<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 3, 1997
WALLACE COMPUTER SERVICES, INC.
-------------------------------
Delaware 1-6528 36-2515832
- --------------------------------------------------------------------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
2275 Cabot Drive, Lisle, Illinois 60532
---------------------------------------------------------------------
(Address of principle executive offices) (Zip Code)
(630) 588-5000
--------------
(Registrant's telephone number, including area code)
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<PAGE> 2
The current report on form 8-K filed November 18, 1997 is hereby amended to add
item 7 below.
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Business Acquired.
(1) Annual Financial Statements for Graphic Industries, Inc. for the fiscal
year ended January 31, 1997.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Graphic Industries, Inc.
We have audited the accompanying consolidated balance sheets of Graphic
Industries, Inc. and subsidiaries as of January 31, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended January 31, 1997. 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 generally accepted auditing
standards. 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 consolidated financial position of Graphic
Industries, Inc. and subsidiaries at January 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended January 31, 1997, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1995 the
Company changed its method of accounting for its investments in marketable
securities.
/s/ Ernst & Young LLP
March 12, 1997
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<PAGE> 3
GRAPHIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31
1997 1996
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Notes 1 and 8) $7,212,351 $14,476,139
Marketable securities (Note 8) 23,577,079 20,031,842
Trade accounts receivable, less allowance for doubtful accounts
of $1,985,000 in 1997 and $1,250,000 in 1996 (Note 3) 80,658,006 73,807,212
Inventories (Note 3):
Materials 10,113,812 11,695,824
Work in process 18,597,802 18,593,850
------------ ------------
Total inventories 28,711,614 30,289,674
Prepaid expenses and other current assets 1,552,493 1,998,694
Deferred income taxes (Note 4) 3,138,818 1,872,389
------------ ------------
Total current assets 144,850,361 142,475,950
Other assets 10,582,417 5,243,584
Property, plant and equipment (Note 3):
Land 9,027,467 8,414,866
Buildings and improvements 43,637,850 39,693,622
Machinery and equipment 164,719,258 157,372,381
------------ ------------
217,384,575 205,480,869
Less accumulated depreciation 90,250,580 83,041,109
------------ ------------
Total property, plant and equipment 127,133,995 122,439,760
Goodwill, less accumulated amortization of $3,311,000 in 1997
and $3,026,000 in 1996 16,909,523 16,343,418
------------ ------------
Total assets $299,476,296 $286,502,712
</TABLE>
-3-
<PAGE> 4
GRAPHIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 31
1997 1996
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable (Notes 3 and 8) $15,814,485 $16,917,239
Trade accounts payable 21,426,662 19,930,381
Accrued compensation 6,752,127 5,705,247
Other current liabilities 13,365,846 12,243,124
Current portion of long-term obligations 3,471,916 3,609,760
------------- ------------
Total current liabilities 60,831,036 58,405,751
Long-term obligations, less current portion (Notes 3 and 8) 99,676,541 97,651,125
Deferred income taxes (Note 4) 15,620,738 16,043,672
Convertible subordinated debentures (Notes 2 and 8) 20,787,000 20,787,000
Shareholders' equity (Notes 2, 3 and 7):
Preferred stock, no par value--authorized 500,000 shares;
none issued 0 0
Common stock, $.10 par value--authorized 20,000,000
shares; issued and outstanding 7,357,309 shares in 1997
and 7,104,250 shares in 1996; including 78,599 shares in
1997 and 95,791 shares in 1996 held in treasury 735,731 710,425
Common stock, Class B, $.10 par value -- authorized
10,000,000 shares; issued and outstanding 4,518,817 in
1997 and 4,519,117 in 1996 451,882 451,912
Additional paid-in capital 19,496,988 17,182,567
Retained earnings (Note 8) 82,657,865 76,229,748
------------- ------------
103,342,466 94,574,652
Treasury stock, at cost (781,485) (959,488)
------------- ------------
Total shareholders' equity 102,560,981 93,615,164
Commitments (Note 5) ------------- ------------
Total liabilities and shareholders' equity $299,476,296 $286,502,712
</TABLE>
See accompanying notes.
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<PAGE> 5
GRAPHIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31
1997 1996 1995
<S> <C> <C> <C>
Net sales $437,107,260 $417,261,697 $348,130,390
Cost of sales 329,515,288 318,319,117 263,485,570
-----------------------------------------
107,591,972 98,942,580 84,644,820
Selling, general and administrative expenses 78,354,798 72,510,489 63,040,317
Restructuring charge (Note 10) 9,000,000 - -
Interest and other income, net 3,595,644 2,670,660 1,716,054
Interest expense 10,654,151 11,712,475 9,539,823
-----------------------------------------
Income before income taxes 13,178,667 17,390,276 13,780,734
Income taxes (Note 4) 5,898,000 6,760,000 5,375,000
-----------------------------------------
Net income $7,280,667 $10,630,276 $8,405,734
Net income per share:
Primary $ .62 $ .98 $ .80
Fully diluted $ .62 $ .95 $ .79
</TABLE>
See accompanying notes
GRAPHIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31
1997 1996 1995
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $7,280,667 $10,630,276 $8,405,734
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 18,999,855 16,599,327 14,113,780
Loss (gain) on sale of property, plant and
equipment and investments 296,675 (671,263) 623,192
Provision for deferred taxes (1,253,000) 169,000 265,000
Changes in operating assets and liabilities:
Trade accounts receivable (4,800,635) (10,806,806) (118,009)
Inventories 2,861,594 (2,305,649) (5,705,536)
Prepaid expenses and other current assets 509,961 (330,474) 13,030
Trade accounts payable (1,300,281) (6,257,260) 6,010,620
Other current liabilities 1,540,374 1,694,285 (2,029,170)
----------- ------------ ------------
Net cash provided by operating activities 24,135,210 8,721,436 21,578,641
</TABLE>
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<PAGE> 6
GRAPHIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31
1997 1996 1995
<S> <C> <C> <C>
INVESTING ACTIVITIES
Additions to property, plant and equipment (23,527,407) (24,982,790) (21,927,430)
Proceeds from sale of property, plant and
equipment 7,354,200 3,868,999 3,937,578
Assets of acquired businesses, net of
cash acquired (7,069,236) (3,330,242) -
Purchase of marketable securities (24,355,192) (12,541,201) (12,263,429)
Proceeds from sale and maturity of
marketable securities 21,182,522 16,226,328 5,569,530
Other investing activities (5,337,297) 4,719,454 (6,110,287)
------------ ------------- ------------
Net cash used in investing activities (31,752,410) (16,039,452) (30,794,038)
FINANCING ACTIVITIES
Borrowings of long-term obligations 20,763,478 92,643,850 12,450,971
Payments on long-term obligations (19,069,299) (73,131,436) (10,716,358)
Net repayments of notes payable (1,102,754) (5,380,588) (446,557)
Purchase of treasury stock (508,905) (475,257) (794,380)
Stock options exercised 297,018 1,670,923 989,946
Other financing activities (26,126) (150,932) (630,610)
------------ ------------- ------------
Net cash provided by financing activities 353,412 15,176,560 853,012
------------ ------------- ------------
Net increase (decrease) in cash and cash
equivalents (7,263,788) 7,858,544 (8,362,385)
Cash and cash equivalents at beginning of 14,476,139 6,617,595 14,979,980
year ------------ ------------- ------------
Cash and cash equivalents at end of year $7,212,351 $14,476,139 $6,617,595
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes $6,039,000 $4,925,000 $6,306,000
Interest $10,705,000 $11,516,000 $9,743,000
</TABLE>
NON-CASH TRANSACTIONS
During fiscal year 1995, the Company issued 89,778 shares of its stock (valued
at $808,002) to an officer of the Company in settlement of a non-compete
agreement entered into in fiscal year 1990 when the Company acquired Monroe
Litho, Inc. This transaction is reflected in goodwill in the accompanying
consolidated balance sheets.
