<PAGE>
[PICTURE]
Why Wallace
1996 ANNUAL REPORT
<PAGE>
WALLACE AT GLANCE -->
Financial Highlights.................................................. PAGE 2
Letter to Shareholders................................................ PAGE 3
Why Wallace........................................................... PAGE 7
11 Year Financial Summary............................................. PAGE 18
Management's Discussion and Analysis.................................. PAGE 20
Consolidated Financial Statements..................................... PAGE 26
Notes to Consolidated Financial Statements............................ PAGE 30
Corporate and Investor Information........................... INSIDE BACK COVER
<PAGE>
WHY WALLACE?
Because Wallace has unique capabilities
and services that generate a dramatic difference
in value for its customers. This value gap
over the competition is accelerating sales and
market share growth, and is yielding
increasing earnings and shareholder value.
WALLACE
(1)
<PAGE>
PRODUCT PERCENTAGE OF COMPARATIVE
SEGMENT EXAMPLES CORPORATE SALES REVENUE GROWTH
Forms - Air freight package forms $323.9 MILLION WALLACE(A)
- Monthly billing statements 15.7%
- Mortgage applications 37.6%
- Healthcare forms INDUSTRY(1)
- Credit card statements [CHART 1] -2.5%
[CHART 5]
FISCAL 1996 HIGHLIGHTS
- -- Forms sales grew 15.7% to $323.9 million despite lower paper prices in the
second half of 1996.
- -- Forms customers continued to be the primary drivers of W.I.N.-TM- and Select
Services-Registered Trademark- sign-ups, increasing 55% to 243 at year-end.
- -- Upgraded manufacturing data collection and communication systems by
implementing the Manufacturing Information Processing System (MIPS) to
speed production and reduce costs.
- -- Sold LaserMax division as market dynamics no longer met our long-term
direction and goals.
- -- Expanded distribution capacity with 100,000 square foot addition to the
Metter, Georgia business forms plant.
- -- Formed alliances to enhance products and services.
GROWTH STRATEGY
- -- Wallace can provide the greatest benefits to large, paperwork-intensive
organizations that have numerous locations. The desire of these businesses
to increase efficiency and cut costs will provide new customer
opportunities.
- -- Continue to enhance our market advantages to maintain our high competitive
close ratio and continue market share expansion.
- -- Expand the W.I.N. and Select Services systems with additional services and
capabilities. As quickly as customers have embraced these systems, there
remains a large opportunity with the rest of the Fortune 1000.
- -- Complete the roll-out of programs that increase manufacturing efficiencies
and customer service such as ASPECTS, an electronic estimating and order
entry system.
- -- Leverage the W.I.N. platform to capture market share.
PRODUCT PERCENTAGE OF COMPARATIVE
SEGMENT EXAMPLES CORPORATE SALES REVENUE GROWTH
Direct - Sweepstakes $217.2 MILLION WALLACE
Response - Credit card offers 36.0%
Printing - Retail point-of-sale materials 25.2%
- Healthcare plan directories INDUSTRY(2)
- Industrial product catalogs [CHART 2] 5.4%
- Business solicitation mailing
[CHART 6]
FISCAL 1996 HIGHLIGHTS
- -- Sales grew 36% to $217.2 million.
- -- Acquired Forms Engineering Company of LaPalma, California to make Wallace
one of the only nationwide direct mail producers.
- -- Developed and launched new products such as Daily Mail-TM- which offer
unique solutions to customers and create additional growth opportunities.
- -- Produced the largest catalog (3,600 pages) ever done with new
direct-to-plate technology.
- -- Opened a new short-run plant in Lebanon, Kentucky.
- -- Expanded nationwide print-on-demand coverage with new sites in Lodi,
California; Allentown, Pennsylvania and Metter, Georgia.
GROWTH STRATEGY
- -- Already a $31 billion market, demand for direct mail and targeted
marketing continues to grow. Colorforms supplies national coverage and the
most advanced imaging capabilities and service options to increase promotion
response rates and minimize costs.
- -- Opportunities to cross-sell this category to W.I.N. and Select Services
accounts will provide growth.
- -- An expected increase in competitive marketing among telecommunications and
cable television companies should provide additional growth opportunities.
- -- Colorforms is developing new growth markets in non-advertising areas such
as outsourced business mailings and personalized marketing materials.
- -- A W.I.N. printing module will be introduced in fiscal 1997 to fuel
commercial printing growth.
PRODUCT PERCENTAGE OF COMPARATIVE
SEGMENT EXAMPLES CORPORATE SALES REVENUE GROWTH
Office - Legal pads $201.4 MILLION WALLACE
Products - Computer paper 19.3%
- Ink jet printer cartridges 23.3%
- ATM paper rolls INDUSTRY(3)
- Brand-name office supplies/ [CHART 3] 12.4%
contract stationer service
[CHART 7]
FISCAL 1996 HIGHLIGHTS
- -- Office products sales grew 19.3% over fiscal 1995.
- -- Began developing TOPS-Registered Trademark- presence in general
merchandise retail chains and achieved exclusive positions in the largest
office products catalogs.
- -- Gained many major agreements for supplying ribbons and paper rolls for
retail point-of-sale applications.
- -- The new contract stationer business ramped up rapidly in the second half
to finish the fiscal year with 45 contracts to supply brand-name office
products to customers.
- -- Completed expansion of the Covington, Tennessee manufacturing plant.
GROWTH STRATEGY
- -- The first year's momentum is expected to continue and increase the number
of contract stationer relationships with large customers.
- -- Expand the number of special-request products we distribute for customers.
- -- Continue shifting our mix of imaging products as the market moves from
impact printing systems to laser, ink jet and thermal transfer.
- -- Expand penetration of TOPS branded products in school and mass market
retail channels.
- -- Enhance supplemental services provided to TOPS customers including
pre-labeling for retailers' warehouse systems, sales trend analysis and
order entry options.
- -- Roll out of W.I.N. Direct-TM- and W.I.N. Office to customers will generate
additional office product sales.
PRODUCT PERCENTAGE OF COMPARATIVE
SEGMENT EXAMPLES CORPORATE SALES REVENUE GROWTH
Labels - Bar-coded shipping labels $119.8 MILLION WALLACE
- Consumer product labels 14.8%
- Airline bag tags 13.9%
- Blank stock labels INDUSTRY(4)
- Label software, printers [CHART 4] 7.6%
and applicators
[CHART 8]
FISCAL 1996 HIGHLIGHTS
- -- Sales increased 14.8% over 1995, driven by Wallace's growing market share,
acquisitions and the increasing use of labels as marketing and information
devices. Moved a Midwest manufacturing plant into a larger facility in St.
Charles, Illinois and increased production capacity for packaging labels.
- -- Added new services to offer complete outsourced label production and
distribution for customers.
- -- Expanded computer-aided, variable imaging capabilities to capitalize on
growing demand for sequential numbering and bar-coding of labels.
- -- Introduced Save-A-Liner-TM- linerless labels that eliminate the backing
paper waste and save customers the related disposal costs.
GROWTH STRATEGY
- -- Expand Wallace's position as one of the only national suppliers with a
full range of label options and integrated services.
- -- Continue to leverage the demand for bar-coded labels for warehousing and
distribution applications. Also, the emerging trend to factory-mark items
with security tags offers growth opportunities.
- -- Expand our range of linerless label products and services as customer
applications grow.
- -- Increase short-cycle manufacturing to help customers reduce obsolescence
and increase inventory turns.
- -- Leverage established W.I.N. and Select Services account relationships to
increase sales.
- -- Introduce new W.I.N. label module to meet needs of large label users.
(A) WALLACE PRODUCT SALES GROWTH FISCAL 1996
(1) INTERNATIONAL BUSINESS FORMS INDUSTRY ASSOC.
(2) DIRECT MARKETING ASSOC.
(3) BUSINESS PRODUCTS INDUSTRY ASSOCIATION
(4) TAG AND LABEL MANUFACTURING INSTITUTE
- -----------------------------------------------------------------------------
<PAGE>
FINANCIAL HIGHLIGHTS
FISCAL YEARS ENDED JULY 31
(in thousands except per share amounts) 1996 1995 CHANGE
Net sales $862,287 $712,838 21%
Net income $ 72,999 $ 55,297 32%
Net income per share $ 1.60 $ 1.23 30%
Dividends per share $ 0.43 $ 0.37 16%
Working capital $206,238 $193,150 7%
Stockholders' equity $510,443 $456,118 12%
Stockholders' equity per share $ 11.20 $ 10.05 11%
Average common shares outstanding 45,582 44,980 1%
SALES
(IN THOUSANDS)
2 YEAR CHANGE 46.6%
5 YEAR CHANGE 87.9%
1992 -- $511,572
1993 -- $545,315
1994 -- $588,173
1995 -- $712,838
1996 -- $862,287
EARNINGS
PER SHARE
2 YEAR CHANGE 48.1%
5 YEAR CHANGE 97.5%
1992 -- $ .88
1993 -- $ .92
1994 -- $ 1.08
1995 -- $ 1.23
1996 -- $ 1.60
DIVIDENDS
PER SHARE
2 YEAR CHANGE 34.4%
5 YEAR CHANGE 72.0%
1992 -- $ .27
1993 -- $ .29
1994 -- $ .32
1995 -- $ .37
1996 -- $ .43
WALLACE
(2)
<PAGE>
LETTER TO SHAREHOLDERS
[PHOTO]
To our current and prospective shareholders
Just before the beginning of the fiscal year, Moore Corporation Limited
of Canada launched a hostile takeover attempt for Wallace. After withdrawing
its offer in December, Moore continued throughout the year to publicly
express interest in buying the company. That continuing distraction helped
fuel unrest among our employees, our customers and our shareholders. The
cloud of the takeover attempt was finally lifted in August when Moore
announced that it would no longer seek to acquire the Company.
Fiscal 1996 was one of the most challenging years in the Company's
history. It is natural for productivity to drop during a hostile offer as
employees focus on their personal situations. Will the Company survive? Will
plants be closed? Will benefit commitments be honored?
The Wallace Board of Directors issued a straightforward challenge: deliver
results that would support the Board's decision to keep the Company
independent.
We are proud to report that our employees met the challenge by setting
new records in every financial category.
WALLACE
(3)
<PAGE>
LETTER TO SHAREHOLDERS
WALLACE EXCEEDED CORPORATE OBJECTIVES
We are pleased to report that results for fiscal 1996 exceeded analysts'
and our own forecasts, and reflect the strongest performance in our industry.
For the year ended July 31, 1996, sales rose 21 percent to $862.3 million
compared to $712.8 million in fiscal 1995. Sales grew 47 percent over the
last two years.
Before takeover expenses, net income increased 43 percent to $79.2
million, or $1.74 per share, compared to $55.3 million or $1.23 per share in
fiscal 1995. On the same basis, earnings per share grew 61 percent over the
last two years. Without the distraction of the hostile takeover attempt last
year, we believe results could have been even better. Sales per employee
reached $218,400, higher than any of our competitors. Even after takeover
expenses, Return on Average Assets was 11.3 percent and Return on Average
Equity was 15.1 percent, our best results in six years. Despite the turmoil
and uncertainty of the last year, we were able to retain all our key
employees.
