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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): June 10, 1998
WALLACE COMPUTER SERVICES, INC.
Delaware 1-6528 36-2515832
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
2275 Cabot Drive, Lisle, Illinois 60532
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(Address of principle executive offices) (Zip Code)
(630) 588-5000
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(Registrant's telephone number, including area code)
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INFORMATION TO BE INCLUDED IN THE REPORT
Item 5 Other Events
RISK FACTORS
The following factors should be considered carefully in evaluating an
investment in debt or equity securities of the Company.
GROWTH THROUGH ACQUISITIONS
The Company's business strategy includes growth through the acquisition of
businesses complementary to the Company's business. The Company has made a
number of acquisitions in the past and believes that it has been successful,
and will be successful, in integrating the acquired assets and businesses into
the Company's operations. There can be no assurance, however, that any
acquired assets or business will be successfully integrated into the Company's
operations. While the Company evaluates acquisition opportunities on an
ongoing basis, it has no current commitments or agreements with respect to any
material acquisitions.
COST AND AVAILABILITY OF PAPER
The cost of paper represents a significant portion of the Company's cost
of materials. Increases in paper costs could have a material adverse effect on
the Company's results of operations and financial condition. The Company
attempts to maintain gross profit margins when paper prices increase by passing
paper price increases onto its customers. There can be no assurance, however,
that the Company will be able to pass on increases in the cost of paper in the
future. The Company's failure to pay on paper price increases in the future
could have a material adverse effect on the Company's gross profits.
Due to the significance of paper in the manufacture of most of the
Company's products, the Company is dependent upon the availability of paper.
During periods of tight paper supply, many paper producers allocate shipments
of paper based on the historical purchase levels of customers. As a result of
the Company's large volume paper purchases from several paper producers, the
Company generally has not experienced difficulty in obtaining adequate
quantities of paper, although occasionally the Company has experienced minor
delays in delivery. Although management believes that the Company's large
volume paper purchases and strong relationships with vendors will continue to
enable the Company to receive adequate supplies of paper in the future, there
can be no assurance in this regard.
COMPETITION
The markets for the Company's products are highly competitive and
relatively fragmented, with a large number of competitors. Some of the
Company's competitors are larger than the Company and have greater financial,
marketing and technical resources. The Company has invested significant
resources in computer technology and distribution facilities in an attempt to
differentiate itself from certain of its competitors. There can be no
assurance that competitors will not take actions, including developing new
technologies, products and services, which could adversely affect the Company's
sales and operating results.
DEPENDENCE ON KEY PERSONNEL
The Company's performance depends in large part on the continued service
of its key sales and management personnel and on its ability to continue to
attract, retain and motivate highly qualified personnel. Competition for such
personnel is intense, and the process of locating key personnel with the
combination of skills and attributes required to execute the Company's strategy
is often lengthy. There can be no assurance that the Company will be able to
attract or retain such personnel in the future, and the inability to do so
could have a material adverse effect upon the Company's business, operating
results or financial condition.
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YEAR 2000
The Company utilizes computer information systems to internally record and
track information, as well as to interact with certain customers, suppliers and
other organizations. Management has preliminarily assessed risks and costs
related to addressing Year 2000 issues as they pertain to the Company and its
information systems. Based upon this assessment, the Company does not believe
that the modification of the Company's systems to address such matters will
have a material impact on the Company's financial position or results of
operations. However, there are certain uncertainties relating to addressing
Year 2000 issues, including the impact of outside parties appropriately
addressing their Year 2000 issues. Actual implementation of measures to
address Year 2000 issues, and other factors, some of which may be beyond the
Company's control, and all of which may cause results to be different than
currently anticipated by the Company.
EFFECTIVE SUBORDINATION
The Company operates a portion of its business through subsidiaries,
including substantially all of its commercial printing operations. The $200
million of senior notes (the "Notes") that may be issued by the Company will
be effectively subordinated to all existing and future indebtedness of the
Company's subsidiaries. At April 30, 1998, the aggregate amount of
indebtedness of Wallace's subsidiaries to which the holders of the Notes would
be effectively subordinated was approximately $19.3 million. Wallace and its
subsidiaries may incur additional indebtedness in the future, subject to
certain limitations contained in the Company's Indenture and the Credit
Agreement and certain of such indebtedness may be secured.
Any right of Wallace to participate in any distribution of the assets of
its subsidiaries upon the liquidation, reorganization or insolvency of any such
subsidiary (and the consequent right of the holders of the Notes to participate
in the distribution of those assets) will be subject to the prior claims of the
respective subsidiary's creditors. As a result of the foregoing, holders of
the Notes may recover less ratably than other creditors of Wallace's
subsidiaries in the event of any liquidation, reorganization or insolvency of
Wallace.
ABSENCE OF PUBLIC MARKET
There is currently no public market for the Notes and there can be no
assurance as to the liquidity of any market that may develop for the Notes, the
ability of holders to sell the Notes, or the price at which holders would be
able to sell the Notes. Future trading prices of the Notes will depend on many
factors, including, among other things, prevailing interest rates, the
Company's operating results and the market for similar securities.
