of Texas on July 27, 1994 (Consolidated Graphics, Inc. Form 10-Q (June 30, 1994) SEC File No.0-24068, Exhibit 4(a)). *3.2 --Articles of Amendment to the Restated Articles of Incorporation of the Company dated as of July 29, 1998.(Consolidated Graphics, Inc. Form 10-Q (June 30, 1998) SEC File No. 0-24068, Exhibit 3.1). *3.3 --Restated By-Laws of the Company, dated as of November 2, 1998 (Consolidated Graphics, Inc. Form 10-Q (September 30, 1998) SEC File No. 0-24068, Exhibit 3.2). *3.4 --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 By-Laws of the Company on December 15, 1999 (Consolidated Graphics, Inc. Form 8-K (December 15, 1999) SEC File No. 0-24068, Exhibit 3.2). *4.1 --Specimen Common Stock Certificate (Consolidated Graphics, Inc. Form 10-K (March 31, 1998) SEC File No. 0-24068, Exhibit 4.1). *4.2 --Rights Agreement dated as of December 15, 1999 between Consolidated Graphics, Inc. and American Stock Transfer and Trust Company, as Rights Agent, which includes as Exhibit A the Certificate of Designations of Series A Preferred Stock, as Exhibit B the form of Right Certificate and as Exhibit C the form of summary of Rights to Purchase Shares (Consolidated Graphics, Inc. Form 8-K (December 15, 1999) SEC File No. 0-24068, Exhibit 4.1). *10.1 --Credit Agreement among the Company and First Union Bank as Administrative Agent and First Union Securities, Inc. as Sole Arranger and Book Runner and Bank One, N. A., as Documentation Agent, dated as of December 11, 2000 (Consolidated Graphics, Inc. Form 8-K (December 28, 2000) SEC File No. 001-12631, Exhibit 10). *10.2 --1994 Consolidated Graphics, Inc. Long-Term Incentive Plan (Consolidated Graphics, Inc. Registration Statement on Form S-1 (Reg. No. 33-77468), Exhibit 10.14). 33 *10.3 --First Amendment to Consolidated Graphics, Inc. Long-Term Incentive Plan (reflecting an increase in the number of shares of Common Stock authorized to be issued thereunder from 367,500 to 967,500) (Consolidated Graphics, Inc. Registration Statement on Form S-8 (Reg. No. 333-66019), Exhibit 4.2). *10.4 --Second Amendment to Consolidated Graphics, Inc. Long-Term Incentive Plan, as amended (reflecting an increase in the number of shares of Common Stock authorized to be issued there- under from 1,935,000 to 3,435,000)(Consolidated Graphics, Inc. Registration Statement on Form S-8 (Reg. No. 333-66019), Exhibit 4.3). +10.5 --Employment Agreement between the Company and Charles F. White dated as of July 25, 2000. +10.6 --Change in Control Agreement between the Company and Charles F. White dated as of July 25, 2000. +10.7 --Employment Agreement between the Company and Joe R. Davis dated as of July 25, 2000. +10.8 --Change in Control Agreement between the Company and Joe R. Davis dated as of July 25, 2000. 10.9 --Final Severance Agreement and Release between the Company and G. Christopher Colville dated as of October 8, 2000. +10.10 --Change in Control Agreement between the Company and Wayne M. Rose dated as of January 8, 2001. 21 --List of Subsidiaries. 23.1 --Consent of Arthur Andersen LLP. 24 --Powers of Attorney. * Incorporated by reference. + Management compensatory agreement. (b) REPORTS ON FORM 8-K: 1) Form 8-K, filed January 19, 2001, in connection with the press releases announcing the appointment of an Executive Vice President and Chief Financial Officer and the Company's preliminary fiscal 2001 third quarter results. 2) Form 8-K, filed January 24, 2001, in connection with the press release announcing the Company's fiscal 2001 third quarter results. 3) Form 8-K, filed March 20, 2001, in connection with the press releases announcing a Strategic Alliance between Chas. P. Young and Merrill Corporation and the Company's implementation of savings initiatives. 4) Form 8-K, filed April 25, 2001, in connection with the press release announcing the Company's fiscal 2001 fourth quarter results. 34 CONSOLIDATED GRAPHICS, INC. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTARY DATA To Consolidated Graphics, Inc.: We have audited in accordance with auditing standards generally accepted in the United States, the consolidated financial statements of Consolidated Graphics, Inc. and subsidiaries included in this Annual Report on Form 10-K and have issued our report thereon dated May 14, 2001, in which we expressed an unqualified opinion. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The Valuation and Qualifying Accounts Schedule (Schedule II) listed in the index at Item 14(a)(2) is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This information has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Houston, Texas May 14, 2001 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
UTILIZATION BALANCE AT AMOUNT OF RESERVE BALANCE AT BEGINNING CHARGED TO (NET OF END OF DESCRIPTION OF YEAR EXPENSE RECOVERIES) OTHER YEAR - ------------------------------------------ ---------- ---------- ------------- ------ ----------- ALLOWANCE FOR DOUBTFUL ACCOUNTS Year Ended March 31, 2001................... $2,763 $1,467 $(1,532) $ - $2,698 Year Ended March 31, 2000.................... 4,968 -- (3,377) 1,172(1) 2,763 Year Ended March 31, 1999.................... 1,505 139 (172) 3,496(1) 4,968
(1) Represents primarily the aggregate increase in the beginning balances arising from acquired businesses. 35 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNDER DULY AUTHORIZED, IN THE CITY OF HOUSTON, STATE OF TEXAS ON THE 22 DAY OF JUNE 2001. CONSOLIDATED GRAPHICS, INC. By: /s/: JOE R. DAVIS -------------------------------------------------- JOE R. DAVIS CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD OF DIRECTORS PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE --------- ----- ---- /s/: JOE R. DAVIS Chief Executive ----------------------- Officer and Director JOE R. DAVIS (Principal Executive Officer) June 22, 2001 /s/: CHARLES F. WHITE President and -------------------------- Chief Operating Officer June 22, 2001 CHARLES F. WHITE /s/: WAYNE M. ROSE Executive Vice President, -------------------------- Chief Financial Officer and Secretary June 22, 2001 WAYNE M. ROSE (Principal Financial Officer) LARRY J. ALEXANDER* Director -------------------------- LARRY J. ALEXANDER BRADY F. CARRUTH* Director -------------------------- BRADY F. CARRUTH CLARENCE C. COMER* Director -------------------------- CLARENCE C. COMER GARY L. FORBES* Director -------------------------- GARY L. FORBES JAMES H. LIMMER* Director -------------------------- JAMES H. LIMMER HUGH N. WEST* Director -------------------------- HUGH N. WEST * By: /s/: JOE R. DAVIS ------------------- JOE R. DAVIS June 22, 2001 Attorney-in-Fact
36 EX-99 2 cgx4371ex4.txt Exhibit 10.5 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT (the "AGREEMENT"), dated effective as of July 25, 2000, is entered into by and between CONSOLIDATED GRAPHICS, INC., a Texas corporation having its principal place of business in Houston, Harris County, Texas ("CGX"), and CHARLES WHITE (the "EXECUTIVE"); other capitalized terms used in this Agreement are defined and shall have the meanings set forth in Section 17 or elsewhere herein. ---------- W I T N E S S E T H: WHEREAS, Executive is to be employed as President and Chief Operating Officer of CGX; WHEREAS, in connection with his employment, Executive will be provided by CGX with specialized training and given access to confidential information; WHEREAS, it is the desire of the Board of Directors of CGX (the "BOARD") to engage Executive as an executive officer of CGX and its subsidiaries pursuant to the terms of this Agreement; and WHEREAS, Executive is desirous of committing himself to serve CGX on the terms herein provided. NOW, THEREFORE, in consideration of the premises, representations and mutual covenants hereinafter set forth, the parties hereby covenant and agree as follows: 1. EMPLOYMENT. CGX hereby employs Executive, and Executive hereby accepts employment with CGX, on the terms and conditions set forth in this Agreement. 2. EMPLOYMENT PERIOD. The term of Executive's employment (the "EMPLOYMENT PERIOD") pursuant to the terms of this Agreement shall commence upon the Effective Date and shall continue until the Termination Date (as defined below). 3. DUTIES. Executive shall (i) serve under the direction of the Board and Joe R. Davis, the Chief Executive Officer of CGX (the "CEO"), as the President and Chief Operating Officer of CGX, (ii) have all the rights, powers and duties associated with his positions, and (iii) faithfully, to the best of Executive's ability, perform the duties and other reasonably related services assigned to Executive by the Board and/or CEO from time to time (the "DUTIES"). Executive shall be subject to, and shall comply with, CGX insider trading policies (a copy of which has been delivered to Executive) and the other policies of CGX in effect from time to time (collectively, the "CGX POLICIES"); provided, however, that to the extent such CGX Policies may contradict the express provisions of this Agreement, the provisions of this Agreement shall govern. Executive shall devote his full business time, efforts and attention to the business of CGX during the Employment Period consistent with past practice and, without the prior written consent of the Board, Executive shall not during the Employment Period render any services of a business, commercial or professional nature, to any person or organization other than CGX and 1 the Affiliates or be engaged in any other business activity, other than those activities described in Section 12 below. Executive represents and warrants ---------- that Executive is not a party to or bound by any agreement or contract or subject to any restrictions, including without limitation in connection with any previous employment, which might prevent Executive from entering into and performing Executive's obligations under this Agreement. 4. COMPENSATION. During the Employment Period, Executive shall be compensated for Executive's services as follows: (a) Executive shall be paid a base monthly salary of not less than $29,166.67, subject to any and all customary payroll deductions, including deductions for the Federal Insurance Contributions Act and other federal, state and local taxes. Such monthly salary shall be increased during the Employment Period at the same time and on at least as favorable a basis as other officers of CGX. (b) Except to the extent such policies may contradict the express provisions of this Agreement, in which case the provisions of this Agreement shall govern, Executive shall be eligible to receive (i) fringe benefits on the same basis as other management employees of CGX pursuant to CGX Policies in effect from time to time, including holiday time and (ii) three (3) weeks paid vacation; provided, however, that earned but unused vacation or other compensated absences shall not be carried forward for use or payment in subsequent periods; and provided, further, that CGX will act reasonably to continue in effect comparable medical benefits to those currently in effect at the Company. (c) Executive shall be eligible to participate, to the extent that Executive meets all eligibility requirements of general application, in each of the employee benefit plans maintained by CGX or in which employees of CGX generally are eligible to participate, including as of the date hereof, group hospitalization, medical, dental, and short and long term disability and life plans. 5. BONUS. In addition to the other compensation set forth herein, Executive shall be entitled to receive an annual cash bonus payment in an amount to be determined in the sole discretion of the CEO and approved by the Board or the Compensation Committee of the Board; provided, however, that the sum of Executive's annual base salary (as paid monthly pursuant to Section 4(a) hereof) plus annual cash bonus payment shall equal or exceed the sum of the annual base salary plus annual cash bonus of each CGX employee working at CGX's corporate headquarters other than that of the CEO. 6. STOCK OPTIONS. In addition to the other compensation set forth herein, Executive shall be provided with options to purchase CGX shares as follows: (a) 200,000 shares to be granted effective as of the Effective Date at an exercise price equal to the closing price per share of CGX common stock as reported on the New York Stock Exchange on July 26, 2000; and 2 (b) 25,000 shares on each anniversary date of the Effective Date during the Employment Period; such options shall have an exercise price equal to the closing price per share of CGX common stock as reported on the New York Stock Exchange (or other applicable national exchange on which the common stock of CGX is then listed) on the day immediately preceding the effective date of the grant of such option. All options granted pursuant to the terms of this Agreement shall be granted pursuant to and subject to the terms of the form CGX Stock Option Agreement attached hereto as Exhibit "A". ----------- 7. EXECUTIVE EXPENSES. During the Employment Period, Executive shall be entitled to be reimbursed for reasonable normal business expenses incurred in the performance of the Duties hereunder in accordance with CGX Policies in effect from time to time; provided, however, that documentation supporting such expenses must be submitted to and approved by the CEO or the Board before such reimbursement is paid to Executive. 8. NO COMPETING BUSINESS. In consideration for the benefits received by Executive pursuant to this Agreement, during the Noncompetition Period, Executive shall not, except as permitted by Section 12 of this Agreement, ---------- directly or indirectly own, manage, operate, control, invest or acquire an interest in, or otherwise engage or participate (whether as a proprietor, partner, employee, stockholder, member, director, officer, executive, joint venturer, investor, consultant, agent, sales representative, broker or other participant) in any Competitive Business operating in or soliciting business from CGX's Market, without regard to (i) whether the Competitive Business has its office or other business facilities within CGX's Market, (ii) whether any of the activities of Executive referred to above occur or are performed within CGX's Market or (iii) whether Executive resides, or reports to an office, within CGX's Market. 9. NO INTERFERENCE WITH THE BUSINESS. In consideration for the benefits received by Executive pursuant to this Agreement, during the Noncompetition Period, Executive shall not: (a) directly or indirectly solicit, induce or intentionally influence any third party sales representative, agent, supplier, lender, lessor or any other person which has a business relationship with CGX and/or any Affiliate or which had on the date of this Agreement a business relationship with CGX and/or any Affiliate to discontinue, reduce the extent of, discourage the development of or otherwise harm such relationship with CGX and/or any Affiliate; (b) directly or indirectly attempt to induce any known customer to terminate any contract or otherwise divert from CGX and/or any Affiliate any trade or business being conducted by any such customer with CGX and/or any Affiliate or directly or indirectly attempt to solicit, induce or intentionally influence any prospective or past customer of CGX and/or any Affiliate to discontinue, reduce the extent of, or not conduct business with CGX and/or any Affiliate; 3 (c) directly or indirectly recruit, solicit, induce or influence any executive, employee or sales agent of CGX and/or any Affiliate to discontinue such sales, employment or agency relationship with CGX and/or any such Affiliate; (d) employ, seek to employ or cause any other person or entity to employ or seek to employ as a sales representative or Executive any person who is then (or was at any time since the Effective Date) employed by CGX and/or any of the Affiliates; or (e) directly or indirectly denigrate or in any manner undertake to discredit CGX, any Affiliate or any successor thereof or any person, operation or entity associated with CGX or any Affiliate. 10. CONSIDERATION FOR RESTRICTIONS. Executive acknowledges that the restrictions imposed under Sections 3, 8, 9, and 11 are supported by the ------------------------ consideration to be received by Executive pursuant to the terms of this Agreement. 11. NO DISCLOSURE OF CONFIDENTIAL INFORMATION. Executive shall not directly or indirectly knowingly disclose to anyone or use or otherwise exploit for Executive's own benefit or for the benefit of anyone other than CGX and/or any of the Affiliates any Confidential Information. Executive shall not disclose the terms of this Agreement to anyone other than a representative or agent of Executive. 12. PERMITTED ACTIVITIES. The restrictions set forth in Sections 3, 8 and ----------------- 9 of this Agreement shall not apply to Permitted Activities (as defined below). - - 13. REDUCTION OF RESTRICTIONS BY COURT ACTION. If the length of time, type of activity, geographic area or other restrictions set forth in the restrictions of Sections 3, 8, 9, or 11 are deemed unreasonable in any court ----------------------- proceeding, the parties hereto agree that the court may reduce such restrictions to ones it deems reasonable to protect the substantial investment of CGX and the Affiliates in their businesses and the goodwill attached thereto. 14. REMEDIES. Executive understands that CGX and the Affiliates will not have an adequate remedy at law for the breach or threatened breach by Executive of any one or more of the covenants set forth in this Agreement and agrees that in the event of any such breach or threatened breach, CGX or any Affiliate may, in addition to the other remedies which may be available to it, file a suit in equity to enjoin Executive from the breach or threatened breach of such covenants. In the event either party commences legal action to enforce its or his rights under this Agreement, the prevailing party in such action shall be entitled to recover all of the costs and expenses in connection therewith, including reasonable attorney's fees. 15. TERMINATION. 4 (a) The "TERMINATION DATE" shall mean the date in which the first of the following occur: (i) the fifth anniversary of the Effective Date or any date subsequent thereto provided one party has given notice to the other at least one (1) year in advance of such date of his/its election to terminate this Agreement on such date; (ii) Executive's death; (iii) the Disability (as defined below) of Executive; (iv) termination by CGX of Executive for Cause (as defined below); (v) termination by CGX of Executive without Cause; (vi) the resignation of Executive for any reason (other than Good Reason (as defined below)), which shall take effect immediately upon CGX's receipt of such resignation, (vii) the resignation of Executive for Good Reason, which shall take effect immediately upon CGX's receipt of such resignation; or (viii) a Change in Control (as defined in the Change in Control Agreement). (each of (i), (ii), (iii), (iv), (v), (vi), (vii) and (viii) are referred to herein as a "TERMINATION"). (b) If a Termination occurs pursuant to subparagraphs (v), or --------------------- (vii), then during the Severance Period (as defined below), (i) ----- Executive shall receive Executive's monthly salary in effect immediately prior to the Termination in accordance with Section 4(a) ------------ and (ii) Executive shall continue to receive and/or be able to elect to receive benefits under CGX welfare plans or substantially equivalent welfare plans at CGX's expense, including but not limited to, medical/hospital, dental, life, and disability, in accordance with the terms of such plans in effect at the time; provided, however, that Executive shall be responsible for the costs of such benefits to the same extent he was responsible (or would have been responsible had he then been a participant) for such costs prior to the Termination Date. 5 (c) If a Termination occurs pursuant to subparagraphs (i), (ii), (iii), (iv), (vi) or (viii), then Executive or Executive's estate shall receive (i) Executive's monthly salary in effect immediately prior to the Termination in accordance with Section 4(a) through the ------------ date of such Termination and (ii) any other amounts earned, accrued or owing as of such Termination Date, but not yet paid by CGX to Executive. (d) Termination of employment hereunder shall not relieve Executive of his obligations under Sections 8 and 9 hereof, ---------------------- notwithstanding the termination of Executive's compensation or the termination of the other terms and conditions of this Agreement. In addition, termination of employment hereunder shall not relieve Executive of his obligations under Section 11 hereof which are ---------- intended to continue indefinitely, notwithstanding the termination of Executive's compensation or the termination of the other terms and conditions of this Agreement. Executive's violation of any of his obligations under Sections 8, 9 or 11 hereof shall relieve CGX of its ------------------- obligation to pay any of the benefits as contemplated in this Section ------- 15. -- (e) In addition to all other compensation due to Executive hereunder, the following shall occur immediately prior to the occurrence of a Termination pursuant to subparagraphs (ii) or (iii) of --------------------------- Section 15; ---------- (i) all CGX stock options held by Executive prior to such a Termination shall become exercisable, regardless of whether or not the vesting/performance conditions set forth in the relevant agreements shall have been satisfied in full; (ii) all restrictions on any restricted securities granted by CGX to Executive prior to such a Termination shall be removed and the securities shall become fully vested and freely transferable, regardless of whether the vesting/performance conditions set forth in the relevant agreements shall have been satisfied in full; (iii) Executive (or Executive's estate) shall have an immediate right to receive all performance shares or bonuses granted prior to such a Termination, and such performance shares and bonuses shall become fully vested and freely transferable or payable without restrictions, regardless of whether or not specific performance goals set forth in the relevant agreements shall have been attained; (iv) all performance units granted to Executive prior to such a Termination shall become immediately payable in cash or common stock, at Executive's sole option (or at the sole option of the executor of the Executive's estate), regardless of whether or not the relevant performance cycle has been completed, and regardless of 6 whether any other terms and conditions of the relevant agreements shall have been satisfied in full; (v) provided, that if the terms of any plan or agreement providing for such options, restricted securities, performance shares or bonuses, or performance units do not allow such acceleration or payment as described above, CGX shall take or cause to be taken any action required to allow such acceleration or payment or to separately pay the value of such benefits. 16. GROSS-UP. (a) Anything in this Agreement to the contrary notwithstanding, in the event a public accounting firm selected by Executive (the "ACCOUNTING FIRM") shall determine that any payment, benefit, or distribution by CGX to Executive (whether paid or payable or distributed or distributable pursuant to the terms of Section 15 of ---------- this Agreement or otherwise, but determined without regard to any additional payments required under this Section 16) (each a "PAYMENT") ---------- is subject to the excise tax imposed by Section 4999 of the Code, or any interest or penalties are incurred by Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "EXCISE TAX"), then CGX shall pay to Executive an additional payment (a "GROSS-UP PAYMENT") in an amount such that after payment by Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto), and the Excise Tax imposed upon the Gross-Up Payment, Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 16(c) below, all ------------- determinations required to be made under this Section 16, including ---------- whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the Accounting Firm which shall provide detailed supporting calculations both to CGX and Executive as soon as possible following a request made by Executive or CGX. All fees and expenses of the Accounting Firm shall be borne solely by CGX. Any Gross-Up Payment, as determined pursuant to this Section 16, shall ---------- be paid by CGX to Executive within five (5) days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by Executive, it shall furnish Executive with a written opinion that failure to report the Excise Tax on Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon CGX and Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by CGX should have 7 been made ("UNDERPAYMENT"), consistent with the calculations required to be made hereunder. If CGX exhausts its remedies pursuant to Section 16(c) ------------- below and Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by CGX to or for the benefit of Executive. (c) Executive shall notify CGX in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by CGX of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after Executive is informed in writing of such claim and shall apprize CGX of the nature of such claim and the date on which such claim is requested to be paid. Executive shall not pay such claim prior to the expiration of the ten (10)-day period following the date on which Executive gives such notice to CGX (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If CGX notifies Executive in writing prior to the expiration of such period that it desires to contest such claim, Executive shall: (i) give CGX any information reasonably requested by CGX relating to such claim, (ii) take such action in connection with contesting such claim as CGX shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by CGX, (iii) cooperate with CGX in good faith to effectively contest such claim, and (iv) permit CGX to participate in any proceedings relating to such claim; provided, however, that CGX shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 16(c), CGX shall control all ------------ proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and Executive agrees to prosecute such contest to a 8 determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as CGX shall determine; provided further, that if CGX directs Executive to pay such claim and sue for a refund, CGX shall advance the amount of such payment to Executive on an interest-free basis and shall indemnify and hold Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and provided further, that any extension of the statute of limitations relating to payment of taxes for the taxable year of Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, CGX's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by Executive of an amount advanced by CGX pursuant to this Section 16, Executive becomes entitled to ---------- receive, and receives, any refund with respect to such claim, Executive shall (subject to CGX's complying with the requirements of this Section 16) promptly pay to CGX the amount of such refund ---------- (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by Executive of any amount advanced by CGX pursuant to Section 16, a determination is made that ---------- Executive shall not be entitled to any refund with respect to such claim and CGX does not notify Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 17. DEFINITIONS. As used in this Agreement, terms defined in the preamble and recitals of or elsewhere in this Agreement shall have the meanings set forth therein and the following terms shall have the meanings set forth below: (a) Affiliate or Affiliates shall mean and refer to any direct or indirect subsidiaries of CGX, or any other entity or entities through which CGX or any subsidiary of CGX may conduct CGX's Line of Business. (b) Cause shall mean and include without limitation (i) the inability of Executive to perform his Duties hereunder due to a legal impediment, including without limitation, the entry against Executive of an injunction, restraining order or other type of judicial judgment, decree or order which would prevent or hinder Executive from performing his Duties; (ii) the willful failure by Executive to follow material CGX Policies or the willful disregard of the reasonable and material instructions of the CEO with respect to the performance of Executive's 9 Duties, other than any failure not occurring in bad faith that is remedied by Executive promptly after receipt of notice thereof from CGX; (iii) excessive