See accompanying notes.
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<PAGE> 7
GRAPHIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK CLASS B ADDITIONAL
-------------------- -------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 31, 1994 5,872,240 $587,224 4,519,117 $451,912 $ 6,698,015
Net income - - - - -
Cumulative effect of change in accounting
principle, net of tax - - - - -
Adjustment to unrealized loss on marketable securities,
net of tax - - - - -
Treasury stock award - - - - (6,906)
Purchase of treasury stock - - - - -
Common stock issued under non-compete agreement 77,650 7,765 - - 665,188
Common stock issued in connection with acquisition 119,337 11,934 - - 993,066
Common stock issued from exercise of stock options 165,222 16,522 - - 973,424
Cash dividends on common stock ($.07) - - - - -
Cash dividends on common stock, Class B ($.05) - - - - -
--------- -------- --------- -------- -----------
BALANCE AT JANUARY 31, 1995 6,234,449 623,445 4,519,117 451,912 9,322,787
Net income - - - - -
Adjustment to unrealized loss on marketable
securities, net of tax - - - - -
Common stock issued under employee stock
purchase plan 22,214 2,221 - - 200,350
Purchase of treasury stock - - - - -
Common stock issued from exercise of stock options 239,293 23,929 - - 1,646,994
Common stock award 888 89 - - 7,903
Common stock issued in connection with acquisitions 607,406 60,741 - - 6,004,533
Cash dividends on common stock ($.07) - - - - -
Cash dividends on common stock, Class B ($.05) - - - - -
--------- -------- --------- -------- -----------
BALANCE AT JANUARY 31, 1996 7,104,250 710,425 4,519,117 451,912 17,182,567
Net income - - - - -
Adjustment to unrealized loss on marketable
securities, net of tax - - - - -
Common stock issued under employee stock
purchase plan - - - - (40,795)
Purchase of treasury stock - - - - -
Common stock issued from exercise of stock options 34,815 3,482 - - 293,536
Common stock award 5,924 592 - - 54,576
Common stock issued in connection with current
and prior year acquisitions 212,020 21,202 - - 2,007,104
Classs B shares converted to common stock 300 30 (300) (30) -
Cash dividends on common stock ($.07) - - - - -
Cash dividends on common stock, Class B ($.05) - - - - -
--------- -------- --------- -------- -----------
BALANCE AT JANUARY 31, 1997 7,357,309 $735,731 4,518,817 $451,882 $19,496,988
</TABLE>
7
<PAGE> 8
GRAPHIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
TREASURY STOCK TOTAL
RETAINED --------------------- SHAREHOLDERS'
EARNINGS SHARES AMOUNT EQUITY
-------- ------ ------ ------
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 31, 1994 $58,854,707 (14,400) $(160,348) $ 66,431,510
Net income 8,405,734 - - 8,405,734
Cumulative effect of change in accounting
principle, net of tax 87,000 - - 87,000
Adjustment to unrealized loss on marketable securities,
net of tax (1,400,352) - - (1,400,352)
Treasury stock award - 2,272 25,299 18,393
Purchase of treasury stock - (77,461) (794,380) (794,380)
Common stock issued under non-compete agreement - 12,128 135,049 808,002
Common stock issued in connection with acquisition - - - 1,005,000
Common stock issued from exercise of stock options - - - 989,946
Cash dividends on common stock ($.07) (423,047) - - (423,047)
Cash dividends on common stock, Class B ($.05) (225,956) - - (225,956)
----------- ------- --------- -----------
BALANCE AT JANUARY 31, 1995 65,298,086 (77,461) (794,380) 74,901,850
Net income 10,630,276 - - 10,630,276
Adjustment to unrealized loss on marketable
securities, net of tax 973,030 - - 973,030
Common stock issued under employee stock
purchase plan - 30,243 310,149 512,720
Purchase of treasury stock - (48,573) (475,257) (475,257)
Common stock issued from exercise of stock options - - - 1,670,923
Common stock award - - - 7,992
Common stock issued in connection with acquisitions - - - 6,065,274
Cash dividends on common stock ($.07) (445,688) - - (445,688)
Cash dividends on common stock, Class B ($.05) (225,956) - - (225,956)
----------- ------- --------- -----------
BALANCE AT JANUARY 31, 1996 76,229,748 (95,791) (959,488) 93,615,164
Net income 7,280,667 - - 7,280,667
Adjustment to unrealized loss on marketable
securities, net of tax (125,144) - - (125,144)
Common stock issued under employee stock
purchase plan - 67,953 686,908 646,113
Purchase of treasury stock - (50,761) (508,905) (508,905)
Common stock issued from exercise of stock options - - - 297,018
Common stock award - - - 55,168
Common stock issued in connection with current
and prior year acquisitions - - - 2,028,306
Class B shares converted to common stock - - - -
Cash dividends on common stock ($.07) (501,454) - - (501,454)
Cash dividends on common stock, Class B ($.05) (225,952) - - (225,952)
----------- ------- --------- -----------
BALANCE AT JANUARY 31, 1997 $82,657,865 (78,599) $(781,485) $102,560,981
</TABLE>
See accompanying notes.
8
<PAGE> 9
GRAPHIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1997
1. Summary of Accounting Policies
Graphic Industries, Inc. and subsidiaries ("GII" or the "Company") are engaged
in providing comprehensive printing, graphic arts services, and related
products and supplies through facilities located in 12 states, principally
Georgia, Texas, Pennsylvania, and Massachusetts. The Company services a diverse
customer base and, therefore, has minimal exposure to credit loss from any
particular customer or industry segment.
The following accounting policies are presented to assist the reader in
understanding the Company's financial statements.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of the Company and all of its subsidiaries, Baum Printing, Inc.,
Carpenter Reserve Printing Company, The Central Press of Miami, Inc., Craftsman
Printing Company, Graphic Direct, Inc. -- Illinois, Heritage Press, Inc.,
Hoechstetter Printing Company, Inc., Imaging Technologies Services, Inc., IPD
Printing & Distributing, Inc., Mercury Printing Company, Inc., Monroe Litho,
Inc., Presstar Printing Corporation, Quadras, Inc., Southern Signatures, Inc.,
State Printing Company, Inc., The Stein Printing Company, Inc., Wetmore &
Company, Williams Printing Company, W.E. Andrews Co., Inc., A.C. Scanning, Inc.
and W.E. Andrews Co., Inc., of Connecticut. The operations of Graphic Direct,
Inc. -- Michigan were merged into other subsidiaries during fiscal year 1995.
During fiscal year 1996, the Company acquired Allied Reprographic Services and
Supplies, Carpenter Reserve Printing Company, and Quadras, Inc. These
acquisitions were financed through issuance of 607,406 shares of the Company's
stock valued at $6,065,274. In December 1995, the Company acquired the printing
operations of Bausch & Lomb for $2,839,000 in cash, including $600,000 for
prepaid rebates. Cost exceeded the fair value of net assets for these 1996
acquisitions by approximately $4.5 million.
During fiscal year 1997, the Company acquired The Wimmer Companies, Inc. and
Presstar Printing Corporation. These acquisitions were financed through
issuance of 155,889 shares of the Company's stock valued at 1,458,512 and cash
payments amounting to $6,650,927. Cost exceeded the fair value of net assets
for these 1997 acquisitions by approximately $653,000.
The above acquisitions were accounted for using the purchase method of
accounting. Operations of the acquired companies have been included in the
consolidated statements of income from the respective dates of purchase.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
USE OF ESTIMATES The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results may
differ from those estimates.