SALES PER EMPLOYEE
2 YEAR CHANGE 27.7%
5 YEAR CHANGE 41.6%
1992 -- $ 160,400
1993 -- $ 161,900
1994 -- $ 171,000
1995 -- $ 195,400
1996 -- $ 218,400
REINVESTMENT GENERATES GROWTH AND VALUE
Fiscal 1996's record results were not a one-time occurrence. Since going
public in 1961, Wallace has reported record sales every year. During this
same thirty-five year period, we have increased net income thirty-four times.
The Company has reported these consistent results because of its
commitment to delivering superior customer value. This commitment was
demonstrated again in fiscal 1996 with capital expenditures of $59.5 million
and capitalized software development costs of $10.4 million. This willingness
to reinvest in the business has made Wallace the acknowledged leader in our
industry.
The core strengths that generate customer value include our computer
systems, distribution capabilities, and broad product line. New internal
information systems and customer communication methods are being developed
that will simplify customer ordering, lower costs and speed-up production.
For example, in fiscal 1997, we will complete the roll-out of ASPECTS, a
company-wide pricing and order entry system, to allow our salespeople to
spend more time working with their customers. Information systems investments
will also result in enhanced imaging and mailing capabilities for labels,
forms and direct response printing, as well as new modules for the W.I.N. and
Select Services programs.
WALLACE
(4)
<PAGE>
On the distribution side, we expanded our warehouses in Metter, Georgia
and Covington, Tennessee, adding 171,000 square feet. We have also just
leased a 114,000 square foot facility in Los Angeles to better serve the West
Coast. Each of these locations uses our proprietary distribution software to
cost-effectively meet our customers' needs.
We also added new products and services during the year such as Daily Mail,
linerless labels, enhanced security features for forms and labels, expanded
contract stationery offerings, and short-run and print-on-demand services. In
addition to research and development in fiscal 1997, we are actively looking at
acquisitions to broaden our product lines.
RATE OF REINVESTMENT
WALLACE
6.5%
INDUSTRY
3.7%
FIVE YEAR AVERAGE CAPITAL
EXPENDITURES AS A PERCENT OF SALES
STRATEGIC PROGRAMS FOR FUTURE GROWTH
Your Board of Directors is unanimous in its commitment to reinvest in
plant, equipment, systems and people. This commitment to grow the company is
one of the reasons why our employees are so loyal.
In addition to the W.I.N. and Select Services programs which are fueling
growth across all product lines, many other strategic growth initiatives
promise continued growth in earnings and shareholder value in fiscal 1997 and
beyond. Highlights include:
- - Wallace's contract stationery business, selling brand name office supplies,
began to accelerate following its launch just before the beginning of the
fiscal year. Large corporate customers are finding Wallace a convenient
source for 23,000 office and computer supplies delivered directly to their
employees nationwide.
- - In addition to growth in the core direct mail business, new markets are
being developed for the company's variable imaging expertise. Examples of
these include store-specific retail signage and informational mailing
services.
- - Healthcare continues to be a significant opportunity upon which we are
capitalizing; sales to healthcare accounts increased 27 percent in fiscal
1996. Wallace's exclusive Consultative Assessment Program-TM- provides
compelling cost saving benefits for HMOs, PPOs and other healthcare
organizations.
- - Market demand is growing for labels in bar-coding, security and packaging
applications. We also introduced the first of our new linerless label
products which eliminate the label backing paper waste. Sales of these
products should accelerate rapidly and attract new customers.
- - We are seeing increasing opportunities for leveraging our computer
expertise, combining paper and electronic technologies in our customers'
systems and processes by integrating electronic forms, electronic commerce,
imaging systems and print-on-demand.
WALLACE
(5)
<PAGE>
LETTER TO SHAREHOLDERS
A CHANGED, BUT SOLID BOARD
The three Board members who were nominated by Moore last year were formally
elected to the Board in January. Since then, Curt Hessler, Al Isenman and Bob
Rittereiser have been contributing members of the Board, which has acted with
unanimity in responding to Moore and its acquisition attempt.
We would also like to recognize the accomplishments of two Directors who
have served the stockholders well for many years. Fred Canning retired in
June after reaching mandatory retirement age. Fred served on the Board for
twelve years. Bill Olsen will also retire this year after serving seventeen
years. We thank both of these gentlemen for their support and counsel.
In July, the Board appointed Jack Pope to complete Fred Canning's term.
Jack is the Chairman of MK Rail Corporation. We know that Jack will be a
valuable addition to the Board.
WHY WALLACE?
Because we have the computer systems, the distribution capabilities, the
broad product line and, most importantly, the people to deliver superior
customer value.
We are starting fiscal 1997 with tremendous momentum. We anticipate
continued market share expansion, growth in all product lines, and increasing
earnings and shareholder value. Sharing this optimism, your Board of
Directors has authorized a share repurchase program for $100 million of the
company's stock. Through August 31, we have reached 40 percent of this goal.
In September, the Board also increased the annual dividend 30 percent to 56
cents per share.
The support of our customers, stockholders and suppliers has been
exceptional and is very much appreciated. Thank you.
[SIG]
TED DIMITRIOU
Chairman of the Board
[SIG]
BOB CRONIN
President and CEO
WALLACE
(6)
<PAGE>
WHY WALLACE?
Customers choose Wallace because we
deliver superior value through
control, service, innovation and simplification.
WALLACE
(7)
<PAGE>
[PHOTO]
CONTROL
WITH WALLACE, CUSTOMERS GAIN NEW TOOLS AND INFORMATION TO INCREASE
THEIR CONTROL OVER THE SUPPLIES PURCHASING PROCESS.
With corporate streamlining and restructuring cutbacks that are so common
today, managers everywhere are being challenged to reduce costs - both in
purchased materials and in internal company overhead. The key to gaining
control over any expense item is INFORMATION that can tell managers about
current costs and the effects that alternative strategies could have. But
few companies have that essential data about their consumable supplies.
Wallace can provide that decision-making information better than anyone
else in the industry because it has the most advanced and fully-integrated
information system that links every factory, warehouse and service center to
the customer's desk. The Wallace Information Network and Select Services
systems give customers all the critical data and analysis tools for finding
new ways to manage supplies that generate those coveted cost savings. These
systems help managers gain control over all their consumable information
management supplies including forms, office products, stock paper, labels and
printed materials. The more remote sites an organization has and the more
paperwork-intensive its business, the greater the increase in control and
cost savings Wallace can deliver.
Since the introduction of these services in 1993, more than 243 companies
have adopted W.I.N. and Select Services, saving millions of dollars and putting
managers in control of their supplies.
WALLACE
(8)
<PAGE>
[PHOTO]
SERVICE
CUSTOMERS GET MORE ATTENTION FROM WALLACE AS WELL AS THE BROADEST RANGE
OF SERVICES AND CUSTOMER RELATIONS OPTIONS.
Only a few years ago, when a customer bought forms, they were produced
and shipped in bulk to the buyer's warehouses for storage and internal
distribution. Recognizing that customers would increasingly want to outsource
this process, Wallace built a state-of-the-art distribution system. For an
increasing percentage of customers, Wallace produces and stores the
customer's forms and other supplies for on-demand distribution to
widely-scattered locations and users. This is one of many added-value
services that Wallace provides which can dramatically cut our customers'
costs. Other services include inventory management, custom-printed catalogs
of approved supplies, work process evaluation, forms layout and design,
labeling systems integration, and mailing list enhancement.
Wallace's superior computer system's infrastructure also lets customers
select from the industry's broadest range of customer service options for:
placing orders; setting location/user order limits; billing formats and
frequencies; reporting detail and electronic commerce.
We strive to tailor every customer relationship into a partnership
focused on the customer's objectives and challenges. It begins with account
representatives who work more like consultants, first learning about the
customers' processes and needs before developing solutions. Then, everyone
throughout Wallace is focused on delivering those solutions and helping the
customer save money in both materials and processes. Wallace's unique
customer-focused culture is the top in the industry and can be readily seen
in Wallace's sales per employee statistic that is double the industry average.
WALLACE
(9)
<PAGE>
[PHOTO]
INNOVATION
WALLACE DEVELOPS NEW PRODUCTS AND SERVICES THAT GIVE CUSTOMERS MORE
EFFECTIVE AND LESS COSTLY
WAYS TO COLLECT, PROCESS, STORE AND MANAGE INFORMATION.
Because we reinvest at almost twice the industry average, Wallace is a
leading innovator of new products. Wallace's Daily Mail program introduced
this year, for example, gives telecommunications service providers a faster,
lower cost way of complying with government-mandated mailings to their
customers. Other recent product innovations include linerless labels that
eliminate label backing paper waste, electronic forms that speed up business
processes, new mailer designs that increase direct mail response rates and
specialized document security features that reduce fraud.
Service innovations also increase value for customers. Many enhancements
have been made to W.I.N., including the recent introduction of W.I.N. Direct
and W.I.N. Office, which streamline customer order processing and result in
faster delivery, higher end-user satisfaction and additional cost savings. At
the same time, we have developed new customer communication systems to
enhance the relationship and speed the flow of information. Wallace provides
many electronic commerce services including Electronic Data Interchange (EDI).
Internal systems are a third area where Wallace innovations benefit
customers. Not satisfied to have the industry's best information system
today, we are aggressively expanding and enhancing it. New software systems
that build on the strength of the Wallace Customer Servicing System are being
continually developed. These give Wallace employees additional
decision-making information, allowing us to continue driving down product
costs and to speed-up manufacturing, distribution and administrative
processes.
WALLACE
(10)
<PAGE>
[PHOTO]
SIMPLIFICATION
WALLACE SIMPLIFIES THE JOB OF PURCHASING AND MANAGING INFORMATION
MANAGEMENT SUPPLIES.
The trend to outsource corporate services is taking root in the purchasing
area and is one of the fundamental ways Wallace can simplify a company's
supplies purchasing process. More and more, customers are choosing Wallace as
their outsourcing partner - leveraging our expertise and unique strengths,
simplifying their jobs, and freeing up time for other tasks. Central to this
outsourcing partnership is a Wallace team of dedicated representatives, plus
for W.I.N. and Select Services customers, a dedicated administrator.
Together, these people do the day-to-day work of managing forms and supplies
while the customer retains control over decisions.
Single sourcing, reducing the number of vendors from which a company
buys, is another growing trend where Wallace is a large organization's best
partner. We offer the broadest range of information management products and
supplies including paper and electronic forms, pressure-sensitive data
processing and packaging labels, brand-name office supplies, stock paper,
envelopes, printer ribbons and cartridges, register and machine paper rolls,
direct mail and promotional marketing materials, and long-run and on-demand
printing. Customers can order all these products, and find cost-saving
opportunities too, all from a single Wallace source.
WALLACE
(11)
<PAGE>
HOW DOES WALLACE VALUE TRANSLATE TO DOLLARS AND CENTS?
THE FOLLOWING PAGES OUTLINE ONE CUSTOMER'S
START-UP EXPERIENCE WITH WALLACE AND THE W.I.N. SYSTEM.
<PAGE>
[PICTURE]
CASE STUDY: ONE CUSTOMER'S START-UP EXPERIENCE WITH W.I.N.