absenteeism, flagrant neglect of work, serious misconduct, conviction of a felony or fraud; or (iv) the failure of Executive to devote substantially all of his full working time and attention to performance of his Duties for CGX. (c) Change in Control Agreement shall mean that certain Change in Control Agreement dated July 25, 2000 between CGX and Executive. (d) CGX's Line of Business shall mean general commercial printing services, including digital imaging, offset lithography, composition, electronic prepress, binding and finishing services, fulfillment of printed materials and includes any products or services manufactured, developed or distributed, including electronic products and services, at any time by CGX and/or the Affiliates before or after the Effective Date. (e) CGX's Market shall mean the United States; (f) Competitive Business shall mean any person or entity engaged in a business that produces any of the products or performs any of the services comprising CGX's Line of Business. (g) Confidential Information shall mean trade secrets, customer and supplier lists, marketing arrangements, business plans, projections, financial information, training manuals, pricing manuals, product and service development plans, market strategies, internal performance statistics and other competitively sensitive information belonging to and concerning CGX and/or any of the Affiliates and not generally known by or available to the public, whether or not in written or tangible form, as the same may exist at any time during the Employment Period. (h) Disability shall mean any illness, disability or incapacity of such a character as to render Executive unable to perform his Duties (which determination shall be made by the CEO) for a total period of one hundred eighty (180) days, whether or not such days are consecutive, during any consecutive twelve (12) month period. (i) Effective Date shall mean the execution date of this Agreement. (j) Employment Period shall mean that period of time set forth in Section 2 of this Agreement. --------- (k) Good Reason shall mean (i) the material breach of this Agreement by CGX, other than any failure not occurring in bad faith that is remedied by CGX promptly after receipt of notice thereof from Executive, (ii) the implementation by CGX of a condition to Executive's continued employment 10 with CGX that Executive's principal place of work be changed to any location outside of the Houston metropolitan area, (iii) a material diminution in the Executive's Duties or cash compensation, (vi) the replacement of Joe R. Davis as the CEO by any person other than Executive (provided that Executive resigns his employment citing the replacement as "Good Reason" within sixty (60) days following the date the Board selects a successor CEO other than Executive), and (v) the termination by the Executive of the Executive's employment with CGX upon the occurrence of any of the events set forth in Section 4(b)(ii) to the Change of Control ---------------- Agreement. (l) Noncompetition Period shall mean a period beginning on the Effective Date and continuing through the Employment Period and for the greater of (i) the period of one (1) year after any Termination pursuant to Section15(a)(i), (iii), (iv) or (vi) or (ii) the --------------------------------------------- Severance Period. (m) Permitted Activities shall mean (i) owning not more than 1% of the outstanding shares of a publicly-held Competitive Business which has shares listed for trading on a securities exchange registered with the Securities and Exchange Commission or through the automated quotation system of a registered securities association; (ii) owning capital stock of CGX; or (iii) those activities or actions undertaken by Executive, to the extent, but only to the extent, such activities or actions are expressly approved in writing by the CEO. (n) Severance Period shall mean that period of time equal to the shorter of (i) either (A), if Joe R. Davis is then the CEO, one (1) year following Termination or (B), if Joe R. Davis is not then the --- CEO, two (2) years following Termination or (ii) the remainder of the Employment Period that would have been applicable pursuant to Section ------- 15(a)(i) but for the early Termination, if at the time of such -------- Termination either of the parties had notified the other of its election to terminate the Employment Period pursuant to Section ------- 15(a)(i). -------- 18. NOTICES. All notices, demands or other communications required or provided hereunder shall be in writing and shall be deemed to have been given and received when delivered in person or transmitted by facsimile transmission (telecopy), cable or telex to the respective parties or seven (7) days after dispatch by registered or certified mail, postage prepaid, addressed to the parties at the addresses set forth below or at such other addresses as such parties may designate by notice to the other parties: If to CGX: Consolidated Graphics, Inc. 5858 Westheimer, Suite 200 Houston, Texas 77057 Attention: Joe R. Davis 11 with a copy (which shall not constitute notice) to: R. Clyde Parker, Jr., Esq. Winstead Sechrest & Minick P.C. 910 Travis, Suite 2400 Houston, Texas 77002 If to Executive: Charles White c/o Consolidated Graphics, Inc. 5858 Westheimer, Suite 200 Houston, Texas 77057 19. ASSIGNMENT. CGX, but not Executive, may assign or delegate any of its rights or obligations hereunder; provided, however, that without the consent of Executive, CGX shall not be relieved of any of its obligations hereunder as a result of any assignment to a third party; provided, further, that an assignment made in accordance with this section shall not constitute a termination of employment for purposes of this Agreement. This Agreement shall be binding upon and inure to the benefit of any assignee thereof and any such assignee shall be deemed substituted for CGX under the terms of this Agreement and all references to the "CGX" shall be deemed to mean such assignee. As used in this Agreement, the term "assignee" shall include any Affiliate or person, firm, partnership, corporation or CGX which at any time, whether by merger, purchase or otherwise, acquires all of the capital stock or substantially all of the assets or business of CGX, and any assignee or successor thereof. 20. NO MITIGATION OBLIGATION. CGX hereby acknowledges that it will be difficult, and may be impossible, for Executive to find reasonably comparable employment following the Termination Date and that the noncompetition covenants contained in Sections 8 and 9 hereof will further limit the employment ---------------- opportunities for Executive. Accordingly, the parties hereto expressly agree that the payment of the severance compensation and benefits by CGX to Executive in accordance with the terms of this Agreement will be liquidated damages, and that Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall any profits, income, earnings or other benefits from any source whatsoever create any mitigation, offset, reduction or any other obligation on the part of Executive hereunder or otherwise, except as expressly provided in Sections 15(c) -------------- and (f) hereof and to the extent Executive actually receives comparable welfare - ------- benefits from another employer during the Severance Period. 21. AMENDMENT AND MODIFICATION. No amendment or modification of the terms of this Agreement shall be binding upon either party unless reduced to writing and signed by Executive and a duly appointed officer of CGX. 22. GOVERNING LAW. This Agreement and all rights and obligations hereunder, including matters of construction, validity and performance, shall be governed by the laws of the State of Texas, without giving effect to the principles of conflicts of laws thereof. 23. COUNTERPARTS. This Agreement may be executed in two or more counterparts, any one of which shall be deemed the original without reference to the others. 24. SEVERABILITY. If any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions and portions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law. 12 25. EFFECTIVE DATE. This Agreement shall become effective only upon and as of the Effective Date. 26. WAIVER. The failure of either party to insist, in any one or more instances, upon performance of the terms or conditions of this Agreement shall not be construed as a waiver or relinquishment of any right granted hereunder or of the future performance of any such term, covenant or condition. 27. CONSTRUCTION OF AGREEMENT. Headings of the sections in this Agreement are for reference purposes only and shall not be deemed to have any substantive effect. Unless the contents of this Agreement otherwise clearly requires, references to the plural include the singular and the singular include the plural. Whenever the context here requires, the masculine shall refer to the feminine, the neuter shall refer to the masculine or feminine, the singular shall refer to the plural, and vice versa. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. EXECUTIVE: /s/ CHARLES WHITE -------------------------------------------------- CHARLES WHITE CGX: CONSOLIDATED GRAPHICS, INC. By: /s/Joe R. Davis --------------------------------------------- Joe R. Davis, Chief Executive Officer SIGNATURE PAGE TO EMPLOYMENT AGREEMENT S-1 13 EX-99 3 cgx4371ex3.txt Exhibit 10.6 CHANGE IN CONTROL AGREEMENT This EMPLOYMENT AND CHANGE IN CONTROL AGREEMENT ("Agreement"), effective as --------- of July 25, 2000, by and between CONSOLIDATED GRAPHICS, INC., a Texas corporation (the "Company"), and CHARLES WHITE (the "Executive"), evidences ------- --------- that; WHEREAS, the Executive is a senior executive of the Company and has made and/or is expected to make or continue to make significant contributions to the profitability, growth and financial strength of the Company; WHEREAS, the Company desires to assure itself of both present and future continuity of management in the event of a Change in Control (as defined hereafter) and desires to establish certain minimum compensation rights with respect to its key senior executives, including the Executive, applicable in the event of a Change in Control; WHEREAS, the Company wishes to ensure that its senior executives are not practically disabled from discharging their duties upon a Change in Control; WHEREAS, this Agreement is not intended to alter materially the compensation and benefits which the Executive could reasonably expect to receive from the Company absent a Change in Control and, accordingly, although effective and binding as of the date hereof, this Agreement shall become operative only upon the occurrence of a Change in Control; and WHEREAS, the Executive is willing to render services to the Company on the terms and subject to the conditions set forth in this Agreement; NOW, THEREFORE, the Company and the Executive agree as follows: 1. Operation of Agreement: ---------------------- (a) Sections 1 and 8 through 21 of this Agreement shall be effective --------------------------- and binding as of the Effective Date, but, anything in this Agreement to the contrary notwithstanding, Sections 2, 3, 4, 5, 6 ---------------------- and 7 of this Agreement shall not be effective and binding unless ----- and until there shall have occurred a Change in Control. For purposes of this Agreement, a "Change in Control" will be deemed ----------------- to have occurred if at any time during the Term (as hereinafter defined) any of the following events shall occur: (i) The Company is merged, consolidated, converted or reorganized into or with another corporation or other legal entity, and as a result of such merger, consolidation, conversion or reorganization less than a majority of the combined voting power of the then outstanding securities of the Company or such corporation or other legal entity immediately after such transaction are held in the aggregate by the holders of Voting Stock (as hereinafter defined) of the Company immediately prior to such transaction and/or such 1 voting power is not held by substantially all of such holders in substantially the same proportions relative to each other; (ii) The Company sells (directly or indirectly) all or substantially all of its assets (including, without limitation, by means of the sale of the capital stock or assets of one or more direct or indirect subsidiaries of the Company) to any other corporation or other legal entity, of which less than a majority of the combined voting power of the then outstanding voting securities (entitled to vote generally in the election of directors or persons performing similar functions on behalf of such other corporation or legal entity) of such other corporation or legal entity is held in the aggregate by the holders of Voting Stock of the Company immediately prior to such sale and/or such voting power is not held by substantially all of such holders in substantially the same proportions relative to each other; (iii) Any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) becomes ------------ (subsequent to the Effective Date) the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of securities representing fifty percent (50%) or more of the combined voting power of the then-outstanding securities entitled to vote generally in the election of directors of the Company ("Voting Stock"); ------------ (iv) The Company files a report or proxy statement with the Securities and Exchange Commission pursuant to the Exchange Act disclosing in response to Form 8-K, Schedule 14A or Schedule 14C (or any successor schedule, form or report or item therein) that a change in control of the Company has occurred; (v) If during any one (1)-year period, individuals who at the beginning of any such period constitute the directors of the Company cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the Company's shareholders, of each director of the Company first elected during such period was approved by a vote of at least two-thirds of (i) the directors of the Company then still in office who were directors of the Company at the beginning of any such period or (ii) directors of the Company whose nomination and/or election was approved by the directors referenced in clause (i) immediately preceding; or (vi) The shareholders of the Company approve a plan contemplating the liquidation or dissolution of the Company. 2 Notwithstanding the foregoing provisions of Subsection 1(a)(iii) -------------------- or 1(a)(iv) hereof, a "Change in Control" shall not be deemed to ----------- have occurred for purposes of this Agreement solely because (i) the Company, (ii) a corporation or other legal entity in which the Company directly or indirectly beneficially owns 100% of the voting securities of such entity, or (iii) any employee stock ownership plan or any other employee benefit plan of the Company or any wholly-owned subsidiary of the Company, either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K, Schedule 14A or Schedule 14C (or any successor schedule, form or report or item therein) under the Exchange Act, disclosing beneficial ownership by it of shares of Voting Stock, or because the Company reports that a change in control of the Company has occurred by reason of such beneficial ownership. (b) Upon occurrence of a Change in Control at any time during the Term, Sections 2, 3, 4, 5, 6 and 7 of this Agreement shall become ---------------------------- immediately binding and effective. (c) The period during which this Agreement shall be in effect (the "Term") shall commence as of the date hereof and shall expire as ---- of the later of (i) the close of business on the third anniversary of the date hereof, or (ii) the expiration of the Period of Employment (as hereinafter defined); provided, however, that (A) subject to Section 9 hereof, if, prior to a Change in --------- Control, the Executive ceases for any reason to be an employee of the Company (or a parent or subsidiary thereof), thereupon the Term shall be deemed to have expired and this Agreement shall immediately terminate and be of no further effect and (B) commencing on the first anniversary of the date hereof and each anniversary thereafter, the Term of this Agreement shall automatically be extended for an additional year. 2. Employment; Period of Employment: --------------------------------- (a) Subject to the terms and conditions of this Agreement, upon the occurrence of a Change in Control, the Company shall continue the Executive in its employ and the Executive shall remain in the employ of the Company for the period set forth in Subsection 2(b) --------------- hereof (the "Period of Employment"), in the position and with -------------------- substantially the same duties and responsibilities that the Executive had immediately prior to the Change in Control, or to which the Company and the Executive may hereafter mutually agree in writing. Throughout the Period of Employment, the Executive shall devote substantially all of the Executive's time during normal business hours (subject to vacations, sick leave and other absences in accordance with the policies of the Company as in effect for senior executives immediately prior to the Change in Control) to the business and affairs of the Company, but nothing in this Agreement shall preclude the Executive from devoting reasonable periods 3 of time during normal business hours to (i) serving as a director, trustee or member of or participant in any organization or business so long as such activity would not constitute Competitive Activity (as hereinafter defined) if conducted by the Executive after the Executive's Termination Date (as hereinafter defined), (ii) engaging in charitable and community activities, or (iii) managing the Executive's personal investments. (b) The Period of Employment shall commence on the date on which a Change in Control occurs and, subject only to the provisions of Section 4 hereof, shall continue until the expiration of the --------- second anniversary of the occurrence of the Change in Control. 3. Compensation During Period of Employment: ----------------------------------------- (a) During the Period of Employment, the Executive shall receive (i) annual base salary at a rate not less than the Executive's highest annual fixed or base compensation paid during or payable with respect to any calendar year during the three calendar years immediately preceding the year in which the Change in Control occurred, or such higher rate as may be determined from time to time by the Board of Directors of the Company (the "Board") or ----- the Compensation Committee thereof (the "Committee") (which base --------- salary at such rate is herein referred to as "Base Pay") and (ii) -------- an annual amount equal to not less than the highest aggregate annual bonus, incentive or other payments of cash compensation paid to the Executive in addition to the amounts referred to in clause (i) above made or to be made in or with respect to any calendar year during the three calendar years immediately preceding the year in which the Change in Control occurred pursuant to any bonus, incentive, profit-sharing, performance, discretionary pay or similar policy, plan, program or arrangement of the Company ("Incentive Pay") which contemplates cash payments ------------- other than Employee Benefits (as hereinafter defined); provided, however, that in no event shall any increase in the Executive's aggregate cash compensation or any portion thereof in any way diminish any other obligation of the Company under this Agreement. The Executive's Base Pay shall be payable monthly. The Executive's Incentive Pay shall be paid annually as soon as reasonably practicable following determination of the amount payable but in no event later than the date which is sixty (60) days following the last day of the fiscal year during which such Incentive Pay is deemed earned. (b) During the Period of Employment the Executive shall, on the same basis as the Executive participated therein immediately prior to the Change in Control, be a full participant in, and shall be entitled to the perquisites, benefits and service credit for benefits as provided under any and all employee retirement income and welfare benefit policies, plans, programs or arrangements in which senior executives of the Company and/or any parent or subsidiary participate generally, including without limitation any 4 stock option, stock purchase, stock appreciation, savings, pension, supplemental executive retirement or other retirement income or welfare benefit, deferred compensation, incentive compensation, group and/or executive life, accident, health, dental, medical/hospital or other insurance (whether funded by actual insurance or self-insured by the Company), disability, salary continuation, expense reimbursement and other employee benefit policies, plans, programs or arrangements that may exist immediately prior to the Change in Control or any equivalent successor policies, plans, programs or arrangements that may be adopted thereafter by the Company and/or any parent or subsidiary (collectively, "Employee Benefits"); provided, however, that, ----------------- except as set forth in Section 5(a)(v) hereof, the Executive's --------------- rights thereunder shall be governed by the terms thereof and shall not be enlarged hereunder or otherwise affected hereby. Subject to the proviso in the immediately preceding sentence, if and to the extent such perquisites, benefits or service credit for benefits are not payable or provided under any such policy, plan, program or arrangement as a result of the amendment or termination thereof subsequent to or after a Change in Control, then the Company shall itself pay or provide such Employee Benefits. Nothing in this Agreement shall preclude improvement or enhancement of any such Employee Benefits, provided that no such improvement shall in any way diminish any other obligation of the Company under this Agreement. (c) The Company has determined that the amounts payable pursuant to this Section 3 constitute reasonable compensation. Accordingly, --------- notwithstanding any other provision hereof, unless such action would be expressly prohibited by applicable law, if any amount paid or payable pursuant to this Section 3 is subject to the --------- excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), the Company will pay to the ---- Executive an additional amount in cash equal to the amount necessary to cause the aggregate remuneration received by the Executive under this Section 3, including such additional cash --------- payment (net of all federal, state and local income and other taxes and all taxes payable as the result of the application of Sections 280G and 4999 of the Code) to be equal to the aggregate remuneration the Executive would have received under this Section 3, excluding such additional payment (net of all federal, --------- state and local income and other taxes), as if Sections 280G and 4999 of the Code (and any successor provisions thereto) had not been enacted into law. 4. Termination Following a Change in Control: ----------------------------------------- (a) In the event of the occurrence of a Change in Control, this Agreement may be terminated by the Company during the Period of Employment only upon the occurrence of one or more of the following events: 5 (i) If the Executive is unable to perform the essential functions of the Executive's job (with or without reasonable accommodation) because the Executive has become permanently disabled within the meaning of, and actually begins to receive disability benefits pursuant to, a long-term disability plan maintained by or on behalf of the Company for senior executives generally or, if applicable, employees of the Company immediately prior to the Change in Control; or (ii) For "Cause," which for purposes of this Agreement shall mean ----- that, prior to any termination pursuant to Subsection 4(b) --------------- hereof, the Executive shall have committed: (A) an intentional act of material fraud, embezzlement or theft in connection with the Executive's duties or in the course of the Executive's employment with the Company; (B) intentional, wrongful damage to material property of the Company; (C) intentional, wrongful disclosure of material secret processes or confidential information of the Company; or (D) intentional wrongful engagement in any Competitive Activity; and any such act shall have been materially harmful to the Company. For purposes of this Agreement, no act, or failure to act, on the part of the Executive shall be deemed "intentional" if it was due primarily to an error in judgment or negligence, but shall be deemed "intentional" only if done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's action or omission was in the best interest of the Company. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for "Cause" hereunder unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the Board then in office at a meeting of the Board called and held for such purpose (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive has committed an act set forth above in this Subsection 4(a)(ii) and specifying the particulars thereof ------------------- in detail. Nothing herein shall limit the right of the Executive or the Executive's beneficiaries to contest the validity or propriety of any such determination. 6 (b) In the event of the occurrence of a Change in Control, this Agreement may be terminated by the Executive during the Period of Employment with the right to benefits as provided in Section 5 hereof upon the occurrence of one or more of the following events as determined by the Executive in the sole discretion of the Executive: (i) Any termination by the Company of the employment of the Executive for any reason other than for Cause or as a result of the death of the Executive or by reason of the Executive's disability and the actual receipt of disability benefits in accordance with Subsection 4(a)(i) hereof; or ------------------ (ii) Termination by the Executive of the Executive's employment with the Company (or any successor to or affiliate thereof) during the Period of Employment upon the occurrence of any of the following events: (A) Failure to elect or reelect the Executive to the office(s) which the Executive held immediately prior to a Change in Control, or failure to elect or reelect the Executive as a director of the Company (or any successor to parent entity thereof) or the removal of the Executive as a director of the Company (or any successor thereto), if the Executive shall have been a director of the Company immediately prior to the Change in Control; (B) An adverse change in the nature or scope of the authorities, powers, functions, responsibilities or duties attached to the position(s) which the Executive held immediately prior to the Change in Control; a reduction in the Executive's Base Pay and/or Incentive Pay received from the Company; or the termination of the Executive's rights to any Employee Benefits to which the Executive was entitled immediately prior to the Change in Control or a reduction in scope or value thereof without the prior written consent of the Executive, any of which is not remedied within ten (10) calendar days after receipt by the Company of written notice from the Executive of such change, reduction or termination, as the case may be; (C) A determination by the Executive that, following a Change in Control, as a result of a change in circumstances significantly affecting the Executive's position(s), including without limitation, a change in the scope of the business or other activities for which the Executive was responsible immediately prior to a Change in Control, the Executive has been rendered substantially unable to carry out, has been substantially hindered in the performance of, or has suffered a substantial reduction in any of the authorities, powers, functions, responsibilities or duties attached to the position(s) held by the Executive immediately prior to the Change in Control, which situation is not remedied within ten (10) calendar days after written notice to the Company from the Executive of such determination; 7 (D) The liquidation, dissolution, merger, consolidation or reorganization of the Company or transfer of all or a significant portion of its business and/or assets (including, without limitation, by means of the sale of the capital stock or assets of one or more direct or indirect subsidiaries of the Company), unless the successor (by liquidation, merger, consolidation, reorganization or otherwise) to which all or a significant portion of its business and/or assets have been transferred (directly or by operation of law) shall have assumed all duties and obligations of the Company under this Agreement pursuant to Section 11 ---------- hereof (in which case, such entity shall be deemed to be the "Company" hereunder); (E) The Company shall require (I) that the principal place of work of the Executive or the appropriate principal executive office of the Company or the Company's operating division or subsidiary for which the Executive performed the majority of his services during the twelve (12)-month period preceding the Change in Control be changed to any location which is in excess of forty (40) miles from the location thereof immediately prior to the Change in Control or (II) that the Executive travel away from the Executive's office in the course of discharging the Executive's responsibilities or duties hereunder more (in terms of either consecutive days or aggregate days in any calendar year) than was required of the Executive prior to the Change in Control, without, in either case, the Executive's prior consent; or (F) Any material breach of this Agreement by the Company or any successor thereto. (c) A termination by the Company pursuant to Subsection 4(a) hereof --------------- or by the Executive pursuant to Subsection 4(b) hereof shall not --------------- affect any rights which the Executive may have pursuant to any agreement, policy, plan, program or arrangement of the Company providing Employee Benefits, which rights shall be governed by the terms thereof. If this Agreement or the employment of the Executive is terminated under circumstances in 8 which the Executive is not entitled to any payments under Sections 3 or 5 hereof, then notwithstanding anything herein --------------- to the contrary, the Executive shall have no further obligation or liability to the Company hereunder with respect to the Executive's prior or any future employment by the Company. 