<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[x] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended July 31, 1997 Commission File Number 1-6528
Wallace Computer Services, Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-2515832
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2275 Cabot Drive Lisle, Illinois 60532
--------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(630) 588-5000
--------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $1.00 par value New York Stock Exchange
Series A Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X Yes No
----- -----
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant.
$1,597,041,468 (based on the October 15, 1997, closing price of these shares on
the New York Stock Exchange)
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
As of October 15, 1997, 43,017,952 shares of Common Stock were
outstanding.
Documents incorporated by reference:
1. Annual Report to Stockholders for 1997 - Parts I, and II of this Form
10-K
2. Definitive Proxy Statement - Part III of this Form 10-K
Indicate by check mark if the disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Form 10-K
Item No. Name of Item Page
- -------- ------------ ----
<S> <C> <C>
Part I
Item 1 Business 3
Item 2 Properties 9
Item 3 Legal Proceedings 12
Item 4 Submission of Matters to a Vote of
Security Holders 12
Part II
Item 5 Market for the Registrant's Common Equity and
Related Stockholder Matters 13
Item 6 Selected Financial Data 13
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 8 Financial Statements and Supplementary Data 13
Item 9 Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure 13
Part III
Item 10 Directors and Executive Officers of the
Registrant 14
Item 11 Executive Compensation 16
Item 12 Security Ownership of Certain Beneficial
Owners and Management 16
Item 13 Certain Relationships and Related
Transactions 16
Part IV
Item 14 Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 17
Signatures 25
Exhibit Index 26
</TABLE>
2
<PAGE> 3
Wallace Computer Services, Inc. Fiscal 1997 10-K
Part I
Item 1 Business
As used in this report, the term "Company" is used to refer to the
Registrant and its wholly-owned subsidiaries, Visible Computer Supply
Corporation and Wallace Commercial Printing, Inc.
(a) Development of Business
The Registrant was organized in June l963 as "Wallace Business
Forms, Inc.", a Delaware corporation and is the successor to an
Illinois corporation known as "Wallace Press, Inc." that was
merged into the Registrant in August 1963. To better reflect the
nature of the Company's business, the Registrant changed its
corporate name in November 1981 from "Wallace Business Forms,
Inc." to "Wallace Computer Services, Inc."
Over the past four years, Wallace has become a leader in Total
Print and Integrated Supply Management services. Central to all
customer services that Wallace provides is the Wallace Information
Network (W.I.N.), a software tool that ties customer's data about
the manufacture, storage and distribution of printed materials and
consumable supplies. Wallace introduced the W.I.N. system in 1993
and it represented the first complete forms management tool in the
market. Today, it is recognized as the industry benchmark. It
continues to be the only system that can bring complete current
data about every order, shipment, and item in inventory to the
customer's desktop for analysis and decision making. More than
three hundred mid-to-large-sized organizations, representing
approximately $400 million in printing orders, are presently
utilizing W.I.N. as the central information tool in Wallace's
integrated supply management services.
In fiscal year 1995, Wallace added to its prime label
manufacturing capacity through acquisitions. On November 29, 1994
the company acquired Lampro Graphics, Inc. for $4.6 million of
cash, a note payable of $.3 million, and the assumption of net
debt totaling $1.9 million. On April 19, 1995 the company
acquired Retterbush and Sauer Label Corporation for $10.1 million
of cash and a note payable of $2.0 million.
In July, 1995, a wholly-owned subsidiary of Moore Corporation,
Ltd. launched an unsolicited tender offer for all of the
outstanding shares of common stock of the Registrant. At the
annual meeting of the stockholders on December 9, 1995, three
directors nominated by the Moore Corporation were elected for a
three year term. Other proposals made by Moore to reduce the
number of directors and to repeal certain By-law provisions did
not receive the required votes by stockholders. On December 20,
1995, Moore's tender offer expired according to its terms. On
August 6, 1996, Moore announced that it would not nominate an
additional slate of directors.
3
<PAGE> 4
Item 1 Continued
In February, 1996, the Registrant acquired Forms Engineering
Company (FEC) for $27.8 million of cash, a note payable of $5.0
million, and the assumption of net debt totalling $2.0 million. FEC,
located in California, gives the company a national presence in the
direct mail promotional printing market.
In the current fiscal year, the Registrant took action towards
creating a national network of high-quality sheet-fed commercial
print facilities. On October 22, 1996, Wallace acquired Post
Printing, Inc. for $6.6 million of cash and on July 24, 1997, Wallace
acquired Moran Printing Co. for notes payable of $29.5 million, and
the assumption of net debt totalling $4.9 million. In addition, on
October 3, 1997, a wholly-owned subsidiary of Wallace Computer
Services, Inc. commenced a tender offer to purchase all of the
outstanding common stock of Graphic Industries, Inc. Graphic
Industries, with sales of $437.1 million in 1997, is a national
network of 20 companies providing full service printing and graphic
communications services. Located in 17 key markets across the U.S.,
Graphic Industries is the nation's largest network of short-to-medium
run, high-quality, full-color commercial printing companies. The
tender offer is scheduled to remain open until 12:00 AM (Eastern
Time) on Friday October 31, 1997, unless extended.
There have been no material changes in financial condition
since the preceding fiscal year which ended July 31, 1996. Fiscal
1997 results do, however, include $787,000 of expenses related to the
proxy contest over the Wyser-Pratt proposals to amend the Company's
bylaws. The Wyser-Pratt proposals were not adopted by the
shareholders at the Registrant's 1996 Annual Stockholders' meeting;
and all expenses related to these proposals were recorded in fiscal
1997.
(b) Industry Segment
The Company is engaged predominantly in the printed materials
and consumable supply industry. Wallace sells a broad line of
products and services including business forms, commercial and
promotional graphics printing, office products, computer and consumer
product labels, machine ribbons, computer hardware and software,
computer accessories, and electronic forms.
(c) Narrative Description of Business
(1) Principal Products and Services
Principal products and services supplied by the Company include
the design, manufacture and sale of both paper based and
electronic business forms, high color promotional materials,
industrial and consumer catalogs, directories and price lists,
pressure sensitive labels, packaging labels,
4
<PAGE> 5
Item 1 Continued
computer and business machine ribbons, a standard line of
office products forms, and direct mail promotional printing. The
Company also markets computer accessory supplies, office supplies,
and computer hardware and software.
The only class of similar products that contributed 10% or more
of total sales for the past three years is printed products. The
contribution of printed products to total sales was 92% for fiscal
1997, 92% for fiscal 1996, and 90% for fiscal 1995.
(2) The principal raw material used by the Company is paper
which is purchased on the open market from numerous suppliers in a
variety of weights, widths, color and sizes.
The Company believes that it has adequate sources of supply of
raw materials to meet the requirements of its business. The
Company's current inventory levels are in line with the inventory
levels necessary to satisfy customer demand that the Company
anticipates for fiscal year 1998.
(3) Although certain features of the Company's products and
manufacturing processes are covered by owned or licensed patents, the
Company does not consider patents to be critical to its business.
The Company believes that principal factors in its
success include its engineering, manufacturing, distribution and
information services capabilities, and its salesforce.
(4) The tax forms product line (which accounts for less than
1% of consolidated net sales) is sold primarily in the first six
months of the Company's fiscal year.
(5) The Company continues to maintain a strong working capital
position, with a current ratio of 2.1 at July 31, 1997. The drop in
the current ratio from 3.1 at July 31, 1996 is due primarily to the
purchase of $95.3 million of the Company's own stock in fiscal 1997.
Business conditions require the Company to produce and store
inventories to meet its customers' requirements. Custom and stock
finished goods inventories are stored throughout the United States in
both public and company-owned warehouses. Finished products represent
73.1% of total inventory at July 31, 1997.
5
<PAGE> 6
Item l Continued
Substantially all of the Company's sales are made on terms of
Net 30 days. The accounts receivable balance at July 31, 1997,
increased by 12.5%, mainly attributable to the increase in fourth
quarter sales and the acquisitions of Post Printing and Moran
Printing. Further information on liquidity and capital resources is
contained in Management's Discussion and Analysis of Financial
Condition and Results of Operations on pages 22-26 of the Company's
Annual Report to Stockholders for 1997, which is incorporated herein
by reference.
(6) The Company is not dependent upon any one customer or a group of
customers under common control. No single customer or group
of customers accounts for more than 10% of consolidated net sales.
(7) Within the consumable business supply industry, the Company sells its
products through three distribution channels: 1) a direct sales
force of approximately 700 employee sales representatives, 2) direct
mail catalogs sent to the customer, and 3) the office products
wholesaler/dealer distribution network.
The predominant distribution channel is the direct sales force.
The Company hires college graduates who start at a base salary of
$20,000 plus training bonuses and commissions. Sales representatives
are placed in one of the Company's 121 sales offices located
throughout the United States and are assigned a specific geographic
territory. Within this assigned territory, a sales representative is
free to sell all of the Company's products to any customer. Sales
support for the direct sales force is provided by the Corporate
Marketing department. The Company has identified the following
specific markets as large users of its product lines: financial
services, telecommunications, retail, transportation/distribution,
utilities, and healthcare.
The direct mail catalog operation accounts for approximately 1%
of the Company's sales. Customers are offered products through a
general catalog, which carries approximately 5,000 items. Most of the
paper-based products in the catalog are produced by the Company.
Products sold through the catalog are either drop-shipped directly
from the manufacturer to the customer, or shipped from the Company's
warehouses in California, Illinois, and Pennsylvania.
6
<PAGE> 7
Item 1 Continued
The office products wholesaler/dealer distribution network
accounts for approximately 11% of the Company's sales. The network
is accessed through the use of the Company's direct sales force, who
are paid a salary plus commissions and by manufacturers'
representatives. The wholesaler/dealer distribution network is
located throughout the United States and Canada. The product line
sold through the network consists mainly of paper products and office
supplies. The Company is also doing an increasing amount of business
with the office superstores, which are estimated to control
approximately 20% to 25% of the office products market.
(8) The principal markets served by the Company are business
forms, commercial printing, direct mail promotional printing,
pressure sensitive labels, and office/computer products.