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<PAGE> 10
REVENUE RECOGNITION The Company reports revenue, with the related costs, in
the accounting period in which the job is completed and available for delivery
to the customer. The Company generally does not require collateral for its
accounts receivable.
CASH EQUIVALENTS The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
INVENTORIES Inventories are stated at the lower of cost (first-in, first-out
basis) or replacement market.
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated on the
basis of cost. Depreciation is computed using the straight-line method over the
estimated useful life of each asset as set forth below. Leases and leasehold
improvements that have been capitalized are amortized over the lives of the
leases. Amortization of these assets is included in depreciation expense.
<TABLE>
<S> <C>
Buildings 15-30 years
Building improvements 5-25 years
Machinery and equipment 4-10 years
Vehicles 2- 5 years
</TABLE>
GOODWILL In connection with the Company's acquisitions, costs in excess of the
fair value of net assets acquired are recorded as goodwill. Goodwill is
amortized on a straight-line basis over a forty-year period. The carrying
value of goodwill is reviewed if the facts and circumstances suggest that it
may be impaired. If this review indicates that the goodwill will not be
recoverable, the Company's carrying value of the goodwill would be reduced to
its estimated fair value.
LONG-LIVED ASSETS In March 1995, the FASB issued Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), which
requires impairment losses to be recognized for long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are not sufficient to recover
the assets' carrying amount. The Company adopted SFAS 121 in the first quarter
of fiscal year 1997. The adoption had no effect on the financial statements.
CHANGE IN ACCOUNTING PRINCIPLE In fiscal year 1995, the Company adopted
Statement of Financial Accounting Standards No. 115, "Accounting for
Investments in Debt and Equity Securities" ("SFAS 115"). The cumulative effect
of adopting SFAS 115 at February 1, 1994 increased the carrying value of the
Company's marketable securities by $145,000, and also increased shareholders'
equity by $87,000 (net of $58,000 of deferred income taxes) to reflect the
unrealized holding gains on these securities which were previously carried at
cost.
NET INCOME PER COMMON SHARE Primary net income per common share is based on
the weighted average number of shares of common stock outstanding during each
year. Fully diluted net income per share is based on the weighted average
number of shares of common stock outstanding and the assumed conversion of
convertible securities outstanding, after appropriate adjustment for interest
on convertible debentures during each year. Shares issuable under the Company's
incentive stock option plans would not materially dilute net income per share;
therefore, they have not been included in the computations. The number of
shares used in computing primary net income per common share was 11,663,751 in
1997, 10,894,319 in 1996 and 10,556,833
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<PAGE> 11
in 1995. The number of shares used in computing fully diluted net income per
common share was 12,942,951 in 1997, 12,173,519 in 1996 and 11,836,033 in 1995.
2. Convertible Subordinated Debentures
The Company has outstanding $20,787,000 of 7% convertible subordinated
debentures due May 15, 2006. The debentures are unsecured general obligations
of the Company.
The debentures are convertible into common stock of the Company at any time on
or before May 15, 2006, unless previously redeemed, at a conversion price of
$16.25 per share, subject to adjustment, as defined. The debentures are subject
to redemption through payment into a sinking fund. The sinking fund is
scheduled to retire 75% of the debentures prior to maturity. The Company
reacquired and holds $2,338,000 of these debentures. The Company's intention is
to present these debentures to the trustee for cancellation in lieu of required
cash payments into the sinking fund. Remaining payment requirements for fiscal
years ending January 31 are as follows:
<TABLE>
<S> <C>
1998 $ -
1999 1,412,000
2000 1,875,000
2001 1,875,000
2002 1,875,000
Thereafter 13,750,000
-----------
$20,787,000
</TABLE>
3. Debt
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
January 31
1997 1996
----------- -----------
<S> <C> <C>
Revolving line of credit with interest at LIBOR plus 1.75% $77,000,000 $75,600,000
Term loan agreement with bank with interest at prime (8.25%
at January 31, 1997) payable in installments of $383,000
annually, including interest 1,400,171 1,646,153
Real estate mortgage loan agreements with interest from 4.5% to
10.4%, payable in installments aggregating from $26,000 to
$395,000 annually, including interest 20,426,531 17,771,454
Capital lease obligations, payable in installments aggregating from
$3,000 to $302,000 annually with interest at 8.4% to 17.65% or
prime plus .25% to .5% 1,827,727 3,043,724
Industrial development revenue bonds with interest from 3% to
70% of prime (5.78% at January 31, 1997) 458,012 553,874
Other notes with interest at 3% to 11.25% or 30 day commercial
paper rate plus 2.35% 2,036,016 2,645,680
----------- -----------
103,148,457 101,260,885
Less amounts due within one year 3,471,916 3,609,760
----------- -----------
$99,676,541 $97,651,125
</TABLE>
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<PAGE> 12
On December 21, 1995, the Company entered into a $110 million revolving credit
facility with a group of lenders led by NationsBank. The interest rate on this
indebtedness is a floating rate which, at the Company's option, will equal
NationsBank's prime rate or a specified margin (based upon a specific financial
ratio) over LIBOR. This indebtedness is secured by substantially all the
accounts receivable and inventories of the Company and its subsidiaries.
On November 18, 1996, the revolving credit facility was amended to include $10
million in additional commitments, for a total availability of $120 million for
this facility. In addition, the maturity date of the amounts outstanding under
the revolving credit facility was extended one year to December 21, 1998 with
two consecutive one-year renewable Periods, with renewal at the option of the
Company.
Under the provisions of the revolving credit facility, the Company may also
borrow up to $10 million for short-term financing. At January 31, 1997, the
Company had borrowed the full amount available under this provision and such
amount is reflected in notes payable in the accompanying balance sheets.
This facility contains covenants, including maintenance of a maximum leverage
ratio, minimum net worth, a minimum cash flow to fixed charges ratio, maximum
debt to earnings ratio and certain limits on outstanding debt and other
transactions.
The Company and certain of its subsidiaries also have credit agreements with
various banks to provide short-term financing, tied into the revolving credit
facility through an intercreditor provision. Some of these agreements contain
covenants, including maintenance of a minimum net worth and a minimum cash flow
to fixed charges ratio. Under these agreements, the Company can borrow an
aggregate of $25,000,000 as of January 31, 1997. Interest rates on these lines
are primarily at the banks' prime interest rates (8.25% at January 31, 1997).
At January 31, 1997, the available unused portion of the credit lines was
approximately $19,200,000. The credit agreements are renewed and revised
periodically.
Certain property, plant and equipment is pledged as collateral on long-term
obligations other than the revolving credit facility.
Aggregate maturities of long-term obligations as of January 31, 1997, are
approximately $3,472,000 in 1998, $2,880,000 in 1999, $2,761,000 in 2000,
$79,688,000 in 2001, $2,180,000 in 2002 and $12,168,000 thereafter, assuming
the revolving credit facility is renewed to its maximum term.
4. Income Taxes
The Company accounts for income taxes using the liability method as required by
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). SFAS 109 requires the recognition of deferred tax assets
and liabilities for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases.