5. Severance Compensation: ---------------------- (a) If, following the occurrence of a Change in Control, (x) the Company shall terminate the Executive's employment during the Period of Employment other than pursuant to Subsection 4(a) --------------- hereof, or (y) the Executive shall terminate the Executive's employment during the Period of Employment pursuant to Subsection 4(b) hereof, or (z) the Executive dies during the --------------- Period of Employment, the Company shall pay to the Executive (or the Executive's estate, as applicable) the amount specified in Subsection 5(a)(i) hereof within five business days after the ------------------ date (the "Termination Date") that the Executive's employment is ---------------- terminated (the effective date of which shall be the date of termination or death, or such other date that may be specified by the Executive if the termination is pursuant to Subsection 4(b) -------------- hereof): (i) In lieu of any further payments under Subsection 3(a) to the --------------- Executive for periods subsequent to the Termination Date, but without affecting the rights of the Executive referred to in Subsection 5(b) hereof, a lump sum payment (the --------------- "Severance Payment") in an amount equal to a multiple of two (2) times the sum of (A) the Executive's Base Pay (at the highest rate in effect during the Term prior to the Termination Date), plus (B) the Executive's Incentive Pay (based upon the greatest amount of Incentive Pay paid or payable to the Executive for any year during the Term prior to the Termination Date). (ii) (A) for the remainder of the Period of Employment the Company shall arrange to provide the Executive with Employee Benefits identical to those which the Executive was receiving or entitled to receive immediately prior to the Termination Date (and if and to the extent that such benefits shall not or cannot be paid or provided under any policy, plan, program or arrangement of the Company solely due to the fact that the Executive is no longer an officer or employee of the Company, then the Company shall itself pay to the Executive and/or the Executive's dependents and beneficiaries, such Employee Benefits) and (B) without limiting the generality of the foregoing, the remainder of the Period of Employment shall be considered service with the Company for the purpose of service credits under the Company's retirement income, supplemental executive retirement and other benefit plans applicable to the Executive and/or the Executive's dependents and beneficiaries 9 immediately prior to the Termination Date. Without otherwise limiting the purposes or effect of Section 6 hereof, Employee Benefits payable to the Executive pursuant to this Subsection 5(a)(ii) by reason of any ------------------- "welfare benefit plan" of the Company (as the term "welfare benefit plan" is defined in Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended) shall be reduced to the extent comparable welfare benefits are actually received by the Executive from another employer during such period following the Executive's Termination Date until the expiration of the Period of Employment. (iii) In addition to all other compensation due to the Executive hereunder, the following shall occur immediately prior to the occurrence of a Change in Control: (A) all Company stock options held by the Executive prior to a Change in Control shall become exercisable, regardless of whether or not the vesting/performance conditions set forth in the relevant agreements shall have been satisfied in full; (B) all restrictions on any restricted securities granted by the Company to the Executive prior to a Change in Control shall be removed and the securities shall become fully vested and freely transferable, regardless of whether the vesting/performance conditions set forth in the relevant agreements shall have been satisfied in full; (C) the Executive shall have an immediate right to receive all performance shares or bonuses granted prior to a Change in Control, and such performance shares and bonuses shall become fully vested and freely transferable or payable without restrictions, regardless of whether or not specific performance goals set forth in the relevant agreements shall have been attained; and (D) all performance units granted to the Executive prior to a Change in Control shall become immediately payable in cash or Common Stock, at the Executive's sole option, regardless of whether or not the relevant performance cycle has been completed, and regardless of whether any other terms and conditions of the relevant agreements shall have been satisfied in full; provided, that if the terms of any plan or agreement providing for such options, restricted securities, performance shares or bonuses, or performance units do not allow such acceleration or payment as described above, the Company shall take or cause to be taken any action required to allow such acceleration or payment or to 10 separately pay the value of such benefits. (b) (i) Anything in this Agreement to the contrary notwithstanding, in the event a public accounting firm selected by the Executive (the "Accounting Firm") shall --------------- determine that any payment, benefit, or distribution by the Company to the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Subsection 5(b) (a --------------- "Payment") is subject to the excise tax imposed by Section ------- 4999 of the Code, or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise ------ Tax"), then the Company shall pay to the Executive an --- additional payment (a "Gross-Up Payment") in an amount such ---------------- that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto), and the Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (ii) Subject to the provisions of Subsection 5(b)(iii), all ------------------- determinations required to be made under this Subsection 5(b), including whether and when a Gross-Up --------------- Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the Accounting Firm which shall provide detailed supporting calculations both to the Company and the Executive as soon as possible following a request made by the Executive or the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Executive shall appoint another nationally recognized public accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Subsection 5(b), shall be paid by the Company to the --------------- Executive within five (5) days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the 11 application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Subsection 5(b)(iii) and -------------------- the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (iii) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the ten (10)-day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (A) give the Company any information reasonably requested by the Company relating to such claim, (B) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (C) cooperate with the Company in good faith to effectively contest such claim, and (D) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay -------- ------- directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect 12 thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Subsection 5(b)(iii), the -------------------- Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided further, that if -------- ------- the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and provided further, that any -------- ------- extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (iv) If, after the receipt by the Executive of an amount advanced by the Company pursuant to this Subsection 5(b), --------------- the Executive becomes entitled to receive, and receives, any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of this Subsection 5(b)) promptly pay to the Company the amount --------------- of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of any amount advanced by the Company pursuant to Subsection 5(b), a determination is made --------------- that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 13 (c) There shall be no right of set-off or counterclaim in respect of any claim, debt or obligation against any payment to or benefit (including Employee Benefits) of the Executive provided for in this Agreement. (d) Without limiting the rights of the Executive at law or in equity, if the Company fails to make any payment required to be made hereunder on a timely basis, the Company shall pay interest on the amount thereof (and on any interest accrued hereunder) at an annualized rate of interest equal to the Highest Lawful Rate as hereafter defined. "Highest Lawful Rate" means, at any time and ------------------- with respect to the Executive, the maximum rate of interest under applicable law that the Executive may charge the Company. The Highest Lawful Rate shall be calculated in a manner that takes into account any and all fees, payments, and other charges in respect of this Agreement that constitute interest under applicable law. Each change in any interest rate provided for herein based upon the Highest Lawful Rate resulting from a change in the Highest Lawful Rate shall take effect without notice to the Company at the time of such change in the Highest Lawful Rate. For purposes of determining the Highest Lawful Rate under Texas law, the applicable rate ceiling shall be the indicated rate ceiling described in, and computed in accordance with the Texas Finance Code. Notwithstanding anything to the contrary contained herein, no provisions of this Agreement shall require the payment or permit the collection of interest in excess of the Highest Lawful Rate. If any excess of interest in such respect is herein provided for, or shall be adjudicated to be so provided, in this Agreement or otherwise in connection with this loan transaction, the provisions of this paragraph shall govern and prevail, and neither the Company nor the sureties, guarantors, successors or assigns of the Company shall be obligated to pay the excess amount of such interest, or any other excess sum paid for the use, forbearance or detention of sums loaned pursuant hereto. If for any reason interest in excess of the Highest Lawful Rate shall be deemed charged, required or permitted by any court of competent jurisdiction, any such excess shall be applied as a payment and reduction of the principal of indebtedness evidenced by this Agreement; and, if the principal amount hereof has been paid in full, any remaining excess shall forthwith be paid to the Company. In determining whether or not the interest paid or payable exceeds the Highest Lawful Rate, the Company and the Executive shall, to the extent permitted by applicable law, (a) characterize any non-principal payment as an expense, fee, or premium rather than as interest, (b) exclude voluntary prepayments and the effects thereof, and (c) amortize, prorate, allocate, and spread in equal or unequal parts the total amount of interest throughout the entire contemplated term of the indebtedness evidenced by this Agreement so that the interest for the entire term does not exceed the Highest Lawful Rate. 6. No Mitigation Obligation: The Company hereby acknowledges that it ------------------------- will be difficult, and may be impossible, for the Executive to find reasonably comparable employment 14 following the Termination Date and that the noncompetition covenant contained in Section 7 hereof will further limit the employment --------- opportunities for the Executive. Accordingly, the parties hereto expressly agree that the payment of the severance compensation and benefits by the Company to the Executive in accordance with the terms of this Agreement will be liquidated damages, and that the Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall any profits, income, earnings or other benefits from any source whatsoever create any mitigation, offset, reduction or any other obligation on the part of the Executive hereunder or otherwise, except as expressly provided in Subsection 5(a)(ii) hereof. ------------------- 7. Competitive Activity: During a period ending one year following the -------------------- Termination Date (or, if less, a period equal to the remaining Period of Employment and beginning on the Termination Date), if the Executive shall have received or shall be receiving benefits under Subsection 5(a) hereof, the --------------- Executive shall not, without the prior written consent by the Company, directly or indirectly engage in any "Competitive Business" (as hereinafter defined) within any metropolitan area served by the Company during the twelve (12)-month period immediately preceding termination of the Executive's employment with the Company nor will the Executive engage, within such geographical area(s), in the design, development, distribution, manufacture, assembly or sale of a product or service in competition with any product or service marketed or planned by the Company immediately prior to the Termination Date, the plans, designs or specifications of which have been revealed to the Executive ("Competitive ----------- Activity"). The Executive acknowledges that these limited prohibitions are - -------- reasonable as to time, geographical area and scope of activities to be restrained and that the limited prohibitions do not impose a greater restraint than is necessary to protect the Company's goodwill, proprietary information and other business interests. "Competitive Activity" shall not include (i) the mere ownership of a de minimis amount of securities in any such enterprise and -- ------- exercise of rights appurtenant thereto or (ii) participation in management of any such enterprise or business operation thereof other than in connection with the competitive operation of such enterprise. For purposes of this Section 7, --------- the term "Competitive Business" means any person or entity engaged in a business -------------------- that produces any of the following products or performs any of the following services: general commercial printing services, including digital imaging, off-set lithography, binding and finishing services and fulfillment of printed materials, including any products or services manufactured, developed, or distributed during the Term and the Term of Employment by the Company and/or its affiliates, predecessors, or successors. 8. Legal Fees and Expenses: It is the intent of the Company that the ----------------------- Executive not be required to incur the expenses associated with the enforcement of the Executive's rights under this Agreement by litigation or other legal action because the cost and expense thereof would substantially detract from the benefits intended to be extended to the Executive hereunder. Accordingly, if it should appear to the Executive that the Company has failed to comply with any of its obligations under this Agreement or in the event that the Company or any other person takes any action to declare this Agreement void or unenforceable, or institutes any litigation designed to deny, or to recover from, the Executive the benefits intended to be provided to the Executive hereunder, the Company irrevocably authorizes the Executive from time to time to retain counsel of the Executive's choice, at the expense of the Company as hereafter provided, to represent the Executive in connection with the litigation or defense of any litigation or other legal action, whether by or against the Company or any director, officer, shareholder or other 15 person affiliated with the Company, in any jurisdiction. Notwithstanding any existing or prior attorney-client relationship between the Company and such counsel, the Company irrevocably consents to the Executive's entering into an attorney-client relationship with such counsel, and in connection therewith the Company and the Executive agree that a confidential relationship shall exist between the Executive and such counsel. The Company shall pay or cause to be paid and shall be solely responsible for any and all attorneys' and related fees and expenses incurred by the Executive as a result of the Company's failure to perform this Agreement or any provision thereof or as a result of the Company or any person contesting the validity or enforceability of this Agreement or any provision thereof as aforesaid. 9. Employment Rights: Nothing expressed or implied in this Agreement ----------------- shall create any right or duty on the part of the Company or the Executive to have the Executive remain in the employment of the Company prior to any Change in Control; provided, however, that any actual or constructive termination of employment of the Executive or removal of the Executive as an officer of the Company following the commencement of any discussion with or receipt of an offer from a third person that ultimately results in a Change in Control shall be deemed to be a termination or removal of the Executive after a Change in Control for purposes of this Agreement. 10. Withholding of Taxes: The Company may withhold from any amounts -------------------- payable under this Agreement all federal, state, city or other taxes as shall be required pursuant to any law or government regulation or ruling. 11. Successors and Binding Agreement: -------------------------------- (a) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business and/or assets of the Company, to expressly assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement shall be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the business and/or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor shall thereafter be deemed the "Company" for the purposes of this Agreement). This Agreement shall not otherwise be assignable, transferable or delegable by the Company. (b) This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees and/or legatees. (c) This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Subsection 11(a) hereof. Without ---------------- limiting the generality of 16 the foregoing, the Executive's right to receive payments hereunder shall not be assignable, transferable or delegable, whether by pledge, creation of a security interest or otherwise, other than by a transfer by the Executive's will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this Subsection 11(c), the Company shall have no liability to pay ---------------- any amount so attempted to be assigned, transferred or delegated. (d) The Company and the Executive recognize that each Party will have no adequate remedy at law for breach by the other of any of the agreements contained herein and, in the event of any such breach, the Company and the Executive hereby agree and consent that the other shall be entitled to a decree of specific performance, mandamus or other appropriate remedy to enforce performance of this Agreement. 12. Applicable Law. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED IN -------------- ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS (EXCLUSIVE OF CONFLICTS OF LAW PRINCIPLES OF ANY STATE) AND THE LAWS OF THE UNITED STATES OF AMERICA AND WILL, TO THE MAXIMUM EXTENT PRACTICABLE, BE DEEMED TO CALL FOR PERFORMANCE IN HARRIS COUNTY, TEXAS. COURTS WITHIN THE STATE OF TEXAS WILL HAVE JURISDICTION OVER ANY AND ALL DISPUTES BETWEEN THE PARTIES HERETO, WHETHER IN LAW OR EQUITY, ARISING OUT OF OR RELATING TO THIS AGREEMENT. THE PARTIES CONSENT TO AND AGREE TO SUBMIT TO THE JURISDICTION OF SUCH COURTS. VENUE IN ANY SUCH DISPUTE, WHETHER IN FEDERAL OR STATE COURT, WILL BE LAID IN HARRIS COUNTY, TEXAS. EACH OF THE PARTIES HEREBY WAIVES, AND AGREES NOT TO ASSERT IN ANY SUCH DISPUTE, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY CLAIM THAT (I) SUCH PARTY IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURTS, (II) SUCH PARTY AND SUCH PARTY'S PROPERTY IS IMMUNE FROM ANY LEGAL PROCESS ISSUED BY SUCH COURTS OR (III) ANY LITIGATION COMMENCED IN SUCH COURTS IS BROUGHT IN AN INCONVENIENT FORUM. 13. Notices. All notices, demands, requests or other communications that ------- may be or are required to be given, served or sent by either party to the other party pursuant to this Agreement will be in writing and will be mailed by first-class, registered or certified mail, return receipt requested, postage prepaid, or transmitted by hand delivery, telegram or facsimile transmission addressed as follows: (a) If to the Company: Consolidated Graphics, Inc. 5858 Westheimer, Suite 200 Houston, Texas 77057 Facsimile No.: (713) 787-0974 Attn: Joe R. Davis 17 with a copy (which will not constitute notice) to: Winstead Sechrest & Minick P.C. 910 Travis Street, Suite 2400 Houston, Texas 77002-5895 Facsimile No.: (713) 650-2400 Attn: R. Clyde Parker, Jr., Esq. (b) If to the Executive: Charles White c/o Consolidated Graphics, Inc. 5858 Westheimer, Suite 200 Houston, Texas 77057 Either party may designate by written notice a new address to which any notice, demand, request or communication may thereafter be given, served or sent. Each notice, demand, request or communication that is mailed, delivered or transmitted in the manner described above will be deemed sufficiently given, served, sent and received for all purposes at such time as it is delivered to the addressee with the return receipt, the delivery receipt, the affidavit of messenger or (with respect to a facsimile transmission) the answer back being deemed conclusive evidence of such delivery or at such time as delivery is refused by the addressee upon presentation. 14. Gender. Words of any gender used in this Agreement will be held and ------ construed to include any other gender, and words in the singular number will be held to include the plural, unless the context otherwise requires. 15. Amendment. This Agreement may not be amended or supplemented except --------- pursuant to a written instrument signed by the parties hereto. Nothing contained in this Agreement will be deemed to create any agency, joint venture, partnership or similar relationship between the parties to this Agreement. Nothing contained in this Agreement will be deemed to authorize either party to this Agreement to bind or obligate the other party. 16. Counterparts. This Agreement may be executed in multiple ------------ counterparts, each of which will be deemed to be an original and all of which will be deemed to be a single agreement. This Agreement will be considered fully executed when all parties have executed an identical counterpart, notwithstanding that all signatures may not appear on the same counterpart. 17. Severability. If any of the provisions of this Agreement are ------------ determined to be invalid or unenforceable, such invalidity or unenforceability will not invalidate or render unenforceable the remainder of this Agreement, but rather the entire Agreement will be construed as if not containing the particular invalid or unenforceable provision or provisions, and the rights and obligations of the parties will be construed and enforced accordingly. The parties acknowledge that if any provision of this Agreement is determined to be invalid or unenforceable, it is their desire and intention that such provision be reformed and construed in such manner that it will, to the maximum extent practicable, be deemed to be valid and enforceable. 18. Third Parties. Except as expressly set forth or referred to in this ------------- Agreement, nothing in this Agreement is intended or will be construed to confer upon or give to any party 18 other than the parties to this Agreement and their successors and permitted assigns, if any, any rights or remedies under or by reason of this Agreement. 19. Waiver. No failure or delay in exercising any right hereunder will ------ operate as a waiver thereof, nor will any single or partial exercise thereof preclude any other or further exercise or the exercise of any other right. 20. Prior Agreements: This Agreement is voluntarily entered into and upon ---------------- the occurrence of a Change in Control will supersede and take the place of any prior change in control agreements between the parties hereto. The parties hereto expressly agree and hereby declare that any and all prior change in control agreements between the parties are terminated and of no force or effect. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first above written. COMPANY: CONSOLIDATED GRAPHICS, INC. By: /s/Joe R. Davis ----------------------------------------- Joe R. Davis, Chairman and Chief Executive Officer EXECUTIVE: /s/Charles White -------------------------------------------- Charles White 19 EX-99 4 davisrev.txt Exhibit 10.7 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT (the "AGREEMENT"), dated effective as of July 25, 2000, is entered into by and between CONSOLIDATED GRAPHICS, INC., a Texas corporation having its principal place of business in Houston, Harris County, Texas ("CGX"), and JOE R. DAVIS (the "EXECUTIVE"); other capitalized terms used in this Agreement are defined and shall have the meanings set forth in Section 17 or elsewhere herein. W I T N E S S E T H: WHEREAS, Executive is to be employed as Chief Executive Officer of CGX; WHEREAS, in connection with his employment, Executive will be provided by CGX with specialized training and given access to confidential information; WHEREAS, it is the desire of the Board of Directors of CGX (the "BOARD") to engage Executive as an executive officer of CGX and its subsidiaries pursuant to the terms of this Agreement; and WHEREAS, Executive is desirous of committing himself to serve CGX on the terms herein provided. NOW, THEREFORE, in consideration of the premises, representations and mutual covenants hereinafter set forth, the parties hereby covenant and agree as follows: 1. EMPLOYMENT. CGX hereby employs Executive, and Executive hereby accepts employment with CGX, on the terms and conditions set forth in this Agreement. 2. EMPLOYMENT PERIOD. The term of Executive's employment (the "EMPLOYMENT PERIOD") pursuant to the terms of this Agreement shall commence upon the Effective Date and shall continue until the Termination Date (as defined below). 3. DUTIES. Executive shall (i) serve under the direction of the Board as Chief Executive Officer of CGX, (ii) have all the rights, powers and duties associated with his positions, and (iii) faithfully, to the best of Executive's ability, perform the duties and other reasonably related services assigned to Executive by the Board from time to time (the "DUTIES"). Executive shall be subject to, and shall comply with, CGX insider trading policies (a copy of which has been delivered to Executive) and the other policies of CGX in effect from time to time (collectively, the "CGX POLICIES"); provided, however, that to the extent such CGX Policies may contradict the express provisions of this Agreement, the provisions of this Agreement shall govern. Executive shall devote his full business time, efforts and attention to the business of CGX during the Employment Period consistent with past practice and, without the prior written consent of the Board, Executive shall not during the Employment Period render any services of a business, commercial or professional nature, to any person or organization other than CGX and the Affiliates or be engaged in any other business activity, other than those activities described in Section 12 below. Executive represents and warrants that Executive is not a party to or bound by any agreement or contract or subject to any restrictions, including without limitation in 1 connection with any previous employment, which might prevent Executive from entering into and performing Executive's obligations under this Agreement. 