Within the $6 billion U.S. business form market, the Company is
one of the few firms that is positioned to accommodate the needs of
large, forms-intensive customers with multiple locations. These
customers typically require a forms vendor with the following
characteristics:
a. sufficient forms manufacturing capacity across several
regions of the U.S. to satisfy their needs;
b. distribution capability across several regions of the U.S.
to deliver multiple types of forms to hundreds of locations on
short notice and
c. the information services capability to provide centralized
billing, reporting, forms management, and control for such
shipments.
The Company is well positioned to meet customer needs in the
above three respects. For many large, forms-intensive customers with
multiple locations, the only acceptable vendors other than the
Company are Moore Corporation Limited, The Reynolds and Reynolds
Company and The Standard Register Company.
The Company also sells business forms to customers that are not
large, forms-intensive firms with multiple locations. These
customers typically have a choice from among many different
acceptable vendors, and the Company accordingly faces more
competition than it does in sales to large, forms-intensive customers
with multiple locations.
7
<PAGE> 8
Item 1 Continued
The commercial printing market segment served by the Company
totals approximately $43 billion and includes the design and
manufacture of industrial and consumer catalogs, directories and
price lists that require computer manipulation of data for electronic
type composition, as well as the manufacture of high color marketing
and point-of-sale brochures. The Company primarily competes with
commercial printers and the market is highly competitive.
The direct mail promotional printing market segment includes
the printing of high quality brochures, letters and other mailed
pieces that are then personalized via computerized imaging. These
mailings include sweepstakes, credit card offerings, and other
business solicitation mailings. These services are part of the $36
billion direct mail industry and the market is very competitive.
The pressure sensitive label market is highly competitive with
over 2,600 converters in the United States. This market is estimated
to total approximately $5.0 billion.
The Company is both a manufacturer and distributor for the
$30.0 billion office supplies market. The Company's sales are small
in relation to the total market.
(9) The Company is continuously involved in research
activities relating to development of new products and improvement of
existing products (none of which are customer sponsored). The
amounts that the Company spends on research activities are not
significant in relation to annual sales volume.
(10) Compliance with federal, state and local provisions
governing the discharge of materials into the environment has not had
and is not anticipated to have a material effect on the Company's
capital expenditures, earnings or competitive position.
(11) The total number of persons employed by the Company was
4,610 as of July 31, 1997.
(d) Foreign Operation and Export Sales
Net sales and income derived from export sales are not material.
8
<PAGE> 9
Item 2 Properties
The Company's corporate offices are located in Lisle, Illinois,
a suburb of Chicago.
The Company believes that all of its properties are well
maintained and in good operating condition.
The following are the Company's principal properties:
<TABLE>
<CAPTION>
Approximate
Square
Location Footage Description
- -------- ----------- -----------
<S> <C> <C>
Gastonia, North Carolina 120,000 Business Forms Plant
- owned by Company.
Luray, Virginia 162,300 Business Forms Plant
- owned by Company.
Marlin, Texas 115,700 Business Forms Plant
- owned by Company.
Metter, Georgia 216,300 Warehouse and Distribution
Center and Manufacturing
Plant for the Business Forms
Group
- owned by Company.
Osage, Iowa 152,500 Business Forms Plant
- owned by Company.
San Luis Obispo, 110,000 Business Forms Plant
California - owned by Company.
Hillside, Illinois 206,600 Commercial Printing Plant
and Corporate and Sales
Offices (35,000 square feet)
attached to plant
- owned by Company.
Lebanon, Kentucky 89,200 Commercial Printing Plant
-owned by Company.
</TABLE>
9
<PAGE> 10
Item 2 Continued
<TABLE>
Approximate
Square
Location Footage Description
- -------- ----------- -----------
<S> <C> <C>
Orlando, Florida 60,000 Commercial Printing Plant
- lease ending in 2007.
Orlando, Florida 40,000 Distribution Center
- lease ending in 2007.
Tampa, Florida 33,000 Commercial Printing Plant
- owned by Company.
West Bend, Wisconsin 31,300 Commercial Printing Plant
- owned by Company.
Lisle, Illinois 105,000 Corporate Headquarters
- owned by Company.
Bellwood, Illinois 30,000 Engineering Facilities
- lease ending March, 2000
Hillside, Illinois 24,400 Additional Corporate Offices
- owned by Company.
Brenham, Texas 128,200 Office Products and Label
Manufacturing Plant
- owned by Company.
Streetsboro, Ohio 80,000 Label Manufacturing Plant
- owned by Company.
Wilson, North Carolina 127,200 Label Manufacturing Plant
- owned by Company.
Cincinnati, Ohio 22,900 Label Manufacturing Plant
- owned by Company.
Lodi, California 138,100 Warehouse and Distribution
Center and Manufacturing Plant for
the Label, Office Products and
Commercial Printing Groups
- owned by Company.
</TABLE>
10
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Item 2 Continued
<TABLE>
Approximate
Square
Location Footage Description
- -------- ----------- -----------
<S> <C> <C>
St. Charles, Illinois 293,000 Warehouse and Distribution
Center and Manufacturing
Plant for the Business Forms
and Office Products Groups
- owned by Company.
St. Charles, Illinois 92,400 Distribution Center and
Manufacturing Plant for the Label Group
- owned by Company.
Ontario, California 114,500 Distribution Center
- lease ending October, 2001.
Osage, Iowa 104,400 Office Products Plant
- owned by Company.
Covington, Tennessee 241,700 Warehouse and Distribution Center,
and Office Products Plant
- owned by Company.
Allentown, Pennsylvania 101,400 Warehouse and Distribution Center
- owned by Company.
Clinton, Illinois 219,000 Promotional Printing Plant
- owned by Company.
LaPalma, California 65,300 Promotional Printing Plant
- lease ending in 2015.
Manchester, Vermont 162,300 Promotional Printing Plant
- owned by Company.
Tonawanda, New York 113,000 Promotional Printing Plant
- owned by Company.
Elk Grove Village, Illinois 142,000 Promotional Printing Plant
and Label Group Office
- owned by Company.
</TABLE>
Distribution warehouses and sales offices throughout the United States are
leased.
11
<PAGE> 12
Item 3 Legal Proceedings
The company and its subsidiaries may from time to time be
involved in claims or lawsuits that arise in the ordinary course of
business. Accruals for claims or lawsuits have been provided for to
the extent that losses are deemed probable and estimatable. Although
the ultimate outcome of these claims or lawsuits cannot be
ascertained on the basis of present information and advice received
from counsel, it is the opinion of management that the disposition or
ultimate determination of such claims or lawsuits will not have a
material adverse effect on the company.
Item 4 Submission of Matters to a Vote of Security Holders
None
Executive Officers of the Registrant
Information concerning the executive officers of the Company is contained in
Item 10 below.
12
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Part II
Item 5 Market for the Registrant's Common Equity and Related Stockholder
Matters
The total number of holders of record of the Company's common
stock was 3,167 as of October 15, 1997. Information about the market
and payment of dividends for the Company's common stock is contained
in the 1997 Annual Report to Stockholders on page 27, and is
incorporated herein by reference.
Item 6 Selected Financial Data
Selected financial data for each of the eleven years ended July
31, 1997, is contained in the Company's Annual Report to Stockholders
for 1997, on pages 20-21, and is incorporated herein by reference.
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations
Management's Discussion and Analysis of Financial Condition and
Results of Operations for the three years ended July 31, 1997 is
contained in the Company's Annual Report to Stockholders for 1997, on
pages 22-27, and is incorporated herein by reference.
Item 8 Financial Statements and Supplementary Data
The consolidated balance sheets of the Company as of July 31,
1997 and 1996, the consolidated statements of income, cash flows and
stockholders' equity for the years ended July 31, 1997, 1996 and
1995, and the notes to consolidated financial statements, together
with the report of Arthur Andersen LLP thereon dated September 3,
1997, are contained in the Company's Annual Report to Stockholders
for 1997, on pages 28-36, and are incorporated herein by reference.
Quarterly financial information for the years ended July 31, 1997 and
1996 is included in Management's Discussion and Analysis of
Financial Condition and Results of Operations, which is contained in
the Company's Annual Report to Stockholders for 1997 on page 27, and
is incorporated herein by reference.
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
13
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Part III
Item 10 Directors and Executive Officers of the Registrant
Information concerning the directors of the Company is
contained in the Company's definitive Proxy Statement dated October
6, 1997, on pages 2-5, and is incorporated herein by reference.
Information concerning Section 16 (a) Beneficial Ownership
Reporting Compliance is contained on page 29 of the Company's
definitive Proxy Statement dated October 6, 1997, and is incorporated
herein by reference.
Executive Officers of the Company
(a) Names, ages and positions of the executive officers:
<TABLE>
Name Age Position
---- --- --------
<S> <C> <C>
Sandra K. Brandt 38 Treasurer
Thomas G. Brooker 39 Vice President - General Manager
- Office Products
Robert J. Cronin 52 President and Chief Executive
Officer
Bruce D'Angelo 45 Vice President - Corporate Sales
Theodore Dimitriou 71 Chairman of the Board
Michael O. Duffield 45 Senior Vice President - Operations
Michael J. Halloran 49 Vice President, Chief Financial
Officer and Assistant Secretary
Donald J. Hoffmann 59 Vice President - Engineering
and Research
Michael T. Laudizio 40 Secretary
Michael T. Leatherman 44 Senior Vice President - Business
Services and Chief Information
Officer
William J. Montanez 44 Assistant Treasurer
Michael M. Mulcahy 55 Vice President - General Manager
- Promotional Printing
</TABLE>
14
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Item 10 Continued
<TABLE>
Name Age Position
---- --- --------
<S> <C> <C>
Wayne E. Richter 41 Vice President - General
Manager - Label Group
</TABLE>
All officers are elected at the Annual Meeting of the Board of
Directors, which is held immediately after the Annual Meeting of
Stockholders.
(b) Business Experience of the Executive Officers:
Ms. Brandt joined Wallace in 1997 as Division Vice President -
Treasurer. Ms. Brandt was previously Assistant Treasurer, Cash
Management for GATX Corporation from 1991 to 1997.