In 1994, Wallace was awarded a major contract to supply business forms to a
large corporation that has several thousand locations nationwide. The
decision was based on our services and the ability to generate cost savings.
Fundamental to this process is the Wallace Information Network (W.I.N.), a
software tool that links customers to Wallace's corporate information system
and centrally organizes all data about forms and other supplies. Utilizing
W.I.N.'s database and analysis tools, we help customers generate purchasing
cost savings, reduce their internal costs and simplify the job of buying and
managing supplies. This actual case highlights the process and results that
were achieved for this customer in the first year and a half.
AUGUST 3
Wallace awarded forms contract, began transition from previous vendor.
Clarified details of implementation plans, began weekly meetings of Wallace's
manufacturing, distribution, information systems, accounting, inventory
management, sales and contract services groups with the customer to
facilitate transition.
AUGUST 15
Implementation team began entering form specification data for 1,700 forms
into the W.I.N. system, and inventory management entered form item/name data
into Wallace's customer service/order entry system (WCSS).
SEPTEMBER 1
Reviewed previous vendor data on 1,700 forms for obsolete and
inactive items, began building and reviewing usage trends, order points and
quantities in W.I.N. Eliminated 500 items with estimated cost savings of $1
million.
<PAGE>
[PICTURE]
OCTOBER 15
Began accepting previous vendor's inventory into Wallace distribution system.
Received 42 truckloads of forms and began distributing to customer
facilities. Also began producing Wallace items for customer.
MARCH 1
Completed transition and began full-time forms management process with
department-by-department review, targeting two per quarter. Prior to meeting
with department heads, W.I.N. administrator analyzed forms origination and
usage and provided reports and detailed information to facilitate decision
making. In first department reviewed (Credit) cut 60 forms originated by the
department to 40 by combining forms and cutting obsolete items.
MARCH 20
Conducted first quarterly review of W.I.N. program results with customer,
analyzing the quarter's accomplishments, savings generated and future
objectives. Based on department analyses, discontinued 85 form items for
$377,000 savings. Price differentials versus previous vendor generated
$120,000 in additional cost savings on active forms.
APRIL 20
Customer initiated new ordering policy which cut next day shipments to user
locations from 375 per month to 12.
MAY 15
Company initiated a test of electronic forms. Wallace's W.I.N. administrator
analyzed W.I.N. data and recommended the best form candidates for conversion.
JUNE 30
Completed two further departmental analyses, Human Resources and one
operating group. Second quarterly review with customer highlighted 60 more
forms discontinued for savings of $144,000, plus $451,000 cost savings on
active forms.
<PAGE>
[PICTURE]
AUGUST 10
Wallace account team visited the customer's 15 largest outside locations to
generate managers' support for the forms management program and corporate
ordering procedures.
SEPTEMBER 30
Third quarter review highlighted 40 forms discontinued for savings of $96,000
in one large department, as well as $301,000 in cost savings versus the
previous vendor.
DECEMBER 31
Fourth quarter review with customer noted 23 form items discontinued and
savings of $194,000 from the corporate Operations department and a second
operating division, with additional cost savings of $203,000.
JANUARY 2
Implemented strict EDI ordering from all customer locations which eliminated
100 phone and 100 fax orders each day for faster, accurate ordering. Wallace
processes a total of 500 to 600 orders per day for the customer.
A year and a half after receiving the contract, Wallace had documented $2.9
million in out-of-pocket cost savings to the company. The customer also
realized additional internal savings from higher efficiency and fewer
problems. Today, the forms management process continues and further savings
are anticipated as remaining departments are reviewed. Because of the
savings generated on forms, the relationship has expanded and Wallace now
also provides the customer with printer ribbons and rolls, labels and
commercial printing--all managed under W.I.N.
<PAGE>
WHY WALLACE?
BECAUSE WALLACE GENERATES TANGIBLE
BOTTOM-LINE REUSLTS FOR
CUSTOMERS AND SHAREHOLDERS.
WALLACE
(15)
<PAGE>
11 Year Financial Summary......................................... PAGE 18
Management's Discussion and Analysis............................. PAGE 20
Consolidated Financial Statements................................ PAGE 26
Notes to Consolidated Financial Statements..................... PAGE 30
Corporate and Investor Information........... INSIDE BACK COVER
<PAGE>
11 YEAR SUMMARY OF SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1996 1995 1994 1993
===================================================================================================
<S> <C> <C> <C> <C>
OPERATIONS
===================================================================================================
Net sales $ 862,287 $ 712,838 $ 588,173 $ 545,315
- ---------------------------------------------------------------------------------------------------
Net income 72,999 55,297 47,931 41,170
- ---------------------------------------------------------------------------------------------------
Net income per share 1.60 1.23 1.08 .92
- ---------------------------------------------------------------------------------------------------
Dividends per share .43 .37 .32 .29
- ---------------------------------------------------------------------------------------------------
FINANCIAL CONDITION
===================================================================================================
Total assets $ 695,850 $ 592,702 $ 538,592 $480,722
- ---------------------------------------------------------------------------------------------------
Long-term debt 30,600 25,600 23,500 25,210
- ---------------------------------------------------------------------------------------------------
Capital expenditures 59,506 51,487 34,228 31,818
- ---------------------------------------------------------------------------------------------------
Working capital 206,238 193,150 183,432 157,937
- ---------------------------------------------------------------------------------------------------
SIGNIFICANT RATIOS
===================================================================================================
Net income:
- ---------------------------------------------------------------------------------------------------
Return on net sales 8.5% 7.8% 8.1% 7.5%
- ---------------------------------------------------------------------------------------------------
Return on average assets 11.3% 9.8% 9.4% 8.7%
- ---------------------------------------------------------------------------------------------------
Return on average equity 15.1% 12.8% 12.3% 11.4%
- ---------------------------------------------------------------------------------------------------
Current ratio 3.1 3.9 3.8 3.9
- ---------------------------------------------------------------------------------------------------
Long-term debt/debt plus equity 5.7% 5.3% 5.4% 6.4%
- ---------------------------------------------------------------------------------------------------
Book value per share $ 11.20 $ 10.05 $ 9.16 $ 8.34
- ---------------------------------------------------------------------------------------------------
Sales per employee* $ 218.4 $ 195.4 $ 171.0 $ 161.9
- ---------------------------------------------------------------------------------------------------
Net property, plant and equipment per employee* $ 73.2 $ 70.3 $ 67.7 $ 67.7
- ---------------------------------------------------------------------------------------------------
OTHER
===================================================================================================
Number of employees 4,131 3,765 3,530 3,350
- ---------------------------------------------------------------------------------------------------
Number of stockholders of record 3,863 4,383 4,531 4,260
===================================================================================================
</TABLE>
*Based on average number of employees during the fiscal year
NOTES TO 11 YEAR SUMMARY
A. ACQUISITIONS: On February 1, 1996, the company sold the LaserMax division
to Stralfors A.B. of Ljungby, Sweden in a cash transaction that approximated
book value. On February 8, 1996, the company acquired Forms Engineering
Company. The acquisition price included $27.8 million of cash, a note payable
of $5.0 million, and the assumption of net debt totalling $2.0 million. On
April 19, 1995, the company acquired Retterbush and Sauer Label Corporation.
The acquisition price included $10.1 million of cash and a note payable of
$2.0 million. On November 29, 1994, the company acquired Lampro Graphics,
Inc. The acquisition price included $4.6 million of cash, a note payable of
$.3 million, and the assumption of debt totalling $1.9 million.
WALLACE
(18)
<PAGE>
<TABLE>
<CAPTION>
1992 1991 1990 1989 1988 1987 1986
======================================================================================================
======================================================================================================
<S> <C> <C> <C> <C> <C> <C>
$ 511,572 $ 458,840 $ 448,700 $ 429,008 $ 383,045 $ 340,504 $ 305,044
- ------------------------------------------------------------------------------------------------------
39,455 35,009 39,555 36,867 31,610 26,027 24,350
- ------------------------------------------------------------------------------------------------------
.88 .81 .93 .88 .76 .64 .60
- ------------------------------------------------------------------------------------------------------
.27 .25 .23 .20 .17 .15 .13
- ------------------------------------------------------------------------------------------------------
======================================================================================================
$ 467,142 $ 399,093 $ 375,203 $ 331,830 $ 291,764 $ 260,004 $ 225,349
- ------------------------------------------------------------------------------------------------------
25,959 19,790 20,155 20,465 20,830 21,180 14,520
- ------------------------------------------------------------------------------------------------------
33,517 40,540 49,835 30,677 24,948 30,039 27,531
- ------------------------------------------------------------------------------------------------------
152,246 141,390 137,598 138,218 117,139 100,128 90,959
======================================================================================================
- ------------------------------------------------------------------------------------------------------
7.7% 7.6% 8.8% 8.6% 8.3% 7.6% 8.0%
- ------------------------------------------------------------------------------------------------------
9.1% 9.0% 11.2% 11.8% 11.5% 10.7% 11.6%
- ------------------------------------------------------------------------------------------------------
11.9% 11.9% 15.1% 16.2% 16.1% 15.3% 16.6%
- ------------------------------------------------------------------------------------------------------
3.9 4.3 3.8 4.4 4.2 3.9 3.7
- ------------------------------------------------------------------------------------------------------
6.8% 6.0% 6.7% 7.7% 9.0% 10.4% 8.4%
- ------------------------------------------------------------------------------------------------------
$ 7.86 $ 7.11 $ 6.52 $ 5.77 $ 5.05 $ 4.41 $ 3.88
- ------------------------------------------------------------------------------------------------------
$ 160.4 $ 154.2 $ 154.4 $ 154.4 $ 145.8 $ 136.3 $ 127.7
- ------------------------------------------------------------------------------------------------------
$ 70.7 $ 64.7 $ 59.3 $ 50.3 $ 48.4 $ 46.3 $ 40.4
- ------------------------------------------------------------------------------------------------------
======================================================================================================
3,386 2,993 2,957 2,857 2,700 2,554 2,442
- ------------------------------------------------------------------------------------------------------
4,435 4,347 4,396 4,350 4,038 4,104 4,223
======================================================================================================
</TABLE>
Effective August 1, 1991, the company acquired MGI Industries, Inc. and
subsidiaries and substantially all of the assets of Evergreen Realty
(collectively "Colorforms"). The acquisition price included 608,034 shares of
common stock, $13 million of cash and the assumption of debt totalling $17.5
million. On December 15, 1988, the company acquired Apollo Labeling Systems
for $900,000. Apollo is a manufacturer of prime pressure sensitive labels.
All acquisitions were accounted for as purchases, and, accordingly,
their results of operations are included in the consolidated financial
statements from their respective dates of acquisition.
B. STOCK SPLITS: All share and per share amounts have been adjusted for the
2 for 1 stock splits effective August, 1989 and July, 1996.
WALLACE
(19)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL 1996 VERSUS FISCAL 1995
Effective July 29, 1996, the Company's common stock was split
two-for-one. All per share amounts in this report are presented on an
after-split basis.