4. COMPENSATION. During the Employment Period, Executive shall be compensated for Executive's services as follows: (a) Executive shall be paid a base monthly salary of not less than $33,333.66, subject to any and all customary payroll deductions, including deductions for the Federal Insurance Contributions Act and other federal, state and local taxes. Such monthly salary shall be increased during the Employment Period at the same time and on at least as favorable a basis as other officers of CGX. (b) Except to the extent such policies may contradict the express provisions of this Agreement, in which case the provisions of this Agreement shall govern, Executive shall be eligible to receive (i) fringe benefits on the same basis as other management employees of CGX pursuant to CGX Policies in effect from time to time, including holiday time and (ii) three (3) weeks paid vacation; provided, however, that earned but unused vacation or other compensated absences shall not be carried forward for use or payment in subsequent periods; and provided, further, that CGX will act reasonably to continue in effect comparable medical benefits to those currently in effect at the Company. (c) Executive shall be eligible to participate, to the extent that Executive meets all eligibility requirements of general application, in each of the employee benefit plans maintained by CGX or in which employees of CGX generally are eligible to participate, including as of the date hereof, group hospitalization, medical, dental, and short and long term disability and life plans. 5. BONUS. In addition to the other compensation set forth herein, Executive shall be entitled to receive an annual cash bonus payment in an amount to be determined in the sole discretion of the Compensation Committee of the Board; provided, however, that the sum of Executive's annual base salary (as paid monthly pursuant to Section 4(a) hereof) plus annual cash bonus payment shall equal or exceed the sum of the annual base salary plus annual cash bonus of each CGX employee working at CGX's corporate headquarters. 6. STOCK OPTIONS. In addition to the other compensation set forth herein, Executive shall be provided with options to purchase CGX shares as follows: (a) 300,000 shares to be granted effective as of the Effective Date at an exercise price equal to the closing price per share of CGX common stock as reported on the New York Stock Exchange on July 26, 2000; and (b) 50,000 shares on each anniversary date of the Effective Date during the Employment Period; such options shall have an exercise price equal to the closing price per share of CGX common stock as reported on the New York Stock Exchange (or other applicable national exchange on which the common stock of CGX is then listed) on the day immediately preceding the effective date of the grant of such option. 2 All options granted pursuant to the terms of this Agreement shall be granted pursuant to and subject to the terms of the form CGX Stock Option Agreement attached hereto as Exhibit "A". 7. EXECUTIVE EXPENSES. During the Employment Period, Executive shall be entitled to be reimbursed for reasonable normal business expenses incurred in the performance of the Duties hereunder in accordance with CGX Policies in effect from time to time; provided, however, that documentation supporting such expenses must be submitted to and approved by the Board before such reimbursement is paid to Executive. 8. NO COMPETING BUSINESS. In consideration for the benefits received by Executive pursuant to this Agreement, during the Noncompetition Period, Executive shall not, except as permitted by Section 12 of this Agreement, directly or indirectly own, manage, operate, control, invest or acquire an interest in, or otherwise engage or participate (whether as a proprietor, partner, employee, stockholder, member, director, officer, executive, joint venturer, investor, consultant, agent, sales representative, broker or other participant) in any Competitive Business operating in or soliciting business from CGX's Market, without regard to (i) whether the Competitive Business has its office or other business facilities within CGX's Market, (ii) whether any of the activities of Executive referred to above occur or are performed within CGX's Market or (iii) whether Executive resides, or reports to an office, within CGX's Market. 9. NO INTERFERENCE WITH THE BUSINESS. In consideration for the benefits received by Executive pursuant to this Agreement, during the Noncompetition Period, Executive shall not: (a) directly or indirectly solicit, induce or intentionally influence any third party sales representative, agent, supplier, lender, lessor or any other person which has a business relationship with CGX and/or any Affiliate or which had on the date of this Agreement a business relationship with CGX and/or any Affiliate to discontinue, reduce the extent of, discourage the development of or otherwise harm such relationship with CGX and/or any Affiliate; (b) directly or indirectly attempt to induce any known customer to terminate any contract or otherwise divert from CGX and/or any Affiliate any trade or business being conducted by any such customer with CGX and/or any Affiliate or directly or indirectly attempt to solicit, induce or intentionally influence any prospective or past customer of CGX and/or any Affiliate to discontinue, reduce the extent of, or not conduct business with CGX and/or any Affiliate; (c) directly or indirectly recruit, solicit, induce or influence any executive, employee or sales agent of CGX and/or any Affiliate to discontinue such sales, employment or agency relationship with CGX and/or any such Affiliate; (d) employ, seek to employ or cause any other person or entity to employ or seek to employ as a sales representative or Executive any person who is then (or was at any time since the Effective Date) employed by CGX and/or any of the Affiliates; or 3 (e) directly or indirectly denigrate or in any manner undertake to discredit CGX, any Affiliate or any successor thereof or any person, operation or entity associated with CGX or any Affiliate. 10. CONSIDERATION FOR RESTRICTIONS. Executive acknowledges that the restrictions imposed under Sections 3, 8, 9, and 11 are supported by the consideration to be received by Executive pursuant to the terms of this Agreement. 11. NO DISCLOSURE OF CONFIDENTIAL INFORMATION. Executive shall not directly or indirectly knowingly disclose to anyone or use or otherwise exploit for Executive's own benefit or for the benefit of anyone other than CGX and/or any of the Affiliates any Confidential Information. Executive shall not disclose the terms of this Agreement to anyone other than a representative or agent of Executive. 12. PERMITTED ACTIVITIES. The restrictions set forth in Sections 3, 8 and 9 of this Agreement shall not apply to Permitted Activities (as defined below). 13. REDUCTION OF RESTRICTIONS BY COURT ACTION. If the length of time, type of activity, geographic area or other restrictions set forth in the restrictions of Sections 3, 8, 9, or 11 are deemed unreasonable in any court proceeding, the parties hereto agree that the court may reduce such restrictions to ones it deems reasonable to protect the substantial investment of CGX and the Affiliates in their businesses and the goodwill attached thereto. 14. REMEDIES. Executive understands that CGX and the Affiliates will not have an adequate remedy at law for the breach or threatened breach by Executive of any one or more of the covenants set forth in this Agreement and agrees that in the event of any such breach or threatened breach, CGX or any Affiliate may, in addition to the other remedies which may be available to it, file a suit in equity to enjoin Executive from the breach or threatened breach of such covenants. In the event either party commences legal action to enforce its or his rights under this Agreement, the prevailing party in such action shall be entitled to recover all of the costs and expenses in connection therewith, including reasonable attorney's fees. 15. Termination. (a) The "TERMINATION DATE" shall mean the date in which the first of the following occur: (i) the fifth anniversary of the Effective Date or any date subsequent thereto provided one party has given notice to the other at least one (1) year in advance of such date of his/its election to terminate this Agreement on such date; (ii) Executive's death; (iii) the Disability (as defined below) of Executive; (iv) termination by CGX of Executive for Cause (as defined below); 4 (v) termination by CGX of Executive without Cause; (vi) the resignation of Executive for any reason (other than Good Reason (as defined below)), which shall take effect immediately upon CGX's receipt of such resignation, (vii) the resignation of Executive for Good Reason, which shall take effect immediately upon CGX's receipt of such resignation; or (viii) a Change in Control (as defined in the Change in Control Agreement). (each of (i), (ii), (iii), (iv), (v), (vi), (vii) and (viii) are referred to herein as a "TERMINATION"). (b) If a Termination occurs pursuant to subparagraphs (v), or (vii), then during the Severance Period (as defined below), (i) Executive shall receive Executive's monthly salary in effect immediately prior to the Termination in accordance with Section 4(a) and (ii) Executive shall continue to receive and/or be able to elect to receive benefits under CGX welfare plans or substantially equivalent welfare plans at CGX's expense, including but not limited to, medical/hospital, dental, life, and disability, in accordance with the terms of such plans in effect at the time; provided, however, that Executive shall be responsible for the costs of such benefits to the same extent he was responsible (or would have been responsible had he then been a participant) for such costs prior to the Termination Date. (c) If a Termination occurs pursuant to subparagraphs (i), (ii), (iii), (iv), (vi) or (viii), then Executive or Executive's estate shall receive (i) Executive's monthly salary in effect immediately prior to the Termination in accordance with Section 4(a) through the date of such Termination and (ii) any other amounts earned, accrued or owing as of such Termination Date, but not yet paid by CGX to Executive. (d) Termination of employment hereunder shall not relieve Executive of his obligations under Sections 8 and 9 hereof, notwithstanding the termination of Executive's compensation or the termination of the other terms and conditions of this Agreement. In addition, termination of employment hereunder shall not relieve Executive of his obligations under Section 11 hereof which are intended to continue indefinitely, notwithstanding the termination of Executive's compensation or the termination of the other terms and conditions of this Agreement. Executive's violation of any of his obligations under Sections 8, 9 or 11 hereof shall relieve CGX of its obligation to pay any of the benefits as contemplated in this Section 15. (e) In addition to all other compensation due to Executive hereunder, the following shall occur immediately prior to the occurrence of a Termination pursuant to subparagraphs (ii) or (iii) of Section 15; (i) all CGX stock options held by Executive prior to such a Termination shall become exercisable, regardless of whether or not 5 the vesting/performance conditions set forth in the relevant agreements shall have been satisfied in full; (ii) all restrictions on any restricted securities granted by CGX to Executive prior to such a Termination shall be removed and the securities shall become fully vested and freely transferable, regardless of whether the vesting/performance conditions set forth in the relevant agreements shall have been satisfied in full; (iii) Executive (or Executive's estate) shall have an immediate right to receive all performance shares or bonuses granted prior to such a Termination, and such performance shares and bonuses shall become fully vested and freely transferable or payable without restrictions, regardless of whether or not specific performance goals set forth in the relevant agreements shall have been attained; (iv) all performance units granted to Executive prior to such a Termination shall become immediately payable in cash or common stock, at Executive's sole option (or at the sole option of the executor of the Executive's estate), regardless of whether or not the relevant performance cycle has been completed, and regardless of whether any other terms and conditions of the relevant agreements shall have been satisfied in full; (v) provided, that if the terms of any plan or agreement providing for such options, restricted securities, performance shares or bonuses, or performance units do not allow such acceleration or payment as described above, CGX shall take or cause to be taken any action required to allow such acceleration or payment or to separately pay the value of such benefits. 16. GROSS-UP. (a) Anything in this Agreement to the contrary notwithstanding, in the event a public accounting firm selected by Executive (the "ACCOUNTING FIRM") shall determine that any payment, benefit, or distribution by CGX to Executive (whether paid or payable or distributed or distributable pursuant to the terms of Section 15 of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 16) (each a "PAYMENT") is subject to the excise tax imposed by Section 4999 of the Code, or any interest or penalties are incurred by Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "EXCISE TAX"), then CGX shall pay to Executive an additional payment (a "GROSS-UP PAYMENT") in an amount such that after payment by Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto), and the Excise Tax imposed upon the Gross-Up Payment, 6 Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 16(c) below, all determinations required to be made under this Section 16, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the Accounting Firm which shall provide detailed supporting calculations both to CGX and Executive as soon as possible following a request made by Executive or CGX. All fees and expenses of the Accounting Firm shall be borne solely by CGX. Any Gross-Up Payment, as determined pursuant to this Section 16, shall be paid by CGX to Executive within five (5) days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by Executive, it shall furnish Executive with a written opinion that failure to report the Excise Tax on Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon CGX and Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by CGX should have been made ("UNDERPAYMENT"), consistent with the calculations required to be made hereunder. If CGX exhausts its remedies pursuant to Section 16(c) below and Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by CGX to or for the benefit of Executive. (c) Executive shall notify CGX in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by CGX of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after Executive is informed in writing of such claim and shall apprize CGX of the nature of such claim and the date on which such claim is requested to be paid. Executive shall not pay such claim prior to the expiration of the ten (10)-day period following the date on which Executive gives such notice to CGX (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If CGX notifies Executive in writing prior to the expiration of such period that it desires to contest such claim, Executive shall: (i) give CGX any information reasonably requested by CGX relating to such claim, (ii) take such action in connection with contesting such claim as CGX shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by CGX, (iii) cooperate with CGX in good faith to effectively contest such claim, and 7 (iv) permit CGX to participate in any proceedings relating to such claim; provided, however, that CGX shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 16(c), CGX shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as CGX shall determine; provided further, that if CGX directs Executive to pay such claim and sue for a refund, CGX shall advance the amount of such payment to Executive on an interest-free basis and shall indemnify and hold Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and provided further, that any extension of the statute of limitations relating to payment of taxes for the taxable year of Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, CGX's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by Executive of an amount advanced by CGX pursuant to this Section 16, Executive becomes entitled to receive, and receives, any refund with respect to such claim, Executive shall (subject to CGX's complying with the requirements of this Section 16) promptly pay to CGX the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by Executive of any amount advanced by CGX pursuant to Section 16, a determination is made that Executive shall not be entitled to any refund with respect to such claim and CGX does not notify Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 8 17. DEFINITIONS. As used in this Agreement, terms defined in the preamble and recitals of or elsewhere in this Agreement shall have the meanings set forth therein and the following terms shall have the meanings set forth below: (a) Affiliate or Affiliates shall mean and refer to any direct or indirect subsidiaries of CGX, or any other entity or entities through which CGX or any subsidiary of CGX may conduct CGX's Line of Business. (b) Cause shall mean and include without limitation (i) the inability of Executive to perform his Duties hereunder due to a legal impediment, including without limitation, the entry against Executive of an injunction, restraining order or other type of judicial judgment, decree or order which would prevent or hinder Executive from performing his Duties; (ii) the willful failure by Executive to follow material CGX Policies or the willful disregard of the reasonable and material instructions of the Board of Directors with respect to the performance of Executive's Duties, other than any failure not occurring in bad faith that is remedied by Executive promptly after receipt of notice thereof from CGX; (iii) excessive absenteeism, flagrant neglect of work, serious misconduct, conviction of a felony or fraud; or (iv) the failure of Executive to devote substantially all of his full working time and attention to performance of his Duties for CGX. (c) Change in Control Agreement shall mean that certain Change in Control Agreement dated July 25, 2000 between CGX and Executive. (d) CGX's Line of Business shall mean general commercial printing services, including digital imaging, offset lithography, composition, electronic prepress, binding and finishing services, fulfillment of printed materials and includes any products or services manufactured, developed or distributed, including electronic products and services, at any time by CGX and/or the Affiliates before or after the Effective Date. (e) CGX's Market shall mean the United States; (f) Competitive Business shall mean any person or entity engaged in a business that produces any of the products or performs any of the services comprising CGX's Line of Business. (g) Confidential Information shall mean trade secrets, customer and supplier lists, marketing arrangements, business plans, projections, financial information, training manuals, pricing manuals, product and service development plans, market strategies, internal performance statistics and other competitively sensitive information belonging to and concerning CGX and/or any of the Affiliates and not generally known by or available to the public, whether or not in written or tangible form, as the same may exist at any time during the Employment Period. (h) Disability shall mean any illness, disability or incapacity of such a character as to render Executive unable to perform his Duties (which determination shall be made by the Board of Directors) for a total period of one hundred eighty (180) days, 9 whether or not such days are consecutive, during any consecutive twelve (12) month period. (i) Effective Date shall mean the execution date of this Agreement. (j) Employment Period shall mean that period of time set forth in Section of this Agreement. (k) Good Reason shall mean (i) the material breach of this Agreement by CGX, other than any failure not occurring in bad faith that is remedied by CGX promptly after receipt of notice thereof from Executive, (ii) the implementation by CGX of a condition to Executive's continued employment with CGX that Executive's principal place of work be changed to any location outside of the Houston metropolitan area, (iii) a material diminution in the Executive's Duties and (iv) the termination by the Executive of the Executive's employment with CGX upon the occurrence of any of the events set forth in Section 4(b)(ii) to the Change of Control Agreement. (l) Noncompetition Period shall mean a period beginning on the Effective Date and continuing through the Employment Period and for the greater of (i) the period of one (1) year after any Termination pursuant to Section15(a)(i), (iii), (iv) or (vi) or (ii) the Severance Period. (m) Permitted Activities shall mean (i) owning not more than 1% of the outstanding shares of a publicly-held Competitive Business which has shares listed for trading on a securities exchange registered with the Securities and Exchange Commission or through the automated quotation system of a registered securities association; (ii) owning capital stock of CGX; or (iii) those activities or actions undertaken by Executive, to the extent, but only to the extent, such activities or actions are expressly approved in writing by the Board of Directors. (n) Severance Period shall mean that period of time equal to the shorter of (i) two (2) years following Termination or (ii) the remainder of the Employment Period that would have been applicable pursuant to Section 15(a)(i) but for the early Termination, if at the time of such Termination either of the parties had notified the other of its election to terminate the Employment Period pursuant to Section 15(a)(i). 18. NOTICES. All notices, demands or other communications required or provided hereunder shall be in writing and shall be deemed to have been given and received when delivered in person or transmitted by facsimile transmission (telecopy), cable or telex to the respective parties or seven (7) days after dispatch by registered or certified mail, postage prepaid, addressed to the parties at the addresses set forth below or at such other addresses as such parties may designate by notice to the other parties: If to CGX: Consolidated Graphics, Inc. 5858 Westheimer, Suite 200 Houston, Texas 77057 Attention: Joe R. Davis 10 with a copy (which shall not constitute notice) to: R. Clyde Parker, Jr., Esq. Winstead Sechrest & Minick P.C. 910 Travis, Suite 2400 Houston, Texas 77002 If to Executive: Joe R. Davis c/o Consolidated Graphics, Inc. 5858 Westheimer, Suite 200 Houston, Texas 77057 19. ASSIGNMENT. CGX, but not Executive, may assign or delegate any of its rights or obligations hereunder; provided, however, that without the consent of Executive, CGX shall not be relieved of any of its obligations hereunder as a result of any assignment to a third party; provided, further, that an assignment made in accordance with this section shall not constitute a termination of employment for purposes of this Agreement. This Agreement shall be binding upon and inure to the benefit of any assignee thereof and any such assignee shall be deemed substituted for CGX under the terms of this Agreement and all references to the "CGX" shall be deemed to mean such assignee. As used in this Agreement, the term "assignee" shall include any Affiliate or person, firm, partnership, corporation or CGX which at any time, whether by merger, purchase or otherwise, acquires all of the capital stock or substantially all of the assets or business of CGX, and any assignee or successor thereof. 20. NO MITIGATION OBLIGATION. CGX hereby acknowledges that it will be difficult, and may be impossible, for Executive to find reasonably comparable employment following the Termination Date and that the noncompetition covenants contained in Sections 8 and 9 hereof will further limit the employment opportunities for Executive. Accordingly, the parties hereto expressly agree that the payment of the severance compensation and benefits by CGX to Executive in accordance with the terms of this Agreement will be liquidated damages, and that Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall any profits, income, earnings or other benefits from any source whatsoever create any mitigation, offset, reduction or any other obligation on the part of Executive hereunder or otherwise, except as expressly provided in Sections 15(c) and (f) hereof and to the extent Executive actually receives comparable welfare benefits from another employer during the Severance Period. 21. AMENDMENT AND MODIFICATION. No amendment or modification of the terms of this Agreement shall be binding upon either party unless reduced to writing and signed by Executive and a duly appointed officer of CGX. 22. GOVERNING LAW. This Agreement and all rights and obligations hereunder, including matters of construction, validity and performance, shall be governed by the laws of the State of Texas, without giving effect to the principles of conflicts of laws thereof. 23. COUNTERPARTS. This Agreement may be executed in two or more counterparts, any one of which shall be deemed the original without reference to the others. 11 24. SEVERABILITY. If any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions and portions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law. 25. EFFECTIVE DATE. This Agreement shall become effective only upon and as of the Effective Date. 26. WAIVER. The failure of either party to insist, in any one or more instances, upon performance of the terms or conditions of this Agreement shall not be construed as a waiver or relinquishment of any right granted hereunder or of the future performance of any such term, covenant or condition. 27. CONSTRUCTION OF AGREEMENT. Headings of the sections in this Agreement are for reference purposes only and shall not be deemed to have any substantive effect. Unless the contents of this Agreement otherwise clearly requires, references to the plural include the singular and the singular include the plural. Whenever the context here requires, the masculine shall refer to the feminine, the neuter shall refer to the masculine or feminine, the singular shall refer to the plural, and vice versa. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. EXECUTIVE: /s/Joe R. Davis ------------------------------------------ JOE R. DAVIS CGX: CONSOLIDATED GRAPHICS, INC. By: /s/Joe R. Davis ---------------------------------------- Name:Joe R. Davis -------------------------------------- Title:CEO -------------------------------------- 12 EXHIBIT A 13 EX-99 5 davis.txt Exhibit 10.8 CHANGE IN CONTROL AGREEMENT This EMPLOYMENT AND CHANGE IN CONTROL AGREEMENT ("Agreement"), effective as of July 25, 2000, by and between CONSOLIDATED GRAPHICS, INC., a Texas corporation (the "Company"), and JOE R. DAVIS (the "Executive"), evidences that; WHEREAS, the Executive is a senior executive of the Company and has made and/or is expected to make or continue to make significant contributions to the profitability, growth and financial strength of the Company; WHEREAS, the Company desires to assure itself of both present and future continuity of management in the event of a Change in Control (as defined hereafter) and desires to establish certain minimum compensation rights with respect to its key senior executives, including the Executive, applicable in the event of a Change in Control; WHEREAS, the Company wishes to ensure that its senior executives are not practically disabled from discharging their duties upon a Change in Control; WHEREAS, this Agreement is not intended to alter materially the compensation and benefits which the Executive could reasonably expect to receive from the Company absent a Change in Control and, accordingly, although effective and binding as of the date hereof, this Agreement shall become operative only upon the occurrence of a Change in Control; and WHEREAS, the Executive is willing to render services to the Company on the terms and subject to the conditions set forth in this Agreement; NOW, THEREFORE, the Company and the Executive agree as follows: 1. Operation of Agreement: ---------------------- (a) Sections 1 and 8 through 21 of this Agreement shall be effective and binding as of the Effective Date, but, anything in this Agreement to the contrary notwithstanding, Sections 2, 3, 4, 5, 6 and 7 of this Agreement shall not be effective and binding unless and until there shall have occurred a Change in Control. For purposes of this Agreement, a "Change in Control" will be deemed to have occurred if at any time during the Term (as hereinafter defined) any of the following events shall occur: (i) The Company is merged, consolidated, converted or reorganized into or with another corporation or other legal entity, and as a result of such merger, consolidation, conversion or reorganization less than a majority of the combined voting power of the then outstanding securities of the Company or such corporation or other legal entity immediately after such transaction are held in the aggregate by the holders of Voting Stock (as hereinafter defined) 1 of the Company immediately prior to such transaction and/or such voting power is not held by substantially all of such holders in substantially the same proportions relative to each other; (ii) The Company sells (directly or indirectly) all or substantially all of its assets (including, without limitation, by means of the sale of the capital stock or assets of one or more direct or indirect subsidiaries of the Company) to any other corporation or other legal entity, of which less than a majority of the combined voting power of the then outstanding voting securities (entitled to vote generally in the election of directors or persons performing similar functions on behalf of such other corporation or legal entity) of such other corporation or legal entity is held in the aggregate by the holders of Voting Stock of the Company immediately prior to such sale and/or such voting power is not held by substantially all of such holders in substantially the same proportions relative to each other; (iii) Any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) becomes (subsequent to the Effective Date) the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of securities representing fifty percent (50%) or more of the combined voting power of the then-outstanding securities entitled to vote generally in the election of directors of the Company ("Voting Stock"); (iv) The Company files a report or proxy statement with the Securities and Exchange Commission pursuant to the Exchange Act disclosing in response to Form 8-K, Schedule 14A or Schedule 14C (or any successor schedule, form or report or item therein) that a change in control of the Company has occurred; (v) If during any one (1)-year period, individuals who at the beginning of any such period constitute the directors of the Company cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the Company's shareholders, of each director of the Company first elected during such period was approved by a vote of at least two-thirds of (i) the directors of the Company then still in office who were directors of the Company at the beginning of any such period or (ii) directors of the Company whose nomination and/or election was approved by the directors referenced in clause (i) immediately preceding; or 2 (vi) The shareholders of the Company approve a plan contemplating the liquidation or dissolution of the Company. Notwithstanding the foregoing provisions of Subsection 1(a)(iii) or 1(a)(iv) hereof, a "Change in Control" shall not be deemed to have occurred for purposes of this Agreement solely because (i) the Company, (ii) a corporation or other legal entity in which the Company directly or indirectly beneficially owns 100% of the voting securities of such entity, or (iii) any employee stock ownership plan or any other employee benefit plan of the Company or any wholly-owned subsidiary of the Company, either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K, Schedule 14A or Schedule 14C (or any successor schedule, form or report or item therein) under the Exchange Act, disclosing beneficial ownership by it of shares of Voting Stock, or because the Company reports that a change in control of the Company has occurred by reason of such beneficial ownership. (b) Upon occurrence of a Change in Control at any time during the Term, Sections 2, 3, 4, 5, 6 and 7 of this Agreement shall become immediately binding and effective. (c) The period during which this Agreement shall be in effect (the "Term") shall commence as of the date hereof and shall expire as of the later of (i) the close of business on the third anniversary of the date hereof, or (ii) the expiration of the Period of Employment (as hereinafter defined); provided, however, that (A) subject to Section 9 hereof, if, prior to a Change in Control, the Executive ceases for any reason to be an employee of the Company (or a parent or subsidiary thereof), thereupon the Term shall be deemed to have expired and this Agreement shall immediately terminate and be of no further effect and (B) commencing on the first anniversary of the date hereof and each anniversary thereafter, the Term of this Agreement shall automatically be extended for an additional year. 2. Employment; Period of Employment: -------------------------------- (a) Subject to the terms and conditions of this Agreement, upon the occurrence of a Change in Control, the Company shall continue the Executive in its employ and the Executive shall remain in the employ of the Company for the period set forth in Subsection 2(b) hereof (the "Period of Employment"), in the position and with substantially the same duties and responsibilities that the Executive had immediately prior to the Change in Control, or to which the Company and the Executive may hereafter mutually agree in writing. Throughout the Period of Employment, the Executive shall devote substantially all of the 3 Executive's time during normal business hours (subject to vacations, sick leave and other absences in accordance with the policies of the Company as in effect for senior executives immediately prior to the Change in Control) to the business and affairs of the Company, but nothing in this Agreement shall preclude the Executive from devoting reasonable periods of time during normal business hours to (i) serving as a director, trustee or member of or participant in any organization or business so long as such activity would not constitute Competitive Activity (as hereinafter defined) if conducted by the Executive after the Executive's Termination Date (as hereinafter defined), (ii) engaging in charitable and community activities, or (iii) managing the Executive's personal investments. (b) The Period of Employment shall commence on the date on which a Change in Control occurs and, subject only to the provisions of Section 4 hereof, shall continue until the expiration of the second anniversary of the occurrence of the Change in Control. 3. Compensation During Period of Employment: ---------------------------------------- (a) During the Period of Employment, the Executive shall receive (i) annual base salary at a rate not less than the Executive's highest annual fixed or base compensation paid during or payable with respect to any calendar year during the three calendar years immediately preceding the year in which the Change in Control occurred, or such higher rate as may be determined from time to time by the Board of Directors of the Company (the "Board") or the Compensation Committee thereof (the "Committee") (which base salary at such rate is herein referred to as "Base Pay") and (ii) an annual amount equal to not less than the highest aggregate annual bonus, incentive or other payments of cash compensation paid to the Executive in addition to the amounts referred to in clause (i) above made or to be made in or with respect to any calendar year during the three calendar years immediately preceding the year in which the Change in Control occurred pursuant to any bonus, incentive, profit-sharing, performance, discretionary pay or similar policy, plan, program or arrangement of the Company ("Incentive Pay") which contemplates cash payments other than Employee Benefits (as hereinafter defined); provided, however, that in no event shall any increase in the Executive's aggregate cash compensation or any portion thereof in any way diminish any other obligation of the Company under this Agreement. The Executive's Base Pay shall be payable monthly. The Executive's Incentive Pay shall be paid annually as soon as reasonably practicable following determination of the amount payable but in no event later than the date which is sixty (60) days following the last day of the fiscal year during which such Incentive Pay is deemed earned. 4 (b) During the Period of Employment the Executive shall, on the same basis as the Executive participated therein immediately prior to the Change in Control, be a full participant in, and shall be entitled to the perquisites, benefits and service credit for benefits as provided under any and all employee retirement income and welfare benefit policies, plans, programs or arrangements in which senior executives of the Company and/or any parent or subsidiary participate generally, including without limitation any stock option, stock purchase, stock appreciation, savings, pension, supplemental executive retirement or other retirement income or welfare benefit, deferred compensation, incentive compensation, group and/or executive life, accident, health, dental, medical/hospital or other insurance (whether funded by actual insurance or self-insured by the Company), disability, salary continuation, expense reimbursement and other employee benefit policies, plans, programs or arrangements that may exist immediately prior to the Change in Control or any equivalent successor policies, plans, programs or arrangements that may be adopted thereafter by the Company and/or any parent or subsidiary (collectively, "Employee Benefits"); provided, however, that, except as set forth in Section 5(a)(v) hereof, the Executive's rights thereunder shall be governed by the terms thereof and shall not be enlarged hereunder or otherwise affected hereby. Subject to the proviso in the immediately preceding sentence, if and to the extent such perquisites, benefits or service credit for benefits are not payable or provided under any such policy, plan, program or arrangement as a result of the amendment or termination thereof subsequent to or after a Change in Control, then the Company shall itself pay or provide such Employee Benefits. Nothing in this Agreement shall preclude improvement or enhancement of any such Employee Benefits, provided that no such improvement shall in any way diminish any other obligation of the Company under this Agreement. (c) The Company has determined that the amounts payable pursuant to this Section 3 constitute reasonable compensation. Accordingly, notwithstanding any other provision hereof, unless such action would be expressly prohibited by applicable law, if any amount paid or payable pursuant to this Section 3 is subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), the Company will pay to the Executive an additional amount in cash equal to the amount necessary to cause the aggregate remuneration received by the Executive under this Section 3, including such additional cash payment (net of all federal, state and local income and other taxes and all taxes payable as the result of the application of Sections 280G and 4999 of the Code) to be equal to the aggregate remuneration the Executive would have received under this Section 3, excluding such additional payment (net of all federal, state and local income and other taxes), as if 5 Sections 280G and 4999 of the Code (and any successor provisions thereto) had not been enacted into law. 4. Termination Following a Change in Control: ----------------------------------------- (a) In the event of the occurrence of a Change in Control, this Agreement may be terminated by the Company during the Period of Employment only upon the occurrence of one or more of the following events: (i) If the Executive is unable to perform the essential functions of the Executive's job (with or without reasonable accommodation) because the Executive has become permanently disabled within the meaning of, and actually begins to receive disability benefits pursuant to, a long-term disability plan maintained by or on behalf of the Company for senior executives generally or, if applicable, employees of the Company immediately prior to the Change in Control; or (ii) For "Cause," which for purposes of this Agreement shall mean that, prior to any termination pursuant to Subsection 4(b) hereof, the Executive shall have committed: (A) an intentional act of material fraud, embezzlement or theft in connection with the Executive's duties or in the course of the Executive's employment with the Company; (B) intentional, wrongful damage to material property of the Company; (C) intentional, wrongful disclosure of material secret processes or confidential information of the Company; or (D) intentional wrongful engagement in any Competitive Activity; and any such act shall have been materially harmful to the Company. For purposes of this Agreement, no act, or failure to act, on the part of the Executive shall be deemed "intentional" if it was due primarily to an error in judgment or negligence, but shall be deemed "intentional" only if done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's action or omission was in the best interest of the Company. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for "Cause" hereunder unless and until there shall have been delivered to the 6 Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the Board then in office at a meeting of the Board called and held for such purpose (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive has committed an act set forth above in this Subsection 4(a)(ii) and specifying the particulars thereof in detail. Nothing herein shall limit the right of the Executive or the Executive's beneficiaries to contest the validity or propriety of any such determination. (b) In the event of the occurrence of a Change in Control, this Agreement may be terminated by the Executive during the Period of Employment with the right to benefits as provided in Section 5 hereof upon the occurrence of one or more of the following events as determined by the Executive in the sole discretion of the Executive: (i) Any termination by the Company of the employment of the Executive for any reason other than for Cause or as a result of the death of the Executive or by reason of the Executive's disability and the actual receipt of disability benefits in accordance with Subsection 4(a)(i) hereof; or (ii) Termination by the Executive of the Executive's employment with the Company (or any successor to or affiliate thereof) during the Period of Employment upon the occurrence of any of the following events: (A) Failure to elect or reelect the Executive to the office(s) which the Executive held immediately prior to a Change in Control, or failure to elect or reelect the Executive as a director of the Company (or any successor to parent entity thereof) or the removal of the Executive as a director of the Company (or any successor thereto), if the Executive shall have been a director of the Company immediately prior to the Change in Control; (B) An adverse change in the nature or scope of the authorities, powers, functions, responsibilities or duties attached to the position(s) which the Executive held immediately prior to the Change in Control; a reduction in the Executive's Base Pay and/or Incentive Pay received from the Company; or the termination of the Executive's rights to any Employee 7 Benefits to which the Executive was entitled immediately prior to the Change in Control or a reduction in scope or value thereof without the prior written consent of the Executive, any of which is not remedied within ten (10) calendar days after receipt by the Company of written notice from the Executive of such change, reduction or termination, as the case may be; (C) A determination by the Executive that, following a Change in Control, as a result of a change in circumstances significantly affecting the Executive's position(s), including without limitation, a change in the scope of the business or other activities for which the Executive was responsible immediately prior to a Change in Control, the Executive has been rendered substantially unable to carry out, has been substantially hindered in the performance of, or has suffered a substantial reduction in any of the authorities, powers, functions, responsibilities or duties attached to the position(s) held by the Executive immediately prior to the Change in Control, which situation is not remedied within ten (10) calendar days after written notice to the Company from the Executive of such determination; (D) The liquidation, dissolution, merger, consolidation or reorganization of the Company or transfer of all or a significant portion of its business and/or assets (including, without limitation, by means of the sale of the capital stock or assets of one or more direct or indirect subsidiaries of the Company), unless the successor (by liquidation, merger, consolidation, reorganization or otherwise) to which all or a significant portion of its business and/or assets have been transferred (directly or by operation of law) shall have assumed all duties and obligations of the Company under this Agreement pursuant to Section 11 hereof (in which case, such entity shall be deemed to be the "Company" hereunder); (E) The Company shall require (I) that the principal place of work of the Executive or the appropriate principal executive office of the Company or the Company's operating division or subsidiary for which the Executive performed the majority of his services during the twelve (12)-month period preceding the Change in Control be changed to any location which is in excess of forty (40) miles from the location thereof immediately prior to the Change in Control or (II) that the Executive travel away from the Executive's 8 office in the course of discharging the Executive's responsibilities or duties hereunder more (in terms of either consecutive days or aggregate days in any calendar year) than was required of the Executive prior to the Change in Control, without, in either case, the Executive's prior consent; or (F) Any material breach of this Agreement by the Company or any successor thereto. (c) A termination by the Company pursuant to Subsection 4(a) hereof or by the Executive pursuant to Subsection 4(b) hereof shall not affect any rights which the Executive may have pursuant to any agreement, policy, plan, program or arrangement of the Company providing Employee Benefits, which rights shall be governed by the terms thereof. If this Agreement or the employment of the Executive is terminated under circumstances in which the Executive is not entitled to any payments under Sections 3 or 5 hereof, then notwithstanding anything herein to the contrary, the Executive shall have no further obligation or liability to the Company hereunder with respect to the Executive's prior or any future employment by the Company. 5. Severance Compensation: ---------------------- (a) If, following the occurrence of a Change in Control, (x) the Company shall terminate the Executive's employment during the Period of Employment other than pursuant to Subsection 4(a) hereof, or (y) the Executive shall terminate the Executive's employment during the Period of Employment pursuant to Subsection 4(b) hereof, or (z) the Executive dies during the Period of Employment, the Company shall pay to the Executive (or the Executive's estate, as applicable) the amount specified in Subsection 5(a)(i) hereof within five business days after the date (the "Termination Date") that the Executive's employment is terminated (the effective date of which shall be the date of termination or death, or such other date that may be specified by the Executive if the termination is pursuant to Subsection 4(b) hereof): (i) In lieu of any further payments under Subsection 3(a) to the Executive for periods subsequent to the Termination Date, but without affecting the rights of the Executive referred to in Subsection 5(b) hereof, a lump sum payment (the "Severance Payment") in an amount equal to a multiple of three (3) times the sum of (A) the Executive's Base Pay (at the highest rate in effect during the Term prior to the Termination Date), plus (B) the Executive's Incentive Pay (based upon the greatest amount of 9 Incentive Pay paid or payable to the Executive for any year during the Term prior to the Termination Date). (ii) (A) for the remainder of the Period of Employment the Company shall arrange to provide the Executive with Employee Benefits identical to those which the Executive was receiving or entitled to receive immediately prior to the Termination Date (and if and to the extent that such benefits shall not or cannot be paid or provided under any policy, plan, program or arrangement of the Company solely due to the fact that the Executive is no longer an officer or employee of the Company, then the Company shall itself pay to the Executive and/or the Executive's dependents and beneficiaries, such Employee Benefits) and (B) without limiting the generality of the foregoing, the remainder of the Period of Employment shall be considered service with the Company for the purpose of service credits under the Company's retirement income, supplemental executive retirement and other benefit plans applicable to the Executive and/or the Executive's dependents and beneficiaries immediately prior to the Termination Date. Without otherwise limiting the purposes or effect of Section 6 hereof, Employee Benefits payable to the Executive pursuant to this Subsection 5(a)(ii) by reason of any "welfare benefit plan" of the Company (as the term "welfare benefit plan" is defined in Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended) shall be reduced to the extent comparable welfare benefits are actually received by the Executive from another employer during such period following the Executive's Termination Date until the expiration of the Period of Employment. (iii) In addition to all other compensation due to the Executive hereunder, the following shall occur immediately prior to the occurrence of a Change in Control: (A) all Company stock options held by the Executive prior to a Change in Control shall become exercisable, regardless of whether or not the vesting/performance conditions set forth in the relevant agreements shall have been satisfied in full; (B) all restrictions on any restricted securities granted by the Company to the Executive prior to a Change in Control shall be removed and the securities shall become fully vested and freely transferable, regardless of whether the vesting/performance conditions set forth in the relevant agreements shall have been satisfied in full; 10 (C) the Executive shall have an immediate right to receive all performance shares or bonuses granted prior to a Change in Control, and such performance shares and bonuses shall become fully vested and freely transferable or payable without restrictions, regardless of whether or not specific performance goals set forth in the relevant agreements shall have been attained; and (D) all performance units granted to the Executive prior to a Change in Control shall become immediately payable in cash or Common Stock, at the Executive's sole option, regardless of whether or not the relevant performance cycle has been completed, and regardless of whether any other terms and conditions of the relevant agreements shall have been satisfied in full; provided, that if the terms of any plan or agreement providing for such options, restricted securities, performance shares or bonuses, or performance units do not allow such acceleration or payment as described above, the Company shall take or cause to be taken any action required to allow such acceleration or payment or to separately pay the value of such benefits. (b) (i) Anything in this Agreement to the contrary notwithstanding, in the event a public accounting firm selected by the Executive (the "Accounting Firm") shall determine that any payment, benefit, or distribution by the Company to the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Subsection 5(b) (a "Payment") is subject to the excise tax imposed by Section 4999 of the Code, or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Company shall pay to the Executive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto), and the Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. 11 (ii) Subject to the provisions of Subsection 5(b)(iii), all determinations required to be made under this Subsection 5(b), including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the Accounting Firm which shall provide detailed supporting calculations both to the Company and the Executive as soon as possible following a request made by the Executive or the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Executive shall appoint another nationally recognized public accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Subsection 5(b), shall be paid by the Company to the Executive within five (5) days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Subsection 5(b)(iii) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (iii) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the ten (10)-day period following the date on which the Executive 12 gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (A) give the Company any information reasonably requested by the Company relating to such claim, (B) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (C) cooperate with the Company in good faith to effectively contest such claim, and (D) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Subsection 5(b)(iii), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided further, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to 13 such advance; and provided further, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (iv) If, after the receipt by the Executive of an amount advanced by the Company pursuant to this Subsection 5(b), the Executive becomes entitled to receive, and receives, any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of this Subsection 5(b)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of any amount advanced by the Company pursuant to Subsection 5(b), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. (c) There shall be no right of set-off or counterclaim in respect of any claim, debt or obligation against any payment to or benefit (including Employee Benefits) of the Executive provided for in this Agreement. (d) Without limiting the rights of the Executive at law or in equity, if the Company fails to make any payment required to be made hereunder on a timely basis, the Company shall pay interest on the amount thereof (and on any interest accrued hereunder) at an annualized rate of interest equal to the Highest Lawful Rate as hereafter defined. "Highest Lawful Rate" means, at any time and with respect to the Executive, the maximum rate of interest under applicable law that the Executive may charge the Company. The Highest Lawful Rate shall be calculated in a manner that takes into account any and all fees, payments, and other charges in respect of this greement that constitute interest under applicable law. Each change in any interest rate provided for herein based upon the Highest Lawful Rate resulting from a change in the Highest Lawful Rate shall take effect without notice to the Company at the time of such change in the Highest Lawful Rate. For purposes of determining the Highest Lawful Rate under 14 Texas law, the applicable rate ceiling shall be the indicated rate ceiling described in, and computed in accordance with the Texas Finance Code. Notwithstanding anything to the contrary contained herein, no provisions of this Agreement shall require the payment or permit the collection of interest in excess of the Highest Lawful Rate. If any excess of interest in such respect is herein provided for, or shall be adjudicated to be so provided, in this Agreement or otherwise in connection with this loan transaction, the provisions of this paragraph shall govern and prevail, and neither the Company nor the sureties, guarantors, successors or assigns of the Company shall be obligated to pay the excess amount of such interest, or any other excess sum paid for the use, forbearance or detention of sums loaned pursuant hereto. If for any reason interest in excess of the Highest Lawful Rate shall be deemed charged, required or permitted by any court of competent jurisdiction, any such excess shall be applied as a payment and reduction of the principal of indebtedness evidenced by this Agreement; and, if the principal amount hereof has been paid in full, any remaining excess shall forthwith be paid to the Company. In determining whether or not the interest paid or payable exceeds the Highest Lawful Rate, the Company and the Executive shall, to the extent permitted by applicable law, (a) characterize any non-principal payment as an expense, fee, or premium rather than as interest, (b) exclude voluntary prepayments and the effects thereof, and (c) amortize, prorate, allocate, and spread in equal or unequal parts the total amount of interest throughout the entire contemplated term of the indebtedness evidenced by this Agreement so that the interest for the entire term does not exceed the Highest Lawful Rate. 6. No Mitigation Obligation: The Company hereby acknowledges that it will be difficult, and may be impossible, for the Executive to find reasonably comparable employment following the Termination Date and that the noncompetition covenant contained in Section 7 hereof will further limit the employment opportunities for the Executive. Accordingly, the parties hereto expressly agree that the payment of the severance compensation and benefits by the Company to the Executive in accordance with the terms of this Agreement will be liquidated damages, and that the Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall any profits, income, earnings or other benefits from any source whatsoever create any mitigation, offset, reduction or any other obligation on the part of the Executive hereunder or otherwise, except as expressly provided in Subsection 5(a)(ii) hereof. 