<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended October 31 1997 Commission file number 0-12204
GRAPHIC INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
GEORGIA 58-1101633
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
2155 MONROE DRIVE, N.E., ATLANTA, GEORGIA 30324
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (404) 874-3327
NOT APPLICABLE
Former name, former address and former fiscal year, if changed since last report
TITLE OF EACH CLASS SHARES OUTSTANDING AS OF 10/31/97
------------------- ---------------------------------
COMMON STOCK, $.10 PAR VALUE 8,560,550
CLASS B COMMON STOCK, $.10 PAR VALUE 4,518,817
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 TWELVE MONTHS (OR SUCH SHORTER PERIODS 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
--- ---
<PAGE>
GRAPHIC INDUSTRIES, INC.
------------------------
INDEX
-----
PART I - FINANCIAL INFORMATION PAGE NUMBER
- ------------------------------ -----------
Item 1. - Financial Statements (Unaudited)
Condensed Consolidated Statements of 1
Operations - three months ended October 31,
1997 and October 31, 1996 - nine months ended
October 31, 1997 and October 31, 1996
Condensed Consolidated Balance Sheets - 2
October 31, 1997 and January 31, 1997
Condensed Consolidated Statements of 4
Cash Flows - nine months ended October
31, 1997 and October 31, 1996
Notes to Condensed Consolidated Financial 5
Statements - October 31, 1997
Item 2. - Management's Discussion and Analysis 7
of Financial Condition and Results of
Operations
PART II - OTHER INFORMATION
- ---------------------------
Item l.Legal Proceedings 12
2.Changes in Securities 12
3.Defaults upon Senior Securities 12
4.Submission of Matters to a Vote of
Security Holders 12
5.Other Information 12
6.Exhibits and Reports on Form 8-K 12
SIGNATURES 13
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
GRAPHIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<S> <C> <C> <C> <C>
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
-------------------- ----------------------
1997 1996 1997 1996
---- ---- ---- ----
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.
-1-
<PAGE>
GRAPHIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
OCTOBER 31, JANUARY 31,
1997 1997
------------- --------------
(Unaudited)
A S S E T S
- -----------
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
------------ ------------
$341,115,366 $299,476,296
============ ============
See notes to condensed consolidated financial statements.
-2-
<PAGE>
GRAPHIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<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)
------------ ------------
120,528,080 102,560,981
------------ ------------
$341,115,366 $299,476,296
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
-3-
<PAGE>
GRAPHIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
NINE MONTHS ENDED
October 31,
---------------------------
1997 1996
------------ ------------
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
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 -
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.
-4-
<PAGE>
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.
-5-
<PAGE>
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:
Quarter Ended Nine Months Ended
October 31, October 31,
-------------- -----------------
1997 1996 1997 1996
Basic earnings
(loss) per share $(.37) $ .30 $ .21 $ .30
Diluted earnings
(loss) per share $(.37) $ .29 $ .21 $ .30
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
-6-
<PAGE>
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.
ITEM 2
------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The following table sets forth items from the Condensed Consolidated Statements
of Operations as a percentage of net sales for the indicated periods.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31 OCTOBER 31
------------------ -----------------
1997 1996 1997 1996
------ ------ ------ -------
Net sales 100.0 % 100.0% 100.0% 100.0%
Cost of sales 76.3 75.1 75.5 75.2
Selling, general and
administrative expenses 20.4 17.7 18.9 18.2
Restructuring charge - - - 2.7
Loss on sale of subsidiary 4.1 - 1.5 -
Interest, other income &
(expense)-net 0.2 0.4 0.6 0.7
Interest expense 2.4 2.4 2.5 2.5
----- ----- ----- -----
Income (loss) before
income taxes (3.0) 5.2 2.2 2.1
Provision for income taxes 0.5 2.1 1.5 1.0
----- ----- ----- -----
Net income (loss) (3.5)% 3.1% 0.7% 1.1%
===== ===== ===== =====
</TABLE>
-7-
<PAGE>
RESULTS OF OPERATIONS
General.
- --------
On May 31, 1996 Mercury Printing Company, Inc. ("Mercury"), Memphis, Tennessee,
a subsidiary of the Company, acquired The Wimmer Companies, Inc., a printer and
publisher of cookbooks in Memphis, Tennessee. The acquisition was financed
through the issuance of 53,830 shares of the Company's Common Stock valued at
$583,376 and cash payments amounting to $1,042,281 to retire certain debt
obligations. In the quarter ended July 31, 1997 the Seller returned 6,181
shares of the Company's Common Stock which related to a final closing
settlement. The shares were canceled.