-12-
<PAGE> 13
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
Year ended January 31
------------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Federal
Current $5,902,000 $5,304,000 $3,661,000
Deferred (1,007,000) 138,000 334,000
State
Current 1,249,000 1,287,000 1,449,000
Deferred (246,000) 31,000 (69,000)
-------------- -------------- --------------
$5,898,000 $6,760,000 $5,375,000
</TABLE>
A reconciliation of income tax expense computed at the statutory federal income
tax rate to the Company's effective income tax rate follows:
<TABLE>
<CAPTION>
Year ended January 31
----------------------------------
1997 1996 1995
<S> <C> <C> <C>
Federal rate 34.3% 34.3% 34.3%
State, net of federal tax benefit 6.7 4.6 6.3
Expenses for which no tax benefits were recorded 3.1 1.3 0.9
Other, net .7 (1.3) (2.5)
----------------------------------
44.8% 38.9% 39.0%
================================
</TABLE>
Significant components of the Company's deferred tax liabilities and assets are
as follows:
<TABLE>
<CAPTION>
January 31
1997 1996
---------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Property, plant and equipment $15,367,254 $16,344,631
Other, net 253,484 260,050
-------------- -------------
Total deferred tax liabilities 15,620,738 16,604,681
Deferred tax assets:
State net operating loss carryforwards (NOLs) (1,233,581) (1,429,875)
Federal net operating loss carryforwards - (259,242)
Employee benefit accruals (1,167,642) (1,034,743)
Allowance for doubtful accounts (795,191) (498,750)
Unrealized loss on marketable securities (337,490) (238,772)
Other, net (838,495) (312,932)
-------------- -------------
Total deferred tax assets (4,372,399) (3,774,314)
Valuation allowance for state NOLs 1,233,581 1,340,916
-------------- -------------
Net deferred tax liabilities $12,481,920 $14,171,283
</TABLE>
The deferred tax accounts are presented in the accompanying balance sheets as
follows:
-13-
<PAGE> 14
<TABLE>
<CAPTION>
January 31
1997 1996
----------------------------------------------
<S> <C> <C>
Current portion (net asset) $(3,138,818) $(1,872,389)
Long-term portion (net liability) 15,620,738 16,043,672
----------------------------------------------
Net deferred tax liabilities $12,481,920 $14,171,283
</TABLE>
SFAS 109 requires that a valuation allowance be recognized if it is "more
likely than not" that some or all of the deferred tax assets will not be
realized. Management believes that the future reversal of existing taxable
temporary differences provides evidence that a significant portion of the
deferred tax assets will be realized. The change in the valuation allowance
during 1997 and 1996 was not material.
5. Commitments
The Company leases facilities, equipment, machinery and vehicles under
operating leases. Certain land and building leases have renewal options for
periods ranging from one to ten years. Rental expense for operating leases
amounted to $7,995,000, $7,314,000, and $6,655,000 in 1997, 1996, and 1995,
respectively. Future minimum payments under noncancellable leases with initial
or remaining terms of one year or more consisted of the following at January
31, 1997:
<TABLE>
<S> <C>
1998 $6,258,000
1999 4,550,000
2000 2,431,000
2001 829,000
2002 208,000
Thereafter 483,000
-----------
Total $14,759,000
</TABLE>
The Company and its subsidiaries are involved in certain legal actions and
claims arising in the ordinary course of business. Management believes (based
on advice of legal counsel) that such litigation and claims will be resolved
without material effect on the Company's financial position.
6. Employee Benefits
The Company has a profit sharing plan (PSP) which includes a "salary reduction
plan" as described in Section 401(k) of the Internal Revenue Code. The PSP
provides for discretionary employee contributions not in excess of 15% of the
employee's annual salaries. The salary reduction plan provides for Company
contributions based on 50% of the first 4% of the covered employee's
contribution. The Company expensed contributions to these plans of
approximately $2,308,000, $1,631,000, and $1,287,000 in 1997, 1996, and 1995,
respectively.
The Company has a payroll-based employee stock ownership plan (Paysop) which
provides for contributions made by the Company and its subsidiaries, as
determined by the respective board of directors, and covers substantially all
employees. Contributions to the plan for the years ended January 31, 1997,
1996, and 1995 were not significant.
-14-
<PAGE> 15
The Company has an employee stock purchase plan which provides for the purchase
of up to 500,000 shares of the Company's outstanding common stock. The plan
provides for employee contributions not to exceed $10,400 per employee in any
one calendar year and allows participants to utilize these contributions to
purchase shares of the Company's common stock at a 10% discount from market
value. The remaining 10% and all related fees and expenses are paid by the
plan.
Participants may also purchase up to $10,000 of common stock per year at market
value. The Company expensed contributions to the plan of approximately $87,000,
$98,000, and $21,000 during 1997, 1996, and 1995, respectively.
Pursuant to various collective bargaining agreements, contributions to
union-sponsored multi-employer pension plans made by the Company's two
unionized subsidiaries were approximately $238,000, $279,000, and $400,000 in
1997, 1996, and 1995, respectively. Information as to the respective
subsidiaries' portion of accumulated plan benefits and plan net assets is not
determinable.
The Company does not provide postretirement benefits, such as healthcare and
life insurance, to retirees.
7. Stock Option and Award Plans
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") requires use of option valuation models
that were not developed for use in valuing employee stock options. Under APB
25, because the exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
The Company adopted an Incentive Stock Option Plan in April 1988 ("1988 Plan")
which permits the granting of options to officers and key employees to purchase
up to an aggregate of 750,000 shares of the Company's common stock, no more
than 200,000 of which may be issued to persons who are directors of the
Company. In April 1991, the Board of Directors approved an amendment to the
1988 Plan. The number of shares exercisable each year was changed from 50% in
the third and fourth years following the year of grant to 33 1/3% during
January in the three years following the amendment. Additionally, in fiscal
year 1995 each subsidiary company president was granted a two-year option for
5,000 shares which are exercisable in two cumulative installments of 50% each
year. Options not exercised within the required times are terminated and
cancelled.
The Company adopted a Stock Option Plan in September 1991 ("1991 Plan"). The
Plan permits the granting of incentive stock options or non-qualified stock
options to officers, key employees and outside directors to purchase up to an
aggregate of 1,000,000 shares of the Company's common stock, no more than
250,000 of which may be issued to persons who are directors of the Company.
Options granted under the 1991 Plan are exercisable during January in the three
years following the date of grant in increments of 33 1/3% each year. Options
not exercised within the required times are terminated and cancelled.
The Company adopted a Stock Option Plan in April 1995 ("1995 Plan"). The Plan
permits the granting of options to officers, key employees, and directors of
the Company and its subsidiaries to purchase up to an aggregate of 1,000,000
shares of the Company's common stock, no more than 250,000 of which may be
issued to persons who are directors of the Company. Options granted under the
1995 Plan are exercisable in one
-15-
<PAGE> 16
designated month occurring in the period from February to July in each of the
three years following the date of grant in increments of 33 1/3% each year.
Options not exercised within the required times are terminated and cancelled.
Pro forma information regarding net income and earnings per share is required
by SFAS 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
January 31, 1995 under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1997
and 1996, respectively: risk-free interest rates of 6.87% and 6.95%; a dividend
yield of .80% and .80%; volatility factors of the expected market price of the
Company's common stock of .35 and .35; and a weighted-average expected life of
the option of 3 years and 3 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except for earnings per share
information):
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Pro forma net income $7,011 $10,341
Pro forma net income per share:
Primary .60 .95
Fully diluted .60 .92
</TABLE>
Because SFAS 123 is applicable only to options granted subsequent to January
31, 1995, its pro forma effect will not be fully reflected until future years.