7. Competitive Activity: During a period ending one year following the Termination Date (or, if less, a period equal to the remaining Period of Employment and beginning on the Termination Date), if the Executive shall have received or shall be receiving benefits under Subsection 5(a) hereof, the Executive shall not, without the prior written consent by the Company, directly or indirectly engage in any "Competitive Business" (as hereinafter defined) within any metropolitan area served by the Company during the twelve (12)-month period 15 immediately preceding termination of the Executive's employment with the Company nor will the Executive engage, within such geographical area(s), in the design, development, distribution, manufacture, assembly or sale of a product or service in competition with any product or service marketed or planned by the Company immediately prior to the Termination Date, the plans, designs or specifications of which have been revealed to the Executive ("Competitive Activity"). The Executive acknowledges that these limited prohibitions are reasonable as to time, geographical area and scope of activities to be restrained and that the limited prohibitions do not impose a greater restraint than is necessary to protect the Company's goodwill, proprietary information and other business interests. "Competitive Activity" shall not include (i) the mere ownership of a de minimis amount of securities in any such enterprise and exercise of rights appurtenant thereto or (ii) participation in management of any such enterprise or business operation thereof other than in connection with the competitive operation of such enterprise. For purposes of this Section 7, the term "Competitive Business" means any person or entity engaged in a business that produces any of the following products or performs any of the following services: general commercial printing services, including digital imaging, off-set lithography, binding and finishing services and fulfillment of printed materials, including any products or services manufactured, developed, or distributed during the Term and the Term of Employment by the Company and/or its affiliates, predecessors, or successors. 8. Legal Fees and Expenses: It is the intent of the Company that the Executive not be required to incur the expenses associated with the enforcement of the Executive's rights under this Agreement by litigation or other legal action because the cost and expense thereof would substantially detract from the benefits intended to be extended to the Executive hereunder. Accordingly, if it should appear to the Executive that the Company has failed to comply with any of its obligations under this Agreement or in the event that the Company or any other person takes any action to declare this Agreement void or unenforceable, or institutes any litigation designed to deny, or to recover from, the Executive the benefits intended to be provided to the Executive hereunder, the Company irrevocably authorizes the Executive from time to time to retain counsel of the Executive's choice, at the expense of the Company as hereafter provided, to represent the Executive in connection with the litigation or defense of any litigation or other legal action, whether by or against the Company or any director, officer, shareholder or other person affiliated with the Company, in any jurisdiction. Notwithstanding any existing or prior attorney-client relationship between the Company and such counsel, the Company irrevocably consents to the Executive's entering into an attorney-client relationship with such counsel, and in connection therewith the Company and the Executive agree that a confidential relationship shall exist between the Executive and such counsel. The Company shall pay or cause to be paid and shall be solely responsible for any and all attorneys' and related fees and expenses incurred by the Executive as a result of the Company's failure to perform this Agreement or any provision thereof or as a result of the Company or any person contesting the validity or enforceability of this Agreement or any provision thereof as aforesaid. 9. Employment Rights: Nothing expressed or implied in this Agreement shall create any right or duty on the part of the Company or the Executive to have the Executive remain in the employment of the Company prior to any Change in Control; provided, however, that any actual or constructive termination of employment of the Executive or removal of the Executive 16 as an officer of the Company following the commencement of any discussion with or receipt of an offer from a third person that ultimately results in a Change in Control shall be deemed to be a termination or removal of the Executive after a Change in Control for purposes of this Agreement. 10. Withholding of Taxes: The Company may withhold from any amounts payable under this Agreement all federal, state, city or other taxes as shall be required pursuant to any law or government regulation or ruling. 11. Successors and Binding Agreement: -------------------------------- (a) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business and/or assets of the Company, to expressly assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement shall be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the business and/or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor shall thereafter be deemed the "Company" for the purposes of this Agreement). This Agreement shall not otherwise be assignable, transferable or delegable by the Company. (b) This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees and/or legatees. (c) This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Subsection 11(a) hereof. Without limiting the generality of the foregoing, the Executive's right to receive payments hereunder shall not be assignable, transferable or delegable, whether by pledge, creation of a security interest or otherwise, other than by a transfer by the Executive's will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this Subsection 11(c), the Company shall have no liability to pay any amount so attempted to be assigned, transferred or delegated. (d) The Company and the Executive recognize that each Party will have no adequate remedy at law for breach by the other of any of the agreements contained herein and, in the event of any such breach, the Company and the Executive hereby agree and consent that the other shall be entitled to a 17 decree of specific performance, mandamus or other appropriate remedy to enforce performance of this Agreement. 12. Applicable Law. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS (EXCLUSIVE OF CONFLICTS OF LAW PRINCIPLES OF ANY STATE) AND THE LAWS OF THE UNITED STATES OF AMERICA AND WILL, TO THE MAXIMUM EXTENT PRACTICABLE, BE DEEMED TO CALL FOR PERFORMANCE IN HARRIS COUNTY, TEXAS. COURTS WITHIN THE STATE OF TEXAS WILL HAVE JURISDICTION OVER ANY AND ALL DISPUTES BETWEEN THE PARTIES HERETO, WHETHER IN LAW OR EQUITY, ARISING OUT OF OR RELATING TO THIS AGREEMENT. THE PARTIES CONSENT TO AND AGREE TO SUBMIT TO THE JURISDICTION OF SUCH COURTS. VENUE IN ANY SUCH DISPUTE, WHETHER IN FEDERAL OR STATE COURT, WILL BE LAID IN HARRIS COUNTY, TEXAS. EACH OF THE PARTIES HEREBY WAIVES, AND AGREES NOT TO ASSERT IN ANY SUCH DISPUTE, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY CLAIM THAT (I) SUCH PARTY IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURTS, (II) SUCH PARTY AND SUCH PARTY'S PROPERTY IS IMMUNE FROM ANY LEGAL PROCESS ISSUED BY SUCH COURTS OR (III) ANY LITIGATION COMMENCED IN SUCH COURTS IS BROUGHT IN AN INCONVENIENT FORUM. 13. Notices. All notices, demands, requests or other communications that may be or are required to be given, served or sent by either party to the other party pursuant to this Agreement will be in writing and will be mailed by first-class, registered or certified mail, return receipt requested, postage prepaid, or transmitted by hand delivery, telegram or facsimile transmission addressed as follows: (a) If to the Company: Consolidated Graphics, Inc. 5858 Westheimer, Suite 200 Houston, Texas 77057 Facsimile No.: (713) 787-0974 Attn: Joe R. Davis with a copy (which will not constitute notice) to: Winstead Sechrest & Minick P.C. 910 Travis Street, Suite 2400 Houston, Texas 77002-5895 Facsimile No.: (713) 650-2400 Attn: R. Clyde Parker, Jr., Esq. (b) If to the Executive: Joe R. Davis c/o Consolidated Graphics, Inc. 5858 Westheimer, Suite 200 Houston, Texas 77057 18 Either party may designate by written notice a new address to which any notice, demand, request or communication may thereafter be given, served or sent. Each notice, demand, request or communication that is mailed, delivered or transmitted in the manner described above will be deemed sufficiently given, served, sent and received for all purposes at such time as it is delivered to the addressee with the return receipt, the delivery receipt, the affidavit of messenger or (with respect to a facsimile transmission) the answer back being deemed conclusive evidence of such delivery or at such time as delivery is refused by the addressee upon presentation. 14. Gender. Words of any gender used in this Agreement will be held and construed to include any other gender, and words in the singular number will be held to include the plural, unless the context otherwise requires. 15. Amendment. This Agreement may not be amended or supplemented except pursuant to a written instrument signed by the parties hereto. Nothing contained in this Agreement will be deemed to create any agency, joint venture, partnership or similar relationship between the parties to this Agreement. Nothing contained in this Agreement will be deemed to authorize either party to this Agreement to bind or obligate the other party. 16. Counterparts. This Agreement may be executed in multiple counterparts, each of which will be deemed to be an original and all of which will be deemed to be a single agreement. This Agreement will be considered fully executed when all parties have executed an identical counterpart, notwithstanding that all signatures may not appear on the same counterpart. 17. Severability. If any of the provisions of this Agreement are determined to be invalid or unenforceable, such invalidity or unenforceability will not invalidate or render unenforceable the remainder of this Agreement, but rather the entire Agreement will be construed as if not containing the particular invalid or unenforceable provision or provisions, and the rights and obligations of the parties will be construed and enforced accordingly. The parties acknowledge that if any provision of this Agreement is determined to be invalid or unenforceable, it is their desire and intention that such provision be reformed and construed in such manner that it will, to the maximum extent practicable, be deemed to be valid and enforceable. 18. Third Parties. Except as expressly set forth or referred to in this Agreement, nothing in this Agreement is intended or will be construed to confer upon or give to any party other than the parties to this Agreement and their successors and permitted assigns, if any, any rights or remedies under or by reason of this Agreement. 19. Waiver. No failure or delay in exercising any right hereunder will operate as a waiver thereof, nor will any single or partial exercise thereof preclude any other or further exercise or the exercise of any other right. 20. Prior Agreements: This Agreement is voluntarily entered into and upon the occurrence of a Change in Control will supersede and take the place of any prior change in control agreements between the parties hereto. The parties hereto expressly agree and hereby declare that any and all prior change in control agreements between the parties are terminated and of no force or effect. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 19 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first above written. COMPANY: CONSOLIDATED GRAPHICS, INC. By: /s/Joe R. Davis ----------------------------------------------------------- Name: Joe R. Davis --------------------------------------------------------- Title: CEO -------------------------------------------------------- EXECUTIVE: /s/Joe R. Davis ------------------------------------------------------------------ Joe R. Davis 21 EX-99 6 colville.txt Exhibit 10.9 FINAL SEVERANCE AGREEMENT AND RELEASE THE STATE OF TEXAS KNOW ALL MEN BY THESE PRESENTS: COUNTY OF HARRIS This Final Severance Agreement and Release is made and entered into between G. Christopher Colville (hereinafter "Colville"), and Consolidated Graphics, Inc., and each of its subsidiaries and affiliates, their respective shareholders, successors, affiliated entities and parent corporations, current and former directors, current and former officers, current and former employees, consultants, agents and assigns (hereinafter collectively referred to as "Consolidated"). This Final Severance Agreement and Release is made in light of the following: RECITALS: WHEREAS, Colville has been employed by Consolidated as its Executive Vice President; and WHEREAS, Colville has submitted his resignation from employment with Consolidated and each of its subsidiaries and affiliates effective October 8, 2000; and WHEREAS, Consolidated is willing to afford Colville certain severance benefits to which he would not otherwise be entitled if Colville agrees to enter into this Final Severance Agreement and Release; and THEREFORE, Colville and Consolidated make the following Final Severance Agreement and Release: 1 AGREEMENT: 1. For good and valuable consideration, the receipt of which is acknowledged, including, but not limited to, the signing of this Final Severance Agreement and Release, Colville, on behalf of himself, and any other person claiming by, through or under him, unconditionally and forever RELEASES, ACQUITS and DISCHARGES Consolidated Graphics, Inc., and each of its subsidiaries and affiliates, its shareholders, successors, affiliated entities, current and former directors, current and former officers, current and former employees, consultants, agents and assigns (hereinafter referred to as "RELEASED PARTIES") from any and all claims, whether based on contract, tort or statute or any other legal or equitable theory of recovery, which Colville now has or may have, of any kind or character. This Final Severance Agreement and Release includes all claims arising from, related to, or which were or could have been brought in connection with: a. Colville's employment with Consolidated; b. Colville's separation of employment with Consolidated; c. any alleged discriminatory, retaliatory, tortious and/or improper actions of RELEASED PARTIES; d. any insurance coverage Colville had by virtue of his employment with Consolidated including but not limited to life insurance; and e. any and all other acts or omissions related to any matter arising from or relating to the employment or termination of employment of Colville with Consolidated by RELEASED PARTIES occurring on or before the date of the execution of this Final Severance Agreement and release. This Final Severance Agreement and Release includes, but is not limited to, any claims under: a. The Age Discrimination in Employment Act of 1967, as amended, 29 U.S.C.ss.621, et. seq.; 2 b. Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C.ss.2000e, et.seq.; c. 42 U.S.C.ss.1981; d. The Employee Retirement Income Security Act, as amended, 29 U.S.C.ss.1001, et. seq.; e. The Americans With Disabilities Act of 1990, 42 U.S.C.ss.12101, et. seq.; f. Texas Commission on Human Rights Act, Chapter 21 of the Texas Labor Code (formerly Tex. Rev. Civ. Stat. Ann. Art. 5221k); g. Chapter 451 of the Texas Labor Code, (formerly Article 8307c of the Texas Revised Civil Statutes Annotated); h. The Civil Rights Act of 1991, 42 U.S.C.ss.1981a; and i. Any claims of wrongful termination, retaliatory discharge, discrimination, retaliation, libel, slander, intentional and/or negligent infliction of emotional distress, invasion of privacy, mental anguish, breach of contract, tortious interference with a contract, breach of an implied covenant of good faith and fair dealing, negligent training or supervision, conspiracy and/or any other alleged unlawful or wrongful conduct, whether arising under any federal or state statute, contract, or tort of any jurisdiction. 2. Colville herby acknowledges and agrees the Release set forth above is a general release and he further expressly waives and assumes the risk of any and all claims for damages which may exist as of this date but of which he does not know or suspect to exist, whether through ignorance, oversight, error, negligence, or otherwise, and which, if known, would materially affect Colville's decision to enter into this Final Severance Agreement and Release. He further agrees he accepts payment of the sums specified herein as a complete compromise of matters involving disputed issues of law and fact and he assumes the risk that the facts or law may be otherwise than he believes. It is understood and agreed by Colville and Consolidated that this severance package is a compromise of all doubtful and disputed claims, and the payments are not to be construed as an admission of liability on the part of RELEASED PARTIES, by whom liability is expressly denied. 3 3. As a part of this Final Severance Agreement and Release, Colville promises to relinquish any and all rights to present or future employment with RELEASED PARTIES or any other company currently owned or controlled by RELEASED PARTIES, except as expressly provided herein. Colville further promises not to seek re-employment with RELEASED PARTIES, nor with any other company currently owned or controlled by RELEASED PARTIES. 4. In consideration of the promises and covenants made by Colville herein, Consolidated agrees to continue to pay Colville an amount equal to his full regular pay through October 7, 2000 and on-half of his regular pay from October 8, 2000 through December 31, 2000, payable on the same pay days which Colville would have been paid had he remained employed by Consolidated. Consolidated also agrees that, on or before September 14, 2000, it will pay Colville's August expenses as reflected by his expense report previously turned in. Colville agrees that, as part of the consideration for the payments made to him under this paragraph, he will perform as follows: A. Through September 14, 2000, Colville will continue to work full-time in his position for Consolidated and will perform all duties and activities necessary to the transition from his position with Consolidated including but not limited to such things as continuing to perform the duties which he had been performing for Consolidated prior to his resignation as necessary during the transition of his position to his replacement, completing or turning over projects on which he is currently working, providing any necessary or requested documentation on matters which he has been handling to assist in the transition of duties, attending meetings and engaging in other communication necessary to the transition of his duties, and assisting in the training of the person or persons assuming his duties. The parties agree that Colville's hours during the period through September 14, 2000 will be consistent with his past practice at Consolidated and he will not be required to travel during that period. B. After September 14, 2000 and through December 31, 2000, Colville will make himself reasonably available to provide 4 counsel to Consolidated with respect to the affairs of Consolidated as to which Colville had knowledge, by telephone or, if convenient to Colville, in person. Colville will provide such counsel at times reasonably convenient to Colville considering that Colville will have full-time responsibilities and obligations to his new employer. C. After December 31, 2000, for any time requested of Colville by Consolidated, Consolidated will pay Colville a fee of $100.00 per hour plus expenses, subject to Colville's availability. D. Colville recognizes the amounts paid to him by virtue of this Final Severance Agreement and Release constitute compensation and, accordingly, he understands taxes must be withheld from the checks he receives. Colville further acknowledges he has received no opinion or advice from anyone associated with Consolidated, with respect to any matter contained herein. 5. Colville covenants and agrees that, through December 31, 2001, he will not directly or indirectly solicit, induce, hire, recruit, take away, employ, endeavor to employ (on his own behalf or on behalf of any other persons or entity) or attempt to influence any employee of Consolidated Graphics or the RELEASED PARTIES to terminate his/her employment with Consolidated Graphics. 6. Colville promises not to sue or initiate any action or proceeding against Consolidated or the RELEASED PARTIES relating in any manner whatsoever to Colville's employment with Consolidated, termination of that employment, or any matter covered by the releases contained in this Final Severance Agreement and Release. 7. Colville and Consolidated agree that Colville shall receive all applicable notices and forms required by the Consolidated Omnibus Budget Reconciliation Act based on his October 8, 2000 resignation. Colville shall have the 5 right to elect to continue coverage or family health care for himself and his dependents and Consolidated will make its contribution toward the premiums for all such coverage in accordance with its normal practice for employees through December 31, 2000. After December 31, 2000, Colville shall have the right to continue such coverage at his own expense and discretion until the expiration of his continuation rights under COBRA. 8. Colville accepts this Agreement in lieu of any other benefits to which he might otherwise be entitled, unless specified to the contrary herein. 9. Colville has informed himself of the terms, contents, conditions and effects of this Final Severance Agreement and Release. Colville further acknowledges; (1) he has been previously informed that he may consider the original Severance Agreement and Release for up to twenty-one (21) days from September 6, 2000, the date on which he was presented the original Severance Agreement and Release, and may accept that offer at any time on or before the conclusion of the aforementioned 21-day period by executing the original Severance Agreement and Release and returning same to Mr. Joe R. Davis at Consolidated's offices located at 5858 Westheimer, Suite 200, Houston, Texas 77057; (2) he has been advised to consult with an attorney prior to executing this Final Severance Agreement and Release; (3) he has received no opinion or advice from Consolidated or its attorney with respect to the advisability of accepting or rejecting this settlement offer; (4) he is over the age of eighteen (18) years, of sound mind and otherwise competent to execute this Final Severance Agreement and Release; and (5) he is entering into this Final Severance Agreement and Release knowingly and voluntarily and without any undue influence or pressures. 10. Colville and Consolidated acknowledge Colville has seven (7) calendar days following his execution of this Final Severance Agreement and Release to revoke the Final Severance Agreement and Release and the Final Severance Agreement and Release shall not become effective or enforceable and no payments shall be made until the revocation period has expired. Any revocation by Colville must be in writing and received by Consolidated Graphics, Inc., Attn: Mr. Joe R. Davis at its offices located at 5858 Westheimer, Suite 200, Houston, Texas 77057, on or before the seventh calendar day after the date of execution of the Final Severance Agreement and Release by Colville. If such revocation is not received pursuant to the terms and conditions of this Agreement, the effective date of this Final Severance Agreement and Release shall remain the date of execution. 6 11. Colville acknowledges that by entering into this Final Severance Agreement and Release, RELEASED PARTIES are not admitting to any unlawful or tortious conduct or other wrongdoing in connection with Colville's employment and his termination from employment. Neither this Final Severance Agreement and Release nor any action or acts taken in connection with this Final Severance Agreement and Release will constitute an admission of any evidence of unlawful or tortious conduct or other wrongdoing on the part of RELEASED PARTIES. RELEASED PARTIES, in fact, deny that they or any of their officers, directors or employees committed unlawful, tortious or improper acts against Colville at any time. 12. Colville is bound to this Final Severance Agreement and Release. Anyone who succeeds to his rights or responsibilities, such as the heirs or the executors of his estate, is also bound. 13. Colville agrees to maintain in strictest confidence the terms of this Final Severance Agreement and Release. Colville further agrees, with the exception of the parties hereto, his wife, and any attorney with whom Colville may consult concerning this Final Severance Agreement and Release, he will not reveal or disclose, directly or indirectly, the terms of this Final Severance Agreement and Release or any communications (written, verbal or otherwise), concerning the negotiation of this Final Severance Agreement and Release, to any other company, entity or person, specifically but not limited to any past, present or potential customers of RELEASED PARTIES, any future employers of Colville, and any past, present and future employees of RELEASED PARTIES. Colville further agrees no copy or any portion of the Final Severance Agreement and Release will be disclosed to any company, person or entity, and he further specifically agrees never to mention to any company, person or entity any amount of money whatsoever as having been paid as a consequence of this Final Severance Agreement and Release. Colville agrees if he fails to comply with matters set out in this paragraph, his actions will constitute a material breach of the Final Severance Agreement and Release and will automatically render Colville liable to 7 Consolidated for injunctive relief and for all other damages flowing from breach thereof and all court costs and legal fees required to enforce such provision. 