On November 1, 1996 the Company acquired Presstar Printing Corporation ("PPC"),
a commercial printing company in Silver Spring, Maryland, serving the Baltimore,
Maryland and Washington, DC market areas. The acquisition was financed through
the issuance of 102,059 shares of the Company's Common Stock valued at $875,136
and cash payments amounting to $5,531,078 to retire certain debt obligations.
In the quarter ended April 30, 1997 the Seller returned $301,480 of cash and
40,816 shares of the Company's Common Stock as part of a post closing
settlement. The shares were canceled.
On June 3, 1997, Imaging Technologies Services, Inc. ("ITS"), Atlanta, Georgia,
a subsidiary of the Company, acquired Birmingham Imaging Technologies, Inc. a
reprographics company serving the Birmingham, Alabama market. The acquisition
was financed through the issuance of cash payments in the amount of $871,250 and
a note payable of $153,750.
On July 1, 1997 the Company acquired The LithoPrint Company ("LC"), a commercial
printing company in Austin, Texas and LithoImage, Inc. a state-of-the-art
digital image processing company. The acquisition was financed through the
issuance of 366,029 shares of the Company's Common Stock valued at $4,000,000
and a cash payment of $500,000.
On August 1, 1997, the Company acquired 100% of the common stock of Harvey
Press, Inc., a commercial printing company in New Orleans, Louisiana. The
acquisition was financed through the issuance of 334,549 shares of the Company's
Common Stock valued at $4,300,000.
On August 29, 1997, the Company acquired 100% of the common stock of Bruce
Offset Company, Inc., a commercial printer in Chicago, Illinois. The total
acquisition price of $11,944,984 was financed with $9,200,000 of the purchase
price for the common stock being paid in cash, $1,869,984 paid in cash at
closing to satisfy debt obligations payable to a bank, and the assumption of an
existing note in the amount of $875,000 payable to one of the sellers due in
September 1998.
On September 3, 1997, The Central Press of Miami, Inc., a subsidiary of the
Company, acquired substantially all of the assets of Graphic Technology, Inc., a
printing and pre-press company doing business in Fort Lauderdale, Florida under
the name of Graphtec. The total purchase price of $3,872,615 was paid as
-8-
<PAGE>
follows: $987,110 in cash to the Graphic Technology, Inc., $554,073 cash paid to
third party lenders at closing, $777,918 in debt payable to third parties
assumed at closing and paid soon thereafter, and the assumption of a note
payable to Graphic Technology, Inc. in the amount of $1,373,875. The assumed
note accrues interest at 8%, is due and payable on April 1, 1998, and is subject
to adjustment based on the realized value of certain of the assets purchased.
NET SALES. Net sales, for the three months ended October 31, 1997, increased
- ----------
approximately $12.1 million or 10.9% as compared to the same period last year.
Of this increase, approximately 10.0% was attributable to the net sales of
acquisitions discussed above in the General section. Atlanta Blue Print which
was divested in the current quarter represented 0.5% of the increase. There was
virtually no change in sales by operations that were included in both three
month periods as compared to the total Company sales for the quarter ended
October 31, 1996. Accordingly there was no significant change in sales of
existing operations between the three month periods ended October 31, 1996 and
1997, as compared to the sales for those same operations for the quarter ended
October 31, 1996.
Net sales, for the nine months ended October 31, 1997, increased approximately
$22.6 million or 6.9% as compared to the same period last year. Of this
increase, approximately 5.5% was attributable to the net sales of the
acquisitions discussed above in the General section. The sales of the
operations connected with the restructuring in the quarter ended April 30, 1996,
of last year accounted for a reduction of 3.2%. Atlanta Blue Print which was
divested in the current quarter represented 0.2% of the increase. Rounding out
the difference was an increase of 4.4% represented by operations that were
included in both nine month periods as compared to the total Company sales for
the period ended October 31, 1996. These same operations that were included in
both nine month periods experienced a 4.9% growth in sales as compared to the
sales of those same operations in the previous nine month period ended October
31, 1996.
COST OF SALES. Cost of sales, as a percent of sales, increased 1.2% as compared
- --------------
to the quarter ended October 31, 1996. This increase primarily consisted of an
adjustment $678,826 or 0.6% to write off raw material inventory which management
anticipates disposing of, and $914,396 or 0.8% to record inventory spoilage on
certain jobs in work in process. Without these two adjustments, the cost of
sales experience would have been essentially the same for the quarter ended
October 31, 1997. Cost of sales, as a percent of sales, increased 0.3%, for the
nine months ended October 31, 1997, as compared to the same period last year.