A summary of the Company's stock option activity and related information for
the years ended January 31 follows:
-16-
<PAGE> 17
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
OPTIONS EXERCISE
(000) PRICE
<S> <C> <C>
1997
Outstanding at beginning of year 728 $8.76
Granted 77 8.43
Exercised (39) 8.67
Canceled (145) 8.82
-----
Outstanding at January 31 621 8.71
Shares available for future grants 749
Weighted-average fair value of options granted during the year 2.42
1996
Outstanding at beginning of year 346 $7.48
Granted 648 8.75
Exercised (239) 7.00
Canceled (27) 7.74
-----
Outstanding at January 31 728 8.76
Shares available for future grants 974
Weighted-average fair value of options granted during the year 2.64
1995
Outstanding at beginning of year 375 $5.99
Granted 192 8.78
Exercised (165) 6.01
Canceled (56) 6.29
-----
Outstanding at January 31 346 7.48
Shares available for future grants 595
</TABLE>
Exercise prices for options outstanding as of January 31, 1997 ranged from
$7.88 to $9.38. The weighted-average remaining contractual life of those
options is one year. No options were exercisable at the end of each fiscal
year.
In April 1992 the Company adopted a Stock Award Plan. This plan provides for
awards of the Company's common stock to key employees and directors up to an
aggregate of 400,000 shares. The plan is administered by a committee, appointed
by the Board of Directors, that has full authority to make awards under the
plan. During 1997, 1996 and 1995, 5,924 shares, 888 shares and 2,272 shares,
respectively, were awarded under this plan and charged to compensation expense.
-17-
<PAGE> 18
8. Fair Value of Financial Instruments and investments
The following methods and assumptions are used by the Company in estimating its
fair value disclosures for financial instruments.
CASH AND CASH EQUIVALENTS The carrying value of cash and cash equivalents
approximates fair value.
MARKETABLE SECURITIES Management determines the appropriate classification of
securities at the time of purchase and reevaluates such designations as of each
balance sheet date.
All marketable securities are classified as "available-for-sale" and,
therefore, are carried at fair value, with the difference between cost and fair
value, net of tax, reported as a component of retained earnings. At January 31,
1997 and 1996, this difference was an unrealized loss of approximately $465,000
and $340,000 which was net of income taxes of approximately $377,000 and
$239,000, respectively. This difference was due to the effect of changes in
market interest rates on the fair value of these securities. Realized gains and
losses are included in investment income. The cost of securities sold is based
on the specific identification method. Interest and dividends on securities
classified as available for sale are included in interest income.
The following is a summary of available-for-sale securities at January 31, 1997
and 1996:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
1997
U.S. Treasury bonds $ 4,824,080 $ - $(183,377) $ 4,640,703
Municipal bond funds 14,873,672 22,710 (552,915) 14,343,467
----------- ---------- ---------- -----------
Total debt securities 19,697,752 22,710 (736,292) 18,984,170
Equity securities 3,655,272 35,987 (149,821) 3,541,438
Other securities 1,066,518 2,640 (17,687) 1,051,471
----------- ---------- ---------- -----------
$24,419,542 $61,337 $(903,800) $23,577,079
1996
U.S. Treasury bonds $ 1,776,192 $ 9,183 $ - $ 1,785,375
Municipal bonds 403,500 - (7,500) 396,000
Municipal bond funds 13,517,193 15,710 (339,538) 13,193,365
----------- ---------- ---------- -----------
Total debt securities 15,696,885 24,893 (347,038) 15,374,740
Equity securities 3,953,766 14,425 (263,430) 3,704,761
Other securities 960,280 18,257 (26,196) 952,341
----------- ---------- ---------- -----------
$20,610,931 $57,575 $(636,664) $20,031,842
</TABLE>
The investments in U.S. Treasury bonds are scheduled to mature in fiscal years
2025 through 2026.
-18-
<PAGE> 19
CONVERTIBLE SUBORDINATED DEBENTURES The fair value of the debentures
approximates $18,916,000 and $19,124,000 as of January 31, 1997 and 1996,
respectively, based on its quoted market prices.
SHORT-TERM BORROWINGS AND LONG-TERM OBLIGATIONS The carrying amounts of the
short-term borrowings and long-term obligations approximate the instruments'
fair values.
9. Related Party Transactions
In January 1995, the Chairman of GII purchased certain land from GII for
$750,000, which represents the higher of two MAI appraisals obtained. In
connection with this transaction, GII realized a gain of approximately
$450,000. This transaction was approved by the Board of Directors of the
Company.
In January 1997, the Chairman of GII purchased a certain building from GII for
$640,000, which represents the higher of two MAI appraisals obtained. In
connection with this transaction, GII realized a gain of approximately
$335,000. This transaction was approved by the Board of Directors of the
Company.
10. Restructuring Charge
On May 14, 1996 the Company announced an agreement in principle for the sale of
its direct-mail subsidiary, Graphic Direct, Inc. -- Illinois ("GDI") and the
closing of a commercial printing subsidiary, The Stein Printing Company, Inc.
("SPC"). On May 31, 1996, the sale of certain assets of GDI was concluded. In
connection with these actions, the Company recorded in its first quarter ended
April 30, 1996, a one-time pre-tax restructuring charge of $9,000,000. The
after-tax effect of the charge was $6,026,500 or equivalent to $0.52 per common
share. The charge primarily covers the costs of liquidating and disposing of
certain assets, the write-off of intangible assets, and a provision for certain
expenses, including severance pay and future lease obligations.
The composition of the Company's restructuring reserves as of January 31, 1997
is as follows:
<TABLE>
<CAPTION>
ORIGINAL WRITEDOWN RESTRUCTURING
RESTRUCTURING OF ASSETS TO CASH RESERVES AS OF
RESERVE FAIR VALUE PAYMENTS JAN. 31, 1997
<S> <C> <C> <C> <C>
Restructuring loss on writedown of current assets $1,633,665 $(1,633,665) $ - $ -
Restructuring loss on writedown of property and
equipment and other assets 2,516,688 ( 2,516,688) - -
Restructuring expenditures to close facilities
including termination benefits of $2,177,271 4,161,018 - 3,149,392 1,011,626
Impairment loss on intangible assets 688,629 (688,629) - -
--------------- ---------------- ---------------- -------------------
Total restructuring reserves $9,000,000 $(4,838,982) $3,149,392 $1,011,626
</TABLE>
For the year ended January 31, 1996, the combined results for GDI and SPC were
net sales of $32,647,782 and a pre-tax loss of $(1,376,281). For the year ended
January 31, 1997, the combined results were net sales of $9,602,649 and pre-tax
loss of $(70,055).
At January 31, 1997, the Company believes that the provision for restructuring
continues to be adequate and will not require adjustment in future periods.
-19-
<PAGE> 20
(2) Interim Financial Statements for Graphic Industries, Inc. for the third
quarter ended October 31, 1997
GRAPHIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net sales $123,341,900 $111,233,906 $348,911,976 $326,263,997
Cost of sales 94,135,546 83,559,109 263,293,949 245,210,368
------------- ------------ ------------ ------------
29,206,354 27,674,797 85,618,027 81,053,629
Selling, general and
administrative expenses 25,188,830 19,682,228 66,099,468 59,293,069
Loss on sale of subsidiary 5,061,835 - 5,061,835 -
Restructuring - - - 9,000,000
Interest, other income
(expense)-net 228,505 472,123 1,879,111 2,129,593
Interest expense 2,938,526 2,643,784 8,714,656 8,062,064
------------- ------------ ------------ ------------
Income (loss) before
income taxes (3,754,332) 5,820,908 7,621,179 6,828,089
Income taxes 523,000 2,328,000 5,073,000 3,358,000
------------- ------------ ------------ ------------
Net income (loss) $(4,277,332) $3,492,908 $2,548,179 $3,470,089
Net income (loss) per share:
Primary $(.37) $.30 $.21 $.30
Fully diluted $(.37) $.29 $.21 $.30
Dividends declared:
Common Stock $.0175 $.0175 $.0525 $.0525
Class B Common Stock $.0125 $.0125 $.0375 $.0375
</TABLE>
See notes to condensed consolidated financial statements.