Mr. Brooker has been with the Company since 1981. He was
elected Vice President - General Manager - Office Products in
1995. Mr. Brooker was previously Vice President - General
Manager - Tops Division from 1993 to 1995, and Vice President -
Sales - Tops Division from 1992 to 1993.
Mr. Cronin has been with the Company since 1967. He was
elected President and Chief Executive Officer in 1993. Mr.
Cronin was previously elected Chief Operating Officer in 1992.
Mr. Cronin is also a director of the Company.
Mr. D'Angelo has been with the Company since 1980. He was
elected Vice President - Corporate Sales in 1992.
Mr. Dimitriou joined the Company in 1959. He was Chief
Executive Officer of the Company from 1992 to 1993. He is also
a director of the Company and has been its Chairman of the Board
since 1979.
Mr. Duffield has been with the Company since 1974. He was
elected Senior Vice President - Operations in 1992.
Mr. Halloran has been with the Company since 1975. He was
elected Vice President and Chief Financial Officer in 1987.
Mr. Hoffmann has been with the Company since 1969. He was
elected Vice President - Engineering and Research in 1986.
Mr. Laudizio has been with the Company since 1989. In 1995, he
was named Division Vice President Taxes and was elected
Secretary. Previously, Mr. Laudizio had been Director of
Taxation since 1989, and Assistant Secretary since 1994.
15
<PAGE> 16
Item 10 Continued
Mr. Leatherman has been with the Company since 1990. He was
elected Senior Vice President - Business Services in 1997 and
Chief Information Officer in 1995. Mr. Leatherman was
previously Senior Vice President - Management Information
Services.
Mr. Montanez has been with the Company since 1992. He was
elected Assistant Treasurer in 1996. Mr. Montanez previously
had been Director of Benefits and Risk Management since 1995 and
Risk Manager from 1992 to 1995.
Mr. Mulcahy has been with the Company since 1961. He was
elected Vice President - General Manager - Promotional Printing
Division in 1992.
Mr. Richter has been with the Company since 1979. He was
elected Vice President - General Manager - Label Division in
1992.
There are no family relationships between these executives.
Item 11 Executive Compensation
Information concerning management remuneration and transactions
for the year ended July 31, 1997 is contained in the Company's
definitive Proxy Statement dated October 6, 1997, on pages 4-5 and
14-25, and is incorporated herein by reference.
Item 12 Security Ownership of Certain Beneficial Owners and Management
Information concerning the beneficial ownership of the
Company's common stock is contained in the Company's definitive Proxy
Statement dated October 6, 1997, on pages 28-30, and is incorporated
herein by reference.
Item 13 Certain Relationships and Related Transactions
Information concerning certain relationships and related
transactions is contained in the Company's definitive Proxy Statement
dated October 6, 1997, and is incorporated herein by reference.
16
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Wallace Computer Services, Inc. Fiscal 1997 10-K
Part IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Financial statements and schedules are included in this
Form 10-K Annual Report as indicated below. Those portions of
the 1997 Annual Report to Stockholders listed below are hereby
incorporated by reference.
<TABLE>
Page Number
Annual Report
to Stockholders
---------------
<S> <C>
Quarterly Financial Data for the years
ended July 31, 1997 and 1996 27
Consolidated Statements of Income
for the years ended July 31, 1997,
1996, and 1995 28
Consolidated Statements of
Stockholders' Equity for the years
ended July 31, 1997, 1996, and 1995 29
Consolidated Balance Sheets as of
July 31, 1997 and 1996 30
Consolidated Statements of Cash
Flows for the years ended July 31,
1997, 1996, and 1995 31
Notes to Consolidated Financial Statements 32-35
Report of Independent Public Accountants 36
</TABLE>
Schedule - II, Valuation and Qualifying Accounts - Page 24 of Form
10-K
Schedules Omitted
All other schedules have been omitted because they are not
applicable or not required or because the required information
is included in the financial statements or notes thereto.
17
<PAGE> 18
Item 14 Continued
(b) No reports on Form 8-K were filed during the last
quarter of the period covered by this report.
(c) Exhibit Index
3. Articles of Incorporation and By-Laws
3.1A Restated Certificate of Incorporation of the
Registrant as filed with the Secretary of State of the
State of Delaware on January 7, 1987 (previously filed as
part of Exhibit 3 to the Registrant's Annual Report on Form
10-K for the fiscal year ended July 31, 1987, and
incorporated herein by reference to such Report).
3.1B Certificate of Amendment amending Section 1 of
Article FOURTH of the Certificate of Incorporation of the
Registrant as filed with the Secretary of State of the
State of Delaware on November 28, 1989 (previously filed as
part of Exhibit 3 to the Registrant's Annual Report on Form
10-K for the fiscal year ended July 31, 1987, and
incorporated herein by reference to such Report).
3.1C Certificate of Amendment amending Section 1 of
Article FOURTH of the Certificate of Incorporation of the
Registrant as filed with the Secretary of State of the
State of Delaware on March 14, 1997, and filed herewith.
3.1D Certificate of Designation, Preferences and Rights
of Series A Preferred Stock of the Registrant as filed with
the Secretary of State of the State of Delaware on March
15, 1990 (previously filed as part of Exhibit 3 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended July 31, 1990, and incorporated herein by reference
to such Report).
3.2 Amended and Restated By-Laws of the Registrant as
adopted on January 5, 1996 (previously filed as Exhibit 3.1
to the Registrant's Quarterly Report on Form 10-Q dated
January 31, 1996, and incorporated herein by reference to
such Report).
4. Instruments defining Rights of Security Holders, including
Indentures *
* The Registrant has not filed as an Exhibit any
instrument defining the rights of holders of long-term debt
because the Registrant and its consolidated subsidiaries do
not have any instrument with respect to long-term debt under
which the total amount of authorized securities exceeds 10% of
the total assets of the Registrant and its subsidiaries on a
consolidated basis. The Registrant has filed an agreement with
the Securities and Exchange Commission to furnish a copy of any
instrument defining the rights of holders of long-term debt to
the Commission upon request.
18
<PAGE> 19
Item 14 Continued
10. Material Contracts
10.1 Form of Rights Agreement, dated as of March 14,
1990, between Registrant and Harris Trust and Savings
Bank, as Rights Agent, which includes as Exhibit A the
Certificate of Designation, Preferences and Rights of
Series A Preferred Stock, as Exhibit B the form of
Rights Certificate, and as Exhibit C the form of Summary
of Rights (previously filed as Exhibit 28.2 to the
Registrant's Current Report on Form 8-K dated March 14,
1990, and incorporated herein by reference to such
Report).
10.2A Fourth Amended and Restated Agreement made and
entered into as of January l, 1993 between the
Registrant and Theodore Dimitriou (previously filed as
part of Exhibit 10 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended July 31, 1993, and
incorporated herein by reference to such Report).
10.2B First Amendment to Fourth Amended and Restated
Agreement made and entered into as of January l, 1993
between the Registrant and Theodore Dimitriou
(previously filed as part of Exhibit 10 to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended July 31, 1993, and incorporated herein by
reference to such Report).
10.2C Second Amendment to Fourth Amended and Restated
Agreement made and entered into as of January 1, 1993
between the Registrant and Theodore Dimitriou
(previously filed as Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q dated October 31, 1995,
and incorporated herein by reference to such Report).
10.2D Third Amendment to Fourth Amended and Restated
Agreement effective as of July 1, 1997 between the
Registrant and Theodore Dimitriou, filed herewith.
10.3A 1989 Stock Option Plan of the Registrant, which
amends and restates as a single, integrated plan the
1974 Non-Qualified Stock Option Plan of the Registrant
and the 1981 Incentive Stock Option Plan of the
Registrant (previously filed as part of Exhibit 10 to
the Registrant's Annual Report on Form 10-K for the
fiscal year ended July 31, 1990, and incorporated herein
by reference to such Report).
10.3B 1997 Stock Incentive Plan of the Registrant
approved by the stockholders of Registrant at a special
meeting held on February 28, 1997 (previously filed as
Exhibit 10.3 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended January 31, 1997, and
incorporated herein by reference to such Report).
19
<PAGE> 20
Item 14 Continued
10.4A Executive Incentive Plan of the Registrant, as
restated to reflect Amendment No. 3 thereto, adopted as
of November 9, 1994 (previously filed as part of Exhibit
10 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended July 31, 1995, and incorporated
herein by reference to such Report).
10.4B Fourth Amendment, adopted as of September 6,
1995, to the Executive Incentive Plan of the Registrant
(previously filed as part of Exhibit 10 to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended July 31, 1995, and incorporated herein by
reference to such Report).
10.5 Form of Deferred Compensation/Capital Accumulation
Plan of the Registrant for each of the years 1988, 1989,
1990, 1991, 1993, 1994, 1995, 1996 and 1997 (previously
filed as part of Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q dated October 31, 1995,
and incorporated herein by reference to such Report).
10.6 Supplemental Profit-Sharing Plan of the Registrant
(previously filed as part of Exhibit 10 to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended July 31, 1988, and incorporated herein by
reference to such Report).
10.7A Executive Severance Pay Plan of the Registrant
(previously filed as part of Exhibit 10 to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended July 31, 1990, and incorporated herein by
reference to such Report).
10.7B First Amendment to the Executive Severance Pay
Plan of the Registrant (previously filed as part of
Exhibit 10 to the Registrant's Annual Report on Form
10-K for the fiscal year ended July 31, 1995, and
incorporated herein by reference to such Report).
10.8 Employee Annual Bonus Plan of the Registrant
(previously filed as part of Exhibit 10 to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended July 31, 1994, and incorporated herein by
reference to such Report).
10.9A Employee Long-Term Performance Plan of the
Registrant (previously filed as part of Exhibit 10 to
the Registrant's Annual Report on Form 10-K for the
fiscal year ended July 31, 1994, and incorporated herein
by reference to such Report).
10.9B First Amendment of the Employee Long-Term
Performance Plan of the Registrant (previously filed as
part of Exhibit 10 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended July 31, 1995, and
incorporated herein by reference to such Report).
20
<PAGE> 21
Item 14 Continued
10.10 Employee Stock Option Guideline of the
Registrant (previously filed as part of Exhibit 10 to
the Registrant's Annual Report on Form 10-K for the
fiscal year ended July 31, 1994, and incorporated herein
by reference to such Report).