This increase was primarily caused by the same inventory adjustments described
above. These adjustments, totaling $1,593,222, while the same in dollar amounts
had a smaller effect on a percentage basis (0.5%) because of their reduced
effect on nine months sales as compared to sales for the current quarter.
Without these adjustments, cost of sales for the nine month period ended October
31, 1997, would have had a favorable improvement of 0.2% caused by stabilization
of paper prices which has allowed our companies to more fully recover these
costs.
-9-
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
- ---------------------------------------------
administrative expenses increased by $5.5 million or 2.7%, as a percentage of
sales, for the three months ended October 31, 1997 and $6.8 million or 0.7% for
the nine months ended October 31, 1997, as compared to the same periods last
year. The increase in the three and nine months ended October 31, 1997 resulted
primarily from (i) an increase of $972,086 in the provision for dilinquent
accounts as several accounts deteriorated recently and management believes these
will be uncollectible in the near term; and (ii) a $768,000 additional increase
in the reserve for self insured portion of group insurance as a result of an
analysis of the incurred but not reported claims as of October 31, 1997.
Selling and general administrative expenses for the quarter and nine months
ended October 31, 1997 also included charges of $100,000 resulting from a
current sales tax audit, certain other assets that were deemed to have no future
value and charges related to the conversion of debentures and prepayment of the
revolving loan agreement required by the change of control provision in the loan
documents.
RESTRUCTURING CHARGE. A pre-tax $9,000,000 restructuring charge was booked in
- ---------------------
the quarter ended April 30, 1996. The after-tax effect of the charge was
$6,026,500. The charge covered the costs associated with the sale of the
Company's direct-mail subsidiary, Graphic Direct-Illinois and the closing of a
commercial printing subsidiary, The Stein Printing Company, Inc.
LOSS ON SALE OF SUBSIDIARY. In the quarter ended October 31, 1997, a charge in
- ---------------------------
the amount of $5,061,835 was recorded to provide for the loss on the sale of the
Atlanta Blue Print Company subsidiary. See Footnote E in the Notes to Condensed
Consolidated Financial Statements above for a discussion of these items.
INTEREST, OTHER INCOME AND EXPENSE-NET. Interest and other income-net, for the
- ---------------------------------------
quarter ended October 31, 1997, as a percentage of sales, are down 0.2%
resulting from a $612,500 provision to cover estimated costs associated with the
clean up of land fills in Massachusetts and South Carolina. Interest and other
income and expense-net, for the nine months ended October 31, 1997, were
comparable to the nine months ended October 31, 1996, except for the $612,500
provision referred to above.
INTEREST EXPENSE. Interest expense, as a percentage of sales, remained
- -----------------
relatively the same for the three months ended October 31, 1997 as compared to
the same period last year. For the nine months ended October 31, 1997, interest
expense, as a percentage of sales, also remained approximately the same. This
was primarily due to the fact that a small increase in rates and an increase in
borrowings were offset by increases in the sales base for both the three and
nine month periods ended October 31, 1997.
INCOME TAXES. The effective income tax rate, for the three months ended October
- -------------
31, 1997, was not comparable to prior periods because the loss on sale of
subsidiary was not tax effected. The effective tax rate, for the nine months
ended October 31, 1997 was 66% compared to 49% for the nine months ended October
31, 1996. The 66% rate for the nine months ended October 31, 1997, resulted from
-10-
<PAGE>
the loss on sale of subsidiary not being tax effected. The higher tax rate for
the nine months ended October 31, 1996 was due to the restructuring charge
recorded at April 30, 1996, and discussed in the General section above in
Results of Operations. A portion of the restructuring charge was related to the
write-off of intangible assets which are not deductible for income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES.
- --------------------------------
At October 31, 1997, the Company had approximately $100.9 million in working
capital as compared to approximately $84.3 million at October 31, 1996. Capital
expenditures for property, plant and equipment were approximately $27.1 million
during the nine months ended October 31, 1997.
As discussed in the General and Subsequent Events sections, working capital will
be provided by Wallace to fund future operating activities.
IMPACT OF INFLATION.
- --------------------
The Company has experienced increases in the costs of materials, labor,
equipment and machinery as well as other operating expenses. Its ability to
pass on such increased costs through increased prices has been affected
differently in different time periods; however, the Company has generally been
able to mitigate cost increases by increasing its production efficiencies or by
passing on increased costs to customers.