14. It is understood this Final Severance Agreement and Release will be executed in duplicate, each of which shall be deemed an original for all purposes. 15. If any provision of this Final Severance Agreement and Release is held invalid or unenforceable, the remainder of this Final Severance Agreement and release shall remain in full force and effect in its other provisions and in all other circumstances. 16. This Final Severance Agreement and Release shall be construed and interpreted in accordance with the laws of the State of Texas. IN WITNESS WHEREOF, the parties execute duplicate originals of this Final Severance Agreement and Release on this 6 day of September, 2000. CONSOLIDATED GRAPHICS, INC. By /s/G. Christopher Colville /s/Joe R. Davis - ------------------------------- -------------------------------- G. Christopher Colville Joe R. Davis Date: September 6, 2000 Date: September 6, 2000 -------------------------- -------------------------- 8 EX-99 7 rose.txt Exhibit 10.10 CHANGE IN CONTROL AGREEMENT This EMPLOYMENT AND CHANGE IN CONTROL AGREEMENT ("Agreement"), effective as of January 8, 2001, by and between CONSOLIDATED GRAPHICS, INC., a Texas corporation (the "Company"), and WAYNE M. ROSE (the "Executive"), evidences that; WHEREAS, the Executive is a senior executive of the Company and has made and/or is expected to make or continue to make significant contributions to the profitability, growth and financial strength of the Company; WHEREAS, the Company desires to assure itself of both present and future continuity of management in the event of a Change in Control (as defined hereafter) and desires to establish certain minimum compensation rights with respect to its key senior executives, including the Executive, applicable in the event of a Change in Control; WHEREAS, the Company wishes to ensure that its senior executives are not practically disabled from discharging their duties upon a Change in Control; WHEREAS, this Agreement is not intended to alter materially the compensation and benefits which the Executive could reasonably expect to receive from the Company absent a Change in Control and, accordingly, although effective and binding as of the date hereof, this Agreement shall become operative only upon the occurrence of a Change in Control; and WHEREAS, the Executive is willing to render services to the Company on the terms and subject to the conditions set forth in this Agreement; NOW, THEREFORE, the Company and the Executive agree as follows: 1. Operation of Agreement: ----------------------- (a) Sections 1 and 8 through 21 of this Agreement shall be effective and binding as of the Effective Date, but, anything in this Agreement to the contrary notwithstanding, Sections 2, 3, 4, 5, 6 and 7 of this Agreement shall not be effective and binding unless and until there shall have occurred a Change in Control. For purposes of this Agreement, a "Change in Control" will be deemed to have occurred if at any time during the Term (as hereinafter defined) any of the following events shall occur: (i) The Company is merged, consolidated, converted or reorganized into or with another corporation or other legal entity, and as a result of such merger, consolidation, conversion or reorganization less than a majority of the combined voting power of the then outstanding securities of the Company or such corporation or other legal entity immediately after such transaction are held in the aggregate by the holders of Voting Stock (as hereinafter defined) 1 of the Company immediately prior to such transaction and/or such voting power is not held by substantially all of such holders in substantially the same proportions relative to each other; (ii) The Company sells (directly or indirectly) all or substantially all of its assets (including, without limitation, by means of the sale of the capital stock or assets of one or more direct or indirect subsidiaries of the Company) to any other corporation or other legal entity, of which less than a majority of the combined voting power of the then outstanding voting securities (entitled to vote generally in the election of directors or persons performing similar functions on behalf of such other corporation or legal entity) of such other corporation or legal entity is held in the aggregate by the holders of Voting Stock of the Company immediately prior to such sale and/or such voting power is not held by substantially all of such holders in substantially the same proportions relative to each other; (iii)Any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) becomes (subsequent to the Effective Date) the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of securities representing fifty percent (50%) or more of the combined voting power of the then-outstanding securities entitled to vote generally in the election of directors of the Company ("Voting Stock"); (iv) The Company files a report or proxy statement with the Securities and Exchange Commission pursuant to the Exchange Act disclosing in response to Form 8-K, Schedule 14A or Schedule 14C (or any successor schedule, form or report or item therein) that a change in control of the Company has occurred; (v) If during any one (1)-year period, individuals who at the beginning of any such period constitute the directors of the Company cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the Company's shareholders, of each director of the Company first elected during such period was approved by a vote of at least two-thirds of (i) the directors of the Company then still in office who were directors of the Company at the beginning of any such period or (ii) directors of the Company whose nomination and/or election was approved by the directors referenced in clause (i) immediately preceding; or 2 (vi) The shareholders of the Company approve a plan contemplating the liquidation or dissolution of the Company. Notwithstanding the foregoing provisions of Subsection 1(a)(iii) or 1(a)(iv) hereof, a "Change in Control" shall not be deemed to have occurred for purposes of this Agreement solely because (i) the Company, (ii) a corporation or other legal entity in which the Company directly or indirectly beneficially owns 100% of the voting securities of such entity, or (iii) any employee stock ownership plan or any other employee benefit plan of the Company or any wholly-owned subsidiary of the Company, either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K, Schedule 14A or Schedule 14C (or any successor schedule, form or report or item therein) under the Exchange Act, disclosing beneficial ownership by it of shares of Voting Stock, or because the Company reports that a change in control of the Company has occurred by reason of such beneficial ownership. (b) Upon occurrence of a Change in Control at any time during the Term, Sections 2, 3, 4, 5, 6 and 7 of this Agreement shall become immediately binding and effective. (c) The period during which this Agreement shall be in effect (the "Term") shall commence as of the date hereof and shall expire as of the later of (i) the close of business on the third anniversary of the date hereof, or (ii) the expiration of the Period of Employment (as hereinafter defined); provided, however, that (A) subject to Section 9 hereof, if, prior to a Change in Control, the Executive ceases for any reason to be an employee of the Company (or a parent or subsidiary thereof), thereupon the Term shall be deemed to have expired and this Agreement shall immediately terminate and be of no further effect and (B) commencing on the first anniversary of the date hereof and each anniversary thereafter, the Term of this Agreement shall automatically be extended for an additional year. 2. Employment; Period of Employment: --------------------------------- (a) Subject to the terms and conditions of this Agreement, upon the occurrence of a Change in Control, the Company shall continue the Executive in its employ and the Executive shall remain in the employ of the Company for the period set forth in Subsection 2(b) hereof (the "Period of Employment"), in the position and with substantially the same duties and responsibilities that the Executive had immediately prior to the Change in Control, or to which the Company and the Executive may hereafter mutually agree in writing. Throughout the Period of Employment, the Executive shall devote substantially all of the 3 Executive's time during normal business hours (subject to vacations, sick leave and other absences in accordance with the policies of the Company as in effect for senior executives immediately prior to the Change in Control) to the business and affairs of the Company, but nothing in this Agreement shall preclude the Executive from devoting reasonable periods of time during normal business hours to (i) serving as a director, trustee or member of or participant in any organization or business so long as such activity would not constitute Competitive Activity (as hereinafter defined) if conducted by the Executive after the Executive's Termination Date (as hereinafter defined), (ii) engaging in charitable and community activities, or (iii) managing the Executive's personal investments. (b) The Period of Employment shall commence on the date on which a Change in Control occurs and, subject only to the provisions of Section 4 hereof, shall continue until the expiration of the second anniversary of the occurrence of the Change in Control. 3. Compensation During Period of Employment: ---------------------------------------- (a) During the Period of Employment, the Executive shall receive (i) annual base salary at a rate not less than the Executive's highest annual fixed or base compensation paid during or payable with respect to any calendar year during the three calendar years immediately preceding the year in which the Change in Control occurred, or such higher rate as may be determined from time to time by the Board of Directors of the Company (the "Board") or the Compensation Committee thereof (the "Committee") (which base salary at such rate is herein referred to as "Base Pay") and (ii) an annual amount equal to not less than the highest aggregate annual bonus, incentive or other payments of cash compensation paid to the Executive in addition to the amounts referred to in clause (i) above made or to be made in or with respect to any calendar year during the three calendar years immediately preceding the year in which the Change in Control occurred pursuant to any bonus, incentive, profit-sharing, performance, discretionary pay or similar policy, plan, program or arrangement of the Company ("Incentive Pay") which contemplates cash payments other than Employee Benefits (as hereinafter defined); provided, however, that in no event shall any increase in the Executive's aggregate cash compensation or any portion thereof in any way diminish any other obligation of the Company under this Agreement. The Executive's Base Pay shall be payable monthly. The Executive's Incentive Pay shall be paid annually as soon as reasonably practicable following determination of the amount payable but in no event later than the date which is sixty (60) days following the last day of the fiscal year during which such Incentive Pay is deemed earned. 4 (b) During the Period of Employment the Executive shall, on the same basis as the Executive participated therein immediately prior to the Change in Control, be a full participant in, and shall be entitled to the perquisites, benefits and service credit for benefits as provided under any and all employee retirement income and welfare benefit policies, plans, programs or arrangements in which senior executives of the Company and/or any parent or subsidiary participate generally, including without limitation any stock option, stock purchase, stock appreciation, savings, pension, supplemental executive retirement or other retirement income or welfare benefit, deferred compensation, incentive compensation, group and/or executive life, accident, health, dental, medical/hospital or other insurance (whether funded by actual insurance or self-insured by the Company), disability, salary continuation, expense reimbursement and other employee benefit policies, plans, programs or arrangements that may ist immediately prior to the Change in Control or any equivalent successor policies, plans, programs or arrangements that may be adopted thereafter by the Company and/or any parent or subsidiary (collectively, "Employee Benefits"); provided, however, that, except as set forth in Section 5(a)(v) hereof, the Executive's rights thereunder shall be governed by the terms thereof and shall not be enlarged hereunder or otherwise affected hereby. Subject to the proviso in the immediately preceding sentence, if and to the extent such perquisites, benefits or service credit for benefits are not payable or provided under any such policy, plan, program or arrangement as a result of the amendment or termination thereof subsequent to or after a Change in Control, then the Company shall itself pay or provide such Employee Benefits. Nothing in this Agreement shall preclude improvement or enhancement of any such Employee Benefits, provided that no such improvement shall in any way diminish any other obligation of the Company under this Agreement. (c) The Company has determined that the amounts payable pursuant to this Section 3 constitute reasonable compensation. Accordingly, notwithstanding any other provision hereof, unless such action would be expressly prohibited by applicable law, if any amount paid or payable pursuant to this Section 3 is subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), the Company will pay to the Executive an additional amount in cash equal to the amount necessary to cause the aggregate remuneration received by the Executive under this Section 3, including such additional cash payment (net of all federal, state and local income and other taxes and all taxes payable as the result of the application of Sections 280G and 4999 of the Code) to be equal to the aggregate remuneration the Executive would have received under this Section 3, excluding such additional payment (net of all federal, state and local income and other taxes), as if 5 Sections 280G and 4999 of the Code (and any successor provisions thereto) had not been enacted into law. 4. Termination Following a Change in Control: ------------------------------------------ (a) In the event of the occurrence of a Change in Control, this Agreement may be terminated by the Company during the Period of Employment only upon the occurrence of one or more of the following events: (i) If the Executive is unable to perform the essential functions of the Executive's job (with or without reasonable accommodation) because the Executive has become permanently disabled within the meaning of, and actually begins to receive disability benefits pursuant to, a long-term disability plan maintained by or on behalf of the Company for senior executives generally or, if applicable, employees of the Company immediately prior to the Change in Control; or (ii) For "Cause," which for purposes of this Agreement shall mean that, prior to any termination pursuant to Subsection 4(b) hereof, the Executive shall have committed: (A) an intentional act of material fraud, embezzlement or theft in connection with the Executive's duties or in the course of the Executive's employment with the Company; (B) intentional, wrongful damage to material property of the Company; (C) intentional, wrongful disclosure of material secret processes orconfidential information of the Company; or (D) intentional wrongful engagement in any Competitive Activity; and any such act shall have been materially harmful to the Company. For purposes of this Agreement, no act, or failure to act, on the part of the Executive shall be deemed "intentional" if it was due primarily to an error in judgment or negligence, but shall be deemed "intentional" only if done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's action or omission was in the best interest of the Company. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for "Cause" hereunder unless and until there shall have been delivered to the 6 Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the Board then in office at a meeting of the Board called and held for such purpose (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive has committed an act set forth above in this Subsection 4(a)(ii) and specifying the particulars thereof in detail. Nothing herein shall limit the right of the Executive or the Executive's beneficiaries to contest the validity or propriety of any such determination. (b) In the event of the occurrence of a Change in Control, this Agreement may be terminated by the Executive during the Period of Employment with the right to benefits as provided in Section 5 hereof upon the occurrence of one or more of the following events as determined by the Executive in the sole discretion of the Executive: (i) Any termination by the Company of the employment of the Executive for any reason other than for Cause or as a result of the death of the Executive or by reason of the Executive's disability and the actual receipt of disability benefits in accordance with Subsection 4(a)(i) hereof; or (ii) Termination by the Executive of the Executive's employment with the Company (or any successor to or affiliate thereof) during the Period of Employment upon the occurrence of any of the following events: (A) Failure to elect or reelect the Executive to the office(s) which the Executive held immediately prior to a Change in Control, or failure to elect or reelect the Executive as a director of the Company (or any successor to parent entity thereof) or the removal of the Executive as a director of the Company (or any successor thereto), if the Executive shall have been a director of the Company immediately prior to the Change in Control; (B) An adverse change in the nature or scope of the authorities, powers, functions, responsibilities or duties attached to the position(s) which the Executive held immediately prior to the Change in Control; a reduction in the Executive's Base Pay and/or Incentive Pay received from the Company; or the termination of the Executive's rights to any Employee 7 Benefits to which the Executive was entitled immediately prior to the Change in Control or a reduction in scope or value thereof without the prior written consent of the Executive, any of which is not remedied within ten (10) calendar days after receipt by the Company of written notice from the Executive of such change, reduction or termination, as the case may be; (C) A determination by the Executive that, following a Change in Control, as a result of a change in circumstances significantly affecting the Executive's position(s), including without limitation, a change in the scope of the business or other activities for which the Executive was responsible immediately prior to a Change in Control, the Executive has been rendered substantially unable to carry out, has been substantially hindered in the performance of, or has suffered a substantial reduction in any of the authorities, powers, functions, responsibilities or duties attached to the position(s) held by the Executive immediately prior to the Change in Control, which situation is not remedied within ten (10) calendar days after written notice to the Company from the Executive of such determination; (D) The liquidation, dissolution, merger, consolidation or reorganization of the Company or transfer of all or a significant portion of its business and/or assets (including, without limitation, by means of the sale of the capital stock or assets of one or more direct or indirect subsidiaries of the Company), unless the successor (by liquidation, merger, consolidation, reorganization or otherwise) to which all or a significant portion of its business and/or assets have been transferred (directly or by operation of law) shall have assumed all duties and obligations of the Company under this Agreement pursuant to Section 11 hereof (in which case, such entity shall be deemed to be the "Company" hereunder); (E) The Company shall require (I) that the principal place of work of the Executive or the appropriate principal executive office of the Company or the Company's operating division or subsidiary for which the Executive performed the majority of his services during the twelve (12)-month period preceding the Change in Control be changed to any location which is in excess of forty (40) miles from the location thereof immediately prior to the Change in Control or (II) that the Executive travel away from the Executive's 8 office in the course of discharging the Executive's responsibilities or duties hereunder more (in terms of either consecutive days or aggregate days in any calendar year) than was required of the Executive prior to the Change in Control, without, in either case, the Executive's prior consent; or (F) Any material breach of this Agreement by the Company or any successor thereto. (c) A termination by the Company pursuant to Subsection 4(a) hereof or by the Executive pursuant to Subsection 4(b) hereof shall not affect any rights which the Executive may have pursuant to any agreement, policy, plan, program or arrangement of the Company providing Employee Benefits, which rights shall be governed by the terms thereof. If this Agreement or the employment of the Executive is terminated under circumstances in which the Executive is not entitled to any payments under Sections 3 or 5 hereof, then notwithstanding anything herein to the contrary, the Executive shall have no further obligation or liability to the Company hereunder with respect to the Executive's prior or any future employment by the Company. 5. Severance Compensation: ----------------------- (a) If, following the occurrence of a Change in Control, (x) the Company shall terminate the Executive's employment during the Period of Employment other than pursuant to Subsection 4(a) hereof, or (y) the Executive shall terminate the Executive's employment during the Period of Employment pursuant to Subsection 4(b) hereof, or (z) the Executive dies during the Period of Employment, the Company shall pay to the Executive (or the Executive's estate, as applicable) the amount specified in Subsection 5(a)(i) hereof within five business days after the date (the "Termination Date") that the Executive's employment is terminated (the effective date of which shall be the date of termination or death, or such other date that may be specified by the Executive if the termination is pursuant to Subsection 4(b) hereof): (i) In lieu of any further payments under Subsection 3(a) to the Executive for periods subsequent to the Termination Date, but without affecting the rights of the Executive referred to in Subsection 5(b) hereof, a lump sum payment (the "Severance Payment") in an amount equal to a multiple of two (2) times the sum of (A) the Executive's Base Pay (at the highest rate in effect during the Term prior to the Termination Date), plus (B) the Executive's Incentive Pay (based upon the greatest amount of 10 Incentive Pay paid or payable to the Executive for any year during the Term prior to the Termination Date). (ii) (A) for the remainder of the Period of Employment the Company shall arrange to provide the Executive with Employee Benefits identical to those which the Executive was receiving or entitled to receive immediately prior to the Termination Date (and if and to the extent that such benefits shall not or cannot be paid or provided under any policy, plan, program or arrangement of the Company solely due to the fact that the Executive is no longer an officer or employee of the Company, then the Company shall itself pay to the Executive and/or the Executive's dependents and beneficiaries, such Employee Benefits) and (B) without limiting the generality of the foregoing, the remainder of the Period of Employment shall be considered service with the Company for the purpose of service credits under the Company's retirement income, supplemental executive retirement and other benefit plans applicable to the Executive and/or the Executive's dependents and beneficiaries immediately prior to the Termination Date. Without otherwise limiting the purposes or effect of Section 6 hereof, Employee Benefits payable to the Executive pursuant to this Subsection 5(a)(ii) by reason of any "welfare benefit plan" of the Company (as the term "welfare benefit plan" is defined in Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended) shall be reduced to the extent comparable welfare benefits are actually received by the Executive from another employer during such period following the Executive's Termination Date until the expiration of the Period of Employment. (iii)In addition to all other compensation due to the Executive hereunder, the following shall occur immediately prior to the occurrence of a Change in Control: (A) all Company stock options held by the Executive prior to a Change in Control shall become exercisable, regardless of whether or not the vesting/performance conditions set forth in the relevant agreements shall have been satisfied in full; (B) all restrictions on any restricted securities granted by the Company to the Executive prior to a Change in Control shall be removed and the securities shall become fully vested and freely transferable, regardless of whether the vesting/performance conditions set forth in the relevant agreements shall have been satisfied in full; 11 (C) the Executive shall have an immediate right to receive all performance shares or bonuses granted prior to a Change in Control, and such performance shares and bonuses shall become fully vested and freely transferable or payable without restrictions, regardless of whether or not specific performance goals set forth in the relevant agreements shall have been attained; and (D) all performance units granted to the Executive prior to a Change in Control shall become immediately payable in cash or Common Stock, at the Executive's sole option, regardless of whether or not the relevant performance cycle has been completed, and regardless of whether any other terms and conditions of the relevant agreements shall have been satisfied in full; provided, that if the terms of any plan or agreement providing for such options, restricted securities, performance shares or bonuses, or performance units do not allow such acceleration or payment as described above, the Company shall take or cause to be taken any action required to allow such acceleration or payment or to separately pay the value of such benefits. (b) Anything in this Agreement to the contrary notwithstanding, in the event a public accounting firm selected by the Executive (the "Accounting Firm") shall determine that any payment, benefit, or distribution by the Company to the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Subsection 5(b) (a "Payment") is subject to the excise tax imposed by Section 4999 of the Code, or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Company shall pay to the Executive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto), and the Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. 