10.11 Form of Deferred Compensation/Capital
Accumulation Plan for Directors of the Registrant for
each of the years 1988, 1989, 1993, 1994, 1995, 1996 and
1997 (previously filed as Exhibit 10.3 to the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended October 31, 1995, and incorporated herein
by reference to such Report).
10.12 Retirement Plan for Outside Directors of the
Registrant (previously filed as part of Exhibit 10 to
the Registrant's Annual Report on Form 10-K for the
fiscal year ended July 31, 1990, and incorporated herein
by reference to such Report).
10.13A Employee Severance Pay Plan of the Registrant
(previously filed as part of Exhibit 10 to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended July 31, 1992, and incorporated herein by
reference to such Report).
10.13B First Amendment of the Employee Severance Pay
Plan of the Registrant (previously filed as part of
Exhibit 10 to the Registrant's Annual Report on Form
10-K for the fiscal year ended July 31, 1995, and
incorporated herein by reference to such Report).
10.14A Form of Indemnification Agreement with Director
between the Registrant and each of the following:
Robert J. Cronin, Theodore Dimitriou, Richard F. Doyle,
Albert W. Isenman III, William N. Lane III, John C.
Pope, Robert P. Rittereiser and Neele E. Stearns, Jr.
(previously filed as part of Exhibit 10 to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended July 31, 1990, and incorporated herein by
reference to such Report).
10.14B Form of Addendum to Indemnification Agreement
with Director (Member of Profit Sharing Committee)
between the Registrant and each of the following:
Robert J. Cronin and Theodore Dimitriou (previously
filed as part of Exhibit 10 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended July 31,
1990, and incorporated herein by reference to such
Report).
21
<PAGE> 22
Item 14 Continued
10.14C Form of Indemnification Agreement with Director
(Member of Profit Sharing Committee) between the
Registrant and Robert P. Rittereiser (previously filed
as part of Exhibit 10 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended July 31, 1996,
and incorporated herein by reference to such Report).
10.15A Form of Indemnification Agreement with Officer
between the Registrant and each of the following:
Sandra K. Brandt, Thomas G. Brooker, Robert J. Cronin,
Bruce D'Angelo, Theodore Dimitriou, Michael O. Duffield,
Michael J. Halloran, Donald J. Hoffmann, Michael T.
Laudizio, Michael T. Leatherman, William J. Montanez,
Michael M. Mulcahy, and Wayne E. Richter (previously
filed as part of Exhibit 10 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended July 31,
1990, and incorporated herein by reference to such
Report).
10.15B Form of Addendum to Indemnification Agreement
with Officer (Trustee of Profit Sharing and Retirement
Trust and Member of Profit Sharing Committee) between
the Registrant and each of the following: Robert J.
Cronin, Theodore Dimitriou and Michael J. Halloran
(previously filed as part of Exhibit 10 to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended July 31, 1990, and incorporated herein by
reference to such Report).
10.15C Form of Addendum to Indemnification Agreement
with Officer (Member of Profit Sharing Committee)
between the Registrant and Michael O. Duffield
(previously filed as part of Exhibit 10 to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended July 31, 1995, and incorporated herein by
reference to such Report).
10.16 Form of Addendum to Indemnification Agreement
with Officer for FEC Employee Stock Ownership Trust
between the Registrant and each of the following:
Robert J. Cronin, Theodore Dimitriou and Michael O.
Duffield (previously filed as Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q dated April
30, 1996, and incorporated herein by reference to such
Report).
10.17A Agreement effective as of July 1, 1997 between
Registrant and Robert J. Cronin (Employment Agreement),
filed herewith.
10.17B Agreement effective as of July 1, 1997 between
Registrant and Robert J. Cronin (Change of Control
Agreement).
22
<PAGE> 23
Item 14 Continued
13. Annual Report to Security Holders, Form 10-Q or Quarterly
Report to Security Holders.
13. Annual Report - Fiscal 1997 of the Registrant (filed as
Exhibit 13 hereto and included only to the extent portions
thereof are expressly incorporated by reference in this Report).
21. Subsidiaries of Registrant
21. Subsidiaries of the Company
23. Consents of Experts and Counsel
23. Consent of Arthur Andersen LLP.
27. Financial Data Schedule
27. Financial Data Schedule
23
<PAGE> 24
Wallace Computer Services, Inc. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
For the years ended July 31
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Balance at Beginning of Year $3,215,000 $2,671,000 $1,982,000
Provision for Doubtful Accounts 1,189,000 560,000 1,132,000
Accounts Written Off Against Allowance (1,180,000) (860,000) (1,061,000)
Recoveries Credited to Allowance 257,000 346,000 593,000
Other Credits (1) --- 498,000 25,000
------------ ------------ ------------
Balance at End of Year $3,481,000 $3,215,000 $2,671,000
============ ============ ============
</TABLE>
(1) Fiscal 1996 credit from acquisition of Forms Engineering Company
as of February 8, 1996.
Fiscal 1995 credit from acquisition of Lampro Graphics, Inc. as of
November 1, 1994.
24
<PAGE> 25
Wallace Computer Services, Inc. Fiscal 1997 10-K
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 24, 1997.
Wallace Computer Services, Inc.
/s/ Michael J. Halloran
By
-----------------------------
Michael J. Halloran
Vice President, Chief Financial
Officer and Assistant Secretary
(principal accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in capacities indicated, on October 24, 1997.
/s/ Theodore Dimitriou /s/ William N. Lane III
- ------------------------- ----------------------------
Theodore Dimitriou William N. Lane III
Chairman of the Board Director
/s/ Robert J. Cronin /s/ John C. Pope
- ------------------------- ----------------------------
Robert J. Cronin John C. Pope
Director, President and Director
Chief Executive Officer
/s/ Richard F. Doyle /s/ Robert P. Rittereiser
- ------------------------- ----------------------------
Richard F. Doyle Robert P. Rittereiser
Director Director
/s/ Albert W. Isenman III /s/ Neele E. Stearns
- --------------------------- ----------------------------
Albert W. Isenman III Neele E. Stearns, Jr
Director Director
25
<PAGE> 26
Exhibit Index
Exhibit
Number Description
3.1A Restated Certificate of Incorporation of the Registrant as
filed with the Secretary of State of the State of Delaware on January
7, 1987 (previously filed as part of Exhibit 3 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended July 31, 1987,
and incorporated herein by reference to such Report).
3.1B Certificate of Amendment amending Section 1 of Article
FOURTH of the Certificate of Incorporation of the Registrant as filed
with the Secretary of State of the State of Delaware on November 28,
1989 (previously filed as part of Exhibit 3 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended July 31, 1987,
and incorporated herein by reference to such Report).
3.1C Certificate of Amendment amending Section 1 of Article
FOURTH of the Certificate of Incorporation of the Registrant as filed
with the Secretary of State of the State of Delaware on March 14,
1997, and filed herewith.
3.1D Certificate of Designation, Preferences and Rights of
Series A Preferred Stock of the Registrant as filed with the
Secretary of State of the State of Delaware on March 15, 1990
(previously filed as part of Exhibit 3 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended July 31, 1990, and
incorporated herein by reference to such Report).
3.2 Amended and Restated By-Laws of the Registrant as adopted
on January 5, 1996 (previously filed as Exhibit 3.1 to the
Registrant's Quarterly Report on Form 10-Q dated January 31, 1996,
and incorporated herein by reference to such Report).
10.1 Form of Rights Agreement, dated as of March 14, 1990,
between Registrant and Harris Trust and Savings Bank, as Rights
Agent, which includes as Exhibit A the Certificate of Designation,
Preferences and Rights of Series A Preferred Stock, as Exhibit B the
form of Rights Certificate, and as Exhibit C the form of Summary of
Rights (previously filed as Exhibit 28.2 to the Registrant's Current
Report on Form 8-K dated March 14, 1990, and incorporated herein by
reference to such Report).
10.2A Fourth Amended and Restated Agreement made and entered
into as of January l, 1993 between the Registrant and Theodore
Dimitriou (previously filed as part of Exhibit 10 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended July 31, 1993,
and incorporated herein by reference to such Report).
10.2B First Amendment to Fourth Amended and Restated
Agreement made and entered into as of January l, 1993 between the
Registrant and Theodore Dimitriou (previously filed as part of
Exhibit 10 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended July 31, 1993, and incorporated herein by reference
to such Report).
26
<PAGE> 27
Exhibit Index (continued)
Exhibit
Number Description
10.2C Second Amendment to Fourth Amended and Restated
Agreement made and entered into as of January 1, 1993 between the
Registrant and Theodore Dimitriou (previously filed as Exhibit 10.1
to the Registrant's dated October 31, 1995, and incorporated
herein by Quarterly Report on Form 10-Q
reference to such Report).
10.2D Third Amendment to Fourth Amended and Restated
Agreement effective as of July 1, 1997 between the Registrant and
Theodore Dimitriou, filed herewith.
10.3A 1989 Stock Option Plan of the Registrant, which amends
and restates as a single, integrated plan the 1974 Non-Qualified
Stock Option Plan of the Registrant and the 1981 Incentive Stock
Option Plan of the Registrant (previously filed as part of Exhibit 10
to the Registrant's Annual Report on Form 10-K for the fiscal year
ended July 31, 1990, and incorporated herein by reference to such
Report).
10.3B 1997 Stock Incentive Plan of the Registrant approved by
the stockholders of Registrant at a special meeting held on February
28, 1997 (previously filed as Exhibit 10.3 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended January 31, 1997,
and incorporated herein by reference to such Report).
10.4A Executive Incentive Plan of the Registrant, as restated
to reflect Amendment No. 3 thereto, adopted as of November 9, 1994
(previously filed as part of Exhibit 10 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended July 31, 1995, and
incorporated herein by reference to such Report).
10.4B Fourth Amendment, adopted as of September 6, 1995, to the
Executive Incentive Plan of the Registrant (previously filed as part
of Exhibit 10 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended July 31, 1995, and incorporated herein by reference
to such Report).