-20-
<PAGE> 21
GRAPHIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1997 1997
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and marketable securities $26,190,930 $30,789,430
Trade accounts receivable 91,713,907 80,658,006
Inventories:
Materials 10,587,625 10,113,812
Work in process 29,145,513 18,597,802
------------- -----------
39,733,138 28,711,614
Prepaid expenses and other current assets 5,339,315 4,691,311
------------- -----------
Total Current Assets 162,977,290 144,850,361
Other Assets 10,814,630 10,582,417
Property, Plant and Equipment
Land 10,102,046 9,027,467
Buildings and improvements 47,163,658 43,637,850
Machinery and equipment 184,269,366 164,719,258
------------- -----------
241,535,070 217,384,575
Less accumulated depreciation 96,027,531 90,250,580
------------- -----------
145,507,539 127,133,995
Goodwill-net 21,815,907 16,909,523
------------- -----------
Total Assets $341,115,366 $299,476,296
</TABLE>
See notes to condensed consolidated financial statements.
-21-
<PAGE> 22
GRAPHIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(continued)
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1997 1997
---- ----
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable $16,094,782 $15,814,485
Accounts payable 21,550,524 21,426,662
Other current liabilities 19,479,833 20,117,973
Current portion of long-term obligations 4,936,315 3,471,916
------------ ------------
Total Current Liabilities 62,061,454 60,831,036
Long-Term Obligations, less current portion 128,608,492 99,676,541
Deferred Income Taxes 17,005,340 15,620,738
7% Convertible Subordinated Debentures 12,912,000 20,787,000
Shareholders' Equity
Preferred Stock, no par value; authorized 500,000
shares; none issued -0- -0-
Common Stock, $.10 par value; authorized 20,000,000
shares; issued 8,560,550 at October 31, 1997 and
7,357,309 at January 31,1997, including treasury
shares of 94,135 at October 31, 1997 and 78,599 at
January 31, 1997 856,055 735,731
Common Stock, Class B, $.l0 par value; authorized
10,000,000 shares; issued 4,518,817 in both periods 451,882 451,882
Additional paid-in capital 35,251,582 19,496,988
Retained earnings 84,978,208 82,657,865
------------ ------------
121,537,727 103,342,466
Less treasury stock at cost (1,009,647) (781,485)
------------ ------------
Total Shareholders' Equity 120,528,080 102,560,981
------------ ------------
Total Liabilities and Shareholders' Equity $341,115,366 $299,476,296
</TABLE>
See notes to condensed consolidated financial statements.
-22-
<PAGE> 23
GRAPHIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
October 31,
--------------------------
1997 1996
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $2,548,179 $3,470,089
Restructuring charge, net of tax benefit -0- (2,016,611)
Loss on sale of subsidiary 5,061,835 -0-
Depreciation and amortization 16,112,126 14,233,694
Net (gain) loss on sale of property,
plant and equipment and investments (966,577) 1,103,283
Gain on purchase of Convertible Subordinated Debentures (81,405) -0-
Provision for deferred taxes 253,650 316,575
Changes in operating assets and liabilities (20,460,862) (7,250,903)
------------ -----------
Net cash provided by operating activities 2,466,946 9,856,127
INVESTING ACTIVITIES
Additions to property, plant and equipment (27,056,413) (18,762,466)
Proceeds from sale of property, plant and equipment 2,709,744 4,022,208
Proceeds from sale of subsidiary 7,065,173 -0-
Assets of acquired businesses, net of cash acquired (10,583,606) (1,458,801)
Net sale (purchase) of marketable securities 21,031,170 (3,616,894)
Other investing activities (2,198,409) (128,588)
------------ -----------
Net cash used in investing activities (9,032,341) (19,944,541)
FINANCING ACTIVITIES
Borrowings on long-term obligations 34,703,803 -0-
Payments on long-term obligations (8,829,172) (2,880,697)
Net borrowings on notes payable (3,405,714) 4,077,215
Purchase of Convertible Subordinated Debentures (1,352,595) -0-
Common stock issued from Debenture Conversion 6,441,000 -0-
Debentures converted to Common Stock (6,441,000) -0-
Dividends (567,957) (544,307)
Other financing activities 1,322,743 560,367
------------ -----------
Net cash provided by financing activities 21,871,108 1,212,578
------------ -----------
Net increase (decrease) in cash and cash equivalent 15,305,713 (8,875,836)
Cash and cash equivalents at beginning of period 7,212,351 14,476,139
------------ -----------
Cash and cash equivalents at end of period $22,518,064 $5,600,303
</TABLE>
See notes to condensed consolidated financial statements.
-23-
<PAGE> 24
GRAPHIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
OCTOBER 31, 1997
NOTE A--BASIS OF PRESENTATION
The financial statements included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information not misleading. These financial statements should be read
in conjunction with the financial statements and related notes contained in the
1997 Annual Report on Form 10-K. In the opinion of Management, the financial
statements contain all adjustments of a normal recurring nature necessary to
present fairly the financial position as of October 31, 1997 and the results of
the operations and cash flows for the three months and nine months ended
October 31, 1997 and 1996. The results of operations for the nine months ended
October 31, 1997 are not necessarily indicative of the results to be expected
for the year ending January 31, 1998.
NOTE B--MARKETABLE SECURITIES
The Company determines the appropriate classification of securities at the time
of purchase and reevaluates such securities at each balance sheet date. At
October 31, 1997, all marketable securities were classified as "available for
sale" and, therefore, were carried at fair value, with the difference between
cost and fair value, net of tax, reported as a component of retained earnings.
At October 31, 1997, this difference was an unrealized loss of $125,339 net of
income taxes of $83,560. This difference was due to the effect of changes in
market interest rates on the fair value of these securities.
NOTE C--NET INCOME PER COMMON SHARE
Primary earnings per share are computed based on the weighted average number of
common shares outstanding during the period. Common share equivalents are
included in primary earnings per share when dilutive. Fully diluted earnings
per share are based on the weighted average number of common shares and common
share equivalents outstanding and, when dillutive, assumed conversion of
convertible securities during the period, after appropriate adjustments for
interest and applicable income tax effect.
NOTE D--SFAS NO. 128, "EARNINGS PER SHARE"
In February 1997 the Financial Accounting Standards Board issued a new
accounting pronouncement, SFAS No. 128, "Earnings per Share", which will change
the current method of computing earnings per share. The new standard requires
presentation of "basic earnings per share" and "diluted earnings per share"
amounts, as defined. SFAS No. 128 will be effective for the Company's quarter
and year ending January 31, 1998, and, upon adoption, all prior-period earnings
per share data presented shall be restated to conform with the provisions of
the new pronouncement. Application earlier than the Company's quarter ending
January 31, 1998 is not permitted.
Proforma basic and diluted earnings (loss) per share for the three months and
nine months ended October 31, 1997 and 1996 calculated under the provisions of
SFAS No. 128 are as follows:
-24-
<PAGE> 25
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
October 31, October 31,
<S> <C> <C> <C> <C>
1997 1996 1997 1996
-------------------------------------
Basic earnings (loss) per share $(.37) $.30 $.21 $.30
Diluted earnings (loss) per share $(.37) $.29 $.21 $.30
</TABLE>
NOTE E--PROVISION FOR LOSS ON SALE OF SUBSIDIARY
As provided for in the agreement with Wallace Computer Services, Inc., the
Company sold its Atlanta Blue Print Company subsidiary to CD Acquisition Corp.,
a company controlled by Carter D. Pope, President of Atlanta Blue Print
Company, a Director of the Company, and son of Mark C. Pope, III, Chairman of
the Company. As of October 31, 1997, the Company recorded the sale of its
Atlanta Blue Print Company subsidiary for $7,065,173 in cash and the related
loss of $5,061,835. An income tax benefit was not recorded for the loss as
realization of any benefit is uncertain.