Net sales for fiscal 1996 increased by 21.0% to $862.3 million. A
breakdown by the four major product groups is as follows:
% to Total % Revenue
PRODUCT GROUP Revenue Increase
Forms 38 16
Direct Response Printing 25 36
Office Products 23 19
Labels 14 15
Over the last five years, sales have grown at an annual compounded rate
of 13.4%, in line with the Company's stated goal of a 13% annual sales
increase.
Fiscal 1996 was a year of extremes. Through the first half of the year,
paper costs remained stable at the historically high levels reached in July,
1995. In January, 1996, paper prices began to decline, falling as much as 40%
by the end of March, 1996. The last time that paper costs had dropped this
much was during the three year period from 1991 to 1993. We experienced the
same percentage decrease in Fiscal 1996 in the space of three months. Paper
prices have remained fairly stable since April 1.
Approximately 75% of our sales come from paper based products which were
affected by this major price change in uncoated free sheet and similar grades
of paper. Label materials have not experienced the same change in price over
the last two years.
For those parts of our business under contract, there is usually a 60 to
90 day lag between the time of a paper price decrease and its effect on our
reported sales. This lag can produce some margin expansion. Conversely, when
paper prices first increase, the 60 to 90 day lag can put pressure on
operating margins. Approximately 40% of our total business is done under
contract.
The nature of the products we sell makes it difficult to precisely
measure the impact of inflation on our sales growth. Nevertheless, we
estimate that unit growth was 12% for the year.
During fiscal 1996, the Company continued to add new W.I.N. and Select
Services customers. The number of customers for these programs totaled 243 at
fiscal year-end, an increase of 55%. Most of these customers sign five year
agreements for their forms, office products, labels and other information
management requirements. These customers represented 40% of consolidated
sales for the year.
The Forms product group is a beneficiary of the increasing number of
W.I.N. and Select Services customers. Most agreements start with forms and
then expand to cover the other product groups. It usually takes six months to
one year to reach the full projected volume for a new account. In many cases,
we take in inventory from the previous vendor at the time of conversion. This
inventory must be depleted before we start to ship product that we have
manufactured. Several large pieces of new business signed in the second half
of fiscal 1996 will start shipping Wallace-produced forms in the second
quarter of the next fiscal year.
Stock computer paper represented 10% of total Forms sales during fiscal
1996. In the period August, 1995 to January, 1996, higher paper costs
resulted in a stock computer sales increase of 39% over the same period of
fiscal 1995. Stock computer sales for the second half of the year were down
8% from the second half of fiscal 1995, reflecting the full impact of the
paper price decrease.
The Office Products group had a good year. The strategic office products
alliance announced last fiscal year did not begin in earnest until Moore
Corporation s bid for the Company was withdrawn in December, 1995. Based on
new orders booked and customer interest, we expect the contract stationer's
business to show significant growth in future years.
The Office Products group includes commodity items that we manufacture
such as legal pads, standardized business forms,
REVENUE
CONTRIBUTION
[CHART]
FORMS 38%
DIRECT RESPONSE PRINTING 25%
OFFICE PRODUCTS 23%
LABELS 14%
WALLACE
(20)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ribbons and add rolls. Manufactured items represent 81% of total office
products sales. The balance of 19% represents items that are purchased from
other vendors for resale.
During the fiscal year, paper based commodity products experienced the
same variations discussed above for stock computer paper. Sales in this
product category were up 48% during the first half of the year, and were then
down 2% during the second half.
Direct response printing is sold through our Colorforms and Wallace Press
divisions. The promotional printing products sold by Colorforms include high
quality printing and personalization services. The commercial printing
products sold by Wallace Press include both long-run catalogs and quick
turnaround documents such as medical provider directories. In February, 1996,
we acquired Forms Engineering Company (FEC) which gave us a nationwide
capability in the promotional printing field. Sales for FEC were $18.7
million. We will add state-of-the-art personalization services to the FEC
product line in fiscal 1997. New services introduced last year such as daily
mail for regulated industries and weekly signage programs for major retail
customers continued to show significant growth. For fiscal 1997, we expect
our largest sales increase to come from this group.
The Label products group manufactures and sells both data processing
labels and packaging labels. Packaging labels and their associated labeling
equipment sales amounted to 30% of this group's total. The expansion of
bar-coded labels plus government mandated labeling requirements will fuel
continued growth in this product category. The linerless label is expected to
be a major product in the coming years. By eliminating the backer ply, the
waste associated with traditional labels is significantly reduced. Besides
benefiting the environment, the linerless label will also reduce our
customer's costs. The Company is currently funding a joint venture to make a
high-speed linerless label applicator.
Net income for the year increased by $17.7 million, a 32.0% increase. The
after-tax ratio to sales was 8.5% in fiscal 1996 versus 7.8% last year. The
current year's results include $10.1 million of one-time expenses in
connection with the hostile tender offer. All expenses associated with the
Moore Corporation offer have been recorded in fiscal 1996. On a per share
basis, the $1.60 reported this year would have been $1.74 exclusive of the
takeover costs. Over the last five years, net income has grown at an average
compound growth rate of 15.8%. The Company's stated target for annual net
income increases is 15.0%. The FEC acquisition was additive to earnings in
the second half of the fiscal year.
Cost of goods sold for fiscal 1996 includes a LIFO credit of $6.6 million
due to the decrease in raw material costs. This credit added 9 cents per
share to fiscal 1996 results. During the previous fiscal year, when raw
material costs had dramatically increased in cost, we recorded a LIFO charge
of $13.8 million, equivalent to 20 cents per share. Before the effects of
LIFO accounting, cost of goods sold as a percentage of sales was 63.2% in
fiscal 1996 and 62.1% for fiscal 1995.
Selling and administrative expenses increased 13.6% for the year. As a
percent to sales, they were 17.6% in fiscal 1996 and 18.8% in fiscal 1995.
The favorable 1996 results are a combination of higher selling prices due to
raw material cost increases, and a reduction in the number of sales
representatives. Due to the uncertainty of the hostile tender offer, it was
difficult to hire fall college graduates, which kept selling expenses below
the prior year's level. This shortage from the fall was made up in the spring
with 150 new college graduates starting at the end of fiscal 1996. Salaries
and training costs for these new hires will impact fiscal 1997 results.
Depreciation and amortization expense increased 20.7% to
NET INCOME
(IN THOUSANDS)
2 YEAR CHANGE 52.3%
5 YEAR CHANGE 108.5%
[CHART]
1992 -- $39,455
1993 -- $41,170
1994 -- $47,931
1995 -- $55,297
1996 -- $72,999
WALLACE
(21)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
$45.0 million. Included in this figure is $.7 million for FEC, and $4.2
million for the amortization of internally developed software programs. Major
software initiatives added $10.4 million of capitalized development costs in
fiscal 1996. These costs are being amortized over periods ranging from five
to seven years. On an on-going basis, we expect to capitalize $4 million of
software development costs each year.
Investment income decreased between years by $772,000 due to lower
investable cash balances from the FEC acquisition, and generally lower
interest rates. Interest income from tax-exempt investments was $1.5 million
in 1996 and $2.5 million in 1995. Interest expense of $1.3 million was
$100,000 higher than in 1995. Capitalized interest for the year decreased
from $1.5 to $1.4 million.
The continuing development of electronic forms software generated a net
loss of $4.2 million pre-tax for the year. During fiscal 1995, the net
expense had been $3.8 million.
The effective income tax rate for fiscal 1996 was 38.4% versus 36.8% in
1995. We expect the effective rate for fiscal 1997 to be 39.5% due to lower
tax-exempt investment income.
The Company has continued to invest in its information services
capabilities and its distributions system. We believe that our core strengths
also include our 700 person salesforce and our broad product line. New
modules are being developed for the W.I.N. and Select Services programs which
will further distinguish these services. New modules will be introduced in
fiscal 1997 for packaging labels and commercial printing. Enhanced ordering
capabilities for customers will be added through W.I.N. Direct and W.I.N.
Office.
Continued investment in new equipment, advanced manufacturing processes,
and production and scheduling software development will allow us to further
improve our manufacturing efficiencies.
Year over year comparisons for fiscal 1997 will be more difficult due to
the great results for fiscal 1996. This will especially be true for the first
two quarters of 1997. However, the company's management is confident that we
can continue to deliver increased value to our stockholders for fiscal 1997
and beyond.
BOOK VALUE
PER SHARE
2 YEAR CHANGE 22.3%
5 YEAR CHANGE 57.5%
[CHART]
1992 -- $ 7.86
1993 -- $ 8.34
1994 -- $ 9.16
1995 -- $10.05
1996 -- $11.20
FISCAL 1995 VERSUS FISCAL 1994
Net sales for fiscal 1995 increased by 21.2% to $712.8 million. A
breakdown by the major product groups is as follows: business forms products,
which represented 39% of total sales, increased 16%; office products, which
represented 24% of total sales, increased 31%; direct response printing
products, which represented 22% of total sales, increased 15%; label
products, which represented 15% of total sales, increased 18% (not including
two acquisitions which added $7.4 million in sales).
We experienced seven paper price increases for the fiscal year which
raised the cost of paper by more than 100%. The increased costs put pressure
on our operating margins. It was not until the third and fourth quarters of
the year that we were able to recover most of the paper cost increases.
Higher selling prices coupled with increased unit growth produced sales
increases in the third and fourth quarters of 27.3% and 33.0%, respectively.
Unit growth accounted for two thirds of the year's sales increase. In the
third and fourth quarters, unit growth was estimated to represent one half of
the sales increase.
During Fiscal 1995, the company continued to add new customers to the
Wallace Information Network (W.I.N.) and the Select Services programs. At
July 31, 1995, 157 customers had either a W.I.N. or a Select Services
installation. These customers represented 35% of consolidated sales for the
year.
WALLACE
(22)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net income before accounting changes increased by $8.0 million to $55.3
million, a 17.0% increase. The after-tax ratio to sales was 7.8%. Fiscal
1994's results had included $.7 million of income from the adoption of two
accounting changes. Net income after accounting changes for Fiscal 1995
increased by 15.4%. Earnings per share for the year were $1.23 versus $1.06
the prior year before accounting changes and $1.08 after accounting changes.
The average number of shares outstanding increased by 1.3% during Fiscal 1995.
Operating income for the year increased by 18.7%. Margins during the year
were negatively impacted by rising raw material costs. During Fiscal 1995,
the LIFO charge was $13.8 million, or 19.5 cents per share versus $.7
million, or 1 cent per share in Fiscal 1994. $7.1 million of the current year
charge was recorded in the fourth quarter. Before the effects of LIFO
accounting, cost of goods sold as a percentage to sales was 62.1% for Fiscal
1995 and 61.7% for Fiscal 1994.
Selling and administrative expenses increased by 11.4% for the year. As a
percent to sales, they were 18.8% in Fiscal 1995 and 20.4% in Fiscal 1994.
During Fiscal 1995, the Company experienced lower than anticipated
payments under its retiree medical program. This positive experience coupled
with a modification of certain assumptions allowed us to reduce the retiree
medical liability at July 31, 1995 by $1.3 million. Offsetting this gain was
a substantial increase in the value of phantom stock equivalents during the
year. In November, 1994 the twelve executive officers elected to convert 100%
of their deferred cash bonus accounts to stock equivalents. The stock
equivalents are included when measuring the executives performance against
stock ownership guidelines established in Fiscal 1995 by the Board of
Directors. The Company's stock price at the time of conversion was $13.50. As
the value of Wallace's stock has increased, an additional charge to
compensation expense is recorded. During Fiscal 1995, the total charge for
stock equivalents was $1.7 million; $.8 million of this amount occurred on
the last day of the Company's fiscal year when the unsolicited offer by the
Moore Corporation was announced.