10.5 Form of Deferred Compensation/Capital Accumulation Plan of
the Registrant for each of the years 1988, 1989, 1990, 1991, 1993,
1994, 1995, 1996 and 1997 (previously filed as part of Exhibit 10.2
to the Registrant's Quarterly Report on Form 10-Q dated October 31,
1995, and incorporated herein by reference to such Report).
10.6 Supplemental Profit-Sharing Plan of the Registrant
(previously filed as part of Exhibit 10 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended July 31, 1988, and
incorporated herein by reference to such Report).
27
<PAGE> 28
Exhibit Index (continued)
Exhibit
Number Description
10.7A Executive Severance Pay Plan of the Registrant
(previously filed as part of Exhibit 10 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended July 31, 1990, and
incorporated herein by reference to such Report).
10.7B First Amendment to the Executive Severance Pay Plan of
the Registrant (previously filed as part of Exhibit 10 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
July 31, 1995, and incorporated herein by reference to such Report).
10.8 Employee Annual Bonus Plan of the Registrant (previously
filed as part of Exhibit 10 to the Registrant's Annual Report on Form
10-K for the fiscal year ended July 31, 1994, and incorporated herein
by reference to such Report).
10.9A Employee Long-Term Performance Plan of the Registrant
(previously filed as part of Exhibit 10 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended July 31, 1994, and
incorporated herein by reference to such Report).
10.9B First Amendment of the Employee Long-Term Performance
Plan of the Registrant (previously filed as part of Exhibit 10 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
July 31, 1995, and incorporated herein by reference to such Report).
10.10 Employee Stock Option Guideline of the Registrant
(previously filed as part of Exhibit 10 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended July 31, 1994, and
incorporated herein by reference to such Report).
10.11 Form of Deferred Compensation/Capital Accumulation Plan
for Directors of the Registrant for each of the years 1988, 1989,
1993, 1994, 1995, 1996 and 1997 (previously filed as Exhibit 10.3 to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
October 31, 1995, and incorporated herein by reference to such
Report).
10.12 Retirement Plan for Outside Directors of the Registrant
(previously filed as part of Exhibit 10 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended July 31, 1990, and
incorporated herein by reference to such Report).
10.13A Employee Severance Pay Plan of the Registrant
(previously filed as part of Exhibit 10 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended July 31, 1992, and
incorporated herein by reference to such Report).
28
<PAGE> 29
Exhibit Index (continued)
Exhibit
Number Description
10.13B First Amendment of the Employee Severance Pay Plan of
the Registrant (previously filed as part of Exhibit 10 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
July 31, 1995, and incorporated herein by reference to such Report).
10.14A Form of Indemnification Agreement with Director between
the Registrant and each of the following: Robert J. Cronin, Theodore
Dimitriou, Richard F. Doyle, Albert W. Isenman III, William N. Lane
III, Neele E. Stearns, John C. Pope and Robert P. Rittereiser
(previously filed as part of Exhibit 10 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended July 31, 1990, and
incorporated herein by reference to such Report).
10.14B Form of Addendum to Indemnification Agreement with
Director (Member of Profit Sharing Committee) between the Registrant
and each of the following: Robert J. Cronin and Theodore Dimitriou
(previously filed as part of Exhibit 10 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended July 31, 1990, and
incorporated herein by reference to such Report).
10.14C Form of Indemnification Agreement with Director (Member
of Profit Sharing Committee) between the Registrant and Robert P.
Rittereiser. (previously filed as part of Exhibit 10 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
July 31, 1996, and incorporated herein by reference to such Report).
10.15A Form of Indemnification Agreement with Officer between
the Registrant and each of the following: Sandra K. Brandt, Thomas
G. Brooker, Robert J. Cronin, Bruce D'Angelo, Theodore Dimitriou,
Michael O. Duffield, Michael J. Halloran, Donald J. Hoffmann, Michael
T. Laudizio, Michael T. Leatherman, William J. Montanez, Michael M.
Mulcahy, and Wayne E. Richter (previously filed as part of Exhibit 10
to the Registrant's Annual Report on Form 10-K for the fiscal year
ended July 31, 1990, and incorporated herein by reference to such
Report).
10.15B Form of Addendum to Indemnification Agreement with
Officer (Trustee of Profit Sharing and Retirement Trust and Member of
Profit Sharing Committee) between the Registrant and each of the
following: Robert J. Cronin, Theodore Dimitriou and Michael J.
Halloran (previously filed as part of Exhibit 10 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended July 31, 1990,
and incorporated herein by reference to such Report).
29
<PAGE> 30
Exhibit Index (continued)
Exhibit
Number Description
10.15C Form of Addendum to Indemnification Agreement with
Officer (Member of Profit Sharing Committee) between the Registrant
and Michael O. Duffield (previously filed as part of Exhibit 10 to
the Registrant's Annual Report on Form 10-K for the fiscal year ended
July 31, 1995, and incorporated herein by reference to such Report).
10.16 Form of Addendum to Indemnification Agreement with
Officer for FEC Employee Stock Ownership Trust between the Registrant
and each of the following: Robert J. Cronin, Theodore Dimitriou and
Michael O. Duffield (previously filed as Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q dated April 30, 1996, and
incorporated herein by reference to such Report).
10.17A Agreement effective as of July 1, 1997 between
Registrant and Robert J. Cronin (Employment Agreement), filed
herewith.
10.17B Agreement effective as of July 1, 1997 between
Registrant and Robert J. Cronin (Change of Control Agreement), filed
herewith.
13 Annual Report - Fiscal 1997 of the Registrant (filed as
Exhibit 13 hereto and included only to the extent portions thereof
are expressly incorporated by reference in this Report).
21 Subsidiaries of the Company
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
30
<PAGE> 1
EXHIBIT 3.1C
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
WALLACE COMPUTER SERVICES, INC.
* * * * * *
Adopted in accordance with Section 242 of the
General Corporation Law of the State of Delaware
* * * * * *
WALLACE COMPUTER SERVICES, INC. (the "Corporation"), a corporation duly
organized and existing under and by virtue of the General Corporation Law of
the State of Delaware, DOES HEREBY CERTIFY THAT:
FIRST: The Corporation filed its original Certificate of
Incorporation on June 10, 1963, under the name of Wallace Business Forms, Inc.
SECOND: The Corporation filed a Restated Certificate of Incorporation
on January 7, 1987.
THIRD: The Corporation filed an amendment to its Restated
Certificate of Incorporation on November 15, 1989 amending Article FOURTH.
FOURTH: In accordance with Section 242 of the General Corporation Law
of the State of Delaware, all of the members of the Board of Directors of the
Corporation adopted a resolution declaring the advisability of amending the
Certificate of Incorporation of the Corporation, as heretofore amended and
restated, at a meeting of the Board of Directors of the Corporation held on
January 14, 1997, which amendment is as follows:
Section 1 of Article FOURTH of the Certificate of
Incorporation, as heretofore amended, restated, and corrected, is hereby
amended to read as follows:
1. Authorized Shares: The total number of shares of all
classes of stock that the corporation shall have authority
to issue is 100,500,000, consisting of 100,000,000 shares
of common stock
<PAGE> 2
having a par value of $1.00 per share, and 500,000
shares of preferred stock having a par value of $50.00 per
share.
FIFTH: In accordance with Section 242 of the General Corporation
Law of the State of Delaware, at the meeting of the Board of Directors of the
Corporation held on January 14, 1997, the Board of Directors directed that the
Amendment be submitted for the consideration and approval of the stockholders
of the Corporation at a special Meeting of Stockholders held on February 28,
1997.
SIXTH: In accordance with Section 242 of the General Corporation
Law of the State of Delaware, the holders of a majority of the outstanding
stock of the Corporation, which outstanding stock consists of one class of
stock, adopted the Amendment to Certificate of Incorporation at a Special
Meeting of the stockholders of the Corporation held on February 28, 1997.
IN WITNESS WHEREOF, the undersigned has caused this Certificate of
Amendment of Certificate of Incorporation to be signed by Robert J. Cronin,
President and Chief Executive Officer of the Corporation, and attested by
Michael T. Laudizio, its Secretary, effective as of February 28, 1997.
WALLACE COMPUTER SERVICES, INC.
a Delaware corporation
/s/ Robert J. Cronin
-------------------------------------
Robert J. Cronin
President and Chief Executive Officer
ATTEST:
/s/ Michael T. Laudizio
By: -----------------------
Michael T. Laudizio
Secretary
<PAGE> 1
EXHIBIT 10.2D
THIRD AMENDMENT TO
FOURTH AMENDED AND RESTATED AGREEMENT
THIRD AMENDMENT effective as of July 1, 1997, to FOURTH AMENDED AND
RESTATED AGREEMENT made and entered into as of January 1, 1993, by and between
WALLACE COMPUTER SERVICES, INC., a Delaware corporation (hereinafter referred
to as the "Company"), and THEODORE DIMITRIOU of Mettawa, Illinois (hereinafter
referred to as "Dimitriou").
RECITALS
The Company and Dimitriou entered into a Fourth Amended and Restated
Agreement dated as of January 1, 1993 (the "Agreement"), pursuant to which
Dimitriou was to serve the Company as its Chairman of the Board and to serve
thereafter as a consultant to the Company. The Company and Dimitriou have
previously entered into a First Amendment to the Agreement to amend Section
E.2(a) of the Agreement. The Company and Dimitriou now wish to enter into this
Third Amendment so that the Agreement, as so amended, accurately reflects their
current intentions.
AGREEMENTS
IN CONSIDERATION OF the foregoing and the mutual undertakings described in
this Third Amendment, the Company and Dimitriou hereby:
1. Agree that the Consulting Period described in Section C.1. of the
Agreement shall continue until the date of Dimitriou's seventy-second (72nd)
birthday, subject to earlier termination in the event of Dimitriou's death,
Permanent Disability (as defined in said Section C.1.) or termination for
"cause" as provided for in said Section C.1.