NOTE F--TENDER OFFER FROM WALLACE CONCLUDED
Pursuant to the Amended and Restated Agreement and Plan of Merger Among Wallace
Computer Services, Inc. (Wallace), Greenwich Acquisition Corp., and the Company
and the Amended and Restated Stockholder Agreement dated as of October 12,
1997, a tender offer was concluded on October 31, 1997 whereby Wallace through
its Greenwich Acquisition Corp. subsidiary, purchased approximately 95% of the
Company's combined outstanding Common Stock and Class B shares. The shares,
both Common and Class B were purchased at $21.75 per share. The conclusion of
the tender offer, and the related reduction in outstanding shares resulted in
the suspension of trading by the New York Stock Exchange on Monday, November 3,
1997. The remaining outstanding shares that were not tendered (representing
approximately 5% of the shares) are scheduled to be purchased at $21.75 per
share subsequent to the approval of the merger which is to be voted on by the
shareholders at a special shareholder meeting scheduled for December 22, 1997.
Given Wallace's stated desire to vote their shares in favor of the merger, it
appears certain that the remaining shares will be purchased by Wallace,
resulting in the Company becoming a 100% owned subsidiary of Wallace.
NOTE G--INCOME TAXES The effective income tax rate for the three and nine
months ended October 31, 1997, was higher than expected as a result of not
recording a benefit on the loss on sale of subsidiary.
-25-
<PAGE> 26
(b) Unaudited Pro Forma Financial Statements
Introduction to pro forma condensed consolidated financial data.
The following Unaudited Pro Forma Condensed Consolidated Statements of
Operations for the three months ended October 31, 1997 and the fiscal year
ended July 31, 1997 present unaudited pro forma operating results for Wallace
Computer Services, Inc. ("Wallace") as if the acquisition of Graphic
Industries, Inc. ("Graphic") and the other transactions described in the next
paragraph (the "Pro Forma Transactions") had occurred as of the beginning of
the periods presented. The following Unaudited Pro Forma Condensed
Consolidated Balance Sheet presents the unaudited pro forma financial condition
of Wallace as if the Pro Forma Transactions had occurred as of October 31,
1997. The excess of the purchase price of Graphic over the net identifiable
assets and liabilities of Graphic is reported as goodwill. The carrying values
of Graphic's net assets are assumed to equal their fair values for purposes of
these unaudited pro forma condensed consolidated financial statements unless
indicated otherwise in the Notes to Unaudited Pro Forma Condensed Consolidated
Financial Data. These values are subject to revision following the results of
several appraisals still pending.
The Pro Forma Transactions are: (i) the Wallace acquisition of Graphic, which
is accounted for under the purchase method of accounting; (ii) the issuance of
debt of $435 million under a new credit agreement dated as of October 31, 1997,
among Wallace, certain lenders and Bank of America NT & SA, as agent for such
lenders; and (iii) the pay down of Graphic's debt of $127 million.
As provided for in the agreement with Wallace, Graphic sold its Atlanta Blue
Print Company subsidiary to CD Acquisition Corp., a company controlled by
Carter D. Pope, President of Atlanta Blue Print Company, a Director of Graphic,
and son of Mark C. Pope, III, Chairman of Graphic. As of October 31, 1997,
Graphic recorded the sale of its Atlanta Blue Print Company subsidiary for
$7,065,000 in cash and the related loss of $5,062,000.
The pro forma financial statements also reflect the historical amounts for
certain revenues and expenses for the periods from August 1, 1996 through the
respective acquisition dates for each of the following companies acquired by
Graphic: The LithoPrint Company, Harvey Press, Inc., and Bruce Offset Company,
Inc. The impact of these acquisitions net of the pro forma impact of the
disposition of Atlanta Blue Print Company mentioned above is shown in a
separate column on the pro forma financial statements.
The unaudited pro forma condensed consolidated financial data does not reflect
any synergies expected to be realized after the Graphic acquisition (because
their realization cannot be assured). The accompanying notes to Unaudited Pro
Forma Condensed Consolidated Financial Data describe other adjustments related
to the Graphic acquisition.
THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA IS PRESENTED FOR
INFORMATIONAL PURPOSED ONLY AND IS NOT NECESSARILY INDICATIVE OF THE OPERATING
RESULTS OR FINANCIAL POSITION THAT WOULD HAVE OCCURRED HAD THE GRAPHIC
ACQUISITION AND OTHER TRANSACTIONS DESCRIBED HEREIN BEEN CONSUMMATED AT THE
DATES INDICATED, NOR IS IT NECESSARILY INDICATIVE OF THE FUTURE OPERATING
RESULTS OR FINANCIAL POSITION OF THE COMPANY FOLLOWING THE GRAPHIC ACQUISITION.
The unaudited pro forma condensed consolidated financial data should be read in
conjunction with each of the consolidated financial statements of Wallace and
Graphic and the related notes thereto contained in (i) Wallace's Annual Report
on Form 10-K for the year ended July 31,1997, (ii) Wallace's Quarterly Report
on Form 10-Q for the quarter ended October 31, 1997 and (iii) Graphic's audited
financial statements for the year ended January 31, 1997, which are included
herein, and (iv) Graphic's interim financial statements for the nine months
ended October 31, 1997, which are included herein.
-26-
<PAGE> 27
Wallace Computer Services, Inc and Subsidiaries
Pro Forma Income Statement
For the year ended July 31, 1997
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Pro forma Operations Pro forma
Wallace Graphic Adjustments Adjust (1) Totals
------- ------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Net Sales 906,290 447,647 9,400 1,363,337
Cost and Expenses
Cost of goods sold 556,073 320,999 800 (j) 6,800 884,672
Selling and admin expenses 165,918 75,575 600 242,093
Provision for depreciation
and amortization 49,205 20,103 5,400 (h)(k) 200 74,908
------- ------- ----------- ---------- ----------
Total costs and expenses 771,196 416,677 6,200 7,600 1,201,673
Interest income (1,876) (3,590) (400) (5,866)
Interest expense 2,619 11,012 17,400 (i) 600 31,631
------- ------- ----------- ---------- ----------
Income from
continuing operations 134,351 23,548 (23,600) 1,600 135,899
Net income from continuing
operations per share:
Primary 3.09 3.13
Fully diluted 3.08 3.11
Average common
shares outstanding 43,422 43,422
Average diluted common
shares outstanding 43,665 43,665
</TABLE>
-27-
<PAGE> 28
Pro Forma Income Statement
For the quarter ended October 31, 1997
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Pro forma Operations Pro forma
Wallace Graphic Adjustments Adjust (1) Totals
------- ------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Net Sales 246,112 123,342 (5,900) 363,554
Cost and Expenses
Cost of goods sold 155,206 89,325 (800) (j) (3,400) 240,331
Selling and admin expenses 43,243 23,878 (800) (j) (2,000) 64,321
Provision for depreciation
and amortization 13,238 6,122 800 (h)(k) (300) 19,860
------- ------- ----------- --------- ---------
Total costs and expenses 211,687 119,325 (800) (5,700) 324,512
Interest income (1,217) (229) (1,446)
Interest expense 918 2,939 4,300 (i) (200) 7,957
------- ------- ----------- --------- ---------
Income from
continuing operations 34,724 1,307 (3,500) - 32,531
Net income from continuing
operations per share:
Primary 0.81 0.76
Fully diluted 0.80 0.75
Average common
shares outstanding 43,009 43,009
Average diluted common
shares outstanding 43,471 43,471
</TABLE>
Note: Does not include loss on sale of Atlanta Blue Print Company, a
subsidiary of Graphic, in the amount of $5.062 million.