Historically, the market for securities similar to the Notes has been subject
to disruptions that have caused substantial volatility in the prices of such
securities. There can be no assurance that any market for the Notes, if such
market develops, will not be subject to similar disruptions. After the
Offering, the Underwriters intend to make a market in the Notes; however, the
Underwriters are not obligated to do so and any market making may be
discontinued at any time without notice.
Item 7 (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 nine months ended April 30, 1998 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
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unaudited pro forma condensed consolidated financial statements unless
indicated otherwise in the Notes to Unaudited Pro Forma Condensed Consolidated
Financial Data.
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 PURPOSES 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 quarters ended October 31, 1997, January 31, 1998, and
April 30, 1998, (iii) Graphic's audited financial statements for the year ended
January 31, 1997, which are included in Form 8-K/A filed January 16, 1998, and
(iv) Graphic's interim financial statements for the nine months ended October
31, 1997, which are included in Form 8-K/A filed January 16, 1998.
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Wallace Computer Services, Inc and Subsidiaries
Pro Forma Income Statement
For the year ended July 31, 1997
(Unaudited)
(in thousands)
Pro forma Operations Pro forma
Wallace Graphic Adjustments Adjust (l) Totals
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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
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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
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Income before Income Taxes 134,351 23,548 (23,600) 1,600 135,899
Provision for Income Taxes (n) 53,069 9,301 (9,322) 632 53,680
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Net Income 81,282 14,247 (14,278) 968 82,219
Net Income per share:
Basic 1.88 1.90
Fully diluted 1.86 1.88
Average common
shares outstanding 43,322 43,322
Average diluted common
shares outstanding 43,665 43,665
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Pro Forma Income Statement
For the nine months ended April 30, 1998
(Unaudited)
(in thousands)
Three Months Ended October 31, 1997 Six
--------------------------------------------------------- Months
Pro forma Operations Ended Pro forma
Wallace Graphic Adjustments Adjust (l) 4/30/98 (m) Totals
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Net Sales 246,112 123,342 (5,900) 742,005 1,105,559
Cost and Expenses
Cost of goods sold 155,206 89,325 (800) (j) (3,400) 504,575 744,906
Selling and admin expenses 43,243 23,878 (800) (j) (2,000) 122,731 187,052
Provision for depreciation
and amortization 13,238 6,122 800 (h)(k) (300) 35,664 55,524
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Total costs and expenses 211,687 119,325 (800) (5,700) 662,970 987,482
Interest income (1,217) (229) (828) (2,274)
Interest expense 918 2,939 4,300 (i) (200) 14,898 22,855
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Income before Income Taxes 34,724 1,307 (3,500) - 64,965 97,496
Provision for Income Taxes (n) 13,716 516 (1,383) - 25,986 38,835
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Net Income 21,008 791 (2,117) - 38,979 58,661
Net Income per share:
Basic 0.49 0.90 1.36
Fully diluted 0.48 0.89 1.34
Average common
shares outstanding 43,009 43,264 43,176
Average diluted common
shares outstanding 43,471 43,759 43,647
Note: Does not include loss on sale of Atlanta Blue Print Company, a
subsidiary of Graphic, in the amount of $5.062 million.
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Wallace Computer Services, Inc. and Subsidiaries
Pro Forma Balance Sheet
October 31, 1997
(Unaudited)
(in thousands)
Pro forma
Wallace Graphic Adjustments Totals
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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
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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
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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
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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
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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
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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)
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Total stockholders' equity 505,092 120,528 (120,528) 505,092
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Total liabilities and stockholders' equity 719,780 341,115 200,228 1,261,123
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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.
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. The adjustment to Accrued Salaries, Wages, Profit Sharing and
other includes $6.0 million related to the adoption of Wallace's
accounting methods for accrued vacation and bonus. The remaining amount
includes reserves for known liabilities and contingencies based on due
diligence. These known liabilities include, but are not limited to,
change in control liabilities, pending litigation, environmental
remediation, pending tax related matters, pending administrative claims,
pension withdrawal liabilities, and qualified benefit plan related
matters.
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
acquisition 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 acquisition). 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
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PRO FORMA ADJUSTMENTS (continued)
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. 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.
m) Represents the six months ended April 30, 1998 operating results including
Wallace and Graphic.
n) Wallace effective tax rate was 39.5% for fiscal year ended July 31, 1997
and quarter ended October 31, 1997, and 40.0% for the six months ended
April 30, 1998.
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):
Market value of shares (including options and converted indenture notes) $308,300
Transaction costs 5,500
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Pro forma purchase price $313,800
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
possible accrual adjustments):
Pro Forma Purchase Price Allocation (in thousands)
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)
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Pro forma purchase price $313,800
Item 7 (c) Exhibits.
The exhibit accompanying this report is listed in the accompanying
Exhibit Index.
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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.
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(Registrant)
By: /s/ Michael J. Halloran
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Michael J. Halloran
Vice President and
Chief Financial Officer
Dated: June 12, 1998
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EXHIBIT INDEX
Exhibit No. Document
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12(a) Wallace Computer Services, Inc. Ratio of Earnings to Fixed
Charges.
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