2. Amend Section E.2(a) of the Agreement so that such section
provides, in its entirety, as follows:
(a) Commencing on the date of his Retirement and continuing
until the later of (I) the date of Dimitriou's death or (II) the tenth
anniversary of his Retirement, and provided that, after Retirement,
Dimitriou does not commit any action that would have permitted the
Company to have terminated his employment for "cause" under the
provisions of Section B.1(v) (including, if
<PAGE> 2
applicable, the proviso thereto), the Company shall pay to Dimitriou a
monthly Supplemental Retirement Benefit determined as provided below;
provided, however, that if Dimitriou should die before the tenth
anniversary of his Retirement, all remaining monthly Supplemental
Retirement Benefit payments shall be made to his Designated Beneficiary
under Section E.2(b). The first payment of the Supplemental Retirement
Benefit shall be made on the first day of the first month following his
Retirement, and the last payment of the Supplemental Retirement Benefit
shall be made on the first day of the later of (A) the one hundred
twentieth month following his Retirement or (B) the month during which his
death occurs. During the Consulting Period described in Section C.1. of
this Agreement, the monthly Supplemental Retirement Benefit payable under
this Section E.2(a) shall be $21,791.67 reduced by (A) 100% of his monthly
social security retirement benefits, if any, and (B) the monthly amount
payable under a single-life annuity for the life of Dimitriou commencing
on the date of his Retirement which is the actuarial equivalent (using the
then current Pension Benefit Guaranty Corporation interest rate for
valuing immediate annuities under single-employer pension plans) of the
benefits payable to Dimitriou under any retirement plan or program
sponsored or maintained by the Company, including, without limitation, any
amounts payable to him under the Company's Profit Sharing and Retirement
Plan and the Company's Supplemental Profit Sharing Plan that are
attributable to Company contributions, but excluding any amounts
attributable to contributions made by the Company on behalf of Dimitriou
under the Company's Profit Sharing and Retirement Plan pursuant to a
salary reduction agreement under Section 401(k) of the Internal Revenue
Code of 1986. After the end of the Consulting Period described in Section
C.1 of this Agreement, the monthly Supplemental Retirement Benefit payable
under this Section E.2(a) shall be $30,125 reduced by the amounts
described in parts (A) and (B) of the immediately preceding sentence. The
Company shall designate the above provisions of this Agreement relating to
the Supplemental Retirement Benefit as a "Plan" subject to the provisions
of the Wallace Computer Services, Inc. Benefit Trust.
3. Amend Section F.1 of the Agreement so that such section
provides, in its entirety, as follows:
1. Material Change. For purposes of this Agreement, a
"Material Change" shall be deemed to have occurred if any of the
following should occur:
(a) The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the Exchange
2
<PAGE> 3
Act) of 35% or more of either (i) the then outstanding shares of
capital stock of the Company (the "Outstanding Company Capital Stock") or
(ii) the combined voting power of the then outstanding voting securities
of the Company entitled to vote generally in the election of directors
(the "Company Voting Securities"); provided, however, that (X) any
acquisition by or from the Company or any of its subsidiaries, (Y) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any of its subsidiaries or (Z) any
acquisition by any corporation with respect to which, following such
acquisition, more than 65% of the then outstanding shares of capital stock
of such corporation and the combined voting power of the then outstanding
voting securities of such corporation entitled to vote generally in the
election of directors is then beneficially owned, directly or indirectly,
by all or substantially all of the individuals and entities who were the
beneficial owners, respectively, of the Outstanding Company Capital Stock
and Company Voting Securities immediately prior to such acquisition, in
substantially the same proportion as their ownership, immediately prior to
such acquisition, of the Outstanding Company Capital Stock and Company
Voting Securities, as the case may be, shall not constitute a Material
Change; or
(b) Individuals who, as of September 6, 1995, constituted the
Board of Directors of the Company (the "Incumbent Board") cease for any
reason to constitute at least a majority of such Board; provided, however,
that any individual who becomes a member of the Board of Directors of the
Company subsequent to such date whose election, or nomination for election
by the stockholders of the Company, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board shall be
deemed to be a member of the Incumbent Board; but provided further, that
no individual whose election or initial assumption of office as a director
of the Company occurs as a result of an actual or threatened election
contest (as such terms are used in Rule 14a-11 of Regulation 14A
promulgated under the Exchange Act) with respect to the election or
removal of directors, or any other actual or threatened solicitation of
proxies or consents by or on behalf of any person other than the Board of
Directors of the Company, shall be deemed to be a member of the Incumbent
Board; or
(c) Approval by the stockholders of the Company of a
reorganization, merger or consolidation (a "Business Combination") with
respect to which all or substantially all of the individuals and entities
who were the respective beneficial owners of the Outstanding Company
Capital Stock and Company Voting Securities immediately prior to such
Business Combination do not, following such Business Combination,
beneficially own, directly or indirectly, more than 65% of, respectively,
the then outstanding shares of capital stock and the combined voting power
of the then outstanding voting securities entitled to vote generally in
the election of directors, as the case may be, of the corporation
resulting from the Business Combination, in substantially the same
proportion as
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their ownership immediately prior to such Business Combination of the
Outstanding Company Capital Stock and Company Voting Securities, as the
case may be; or
(d) Approval by the stockholders of the Company of a sale or
other disposition of all or substantially all of the assets of the Company
other than to a corporation with respect to which, following such sale or
disposition, more than 65% of, respectively, the then outstanding shares
of capital stock and the combined voting power of the then outstanding
voting securities entitled to vote generally in the election of directors
is then owned beneficially, directly or indirectly, by all or
substantially all of the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Company Capital Stock and Company
Voting Securities immediately prior to such sale or disposition, in
substantially the same proportion as their ownership of the Outstanding
Company Capital Stock and Company Voting Securities, as the case may be,
immediately prior to such sale or disposition; or
(e) A complete liquidation or dissolution of the Company.
4. Acknowledge and agree that, in all other respects, the Agreement
shall remain in full force and effect in accordance with its terms.
IN WITNESS WHEREOF, the Company has caused this Third Amendment to be
executed on its behalf by the Chairman of the Compensation Committee of its
Board of Directors and Dimitriou has executed this Third Amendment, all as of
the day and year first above written.
WALLACE COMPUTER SERVICES, INC.
ATTEST:
/s/ Michael T. Laudizio By: /s/ William N. Lane III
- ------------------------------ -----------------------------
Its Secretary Chairman of the Compensation
Committee of the Board of Directors
/s/ Theodore Dimitriou
-----------------------------
THEODORE DIMITRIOU
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EXHIBIT 10.17A
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made and entered into as of July 1, 1997, by and between
WALLACE COMPUTER SERVICES, INC., a Delaware corporation, (hereinafter called
the "Corporation") and ROBERT J. CRONIN, (hereinafter called the "Executive").
WITNESSETH THAT:
WHEREAS, the Corporation desires to continue to employ the Executive as
its President and Chief Executive Officer, and the Executive desires to
continue in such employment;
NOW, THEREFORE, the Corporation and the Executive, each intending to be
legally bound, hereby mutually covenant and agree as follows:
1. Employment and Term.
(a) Employment. The Corporation shall employ the Executive as the
President and Chief Executive Officer of the Corporation, and the Executive
shall so serve, for the term set forth in Paragraph 1(b).
(b) Term. The term of the Executive's employment under this Agreement
shall commence on July 1, 1997 and end on June 30, 2000, subject to the
extension of such term as hereinafter provided and subject to earlier
termination as provided in Paragraph 9. The term of this Agreement shall be
extended automatically for one (1) additional year as of July 1, 1998 and each
annual anniversary date thereof unless, no later than ninety (90) days prior to
any such renewal date, either the Board of Directors of the Corporation (the
"Board"), on behalf of the Corporation, or the Executive gives written notice
to the other, in accordance with Paragraph 16, that the term of this Agreement
shall not be so extended.
2. Duties. During the period of employment as provided in Paragraph 1(b)
hereof, the Executive shall serve as President and Chief Executive Officer of
the Corporation and have all powers and duties consistent with such positions,
subject to the reasonable direction of the Board. The Executive shall also
continue to serve as a member of the Board if elected as such, and the parties
anticipate (but make no commitment) that, in the absence of a significant
change in circumstances, the Executive will be elected in November 1997 to the
additional position of Chairman of the Board. The Executive shall devote
substantially his entire time during reasonable business hours (reasonable sick
leave and vacations excepted) and such additional time as is necessary to
fulfill faithfully, responsibly and to the best of his ability his duties
hereunder.
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3. Salary.
(a) Base Salary. For services performed by the Executive for the
Corporation pursuant to this Agreement during the period of employment as
provided in Paragraph 1(b) hereof, the Corporation shall pay the Executive a
base salary at the rate of four hundred fifty-eight thousand six hundred
forty-six dollars ($458,646) per year, payable in substantially equal
installments in accordance with the Corporation's regular payroll practices.
The Executive's base salary (with any increases under paragraph (b), below)
shall not be subject to reduction. Any compensation which may be paid to the
Executive under any additional compensation or incentive plan of the
Corporation or which may be otherwise authorized from time to time by the Board
(or an appropriate committee thereof) shall be in addition to the base salary
to which the Executive shall be entitled under this Agreement.
(b) Salary Increases. During the period of employment as provided in
Paragraph 1(b) hereof, the base salary of the Executive shall be reviewed no
less frequently than annually by the Board to determine whether or not the same
should be increased in light of the duties and responsibilities of the
Executive and the performance thereof, and if it is determined that an increase
is merited, such increase shall be promptly put into effect and the base salary
of the Executive as so increased shall constitute the base salary of the
Executive for purposes of Paragraph 3(a).
4. Annual Bonuses. For each fiscal year during the term of employment,
the Executive shall be eligible to receive a cash bonus based on the
Corporation's achievement of certain operating and/or financial goals, with an
annual target bonus amount equal to 60% of the Executive's then current annual
base salary, in accordance with the terms of a bonus plan adopted and
administered by the Board for senior executives of the Corporation, which plan
may be amended from time to time by the Board in its discretion.
5. Payment of Bonuses. Whenever any annual bonus or any other cash bonus
is awarded to Executive, payment of such bonus shall be made in accordance with
the following provisions:
(a) Prior to the commencement of any fiscal year, Executive may advise
the Compensation Committee of the Board of his election to be paid any annual
bonus or any other cash bonus to be awarded to him for such fiscal year on a
current or deferred basis. If no such election is made, Executive shall be
deemed to have elected to be paid such bonus on a current basis.