12 (ii) Subject to the provisions of Subsection 5(b)(iii), all determinations required to be made under this Subsection 5(b), including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the Accounting Firm which shall provide detailed supporting calculations both to the Company and the Executive as soon as possible following a request made by the Executive or the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Executive shall appoint another nationally recognized public accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Subsection 5(b), shall be paid by the Company to the Executive within five (5) days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Subsection 5(b)(iii) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (iii) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the ten (10)-day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (A) give the Company any information reasonably requested by the Company relating to such claim, (B) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (C) cooperate with the Company in good faith to effectively contest such claim, and (D) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Subsection 5(b)(iii), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided further, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to 13 such advance; and provided further, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (iv) If, after the receipt by the Executive of an amount advanced by the Company pursuant to this Subsection 5(b), the Executive becomes entitled to receive, and receives, any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of this Subsection 5(b)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of any amount advanced by the Company pursuant to Subsection 5(b), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. (c) There shall be no right of set-off or counterclaim in respect of any claim, debt or obligation against any payment to or benefit (including Employee Benefits) of the Executive provided for in this Agreement. (d) Without limiting the rights of the Executive at law or in equity, if the Company fails to make any payment required to be made hereunder on a timely basis, the Company shall pay interest on the amount thereof (and on any interest accrued hereunder) at an annualized rate of interest equal to the Highest Lawful Rate as hereafter defined. "Highest Lawful Rate" means, at any time and with respect to the Executive, the maximum rate of interest under applicable law that the Executive may charge the Company. The Highest Lawful Rate shall be calculated in a manner that takes into account any and all fees, payments, and other charges in respect of this Agreement that constitute interest under applicable law. Each change in any interest rate provided for herein based upon the Highest Lawful Rate resulting from a change in the Highest Lawful Rate shall take effect without notice to the Company at the time of such change in the Highest Lawful Rate. For purposes of determining the Highest Lawful Rate under 14 Texas law, the applicable rate ceiling shall be the indicated rate ceiling described in, and computed in accordance with the Texas Finance Code. Notwithstanding anything to the contrary contained herein, no provisions of this Agreement shall require the payment or permit the collection of interest in excess of the Highest Lawful Rate. If any excess of interest in such respect is herein provided for, or shall be adjudicated to be so provided, in this Agreement or otherwise in connection with this loan transaction, the provisions of this paragraph shall govern and prevail, and neither the Company nor the sureties, guarantors, successors or assigns of the Company shall be obligated to pay the excess amount of such interest, or any other excess sum paid for the use, forbearance or detention of sums loaned pursuant hereto. If for any reason interest in excess of the Highest Lawful Rate shall be deemed charged, required or permitted by any court of competent jurisdiction, any such excess shall be applied as a payment and reduction of the principal of indebtedness evidenced by this Agreement; and, if the principal amount hereof has been paid in full, any remaining excess shall forthwith be paid to the Company. In determining whether or not the interest paid or payable exceeds the Highest Lawful Rate, the Company and the Executive shall, to the extent permitted by applicable law, (a) characterize any non-principal payment as an expense, fee, or premium rather than as interest, (b) exclude voluntary prepayments and the effects thereof, and (c) amortize, prorate, allocate, and spread in equal or unequal parts the total amount of interest throughout the entire contemplated term of the indebtedness evidenced by this Agreement so that the interest for the entire term does not exceed the Highest Lawful Rate. 6. No Mitigation Obligation: The Company hereby acknowledges that it will be difficult, and may be impossible, for the Executive to find reasonably comparable employment following the Termination Date and that the noncompetition covenant contained in Section 7 hereof will further limit the employment opportunities for the Executive. Accordingly, the parties hereto expressly agree that the payment of the severance compensation and benefits by the Company to the Executive in accordance with the terms of this Agreement will be liquidated damages, and that the Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall any profits, income, earnings or other benefits from any source whatsoever create any mitigation, offset, reduction or any other obligation on the part of the Executive hereunder or otherwise, except as expressly provided in Subsection 5(a)(ii) hereof. 7. Competitive Activity: During a period ending one year following the Termination Date (or, if less, a period equal to the remaining Period of Employment and beginning on the Termination Date), if the Executive shall have received or shall be receiving benefits under Subsection 5(a) hereof, the Executive shall not, without the prior written consent by the Company, directly or indirectly engage in any "Competitive Business" (as hereinafter defined) within any metropolitan area served by the Company during the twelve (12)-month period 15 immediately preceding termination of the Executive's employment with the Company nor will the Executive engage, within such geographical area(s), in the design, development, distribution, manufacture, assembly or sale of a product or service in competition with any product or service marketed or planned by the Company immediately prior to the Termination Date, the plans, designs or specifications of which have been revealed to the Executive ("Competitive Activity"). The Executive acknowledges that these limited prohibitions are reasonable as to time, geographical area and scope of activities to be restrained and that the limited prohibitions do not impose a greater restraint than is necessary to protect the Company's goodwill, proprietary information and other business interests. "Competitive Activity" shall not include (i) the mere ownership of a de minimis amount of securities in any such enterprise and exercise of rights appurtenant thereto or (ii) participation in management of any such enterprise or business operation thereof other than in connection with the competitive operation of such enterprise. For purposes of this Section 7, the term "Competitive Business" means any person or entity engaged in a business that produces any of the following products or performs any of the following services: general commercial printing services, including digital imaging, off-set lithography, binding and finishing services and fulfillment of printed materials, including any products or services manufactured, developed, or distributed during the Term and the Term of Employment by the Company and/or its affiliates, predecessors, or successors. 8. Legal Fees and Expenses: It is the intent of the Company that the Executive not be required to incur the expenses associated with the enforcement of the Executive's rights under this Agreement by litigation or other legal action because the cost and expense thereof would substantially detract from the benefits intended to be extended to the Executive hereunder. Accordingly, if it should appear to the Executive that the Company has failed to comply with any of its obligations under this Agreement or in the event that the Company or any other person takes any action to declare this Agreement void or unenforceable, or institutes any litigation designed to deny, or to recover from, the Executive the benefits intended to be provided to the Executive hereunder, the Company irrevocably authorizes the Executive from time to time to retain counsel of the Executive's choice, at the expense of the Company as hereafter provided, to represent the Executive in connection with the litigation or defense of any litigation or other legal action, whether by or against the Company or any director, officer, shareholder or other person affiliated with the Company, in any jurisdiction. Notwithstanding any existing or prior attorney-client relationship between the Company and such counsel, the Company irrevocably consents to the Executive's entering into an attorney-client relationship with such counsel, and in connection therewith the Company and the Executive agree that a confidential relationship shall exist between the Executive and such counsel. The Company shall pay or cause to be paid and shall be solely responsible for any and all attorneys' and related fees and expenses incurred by the Executive as a result of the Company's failure to perform this Agreement or any provision thereof or as a result of the Company or any person contesting the validity or enforceability of this Agreement or any provision thereof as aforesaid. 9. Employment Rights: Nothing expressed or implied in this Agreement shall create any right or duty on the part of the Company or the Executive to have the Executive remain in the employment of the Company prior to any Change in Control; provided, however, that any actual or constructive termination of employment of the Executive or removal of the Executive 16 as an officer of the Company following the commencement of any discussion with or receipt of an offer from a third person that ultimately results in a Change in Control shall be deemed to be a termination or removal of the Executive after a Change in Control for purposes of this Agreement. 10. Withholding of Taxes: The Company may withhold from any amounts payable under this Agreement all federal, state, city or other taxes as shall be required pursuant to any law or government regulation or ruling. 11. Successors and Binding Agreement: (a) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business and/or assets of the Company, to expressly assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement shall be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the business and/or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor shall thereafter be deemed the "Company" for the purposes of this Agreement). This Agreement shall not otherwise be assignable, transferable or delegable by the Company. (b) This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees and/or legatees. (c) This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Subsection 11(a) hereof. Without limiting the generality of the foregoing, the Executive's right to receive payments hereunder shall not be assignable, transferable or delegable, whether by pledge, creation of a security interest or otherwise, other than by a transfer by the Executive's will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this Subsection 11(c), the Company shall have no liability to pay any amount so attempted to be assigned, transferred or delegated. (d) The Company and the Executive recognize that each Party will have no adequate remedy at law for breach by the other of any of the agreements contained herein and, in the event of any such breach, the Company and the Executive hereby agree and consent that the other shall be entitled to a 17 decree of specific performance, mandamus or other appropriate remedy to enforce performance of this Agreement. 12. Applicable Law. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS (EXCLUSIVE OF CONFLICTS OF LAW PRINCIPLES OF ANY STATE) AND THE LAWS OF THE UNITED STATES OF AMERICA AND WILL, TO THE MAXIMUM EXTENT PRACTICABLE, BE DEEMED TO CALL FOR PERFORMANCE IN HARRIS COUNTY, TEXAS. COURTS WITHIN THE STATE OF TEXAS WILL HAVE JURISDICTION OVER ANY AND ALL DISPUTES BETWEEN THE PARTIES HERETO, WHETHER IN LAW OR EQUITY, ARISING OUT OF OR RELATING TO THIS AGREEMENT. THE PARTIES CONSENT TO AND AGREE TO SUBMIT TO THE JURISDICTION OF SUCH COURTS. VENUE IN ANY SUCH DISPUTE, WHETHER IN FEDERAL OR STATE COURT, WILL BE LAID IN HARRIS COUNTY, TEXAS. EACH OF THE PARTIES HEREBY WAIVES, AND AGREES NOT TO ASSERT IN ANY SUCH DISPUTE, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY CLAIM THAT (I) SUCH PARTY IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURTS, (II) SUCH PARTY AND SUCH PARTY'S PROPERTY IS IMMUNE FROM ANY LEGAL PROCESS ISSUED BY SUCH COURTS OR (III) ANY LITIGATION COMMENCED IN SUCH COURTS IS BROUGHT IN AN INCONVENIENT FORUM. 13. Notices. All notices, demands, requests or other communications that may be or are required to be given, served or sent by either party to the other party pursuant to this Agreement will be in writing and will be mailed by first-class, registered or certified mail, return receipt requested, postage prepaid, or transmitted by hand delivery, telegram or facsimile transmission addressed as follows: (a) If to the Company: Consolidated Graphics, Inc. 5858 Westheimer, Suite 200 Houston, Texas 77057 Facsimile No.: (713) 787-0974 Attn: Joe R. Davis with a copy (which will not constitute notice) to: Winstead Sechrest & Minick P.C. 910 Travis Street, Suite 2400 Houston, Texas 77002-5895 Facsimile No.: (713) 650-2400 Attn: R. Clyde Parker, Jr., Esq. (b) If to the Executive: Wayne M. Rose c/o Consolidated Graphics, Inc. 5858 Westheimer, Suite 200 Houston, Texas 77057 18 Either party may designate by written notice a new address to which any notice, demand, request or communication may thereafter be given, served or sent. Each notice, demand, request or communication that is mailed, delivered or transmitted in the manner described above will be deemed sufficiently given, served, sent and received for all purposes at such time as it is delivered to the addressee with the return receipt, the delivery receipt, the affidavit of messenger or (with respect to a facsimile transmission) the answer back being deemed conclusive evidence of such delivery or at such time as delivery is refused by the addressee upon presentation. 14. Gender. Words of any gender used in this Agreement will be held and construed to include any other gender, and words in the singular number will be held to include the plural, unless the context otherwise requires. 15. Amendment. This Agreement may not be amended or supplemented except pursuant to a written instrument signed by the parties hereto. Nothing contained in this Agreement will be deemed to create any agency, joint venture, partnership or similar relationship between the parties to this Agreement. Nothing contained in this Agreement will be deemed to authorize either party to this Agreement to bind or obligate the other party. 16. Counterparts. This Agreement may be executed in multiple counterparts, each of which will be deemed to be an original and all of which will be deemed to be a single agreement. This Agreement will be considered fully executed when all parties have executed an identical counterpart, notwithstanding that all signatures may not appear on the same counterpart. 17. Severability. If any of the provisions of this Agreement are determined to be invalid or unenforceable, such invalidity or unenforceability will not invalidate or render unenforceable the remainder of this Agreement, but rather the entire Agreement will be construed as if not containing the particular invalid or unenforceable provision or provisions, and the rights and obligations of the parties will be construed and enforced accordingly. The parties acknowledge that if any provision of this Agreement is determined to be invalid or unenforceable, it is their desire and intention that such provision be reformed and construed in such manner that it will, to the maximum extent practicable, be deemed to be valid and enforceable. 18. Third Parties. Except as expressly set forth or referred to in this Agreement, nothing in this Agreement is intended or will be construed to confer upon or give to any party other than the parties to this Agreement and their successors and permitted assigns, if any, any rights or remedies under or by reason of this Agreement. 19. Waiver. No failure or delay in exercising any right hereunder will operate as a waiver thereof, nor will any single or partial exercise thereof preclude any other or further exercise or the exercise of any other right. 20. Prior Agreements: This Agreement is voluntarily entered into and upon the occurrence of a Change in Control will supersede and take the place of any prior change in control agreements between the parties hereto. The parties hereto expressly agree and hereby declare that any and all prior change in control agreements between the parties are terminated and of no force or effect. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 19 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first above written. COMPANY: CONSOLIDATED GRAPHICS, INC. By:/s/Joe R. Davis ------------------------------------------- Joe R. Davis, Chief Executive Officer EXECUTIVE: /s/Wayne M. Rose ---------------------------------------------- Wayne M. Rose 20 EX-99 8 cgx4371ex5.txt Exhibit 21 LIST OF SUBSIDIARIES --------------------- SUBSIDIARIES JURISDICTION OF INCORPORATION - -------------------------------------------------------------------------------- Apple Graphics, Inc. California Arts and Crafts Press, Inc. California Austin Printing Company, Inc. Georgia Automated Graphic Imaging/Copy Center, Inc. Washington D. C. Automated Graphic Systems - Ohio, Inc. Maryland Automated Graphic Systems, Inc. Maryland Bridgetown Printing Co. Oregon Byrum Lithographing Co. Ohio Chas. P. Young Company Texas Clear Visions, Inc. Texas Columbia Color, Inc. California Consolidated Paragraphics, Inc. California Copy-Mor, Inc. Illinois Courier Printing Company Tennessee Digital Direct, Inc. Pennsylvania Direct Color, Inc. California Eagle Press, Inc. California Emerald City Graphics, Inc. Washington Fittje Bros. Printing Co. Colorado Frederic Printing Company Colorado Garner Printing Company Iowa Georges & Shapiro Lithograph, Inc. California Geyer Printing Company, Inc. Pennsylvania Graphic Communications, Inc. California Graphic Technology of Maryland, Inc. Maryland Grover Printing Company Texas H & N Printing & Graphics, Inc. Maryland Heritage Graphics, Inc. Texas Image Systems, Inc. Wisconsin Ironwood Lithographers, Inc. Arizona Keys Printing Company South Carolina Lincoln Printing Corporation Indiana Maryland Composition.com, Inc. Maryland Maxwell Graphic Arts, Inc. New Jersey McKay Press, Inc. Michigan Mercury Printing Company, Inc. Tennessee Mercury Web Printing, Inc. Kansas Metropolitan Printing Services, Inc. Indiana Mobility, Inc. Virginia Mount Vernon Printing Company Virginia Multiple Images Printing, Inc. Illinois Piccarri Press, Inc. Pennsylvania Precision Litho, Inc. California Pride Printers, Inc. Massachusetts Printing Corporation of America Maryland Printing, Inc. Kansas Rush Press, Inc. California Serco Forms, LLC Kansas StorterChilds Printing Co., Inc. Florida Superior Colour Graphics, Inc. Michigan Tewell Warren Printing Company Colorado The Etheridge Company Michigan The Graphics Group, Inc. Texas The Jarvis Press, Inc. Texas The John C. Otto Company, Inc. Massachusetts The Printery, Inc. Wisconsin Theo. Davis Sons, Incorporated North Carolina Thousand Oaks Printing and Specialties, Inc. California Tucker Printers, Inc. Texas Tulsa Litho Company Oklahoma Tursack Incorporated Pennsylvania Walnut Circle Press, Inc. North Carolina Web Graphics, Inc. Kansas Wentworth Corporation South Carolina Western Lithograph Company Texas Westland Printers, Inc. Maryland Wetzel Brothers, Inc. Wisconsin Woodridge Press, Inc. California Consolidated Graphics Management, Inc. Delaware Consolidated Graphics Management II, Inc. Delaware Consolidated Graphics Management III, Inc. Delaware CGML General Partner, Inc. Delaware Consolidated Graphics Management, Ltd. Texas Consolidated Graphics Properties, Inc. Texas Consolidated Graphics Properties II, Inc. Texas Gulf Printing Company Texas Superb Printing Company Texas Chas. P. Young Company, Inc. New York Gilliland Printing, Inc. Kansas Gritz-Ritter Graphics, Inc. Colorado Heath Printers, Inc. Washington EX-23 9 cgx4371ex2.txt EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our report dated May 14, 2001, included in this Form 10-K into Consolidated Graphics, Inc. previously filed Registration Statement Files No. 333-82835 on Form S-3, No. 333-62317 on Form S-4, No. 33-87192 on Form S-8, No. 333-13737 on Form S-8, No. 333-18435 on Form S-8 and No. 333-66019 on Form S-8. Arthur Andersen LLP Houston, Texas June 18, 2001 EX-24 10 cgx4371ex.txt Exhibit 24 CONSOLIDATED GRAPHICS, INC. POWER OF ATTORNEY FOR REPORT ON FORM 10-K WHEREAS, CONSOLIDATED GRAPHICS, INC., a Texas corporation (the "Company"), intends to file with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1934, as amended (the "Securities Act"), an Annual Report on Form 10-K (the "Annual Report") for the fiscal year ended March 31, 2001, as prescribed by the Commission pursuant to the Act and the rules and regulations of the Commission promulgated thereunder, with any and all exhibits and other documents related to said Annual Report; NOW, THEREFORE, the undersigned in his capacity as a director or officer or both, as the case may be, of the Company, does hereby appoint Joe R. Davis and Wayne M. Rose, and each of them severally, his true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to execute in his name, place and stead, in his capacity as director, officer or both, as the case may be, of the Company, said Annual Report and all instruments as said attorney or attorneys shall deem necessary or incidental in connection therewith, and to file the same with the Commission. Each of said attorneys shall have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever necessary or desirable as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys and each of them. IN WITNESS WHEREOF, the undersigned has executed this power of attorney as of April 23, 2001. /s/ Larry J. Alexander ---------------------------- Larry J. Alexander CONSOLIDATED GRAPHICS, INC. POWER OF ATTORNEY FOR REPORT ON FORM 10-K WHEREAS, CONSOLIDATED GRAPHICS, INC., a Texas corporation (the "Company"), intends to file with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1934, as amended (the "Securities Act"), an Annual Report on Form 10-K (the "Annual Report") for the fiscal year ended March 31, 2001, as prescribed by the Commission pursuant to the Act and the rules and regulations of the Commission promulgated thereunder, with any and all exhibits and other documents related to said Annual Report; NOW, THEREFORE, the undersigned in his capacity as a director or officer or both, as the case may be, of the Company, does hereby appoint Joe R. Davis and Wayne M. Rose, and each of them severally, his true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to execute in his name, place and stead, in his capacity as director, officer or both, as the case may be, of the Company, said Annual Report and all instruments as said attorney or attorneys shall deem necessary or incidental in connection therewith, and to file the same with the Commission. Each of said attorneys shall have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever necessary or desirable as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys and each of them. IN WITNESS WHEREOF, the undersigned has executed this power of attorney as of April 23, 2001. /s/ Brady F. Carruth ---------------------------- Brady F. Carruth CONSOLIDATED GRAPHICS, INC. POWER OF ATTORNEY FOR REPORT ON FORM 10-K WHEREAS, CONSOLIDATED GRAPHICS, INC., a Texas corporation (the "Company"), intends to file with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1934, as amended (the "Securities Act"), an Annual Report on Form 10-K (the "Annual Report") for the fiscal year ended March 31, 2001, as prescribed by the Commission pursuant to the Act and the rules and regulations of the Commission promulgated thereunder, with any and all exhibits and other documents related to said Annual Report; NOW, THEREFORE, the undersigned in his capacity as a director or officer or both, as the case may be, of the Company, does hereby appoint Joe R. Davis and Wayne M. Rose, and each of them severally, his true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to execute in his name, place and stead, in his capacity as director, officer or both, as the case may be, of the Company, said Annual Report and all instruments as said attorney or attorneys shall deem necessary or incidental in connection therewith, and to file the same with the Commission. Each of said attorneys shall have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever necessary or desirable as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys and each of them. IN WITNESS WHEREOF, the undersigned has executed this power of attorney as of April 23, 2001. /s/ Clarence C. Comer ---------------------------- Clarence C. Comer CONSOLIDATED GRAPHICS, INC. POWER OF ATTORNEY FOR REPORT ON FORM 10-K WHEREAS, CONSOLIDATED GRAPHICS, INC., a Texas corporation (the "Company"), intends to file with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1934, as amended (the "Securities Act"), an Annual Report on Form 10-K (the "Annual Report") for the fiscal year ended March 31, 2001, as prescribed by the Commission pursuant to the Act and the rules and regulations of the Commission promulgated thereunder, with any and all exhibits and other documents related to said Annual Report; NOW, THEREFORE, the undersigned in his capacity as a director or officer or both, as the case may be, of the Company, does hereby appoint Joe R. Davis and Wayne M. Rose, and each of them severally, his true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to execute in his name, place and stead, in his capacity as director, officer or both, as the case may be, of the Company, said Annual Report and all instruments as said attorney or attorneys shall deem necessary or incidental in connection therewith, and to file the same with the Commission. Each of said attorneys shall have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever necessary or desirable as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys and each of them. IN WITNESS WHEREOF, the undersigned has executed this power of attorney as of April 23, 2001. /s/ Gary L. Forbes ---------------------------- Gary L. Forbes CONSOLIDATED GRAPHICS, INC. POWER OF ATTORNEY FOR REPORT ON FORM 10-K WHEREAS, CONSOLIDATED GRAPHICS, INC., a Texas corporation (the "Company"), intends to file with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1934, as amended (the "Securities Act"), an Annual Report on Form 10-K (the "Annual Report") for the fiscal year ended March 31, 2001, as prescribed by the Commission pursuant to the Act and the rules and regulations of the Commission promulgated thereunder, with any and all exhibits and other documents related to said Annual Report; NOW, THEREFORE, the undersigned in his capacity as a director or officer or both, as the case may be, of the Company, does hereby appoint Joe R. Davis and Wayne M. Rose, and each of them severally, his true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to execute in his name, place and stead, in his capacity as director, officer or both, as the case may be, of the Company, said Annual Report and all instruments as said attorney or attorneys shall deem necessary or incidental in connection therewith, and to file the same with the Commission. Each of said attorneys shall have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever necessary or desirable as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys and each of them. IN WITNESS WHEREOF, the undersigned has executed this power of attorney as of April 23, 2001. /s/ James H. Limmer ---------------------------- James H. Limmer CONSOLIDATED GRAPHICS, INC. POWER OF ATTORNEY FOR REPORT ON FORM 10-K WHEREAS, CONSOLIDATED GRAPHICS, INC., a Texas corporation (the "Company"), intends to file with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1934, as amended (the "Securities Act"), an Annual Report on Form 10-K (the "Annual Report") for the fiscal year ended March 31, 2001, as prescribed by the Commission pursuant to the Act and the rules and regulations of the Commission promulgated thereunder, with any and all exhibits and other documents related to said Annual Report; NOW, THEREFORE, the undersigned in his capacity as a director or officer or both, as the case may be, of the Company, does hereby appoint Joe R. Davis and Wayne M. Rose, and each of them severally, his true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to execute in his name, place and stead, in his capacity as director, officer or both, as the case may be, of the Company, said Annual Report and all instruments as said attorney or attorneys shall deem necessary or incidental in connection therewith, and to file the same with the Commission. Each of said attorneys shall have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever necessary or desirable as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys and each of them. IN WITNESS WHEREOF, the undersigned has executed this power of attorney as of April 23, 2001. /s/ Dr. Hugh N. West ---------------------------- Dr. Hugh N. West -----END PRIVACY-ENHANCED MESSAGE-----