SUBSEQUENT EVENTS.
- ------------------
The change of control resulting from the closure of the tender offer from
Wallace, on October 31, 1997, triggered a technical default with the provisions
of the revolving loan agreement between the Company and its lenders. This
technical default was planned as a consequence of the transaction and the loans
outstanding under the revolving loan agreement were paid in full on November 3,
1997, with proceeds from a grid loan to the Company from Wallace. The grid loan
is payable on demand and bears interest at Prime.
-11-
<PAGE>
PART II - OTHER INFORMATION
---------------------------
ITEM ONE - LEGAL PROCEEDINGS
- ----------------------------
At October 31, 1997, there were no material pending legal proceedings to which
the Company was a party or to which any of its property was the subject.
ITEM TWO - CHANGES IN SECURITIES
- --------------------------------
None
ITEM THREE - DEFAULTS UPON SENIOR SECURITIES
- --------------------------------------------
None
ITEM FOUR - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ---------------------------------------------------------------
None
ITEM FIVE - OTHER INFORMATION
- -----------------------------
David S. Fraser, Chief Financial Officer and Treasurer of the Company resigned
on June 30, 1997. Martin C. Kendall, Director of Acquisitions of the Company
was appointed Vice President and Chief Financial Officer of the Company on
August 12, 1997. He will retain his former responsibilities as Director of
Acquisitions.
ITEM SIX - EXHIBITS AND REPORTS ON 8-K
- --------------------------------------
Exhibit 11 - Statement Regarding Computation of Earnings Per Share.
-12-
<PAGE>
SIGNATURES
----------
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 thereunto duly authorized.
GRAPHIC INDUSTRIES, INC.
----------------------------------------
DATE: December 12, 1997
------------------
/s/ Mark C. Pope III
----------------------------------------
Mark C. Pope III
Chairman and Chief Executive Officer
DATE: December 12, 1997
-----------------
/s/ Martin C. Kendall
--------------------------------------
Vice President and Chief Financial Officer
-13-
<PAGE>
EXHIBIT 11
GRAPHIC INDUSTRIES, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
-------------------- --------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income (loss) $(4,277,332) $3,492,908 $ 2,548,179 $3,470,089
Add interest on 7% convertible
subordinated debentures (1) 93,703 218,263 502,217 654,791
----------- ---------- ---------- ----------
TOTAL $(4,183,629) $3,711,171 $ 3,050,396 $4,124,880
=========== ========== =========== ==========
Shares (2)
Primary
Weighted average shares
outstanding 12,612,430 11,676,775 12,118,628 11,616,735
Fully Diluted
Add conversion of common
share equivalents 392,395 - 392,395 -
Add common shares
applicable to assumed
conversion of 7%
convertible sub-
ordinated debentures 1,164,619 1,279,200 1,186,092 1,279,200
----------- ---------- ---------- ----------
Weighted average shares
outstanding, as adjusted 14,169,444 12,955,975 13,697,115 12,895,935
=========== ========== ========== ==========
Primary earnings (loss) per share $ (.37) $ .30 $ .21 $ .30
=========== ========== ========== ==========
Fully diluted earnings (loss)
per share (3) $ (.37) $ .29 $ .21 $ .30
=========== ========== ========== ==========
</TABLE>
(1) Net of income tax effect.
(2) No significant dilutive common stock equivalents were outstanding for the
three and nine months ended October 31, 1996.
(3) Fully diluted earnings (loss) per share, as computed resulted in an increase
in earnings per share for the nine months ended October 31, 1997 and a
decrease in loss per share for the three months ended October 31, 1997 and
thus primary earnings per share amounts were used.
-14-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> OCT-31-1997
<CASH> 26,191
<SECURITIES> 0
<RECEIVABLES> 91,714
<ALLOWANCES> 0
<INVENTORY> 39,733
<CURRENT-ASSETS> 162,977
<PP&E> 241,535
<DEPRECIATION> 96,028
<TOTAL-ASSETS> 341,115
<CURRENT-LIABILITIES> 62,061
<BONDS> 12,912
0
0
<COMMON> 1,308
<OTHER-SE> 119,220
<TOTAL-LIABILITY-AND-EQUITY> 341,115
<SALES> 348,912
<TOTAL-REVENUES> 348,912
<CGS> 263,294
<TOTAL-COSTS> 263,294
<OTHER-EXPENSES> 69,282
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,715
<INCOME-PRETAX> 7,621
<INCOME-TAX> 5,073
<INCOME-CONTINUING> 2,548
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,548
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
</TABLE>