Depreciation and amortization expense increased 13.0% to $37.3 million.
Included in this figure is $2.7 million for the amortization of internally
developed software programs.
Investment income was comparative between years at $3.6 million. Interest
income from tax-exempt bonds was $2.5 million in 1995 and $2.3 million in
1994. Interest expense of $1.2 million was slightly below the prior year.
During Fiscal 1995, we paid down $6.1 million of debt from the Colorforms
acquisition in 1991. Interest savings from the retirement of these
obligations was $.4 million for Fiscal 1996.
During Fiscal 1995, the company incurred a net expense of $3.8 million
for the continuing development of electronic forms software, which is
marketed under the name of Platforms.
The effective income tax rate for Fiscal 1995 was 36.8% versus 36.0% in
1994.
[CHART]
TOTAL CAPITALIZATION
(IN THOUSANDS)
Long-Term Debt Stockholders' Equity
-------------- --------------------
1992 $25,959 $355,564
1993 $25,210 $368,146
1994 $23,500 $410,139
1995 $25,600 $456,118
1996 $30,600 $510,443
LIQUIDITY AND CAPITAL RESOURCES
Working capital at July 31, 1996 reached $206.2 million, an increase of
$13.1 million during the year. This total includes $62.6 million of cash and
short-term investments, an increase of $21.6 million from July 31, 1995.
Capital expenditures for the year were up 15.6% to $59.5 million. Over
the last five years, capital expenditures have totaled $210.6 million, the
highest five year total in the Company's history. $6.2 million of these
expenditures were financed by industrial revenue bonds; the balance was
financed through internally generated funds. Over the last five years, the
Company has also spent $29.1 million for the development of
WALLACE
(23)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
proprietary software programs.
The only major construction project still in-process at fiscal year-end
was construction of a new corporate headquarters in Lisle, Illinois. The new
headquarters was occupied during the first week of August, 1996. Estimated
expenditures in fiscal 1997 to complete this project are $3.5 million. During
fiscal 1996, several construction initiatives were completed: the new
Lebanon, Kentucky plant; expansions at Brenham, Texas, Metter, Georgia, and
Covington, Tennessee; plus a major renovation of a facility in St. Charles,
Illinois. In total, "brick and mortar" expenditures for fiscal 1996 were
$21.4 million.
Total capital expenditures for fiscal 1997 are projected at $40 million,
with an additional $4 million for software development. In February, the
Company completed the acquisition of Forms Engineering Company (FEC) for a
total consideration of $34.8 million, including a note for $5.0 million. In
February, the Company also completed the sale of the LaserMax division for
$5.6 million, which approximated book value.
Long-term debt at July 31, 1996 was $30.6 million. $23.5 million
represents industrial revenue bonds issued in prior years for the
construction of three manufacturing facilities. The balance of $7.1 million
represents deferred payments in connection with recent acquisitions; this
balance will be paid out in 1998. In September, 1996, the Company negotiated
a $50 million revolving credit agreement. There are no compensating balance
requirements under this agreement.
Stockholder's equity increased 11.9% to $510.4 million. Return on average
stockholder's equity was 15.1% versus 12.8% last year. Book value per share
increased 11.4% to $11.20. Through July 31, 1996, the Company had repurchased
$9.9 million of its common stock in open market transactions. Through August
31, 1996, share repurchases totaled $40.6 million. The Company expects to
complete the full $100 million authorized repurchase by the end of fiscal
1997.
We do not anticipate the need for additional borrowings during fiscal
1997 to cover capital expenditures or working capital requirements. However,
the $50 million revolving credit agreement is expected to be used either in
connection with the share repurchase program or to make acquisitions.
[CHART]
CAPITAL EXPENDITURES
AND DEPRECIATION
Depreciation Capital Expenditures
------------ --------------------
1992 $26,023 $33,517
1993 $28,543 $31,818
1994 $30,934 $34,228
1995 $33,708 $51,487
1996 $39,473 $59,506
COMMON STOCK
Dividends were raised for the 24th consecutive year to $.43 per share in
September, 1995, a 16.2% increase. Effective July 29, 1996, the Company's
common stock was split with one additional share issued for each share
owned. This 2 for 1 split increased the number of outstanding shares by
22,793,000.
During fiscal 1996, 542,000 shares of common stock were issued in
connection with the Company's 1989 Stock Option Plan and the Employee Stock
Purchase Plan. The Company also purchased 332,000 shares of common stock
through July 31, 1996. As of that date, 177,216 shares remained in treasury
stock. Through August 31, 1996, the number of shares repurchased had reached
1,457,500. These treasury shares will be used for future acquisitions or for
stock purchases under the employee benefit programs.
The Company's common stock is traded on the New York Stock Exchange under
the symbol WCS.
WALLACE
(24)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
QUARTERLY RESULTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
================================================================================
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
================================================================================
1996
- --------------------------------------------------------------------------------
Net sales $ 214,438 $ 219,545 $ 213,762 $ 214,542
- --------------------------------------------------------------------------------
Cost of goods sold
(excluding depreciation) 136,331 136,535 133,781 131,726
- --------------------------------------------------------------------------------
Operating income 26,543 31,481 28,195 30,703
- --------------------------------------------------------------------------------
Income before income taxes 27,061 31,823 28,375 31,219
- --------------------------------------------------------------------------------
Net income 16,778 19,571 17,451 19,199
- --------------------------------------------------------------------------------
Net income per share $ .37 $ .43 $ .38 $ 42
- --------------------------------------------------------------------------------
1995
- --------------------------------------------------------------------------------
Net sales $ 158,353 $ 176,165 $ 180,119 $ 198,201
- --------------------------------------------------------------------------------
Cost of goods sold
(excluding depreciation) 101,620 113,695 112,755 128,729
- --------------------------------------------------------------------------------
Operating income 17,708 20,497 22,510 24,315
- --------------------------------------------------------------------------------
Income before income taxes 18,335 21,160 22,937 25,028
- --------------------------------------------------------------------------------
Net income 11,643 13,436 14,450 15,768
- --------------------------------------------------------------------------------
Net income per share $ .26 $ .30 $ .32 $ 35
================================================================================
MARKET PRICE PER SHARE DIVIDENDS PAID PER SHARE
- --------------------------------------------------------------------------------
FISCAL 1996 FISCAL 1995 FISCAL 1996 FISCAL 1995
================================================================================
QUARTER HIGH LOW HIGH LOW
- --------------------------------------------------------------------------------
First $ 29.75 $ 27.88 $ 17.13 $ 13.38 $ .0925 $.0800
- --------------------------------------------------------------------------------
Second 29.69 26.44 14.50 12.94 .1075 .0925
- --------------------------------------------------------------------------------
Third 30.00 27.31 16.82 14.44 .1075 .0925
- --------------------------------------------------------------------------------
Fourth 30.56 27.13 30.00 16.57 .1075 .0925
================================================================================
WALLACE
(25)
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARY
(in thousands, except per share amounts)
For the years ended
July 31, 1996, 1995 and 1994 1996 1995 1994
================================================================================
Net sales $ 862,287 $ 712,838 $ 588,173
- --------------------------------------------------------------------------------
Cost and expenses:
- --------------------------------------------------------------------------------
Cost of goods sold 538,373 456,799 363,488
- --------------------------------------------------------------------------------
Selling and administrative expenses 151,846 133,713 120,049
- --------------------------------------------------------------------------------
Provision for depreciation and amortization 45,029 37,296 33,006
- --------------------------------------------------------------------------------
Hostile takeover expenses 10,117 -- --
- --------------------------------------------------------------------------------
Total costs and expenses 745,365 627,808 516,543
- --------------------------------------------------------------------------------
Operating income 116,922 85,030 71,630
- --------------------------------------------------------------------------------
Interest income (2,867) (3,639) (3,551)
- --------------------------------------------------------------------------------
Interest expense, net of capitalized interest 1,311 1,209 1,325
- --------------------------------------------------------------------------------
Income before income taxes 118,478 87,460 73,856
- --------------------------------------------------------------------------------
Provision for income taxes: (Note 7)
- --------------------------------------------------------------------------------
Current:
- --------------------------------------------------------------------------------
Federal 35,385 24,309 21,615
- --------------------------------------------------------------------------------
State 7,390 5,942 5,028
- --------------------------------------------------------------------------------
Deferred 2,704 1,912 (55)
- --------------------------------------------------------------------------------
Total income taxes 45,479 32,163 26,588
- --------------------------------------------------------------------------------
Net income before cumulative effect
of accounting changes $ 72,999 $ 55,297 $ 47,268
- --------------------------------------------------------------------------------
Adoption of FASB 109
(Accounting for income taxes) (Note 7) -- -- 3,955
- --------------------------------------------------------------------------------
Adoption of FASB 106, net of $1,853 of
tax benefits
(Employers' accounting for postretirement
benefits) (Note 8) -- -- (3,292)
- --------------------------------------------------------------------------------
Net income after cumulative effect of
accounting changes $ 72,999 $ 55,297 $ 47,931
================================================================================
Income (charge) per common share:
- --------------------------------------------------------------------------------
Operations before cumulative effect of
accounting changes $ 1.60 $ 1.23 $ 1.06
- --------------------------------------------------------------------------------
Cumulative effect of changes in
accounting for:
- --------------------------------------------------------------------------------
Postretirement benefits other than
pensions (net of tax benefits) -- -- (.07)
- --------------------------------------------------------------------------------
Income taxes -- -- .09
- --------------------------------------------------------------------------------
Net income per share $ 1.60 $ 1.23 $ 1.08
================================================================================
The accompanying notes are an integral part of these statements.