(b) Any bonus payable on a current basis shall be paid to Executive
within sixty (60) days of the date of the award, subject to normal withholdings
and deductions.
(c) Any bonus payable on a deferred basis shall be accrued and paid to
Executive as follows:
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(i) Effective as of the date of the award, the Corporation shall
credit the amount of any deferred bonus to the book reserve account known as the
"Deferred Compensation Account of Robert J. Cronin" (hereinafter referred to as
the "Deferred Compensation Account"). There shall also be credited to the
Deferred Compensation Account, effective as of the date hereof, all deferred
bonuses and interest accrued thereon credited to Executive prior to the date
hereof.
(ii) Interest shall accrue on all amounts credited to the Deferred
Compensation Account from the date credited to such account until the date paid
to Executive as provided in paragraph (iii), below. Such interest shall be
computed quarterly on the last day of each calendar quarter based upon the
interest rate payable on ninety (90) day certificates of deposit of The First
National Bank of Chicago prevailing as of the first day of such calendar
quarter. Interest shall be credited to the Deferred Compensation Account, and
thereafter accrue interest as provided in this paragraph (ii), effective as of
the first day of each calendar year. Any other provision of this subparagraph
(ii) to the contrary notwithstanding, in the event the Corporation shall
implement deferred compensation provisions in connection with its incentive
compensation programs which provide for deferred payments thereunder in the
form of, or based on the rate of return of the Corporation's common stock, the
Executive shall be provided with a similar deferred payment opportunity with
regard to the Deferred Compensation Account.
(iii) The amounts of deferred bonus and other amounts credited to the
Deferred Compensation Account shall be paid to Executive, subject to normal
withholdings and deductions, in one hundred twenty (120) equal monthly
installments, with interest on the unpaid balance at the rate specified in
paragraph (ii), above, commencing in the month immediately following the
termination of Executive's employment with the Corporation; provided, however,
that if Executive should die before all amounts credited to the Deferred
Compensation Account have been paid to him, the full unpaid amount then
credited to the Deferred Compensation Account and all interest accrued thereon
shall be immediately paid in a lump sum to his designated beneficiary or, if no
beneficiary is designated, to his estate.
(d) Any other provision of this Agreement to the contrary
notwithstanding, Executive may at any time or from time to time request the
payment to him of all or any portion of the amounts then credited to the
Deferred Compensation Account, but the Corporation shall make a payment to
Executive pursuant to such a request only if and to the extent that such
request is approved by the Board.
(e) The Corporation shall designate the provisions of this Agreement and
the Change of Control Agreement (described in Paragraph 23 below) relating to
the Deferred Compensation Account as a "Plan" subject to the provisions of the
Wallace Computer Services, Inc. Benefit Trust (the "Benefit Trust").
6. Equity Incentive Compensation. During the term of employment hereunder
the
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Executive shall be eligible to participate, in an appropriate manner relative
to other senior executives of the Corporation, in any equity-based incentive
compensation plan or program approved by the Board from time to time, including
(but not by way of limitation) any plan providing for the granting of (a)
options to purchase stock of the Corporation, (b) restricted stock of the
Corporation or (c) similar equity-based units or interests.
7. Other Benefits. In addition to the compensation described in
Paragraphs 3, 4 and 6, above, the Executive shall also be entitled to the
following:
(a) Participation in Benefit Plans. The Executive shall be entitled to
participate in all of the various retirement, welfare, fringe benefit,
executive perquisite, and expense reimbursement plans, programs and
arrangements of the Corporation to the extent the Executive is eligible for
participation under the terms of such plans, programs and arrangements, except
that the Executive shall not participate in the Supplemental Retirement Plan of
the Corporation.
(b) Uninsured Medical Expenses. Continuing until Executive's death,
or if later, the death of Executive's spouse, the Corporation shall reimburse
Executive upon request for expenses incurred by Executive for or in respect of
medical care (as defined in Section 213 of the Internal Revenue Code of 1986,
as amended (the "Code")) of Executive and his spouse; provided, however, that
Executive shall be entitled to reimbursement of medical expenses as set forth
in this paragraph (b) if and so long as (and only if and so long as) (i)
Executive does not, at any time while he is an employee of the Corporation or
at any time thereafter, violate the confidentiality, noncompetition or
nonsolicitation covenants set forth in Paragraph 8, below, and (ii) Executive
does not commit any action that would permit the Corporation to terminate his
employment for "Cause" (as defined in Paragraph 9(d)(ii), below). The
Corporation may, in its discretion, pay any such medical expenses directly in
lieu of making reimbursement therefor. The reimbursement or payment of such
medical expenses on behalf of Executive and/or his spouse shall be limited to
an aggregate of $500,000, and reimbursement or payment of such medical expenses
shall be made by the Corporation only in the event and to the extent that such
reimbursement or payment is not then provided under any insurance policy or
policies, whether owned by the Corporation or Executive, or under any other
private or public health and accident plan or program under which Executive or
his spouse, as the case may be, is then eligible for benefits; provided,
however, that, if Executive's employment terminates:
(i) Before his 55th birthday, there shall be no reimbursement or
payment of medical expenses on behalf of Executive and/or his spouse after his
employment terminates,
(ii) On or after his 55th but before his 60th birthday, the
reimbursement or payment of medical expenses on behalf of Executive and/or his
spouse shall be limited to an aggregate of $150,000, or
(iii) On or after his 60th but before his 65th birthday, the
reimbursement or payment of medical expenses on behalf of Executive and/or his
spouse shall be limited to an
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aggregate of $300,000.
Upon the request of the Corporation, Executive shall submit to the Corporation
hospitalization, doctor, dental or other medical bills, including premium
notices for accident or health insurance, for verification by the Corporation.
(c) Supplemental Retirement Benefit. Except as described in paragraph
(ii), below, the Corporation shall pay to the Executive after the termination
of his employment a Supplemental Retirement Benefit ("SRB") determined and paid
as follows:
(i) The monthly amount of the SRB shall be the excess of (A) the
amount determined by multiplying (1) the Executive's Recent Average Monthly
Compensation (as described in paragraph (iii), below) by (2) the Executive's
Supplemental Retirement Percentage (as described in paragraph (ii), below) over
(B) the sum (but not to exceed 70% of the amount determined under the
immediately preceding clause (A)) of (1) the Executive's monthly Social
Security retirement benefits, if any, and (2) the monthly amount payable under
a single-life annuity for the Executive's life which is the actuarial
equivalent of the benefits payable to the Executive under any retirement or
profit-sharing plan or program provided by the Corporation, to the extent such
benefits are attributable to contributions by the Corporation other than
contributions by the Corporation on behalf of the Executive under a salary
reduction agreement.
(ii) The Executive's Supplemental Retirement Percentage shall be
25%, plus an additional 2.5% for each additional year of age attained by the
Executive after age 55, up to a maximum Supplemental Retirement Percentage of
50% upon attaining age 65; but the Supplemental Retirement Percentage shall be
0% if the Executive's employment with the Corporation and its subsidiaries
terminates prior to age 55 and such termination is for Cause (as defined in
Paragraph 9(d)(ii), below) or because of the Executive's resignation without
Good Reason (as defined in Paragraph 9(d)(v), below).
(iii) The Executive's Recent Average Monthly Compensation shall be
the monthly average of his cash compensation for the last 60 months of his
full-time employment by the Corporation. Cash compensation shall consist of
salary, current and deferred bonuses, and contributions paid on the Executive's
behalf by the Corporation pursuant to a salary reduction agreement but shall
not include amounts attributable to equity-participation awards or payments
made during that 60-month period pursuant to deferral from a previous period.
(iv) The SRB shall be payable in monthly installments for the life
of the Executive but in any event for a minimum period of 10 years after the
termination of employment. If the Executive dies before the completion of 120
monthly payments, the remaining payments shall be made to his designated
beneficiary or, if none is designated, to his estate. If the Executive dies
prior to termination of employment, the SRB shall be calculated as of the date
of the Executive's death and shall be paid for a period of 10 years to the
Executive's designated beneficiary or, if none is designated, to his estate.
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(v) The Corporation's shall designate the provisions of this
Agreement and the Change in Control Agreement relating to the SRB as a "Plan"
subject to the provisions of the Benefit Trust.
8. Covenants of the Executive. In order to induce the Corporation to
enter into this Agreement, the Executive hereby agrees as follows:
(a) Confidentiality. Except for and on behalf of the Corporation with
the consent of or as directed by the Board, the Executive shall keep
confidential and shall not divulge to any other person or entity, during the
term of employment or thereafter, any of the business secrets or other
confidential information regarding the Corporation and its subsidiaries which
has not otherwise become public knowledge; provided, however, that nothing in
this Agreement shall preclude the Executive from disclosing information (i) to
an appropriate extent to parties retained to perform services for the
Corporation or its subsidiaries or (ii) under any other circumstances to the
extent such disclosure is, in the reasonable judgment of the Executive,
appropriate or necessary to further the best interests of the Corporation or
its subsidiaries or (iii) as may be required by law.
(b) Records. All papers, books and records of every kind and
description relating to the business and affairs of the Corporation and its
subsidiaries, whether or not prepared by the Executive, other than personal
notes prepared by or at the direction of the Executive, shall be the sole and
exclusive property of the Corporation, and the Executive shall surrender them
to the Corporation at any time upon request by the Board.