-28-
<PAGE> 29
Wallace Computer Services, Inc. and Subsidiaries
Pro Forma Balance Sheet
October 31, 1997
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Pro forma
Wallace Graphic Adjustments Totals
-------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Assets
Current Assets
Cash and cash equivalents 1,725 22,518 24,243
Short-term investments 1,725 3,673 5,398
Accounts receivable 185,525 95,147 (200) (e) 280,472
Less-allowance for doubtful accounts 3,880 3,433 1,400 (e) 8,713
-------- ------- ----------- ---------
Net receivables 181,645 91,714 (1,600) 271,759
Inventories 84,456 39,733 (6,400) (e) 117,789
Prepaid taxes 16,648 - 7,300 (f) 23,948
Advances and prepaid expenses 4,364 5,339 - 9,703
-------- ------- ----------- ---------
Total current assets 290,563 162,977 (700) 452,840
Property, plant and equipment, at cost 615,902 241,535 (96,800) (b) 760,637
Less-reserves for depreciation & amortization 316,485 96,028 (96,028) (b) 316,485
-------- ------- ----------- ---------
Net property, plant and equipment 299,417 145,507 (772) 444,152
Intangible assets arising from acquisitions 59,506 21,816 202,000 (g) 283,322
Cash surrender value of life insurance 40,938 152 41,090
Systems development costs 24,701 24,701
Other assets 4,655 10,663 (300) (e) 15,018
-------- ------- ----------- ---------
Total assets 719,780 341,115 200,228 1,261,123
Liabilities and Stockholders' Equity
Current Liabilities
Notes payable 13,500 16,095 29,595
Current portion long-term debt 7,100 4,936 12,036
Accounts payable 33,267 21,551 5,556 (d)(e) 60,374
Accrued salaries, wages, profit sharing
and other 62,269 19,480 20,200 (e) 101,949
Accrued income taxes 13,300 - - 13,300
-------- ------- ----------- ---------
Total current liabilities 129,436 62,062 25,756 217,254
Long-term debt 24,500 141,520 295,400 (a) 461,420
Deferred income taxes 32,351 17,005 (400) (f) 48,956
Deferred compensation and retirement
benefits 28,401 28,401
Stockholders'equity
Common stock 45,764 1,308 (1,308) (c) 45,764
Additional capital 34,860 35,252 (35,252) (c) 34,860
Retained earnings 505,463 84,978 (84,978) (c) 505,463
Unrealized loss on securities (83) (83)
Treasury stock (80,912) (1,010) 1,010 (c) (80,912)
-------- ------- ----------- ---------
Total stockholders' equity 505,092 120,528 (120,528) 505,092
-------- ------- ----------- ---------
Total liabilities and stockholders' equity 719,780 341,115 200,228 1,261,123
</TABLE>
-29-
<PAGE> 30
PRO FORMA ADJUSTMENTS
a) The pro forma adjustment to indebtedness reflects borrowings of $308.3
million related to the financing of the Graphic acquisition net of
conversion of indentured notes of $12.9 million to equity.
b) Records the fair value adjustments for Graphic's fixed assets. Wallace
is currently awaiting the results of in process appraisals to determine if
further adjustments are needed.
c) Records the elimination of Graphic's equity accounts.
d) Records the liability of $5.5 million for legal and investment banker
fees due to the acquisition.
e) Reflects the pro forma adjustment of various balances to fair market
value. Includes changes in accounting policies to comply with those of
Wallace.
f) Records the deferred tax impact of the fair value adjustments.
g) Reflects the pro forma purchase price allocation to goodwill for excess
of purchase price over net assets and direct costs of the transaction,
primarily financial advisory and legal fees; and to eliminate the goodwill
of Graphic of $21.8 million as of October 31, 1997.
h) Amortization of the estimated goodwill relating to the Graphic
acquisition of $223.8 million over a 40-year period ($223.8 million/40 =
$5.6 million). The goodwill reflected on the Graphic balance sheet was
being amortized over a 40 year period at $0.5 million per year.
Accordingly, the pro forma incremental charge to goodwill is $5.1 million.
The pro forma adjustment for the 3-month period ended October 31, 1997
represents one quarter of the annual goodwill amortization from the
acquistion of Graphic less Graphic's goodwill amortization for the quarter
ended October 31, 1997.
i) Reflects the net pro forma adjustment to interest expense. The first
adjustment is to reduce the Graphic interest expense to reflect the lower
Wallace borrowing rate. Graphic's borrowing rate under their revolving
credit agreement is LIBOR plus 112.5 basis points, while Wallace's rate is
LIBOR plus 27.5 basis points (at the date of the acquistion). Using the 6
month LIBOR rate of 5.8125%, this would amount to a reduction of interest
of $1.4 million for the year ended July 31, 1997 and a reduction of $0.4
million for the quarter ended October 31, 1997. The second adjustment is
to record the interest expense on the proceeds of the loan, in the amount
of $308.3 million, to finance the transaction. At the current borrowing
rate of 6.0875%, the incremental annual expense is $18.8 million. The
impact of a 1/8% increase in the variable rate would be an additional $0.4
million annually.
j) Reverses adjustments made in the quarter ended October 31, 1997 that are
either non-recurring or apply to a prior quarter. To the extent the
charge applies to the fiscal year ended July 31, 1997 an adjustment is
included there. These adjustments do not have a material impact on prior
quarters.
k) Adjusts depreciation expense to reflect remaining lives and fair market
value. The impact for the year ended July 31, 1997 is additional expense
of $0.3 million, and for the quarter ended October 31, 1997 is a reduction
of expense of $0.5 million.
l) Reflects the reversal of the results of operations for the Atlanta Blue
Print Company, net of the results of operations for the previously
acquired companies: The LithoPrint Company, Harvey Press, Inc., Bruce
Offset Company, Inc. The amounts presented represent the historical
amounts for certain revenues and expenses for the periods from August 1,
1996 through the respective acquisition dates for each company.
-30-
<PAGE> 31
PRO FORMA ADJUSTMENTS (continued)
The results for the asset purchases of Presstar Printing Corporation and
Graphic Technology, Inc. are immaterial for the periods presented, and as
such are not included in this adjustment.
DETERMINATION AND ALLOCATION OF PURCHASE PRICE
The acquisition was made through an all cash purchase of Graphic's shares at
$21.75 per share. The purchase price below assumes all options are exercised
and all convertible debt will be converted to stock. Effective with the
consummation of the merger, each share was converted into the right to receive
$21.75 in cash, without interest.
Determination of Purchase Price (in thousands):
<TABLE>
<S> <C>
Market value of shares (including options and converted indenture notes) $308,300
Transaction costs 5,500
--------
Pro forma purchase price $313,800
</TABLE>
The Graphic acquisition will be accounted for as a purchase. The preliminary
allocation of the proforma purchase price by Wallace is as follows (subject to
final fixed asset appraisals, as well as other possible accrual adjustments):
Pro Forma Purchase Price Allocation (in thousands)
<TABLE>
<S> <C>
Cash and short-term investments $ 26,200
Accounts receivable 90,100
Inventory 33,400
Other assets 23,200
Fixed Assets 144,700
Goodwill 223,800
Other liabilities (99,000)
Long-term debt (128,600)
--------
Pro forma purchase price $313,800
</TABLE>
-31-
<PAGE> 32
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
WALLACE COMPUTER SERVICES, INC.
-------------------------------
(Registrant)
By: /s/ Michael J. Halloran
-------------------------------
Michael J. Halloran
Vice President and
Chief Financial Officer
Dated: January 16, 1998
-32-