WALLACE
(26)
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARY
<TABLE>
Common Common
Stock Stock UNREALIZED
(in thousands, except per share amounts) SHARES PAR PREFERRED SECURITY ADDITIONAL RETAINED
For the years ended July 31, 1996, 1995 and 1994 OUTSTANDING VALUE STOCK GAIN/LOSS CAPITAL EARNINGS
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Balance, July 31, 1993 22,061 $ 22,061 $ -- $ -- $ 30,584 $ 315,501
- -----------------------------------------------------------------------------------------------------------------------------------
Net income -- -- -- -- -- 47,931
- -----------------------------------------------------------------------------------------------------------------------------------
Cash dividends ($.32 per share) -- -- -- -- -- (14,239)
- -----------------------------------------------------------------------------------------------------------------------------------
Sale of stock under employee
stock purchase plan (Note 5) 236 236 -- -- 5,541 --
- -----------------------------------------------------------------------------------------------------------------------------------
Stock options exercised net of shares
exchanged in lieu of cash (Note 5) 96 96 -- -- 1,572 --
- -----------------------------------------------------------------------------------------------------------------------------------
Tax benefit from early disposition by
employees of stock issued under stock
option plans and exercise of
non-qualified stock options -- -- -- -- 856 --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, July 31, 1994 22,393 22,393 -- -- 38,553 349,193
- -----------------------------------------------------------------------------------------------------------------------------------
Net income -- -- -- -- -- 55,297
- -----------------------------------------------------------------------------------------------------------------------------------
Cash dividends ($.37 per share) -- -- -- -- -- (16,680)
- -----------------------------------------------------------------------------------------------------------------------------------
Sale of stock under employee
stock purchase plan (Note 5) 265 265 -- -- 6,169 --
- -----------------------------------------------------------------------------------------------------------------------------------
Stock options exercised net of shares
exchanged in lieu of cash (Note 5) 31 31 -- -- 560 --
- -----------------------------------------------------------------------------------------------------------------------------------
Tax benefit from early disposition by
employees of stock issued under stock
option plans and exercise of
non-qualified stock options -- -- -- -- 518 --
- -----------------------------------------------------------------------------------------------------------------------------------
Unrealized security gain/loss (Note 9) -- -- -- (181) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, July 31, 1995 22,689 22,689 -- (181) 45,800 387,810
- -----------------------------------------------------------------------------------------------------------------------------------
Net income -- -- -- -- -- 72,999
- -----------------------------------------------------------------------------------------------------------------------------------
Cash dividends ($.43 per share) -- -- -- -- -- (19,622)
- -----------------------------------------------------------------------------------------------------------------------------------
Sale of stock under employee
stock purchase plan (Note 5) 188 188 -- -- 6,997 --
- -----------------------------------------------------------------------------------------------------------------------------------
Stock options exercised net of shares
exchanged in lieu of cash (Note 5) 83 83 -- -- 1,825 --
- -----------------------------------------------------------------------------------------------------------------------------------
Tax benefit from early disposition by
employees of stock issued under stock
option plans and exercise of
non-qualified stock options -- -- -- -- 1,771 --
- -----------------------------------------------------------------------------------------------------------------------------------
Treasury stock purchased (166) (166) -- -- (9,711) --
- -----------------------------------------------------------------------------------------------------------------------------------
Two-for-one stock split effective July, 1996 22,793 22,793 -- -- (22,793) --
- -----------------------------------------------------------------------------------------------------------------------------------
Unrealized security gain/loss (Note 9) -- -- -- (39) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, July 31, 1996 45,587 $ 45,587 $ -- $ (220) $ 23,889 $ 441,187
===================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
WALLACE
(27)
<PAGE>
CONSOLIDATED BALANCE SHEETS
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARY
(dollars in thousands) July 31, 1996 and 1995 1996 1995
===============================================================================
Assets
- -------------------------------------------------------------------------------
Current Assets:
- -------------------------------------------------------------------------------
Cash and cash equivalents $ 23,618 $ 10,815
- -------------------------------------------------------------------------------
Short-term investments (Note 9) 39,025 30,242
- -------------------------------------------------------------------------------
Accounts receivable, less allowance for doubtful
accounts of $3,215 in 1996 and $2,671 in 1995 148,918 127,365
- -------------------------------------------------------------------------------
Inventories (Note 2) 71,332 79,523
- -------------------------------------------------------------------------------
Prepaid taxes* 15,138 5,074
- -------------------------------------------------------------------------------
Advances and prepaid expenses* 6,077 5,853
- -------------------------------------------------------------------------------
Total current assets 304,108 258,872
- -------------------------------------------------------------------------------
Property, plant and equipment, at cost:
- -------------------------------------------------------------------------------
Land and buildings 123,993 106,342
- -------------------------------------------------------------------------------
Machinery, equipment, furniture and fixtures 431,648 380,380
- -------------------------------------------------------------------------------
Leasehold improvements 1,428 485
- -------------------------------------------------------------------------------
Total property, plant and equipment 557,069 487,207
- -------------------------------------------------------------------------------
Less-reserves for depreciation and amortization (268,197) (230,691)
- -------------------------------------------------------------------------------
Net property, plant and equipment 288,872 256,516
- -------------------------------------------------------------------------------
Intangible assets arising from acquisitions 43,180 26,575
- -------------------------------------------------------------------------------
Cash surrender value of life insurance 32,244 26,836
- -------------------------------------------------------------------------------
System development costs 21,499 15,253
- -------------------------------------------------------------------------------
Other assets 5,947 8,650
- -------------------------------------------------------------------------------
Total Assets $ 695,850 $ 592,702
===============================================================================
Liabilities and Stockholders' Equity
- -------------------------------------------------------------------------------
Current Liabilities:
- -------------------------------------------------------------------------------
Current maturities of long-term debt $ -- $ 205
- -------------------------------------------------------------------------------
Accounts payable 46,044 24,209
- -------------------------------------------------------------------------------
Dividends payable 4,900 4,198
- -------------------------------------------------------------------------------
Accrued compensation and related expenses 22,281 18,450
- -------------------------------------------------------------------------------
Other accrued expenses 8,821 6,754
- -------------------------------------------------------------------------------
Contribution to profit sharing and retirement fund
(Note 4) 15,824 11,906
- -------------------------------------------------------------------------------
Total current liabilities 97,870 65,722
- -------------------------------------------------------------------------------
Deferred compensation and retirement benefits (Note 8) 24,750 21,167
- -------------------------------------------------------------------------------
Deferred income taxes (Note 7) 32,187 24,095
- -------------------------------------------------------------------------------
Long-term debt (Note 3) 30,600 25,600
- -------------------------------------------------------------------------------
Stockholders' equity:
- -------------------------------------------------------------------------------
Preferred stock, $50 par value, authorized
500,000 shares -- --
- -------------------------------------------------------------------------------
Common stock, $1.00 par value, authorized
50,000,000 shares 45,587 45,379
- -------------------------------------------------------------------------------
Unrealized security gain/loss (Note 9) (220) (181)
- -------------------------------------------------------------------------------
Additional capital 23,889 23,110
- -------------------------------------------------------------------------------
Retained earnings 441,187 387,810
- -------------------------------------------------------------------------------
Total stockholders' equity 510,443 456,118
- -------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 695,850 $ 592,702
===============================================================================
The accompanying notes are an integral part of these statements.
*Prior year has been reclassified to conform with current year presentation.
WALLACE
(28)
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOW
(BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES)
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARY
(dollars in thousands)
For the years ended July 31, 1996, 1995 and 1994 1996 1995 1994
===============================================================================
Cash flows from operating activities:
- -------------------------------------------------------------------------------
Net income $ 72,999 $ 55,297 $ 47,268
- -------------------------------------------------------------------------------
Adjustments to reconcile net income to
net cash provided by operating activities:
- -------------------------------------------------------------------------------
Depreciation and amortization 45,029 37,296 33,006
- -------------------------------------------------------------------------------
Deferred taxes 5,375 1,375 3,737
- -------------------------------------------------------------------------------
(Gain) loss on disposal of property 3 (399) 57
- -------------------------------------------------------------------------------
Changes in assets and liabilities, net of
effects from the purchase of Lampro Graphics,
Retterbush and Sauer, and Forms Engineering
Company, and the sale of the LaserMax Division:
- -------------------------------------------------------------------------------
Accounts receivable (13,863) (30,538) (2,403)
- -------------------------------------------------------------------------------
Inventories 4,820 (9,213) (853)
- -------------------------------------------------------------------------------
Prepaid taxes* (6,347) (3,589) (1,485)
- -------------------------------------------------------------------------------
Advances and prepaid expenses* (145) 778 (314)
- -------------------------------------------------------------------------------
Other assets (16,032) (14,145) (9,696)
- -------------------------------------------------------------------------------
Accounts payable and other liabilities 26,523 6,328 5,708
- -------------------------------------------------------------------------------
Federal and state income taxes (2,055) (1,886) (1,827)
- -------------------------------------------------------------------------------
Deferred compensation and retirement benefits 3,583 3,191 2,871
- -------------------------------------------------------------------------------
Net cash provided by operating activities 119,890 44,495 76,069
- -------------------------------------------------------------------------------
Cash flows from investing activities:
- -------------------------------------------------------------------------------
Capital expenditures (59,506) (51,487) (34,228)
- -------------------------------------------------------------------------------
Short-term investments (8,783) 29,169 (19,588)
- -------------------------------------------------------------------------------
Unrealized security loss (39) (181) --
- -------------------------------------------------------------------------------
Proceeds from disposal of property 407 455 262
- -------------------------------------------------------------------------------
Other capital investments, including
acquisitions/divestitures (29,165) (17,017) (2,700)
- -------------------------------------------------------------------------------
Net cash used in investing activities (97,086) (39,061) (56,254)
- -------------------------------------------------------------------------------
Cash flows from financing activities:
Cash dividends paid (18,919) (16,065) (13,855)
- -------------------------------------------------------------------------------
Amounts paid on long-term debt (205) (6,110) (4,849)
- -------------------------------------------------------------------------------
Proceeds from issuance of short-term debt 4,216 4,829 --
- -------------------------------------------------------------------------------
Proceeds from issuance of long-term debt 5,000 2,100 8,500
- -------------------------------------------------------------------------------
Proceeds from issuance of common stock 10,864 7,544 8,301
- -------------------------------------------------------------------------------
Retirement of short-term and acquired debt (4,216) (6,474) --
- -------------------------------------------------------------------------------
Net construction funds held by trustee 3,137 1,970 (7,432)
- -------------------------------------------------------------------------------
Purchase of treasury stock (9,878) -- --
- -------------------------------------------------------------------------------
Net cash used in financing activities (10,001) (12,206) (9,335)
- -------------------------------------------------------------------------------
Net changes in cash and cash equivalents 12,803 (6,772) 10,480
- -------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 10,815 17,587 7,107
- -------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 23,618 $ 10,815 $ 17,587
===============================================================================
Supplemental disclosure:
- -------------------------------------------------------------------------------
Interest paid (net of interest capitalized) $ (297) $ (220) $ 339
- -------------------------------------------------------------------------------
Income taxes paid 46,910 35,520 25,444
===============================================================================
The accompanying notes are an integral part of these statements.
*Prior year has been reclassified to conform with current year presentation.
WALLACE
(29)
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1996
1. SUMMARY OF MAJOR ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION: The accompanying financial statements include
the accounts of the company and its subsidiary, which is wholly owned. All
significant intercompany transactions have been eliminated.
REVENUE RECOGNITION: Revenues from product sales and software licenses are
recorded when the product is shipped to the customer. In some instances,
revenue is not recognized until installation is complete or customer
acceptance is acknowledged.
INVENTORIES: Inventories are stated at cost which does not exceed market and
include material, labor and overhead. Cost is determined on the last-in,
first-out (LIFO) basis for certain inventories, and on the first-in,
first-out (FIFO) basis for other inventories.
DEPRECIATION: Depreciation for financial statement purposes is computed using
the straight-line method over the estimated useful lives of the various
classes of property, plant and equipment.
- ------------------------------------------------------------------------
Buildings 40 years
- ------------------------------------------------------------------------
Building equipment 10-15 years
- ------------------------------------------------------------------------
Machinery and equipment 3-10 years
- ------------------------------------------------------------------------
Leasehold improvements Lease period
- ------------------------------------------------------------------------
INTANGIBLE ASSETS: The excess of cost over the assigned value of the net
tangible assets in connection with all acquisitions is being amortized on a
straight-line basis primarily over 40 years. Amortization expense amounted to
$965,000 in 1996, $491,000 in 1995 and $389,000 in 1994. The unamortized
balance relating to the Forms Engineering Company was $17,350,000 at July 31,
1996; the balance relating to all other acquisitions was $25,830,000 at July
31, 1996, and $26,575,000 at July 31, 1995.
OTHER ASSETS: $2,325,000 in 1996, and $5,462,000 in 1995 represent the unused
balance of construction funds held for the Lebanon, Kentucky plant. The
company expenses as incurred the cost of maintaining existing computer
software. Purchased or developed software is capitalized and then amortized
over periods ranging from one to seven years. Amortization expense for
computer software was $4,169,000 in 1996; $2,866,000 in 1995; and $1,595,000
in 1994. The unamortized balance of capitalized computer software was
$21,499,000 in 1996 and $15,253,000 in 1995.
INCOME TAXES: The company has adopted Statement of Financial Accounting
Standards No. 109 (SFAS109), "Accounting for Income Taxes." Under that
standard, deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying statutory tax rates applicable to future
years to differences between the financial statement carrying amount and the
tax bases of existing assets and liabilities. Investment tax credits are
amortized to income over the lives of the applicable assets. The unamortized
investment tax credit amounted to $300,000 in 1996 and $401,000 in 1995.
INDUSTRY SEGMENT: The company is engaged primarily in the computer services
and supply industry.
NET INCOME PER SHARE: Net income per share is based on the weighted average
number of shares outstanding during each year. The exercise of outstanding
stock options would not have a significant dilutive effect upon net income
per share.
CASH AND CASH EQUIVALENTS: The company invests excess cash balances in
short-term securities, including commercial paper, money market funds, and
municipal bonds whose original maturities are less than three months.
CAPITALIZED INTEREST COSTS: Interest costs are capitalized based upon the
cost of capital projects in progress during the year. Interest costs
capitalized (in thousands) for the last three years were:
Interest Interest
Expense Capitalized
- ------------------------------------------------------------------------
1996 $ 2,717 $ 1,406
- ------------------------------------------------------------------------
1995 2,717 1,508
- ------------------------------------------------------------------------
1994 2,311 986
- ------------------------------------------------------------------------
Amortization expense for interest capitalized was $794,000 in 1996; $681,000
in 1995; and $597,000 in 1994.
USE OF ESTIMATES: In preparing financial statements in conformity with
generally accepted accounting principles, management makes estimates and
assumptions that affect reported and disclosed assets and liabilities at the
date of the financial statements and reported revenues and expenses during
the reporting period. Actual results could differ from those estimates.
WALLACE
(30)
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVENTORIES:
Inventories (in thousands) at July 31, were as follows:
1996 1995
- ------------------------------------------------------------------------
Raw materials $ 20,470 $ 25,981
- ------------------------------------------------------------------------
Work in process 1,771 2,060
- ------------------------------------------------------------------------
Finished products 49,091 51,482
- ------------------------------------------------------------------------
$ 71,332 $ 79,523
- ------------------------------------------------------------------------
At July 31, 1996 and 1995 the cost of inventories aggregating $49,623,000 and
$51,957,000, respectively, was determined on the LIFO method.
Inventories would have been $19,790,000 higher in Fiscal 1996 and
$26,437,000 higher in Fiscal 1995, if the FIFO method had been used for all
inventories.
3. FINANCING ARRANGEMENTS:
Long-term debt (in thousands) consisted of the following at July 31:
1996 1995
- ------------------------------------------------------------------------
Average 3.78% adjustable industrial
revenue bonds due 2007 $ 7,000 $ 7,000
- ------------------------------------------------------------------------
Average 3.66% adjustable industrial
revenue bonds due 2009 8,000 8,000
- ------------------------------------------------------------------------
Average 3.76% adjustable industrial
revenue bonds due 2019 8,500 8,500
- ------------------------------------------------------------------------
Average 5.55% adjustable promissory
note due 1998 2,000 2,000
- ------------------------------------------------------------------------
Average 5.11% adjustable promissory note
maturing serially not earlier than 1998 100 305
- ------------------------------------------------------------------------
Average 4.83% adjustable promissory
note due 1998 5,000 --
- ------------------------------------------------------------------------
$ 30,600 $ 25,805
- ------------------------------------------------------------------------
Less-current portion -- 205
- ------------------------------------------------------------------------
$ 30,600 $ 25,600
- ------------------------------------------------------------------------
Based upon the interest rates currently available to the company for
borrowings with similar terms and maturities, the fair value of the company's
debt and other financial instruments are either carried at fair value or do
not materially differ from fair value.
The industrial revenue bonds due 2007, 2009 and 2019 may be tendered at
the option of the holders on dates specified in the agreements. The company
maintains arrangements with agents to remarket any bonds tendered before the
final maturity dates. The bonds are also supported by letters of credit.
The company's financing arrangements contain certain restrictive
financial covenants. Under the most restrictive of the covenants, the company
must maintain a current ratio of at least 2 to 1, net worth of not less than
$297 million and funded debt not greater than 40% of net tangible assets plus
funded debt. The company was in compliance with all debt covenants at July
31, 1996 and 1995.
Principal payments due on long-term debt during the next five years are
as follows: $0 in 1997; $7,100,000 in 1998; and $0 in each of 1999 through
2001.
4. PROFIT SHARING AND RETIREMENT PLAN:
The company has a contributory profit sharing and retirement plan covering
most employees. Company contributions to the Plan charged to operations were
$15,824,000 in Fiscal 1996, $11,906,000 in Fiscal 1995, and $10,403,000 in
Fiscal 1994.
5. STOCK OPTIONS:
The company has a 1989 stock option plan, which will expire on September 12,
1999, under which options may be granted to officers and others, except for
non-employee directors. Two types of options to purchase common stock may be
granted: Incentive Options and Non-Qualified Options. In the case of
Incentive Options, the option price may not be less than 100% of the market
value of the stock at the date of grant. For Non-Qualified Options, the grant
price may not be less than 85% of the market value; however, to date no
options have been granted at less than 100% of market value. The option price
may be paid in cash or by exchanging previously acquired company common stock
with a market value equal to the purchase price. Options become exercisable
as to 40% of the shares granted one year after grant and the remaining 60% of
the shares granted become exercisable two years after grant. Options expire
10 years after grant.
The following table summarizes the activity under the stock option plan
for the last two years:
Average
option
Number price per
of shares share
- ------------------------------------------------------------------------
Outstanding at July 31, 1994 708,400 $ 12.01
- ------------------------------------------------------------------------
Granted 185,800 16.66
- ------------------------------------------------------------------------
Forfeited (4,200) 14.86
- ------------------------------------------------------------------------
Exercised (70,216) 10.55
- ------------------------------------------------------------------------
Outstanding at July 31, 1995 819,784 $ 13.18
- ------------------------------------------------------------------------
Granted 267,400 28.94
- ------------------------------------------------------------------------
Forfeited (5,800) 18.76
- ------------------------------------------------------------------------
Exercised (174,212) 12.38
- ------------------------------------------------------------------------
Outstanding at July 31, 1996 907,172 $ 17.94
- ------------------------------------------------------------------------
July 31 July 31
- ------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------
Shares available for future grants 328,752 590,352
- ------------------------------------------------------------------------
Shares exercisable 536,657 545,984
- ------------------------------------------------------------------------
WALLACE
(31)
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The company also has an Employee Stock Purchase Plan, adopted in 1974 and
expiring December 31, 1997, under which a total of 4,700,000 shares of common
stock have been reserved for purchase by employees through semi-annual
offerings. The option price is the lower of 85% of the market price of the
shares on the commencement date or the termination date of each offering
period. Employees participate in the plan through payroll deductions and the
plan qualifies for certain tax advantages under section 423 of the Internal
Revenue Code. Options were exercised to purchase 375,754 shares at $19.12 in
Fiscal 1996, and 531,254 shares at $12.11 in Fiscal 1995. Shares totalling
369,810 in Fiscal 1996 and all shares in Fiscal 1995 were issued from the
company's Treasury Stock. There were 977,498 shares available at July 31,
1996 and 1,353,252 shares available at July 31, 1995 for future issuance
under this plan.
6. LEASE COMMITMENTS:
Total rent expense for manufacturing facilities, sales offices and equipment
amounted to $5,906,000 in 1996, $5,508,000 in 1995 and $4,907,000 in 1994.
The minimum future rental commitments under non-cancellable lease
arrangements are $3,437,000 in 1997; $2,449,000 in 1998; $1,642,000 in 1999;
$795,255 in 2000; and $6,722,000 for 2001 and beyond.
7. INCOME TAXES:
The significant deferred tax assets and liabilities at July 31, in thousands
of dollars, were as follows:
1996 1995
- ------------------------------------------------------------------------
Deferred tax liabilities:
- ------------------------------------------------------------------------
Accelerated depreciation $ 30,053 $ 30,124
- ------------------------------------------------------------------------
Software development 7,545 5,052
- ------------------------------------------------------------------------
Other 7,544 4,971
- ------------------------------------------------------------------------
Total Deferred Liabilities 45,142 40,147
- ------------------------------------------------------------------------
Deferred tax assets:
- ------------------------------------------------------------------------
Deferred compensation 7,126 5,300
- ------------------------------------------------------------------------
Postretirement benefits 1,516 1,601
- ------------------------------------------------------------------------
Inventory capitalization 2,514 2,926
- ------------------------------------------------------------------------
Other 8,291 7,674
- ------------------------------------------------------------------------
Total Deferred Assets 19,447 17,501
- ------------------------------------------------------------------------
Net Deferred Tax Liabilities $ 25,695 $ 22,646
- ------------------------------------------------------------------------
The provision for income taxes is comprised of the following:
1996 1995 1994
- ------------------------------------------------------------------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
- ------------------------------------------------------------------------
State and local income taxes 4.4 4.4 4.4
- ------------------------------------------------------------------------
Tax exempt interest income (0.4) (1.0) (1.1)
- ------------------------------------------------------------------------
Tax credits and other (0.6) (1.6) (2.3)
- ------------------------------------------------------------------------
Effective tax rate 38.4% 36.8% 36.0%
- ------------------------------------------------------------------------
8. POSTRETIREMENT BENEFITS:
All current retirees; employees at least 55 with 20 or more years of service
as of December 31, 1993; and employees between the ages of 50 and 54 who have
at least 20 years of service as of December 31, 1993, and retire before
December 31, 1998; are entitled to postretirement health care coverage. These
benefits are subject to the same deductibles and co-payment provisions which
apply to active employees. All other employees who retire after December 31,
1993 will pay 100% of their retirement medical coverage. The company may
amend or change the plan periodically.
The company has adopted Statement of Financial Accounting Standards No.
106 (SFAS 106), "Employers' Accounting for Postretirement Benefits Other Than
Pensions." The company elected to immediately recognize the transition
obligation for future benefits to be paid related to past employee services.
The net-accrual basis expense for postretirement benefits as of July 31
was as follows:
(in thousands of dollars) 1996 1995 1994
- -------------------------------------------------------------------------------
Components of net periodic postretirement
benefit costs:
- -------------------------------------------------------------------------------
Service cost $ 22 $ 22 $ 40
- -------------------------------------------------------------------------------
Interest cost 298 308 391
- -------------------------------------------------------------------------------
Amortization of (gain) loss 134 (985) --
- -------------------------------------------------------------------------------
Net periodic postretirement
benefit cost $ 454 $ (655) $ 431
- -------------------------------------------------------------------------------
The liability at July 31 (included in Deferred Compensation and
Retirement Benefits on the accompanying Consolidated Balance Sheet, in
thousands of dollars) for postretirement benefits is as follows:
1996 1995
- -------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
- -------------------------------------------------------------------------------
Retirees $ 2,386 $ 2,580
- -------------------------------------------------------------------------------
Fully eligible active plan participants 947 800
- -------------------------------------------------------------------------------
Other active plan participants 269 666
- -------------------------------------------------------------------------------
Life insurance 219 --*
- -------------------------------------------------------------------------------
Actuarial present value
of benefit obligations $ 3,821 $ 4,046
- -------------------------------------------------------------------------------
* Included in participants' amounts
For financial reporting purposes, the actuarial computations assumed a
discount rate of 8.0% to determine the accumulated postretirement benefit
obligation, and an assumed health care cost trend rate of 9.78% and 8.35% for
pre-65 and post-65 medical coverage, respectively, for 1996, declining
gradually to 6.0% in 2001, to measure the accumulated postretirement benefit
obligation. However, a one percentage point increase in the assumed health
care cost trend would increase the aggregate of the service cost and interest
cost components of the annual postretirement expense by $28,000 and the
postretirement benefit obligation as of July 31, 1996 by $250,000.
WALLACE
(32)
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INVESTMENTS IN DEBT AND EQUITY SECURITIES:
Effective August 1, 1994, the company adopted Statement of Financial
Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments
in Debt and Equity Securities," which requires securities that are
available-for-sale to be carried at fair value, with changes in net
unrealized gains and losses recorded as a separate component of shareholders
equity. Previously, fixed income securities classified as available-for-sale
were carried at the lower of amortized cost or fair value, determined in the
aggregate. The adoption of this statement had no impact on net income, but
decreased shareholders equity by $220,000 at July 31, 1996 and $181,000 at
July 31, 1995 (net of tax).
The amortized cost and market value of investments as of July 31, 1995, and
July 31, 1996 were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
AMORTIZED UNREALIZED HOLDING MARKET
July 31, 1995 COST GAINS LOSSES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale
- ---------------------------------------------------------------------------------------------------------------------------
State, municipal & other gov't debt $ 21,293,000 $ 113,000 $ 23,000 $ 21,383,000
- ---------------------------------------------------------------------------------------------------------------------------
Equity 9,251,000 -- 392,000 8,859,000
- ---------------------------------------------------------------------------------------------------------------------------
Held-to-maturity
- ---------------------------------------------------------------------------------------------------------------------------
State, municipal & other gov t debt -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total short-term investments $ 30,544,000 $ 113,000 $ 415,000 $ 30,242,000
- ---------------------------------------------------------------------------------------------------------------------------
Long-term available-for-sale
- ---------------------------------------------------------------------------------------------------------------------------
Equity $ 1,992,000 $ -- $ -- $ 1,992,000
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED HOLDING MARKET
July 31, 1996 COST GAINS LOSSES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale
- ---------------------------------------------------------------------------------------------------------------------------
State, municipal & other gov't debt $ 60,000 $ -- $ 23,000 $ 37,000
- ---------------------------------------------------------------------------------------------------------------------------
Equity 39,332,000 -- 344,000 38,988,000
- ---------------------------------------------------------------------------------------------------------------------------
Held-to-maturity
- ---------------------------------------------------------------------------------------------------------------------------
State, municipal & other gov't debt -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total short-term investments $ 39,392,000 $ -- $ 367,000 $ 39,025,000
- ---------------------------------------------------------------------------------------------------------------------------
Long-term available-for-sale
- ---------------------------------------------------------------------------------------------------------------------------
Equity $ 1,880,000 $ -- $ -- $ 1,880,000
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Maturities for all debt securities classified as short-term are less than one
year. The long-term investment is included in the 'Other Assets' section of
the balance sheet.
Proceeds on the sale of available-for-sale securities were $23,323,000
for Fiscal 1996, and $8,710,000 for Fiscal 1995, with gross realized losses
of $107,000 in Fiscal 1996, and gross realized gains of $144,000 in Fiscal
1995. The amortized cost of these securities was based on specific
identification. No securities during the period were classified as trading
securities. There have been no sales of held-to-maturity securities other
than at their maturity date. The change in net unrealized loss on
available-for-sale securities from July 31, 1995 to July 31, 1996 was $39,000
(net of tax).
WALLACE
(33)
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS OF WALLACE COMPUTER SERVICES, INC.
We have audited the accompanying consolidated balance sheets of Wallace
Computer Services, Inc., (a Delaware corporation) and Subsidiary as of July
31, 1996 and 1995 and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three Fiscal years in the
period ended July 31, 1996. 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 financial position of Wallace Computer
Services, Inc. and Subsidiary as of July 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the three Fiscal years
in the period ended July 31, 1996 in conformity with generally accepted
accounting principles.
As discussed in Notes 7, 8 and 9 to the consolidated financial
statements, the company changed its method of accounting for income taxes and
post retirement benefits effective August 1, 1993, and its method of
accounting for certain investments in debt and equity securities effective
August 1, 1994.
Arthur Andersen LLP
Chicago, Illinois
September 4, 1996
WALLACE
(34)
<PAGE>
CORPORATE AND INVESTOR INFORMATION
BOARD OF DIRECTORS
THEODORE DIMITRIOU (E) (P)
Chairman
ROBERT J. CRONIN (E) (P)
President and Chief
Executive Officer
RICHARD F. DOYLE (A) (E)
Former Senior Vice President
Finance and Administration
Texas Oil & Gas Corp.
CURTIS A. HESSLER (A)
Chairman
I-NET, Inc.
ALBERT W. ISENMAN III (C)
Professor of Management
Kellogg Graduate School of Management
Northwestern University
WILLIAM N. LANE, III (C)
Chairman, President and
Chief Executive Officer
Lane Industries, Inc.
WILLIAM E. OLSEN (A) (C)
Independent Consultant
JOHN C. POPE
Chairman of the Board
MK Rail Corporation
ROBERT P. RITTEREISER (P)
President
Gruntal Financial, Inc.
(A) Member of the Audit
Committee
(C) Member of the Compensation
Committee
(E) Member of the Executive
Committee
(P) Member of the Profit
Sharing Committee
OFFICERS
THEODORE DIMITRIOU
Chairman of the Board
ROBERT J. CRONIN
President and Chief
Executive Officer
MICHAEL O. DUFFIELD
Senior Vice President
Operations
MICHAEL T. LEATHERMAN
Senior Vice President
Chief Information Officer
THOMAS G. BROOKER
Vice President,
General Manager
Office Products
BRUCE D'ANGELO
Vice President Corporate Sales
MICHAEL J. HALLORAN
Vice President, Chief Financial
Officer and Assistant Secretary
DONALD J. HOFFMANN
Vice President Engineering
and Research
MICHAEL M. MULCAHY
Vice President, General
Manager Colorforms Division
WAYNE E. RICHTER
Vice President, General
Manager Label Division
MICHAEL T. LAUDIZIO
Secretary, Division
Vice President Taxes
WILLIAM J. MONTANEZ
Assistant Treasurer
CRAIG T. BOYD
Assistant Secretary
DIVISION MANAGERS
MICHAEL A. ANDERSON
Vice President,
General Manager
TOPS Division
DAVID W. BERTRAM
Vice President
Corporate Controller
MICHAEL R. FINGER
Vice President
Direct Mail Division
DOUGLAS W. FITZGERALD
Vice President Marketing
THOMAS W. FRANKE
Vice President, General
Manager Wallace Press
JILL K. GWALTNEY
Vice President FEC
JOSEPH J. JUSZAK
Vice President Quality
and Technical Services
MICHAEL D. KEIM
Vice President Business
Forms Manufacturing
MICHAEL A. REPP
Vice President
Wallace Press
DAVID M. ROUSSEAU
Vice President
Information Services
STEVEN F. ARPAIA
Vice President
Colorforms Sales
JAMES E. KERSTEN
Vice President Direct
Sales - West
MARK D. MINDRUM
Vice President Direct
Sales - Midwest
EDWARD A. RIGUARDI
Vice President Direct
Sales - East
RONALD D. SEAVEY
Vice President Direct
Sales - Southeast
FACILITIES
HEADQUARTERS
Lisle, Ill.
MANUFACTURING PLANTS
La Palma, Calif. (D)
Lodi, Calif. (F,O,L,D)
San Luis Obispo, Calif. (F)
Metter, Ga. (F,D)
Clinton, Ill. (D)
Elk Grove Village, Ill. (L,D)
Hillside, Ill. (D)
St. Charles, Ill. (F,L,D)
St. Charles, Ill. (F)
Osage, Iowa (F)
Osage, Iowa (O)
Lebanon, Ky. (F,D)
Gastonia, N.C. (F)
Wilson, N.C. (L)
Tonawanda, N.Y. (D)
Cincinnati, Ohio (L)
Streetsboro, Ohio (L)
Allentown, Penn. (D)
Covington, Tenn. (O)
Brenham, Texas (O,L)
Marlin, Texas (F)
Luray, Va. (F)
Manchester, Vt. (F,D)
(F) Forms
(O) Office products
(L) Labels
(D) Direct response printing
DISTRIBUTION CENTERS
Lodi, Calif.
Ontario, Calif.
Metter, Ga.
St. Charles, Ill.
Allentown, Penn.
Covington, Tenn.
MARKETING AND ADMINISTRATIVE
Elk Grove Village, Ill.
Hillside, Ill.
Lisle, Ill.
Oak Brook, Ill.
St. Charles, Ill.
RESEARCH AND DEVELOPMENT
Bellwood, Ill.
Hillside, Ill.
St. Charles, Ill.
SALES OFFICES
Nationwide
CORPORATE INFORMATION
CORPORATE COUNSEL
Steven L. Carson
TRANSFER AGENT AND REGISTRAR
Boston EquiServe
Boston, Mass.
AUDITORS
Arthur Andersen LLP
Chicago, Ill.
COMMON STOCK
The common shares of
Wallace Computer Services
are traded on the
New York Stock Exchange.
Ticker symbol: WCS
Daily newspaper stock
table listing: WallaceCS
REPORTS TO THE S.E.C.
Reports to the S.E.C.
on Forms 10-K and 10-Q
are available by writing
to the Corporate Secretary.
PRODUCT INFORMATION
For information on Wallace's
information management
products, services and solutions,
or the number of a
Wallace sales office in
your area, please
call or write to the
Marketing Department at corporate
headquarters in Lisle:
800/323-8447.
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[LOGO]
INFORMATION MANAGEMENT Products Services Solutions
WALLACE COMPUTER SERVICES. INC.
CORPORATE OFFICES
2275 CABOT DRIVE LISLE, IL 60532-3630
630.588.5000