(c) Noncompetition and Nonsolicitation. The Executive hereby agrees
with the Corporation that during the term of his employment hereunder, and in
certain instances, as provided below, for a period of two (2) years following
termination of his employment hereunder, (i) he shall not, directly or
indirectly, engage in, or be employed by, or act as a consultant to, or be a
director, officer, owner or partner of, or acquire a substantial interest in,
any business activity or entity which competes significantly with the
Corporation or any of its subsidiaries; provided that, after the termination of
his employment with the Corporation, "significant" competition shall not
include involvement in any line of business that contributes less than five
percent (5%) of the gross revenues of the Corporation and its subsidiaries or
contributes less than five percent (5%) of the gross revenues of another
business entity or activity with which Executive becomes associated, (ii) he
shall not solicit any employee of the Corporation or any of its subsidiaries to
leave the employment thereof or in any way interfere with the relationship of
such employee with the Corporation or its subsidiaries, unless he believes in
good faith that such action during the term of his employment by the
Corporation is in the best interests of the Corporation, and (iii) he shall not
induce or attempt to induce any customer, supplier, licensee or other
individual, corporation or other business organization having a business
relation with the Corporation or its subsidiaries to cease doing business with
the Corporation or its subsidiaries or in any way interfere with the
relationship between any such customer, supplier, licensee or other person and
the Corporation or its subsidiaries; provided, however, that as to the period
after termination of the
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Executive's employment with the Corporation, the restrictive covenants set
forth in part (i) of this paragraph (c) shall apply only if such termination
results from the Executive's resignation without Good Reason (as defined in
Paragraph 9(d)(v), below) or from discharge for Cause (as defined in Paragraph
9(d)(ii), below).
(d) Enforcement. The Executive recognizes that the provisions of this
Paragraph 8 are vitally important to the continuing welfare of the Corporation
and its subsidiaries and that money damages would constitute an inadequate
remedy for any violation thereof. Accordingly, in the event of any such
violation by the Executive, the Corporation and its subsidiaries, in addition
to any other remedies they may have, shall have the right to compel specific
performance thereof or to seek an injunction restraining any action by the
Executive in violation of this Paragraph 8.
9. Termination. Unless earlier terminated in accordance with the
following provisions of this Paragraph 9, the Corporation shall continue to
employ the Executive and the Executive shall remain employed by the Corporation
during the entire term of this Agreement as set forth in Paragraph 1(b).
Paragraph 10 hereof sets forth certain obligations of the Corporation in the
event that the Executive's employment hereunder is terminated. Certain
capitalized terms used in this Paragraph 9 and in Paragraph 10 hereof are
defined in Paragraph 9(d), below.
(a) Death or Disability. Except to the extent otherwise provided in
Paragraph 10 with respect to certain post-Date of Termination payment
obligations of the Corporation, this Agreement shall terminate immediately as
of the Date of Termination in the event of the Executive's death or in the
event that the Executive becomes disabled. The Executive will be deemed to be
disabled upon the earlier of (i) the end of a six (6)-consecutive month period,
or of an aggregate period of nine (9) months out of any consecutive twelve (12)
months, during which, by reason of physical or mental injury or disease, the
Executive has been unable to perform substantially all of his usual and
customary duties under this Agreement or (ii) the date that a reputable
physician selected by the Board, and as to whom the Executive has no reasonable
objection, determines in writing that the Executive will, by reason of physical
or mental injury or disease, be unable to perform substantially all of the
Executive's usual and customary duties under this Agreement for a period of at
least six (6) consecutive months. If any question arises as to whether the
Executive is disabled, upon reasonable request therefor by the Board, the
Executive shall submit to reasonable medical examination for the purpose of
determining the existence, nature and extent of any such disability. The Board
shall promptly give the Executive written notice of any such determination of
the Executive's disability and of any decision of the Board to terminate the
Executive's employment by reason thereof. In the event of disability, until
the Date of Termination, the base salary payable to the Executive under
Paragraph 3 hereof shall be reduced dollar-for-dollar by the amount of
disability benefits, if any, paid to the Executive in accordance with any
disability policy or program of the Corporation.
(b) Discharge for Cause. In accordance with the procedures hereinafter
set forth, the Board may discharge the Executive from his employment hereunder
for Cause. Except
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to the extent otherwise provided in Paragraph 10 with respect to certain
post-Date of Termination obligations of the Corporation, this Agreement shall
terminate immediately as of the Date of Termination in the event the Executive
is discharged for Cause. Any discharge of the Executive for Cause shall be
communicated by a Notice of Termination to the Executive given in accordance
with Paragraph 16 of this Agreement.
(c) Termination for Other Reasons. The Corporation may discharge the
Executive without Cause by giving written notice to the Executive in accordance
with Paragraph 16 at least thirty (30) days prior to the Date of Termination.
The Executive may resign from his employment, without liability to the
Corporation, by giving written notice to the Corporation in accordance with
Paragraph 16 at least thirty (30) days prior to the Date of Termination.
Except to the extent otherwise provided in Paragraph 10 with respect to certain
post-Date of Termination obligations of the Corporation, this Agreement shall
terminate immediately as of the Date of Termination in the event the Executive
is discharged without Cause or resigns.
(d) Definitions. For purposes of this Agreement, the following
capitalized terms shall have the meanings set forth below:
(i) "Accrued Obligations" shall mean, as of the Date of Termination,
the sum of (A) the Executive's base salary under Paragraph 3 through the Date of
Termination to the extent not theretofore paid, (B) the amount of any bonus,
incentive compensation, deferred compensation and other cash compensation
accrued by the Executive as of the Date of Termination to the extent not
theretofore paid, (C) any vacation pay, expense reimbursements and other cash
entitlements accrued by the Executive as of the Date of Termination to the
extent not theretofore paid, and (D) all other benefits which have accrued as
of the Date of Termination, including any applicable retiree benefits
(including, but not by way of limitation, medical expense reimbursement
benefits under Paragraph 7(b), above, and supplemental retirement benefits
under Paragraph 7(c), above) and including any applicable life insurance or
disability insurance benefits. For the purpose of this Paragraph 9(d)(i),
amounts shall be deemed to accrue ratably over the period during which they are
earned, but no discretionary compensation shall be deemed earned or accrued
until it is specifically approved by the Board in accordance with the
applicable plan, program or policy.
(ii) "Cause" shall mean (A) the Executive's willful and continued
failure to perform substantially the duties of his employment; or (B) the
Executive's willful engaging in illegal conduct or gross misconduct which is
materially and demonstrably injurious to the Corporation; or (C) the
Executive's conviction of a felony involving moral turpitude, but specifically
excluding any conviction based entirely on vicarious liability (with "vicarious
liability" meaning liability based on acts of the Corporation for which the
Executive is charged solely as a result of his offices with the Corporation and
in which he was not directly involved and did not have prior knowledge of such
actions or intended actions); provided, however, that no act or failure to act,
on the part of the Executive, shall be considered "willful" unless it is done,
or omitted to be done, by the Executive in bad faith or without reasonable
belief that the Executive's
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action or omission was in the best interests of the Corporation; and provided
further that no act or omission by the Executive shall constitute Cause
hereunder unless the Corporation has given detailed written notice thereof to
the Executive, and the Executive has failed to remedy such act or omission
within 30 days after receiving such notice. Termination for Cause must be
evidenced by a specific resolution adopted by at least a three-fourths vote of
the Board after the Executive is given an opportunity prior to the expiration
of such 30-day period, together with his legal counsel, to be heard before the
Board.
(iii) "Change of Control" shall mean:
(A) The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 35% or
more of either (i) the then outstanding shares of capital stock of the
Corporation (the "Outstanding Corporation Capital Stock") or (ii) the combined
voting power of the then outstanding voting securities of the Corporation
entitled to vote generally in the election of directors (the "Corporation
Voting Securities"); provided, however, that (X) any acquisition by or from the
Corporation or any of its subsidiaries, (Y) any acquisition by any employee
benefit plan (or related trust) sponsored or maintained by the Corporation or
any of its subsidiaries or (Z) any acquisition by any corporation with respect
to which, following such acquisition, more than 65% of the then outstanding
shares of capital stock of such corporation and the combined voting power of
the then outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Corporation
Capital Stock and Corporation Voting Securities immediately prior to such
acquisition, in substantially the same proportion as their ownership,
immediately prior to such acquisition, of the Outstanding Corporation Capital
Stock and Corporation Voting Securities, as the case may be, shall not
constitute a Change of Control; or
(B) Individuals who, as of September 6, 1995, constituted the
Board of Directors of the Corporation (the "Incumbent Board") cease for any
reason to constitute at least a majority of such Board; provided, however, that
any individual who becomes a member of the Board of Directors of the
Corporation subsequent to such date whose election, or nomination for election
by the stockholders of the Corporation, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board shall be deemed
to be a member of the Incumbent Board; but provided further, that no individual
whose election or initial assumption of office as a director of the Corporation
occurs as a result of an actual or threatened election contest (as such terms
are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act)
with respect to the election or removal of directors, or any other actual or
threatened solicitation of proxies or consents by or on behalf of any person
other than the Board of Directors of the Corporation, shall be deemed to be a
member of the Incumbent Board; or
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(C) Approval by the stockholders of the Corporation of a
reorganization, merger or consolidation (a "Business Combination") with respect
to which all or substantially all of the individuals and entities who were the
respective beneficial owners of the Outstanding Corporation Capital Stock and
Corporation Voting Securities immediately prior to such Business Combination do
not, following such Business Combination, beneficially own, directly or
indirectly, more than 65% of, respectively, the then outstanding shares of
capital stock and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors, as the case
may be, of the corporation resulting from the Business Combination, in
substantially the same proportion as their ownership immediately prior to such
Business Combination of the Outstanding Corporation Capital Stock and
Corporation Voting Securities, as the case may be; or
(D) Approval by the stockholders of the Corporation of a sale
or other disposition of all or substantially all of the assets of the
Corporation other than to a corporation with respect to which, following such
sale or disposition, more than 65% of, respectively, the then outstanding
shares of capital stock and the combined voting power of the then outstanding
voting securities entitled to vote generally in the election of directors is
then owned beneficially, directly or indirectly, by all or substantially all of
the individuals and entities who were the beneficial owners, respectively, of
the Outstanding Corporation Capital Stock and Corporation Voting Securities
immediately prior to such sale or disposition, in substantially the same
proportion as their ownership of the Outstanding Corporation Capital Stock and
Corporation Voting Securities, as the case may be, immediately prior to such
sale or disposition; or
(E) A complete liquidation or dissolution of the Corporation.
Any other provision of this Agreement to the contrary notwithstanding, "Change
of Control" shall not include any transaction described in subparagraphs (A),
(C) or (D) of this paragraph (iii) where, in connection with such transaction,
the Executive or any party acting in concert with the Executive substantially
increases his or its, as the case may be, ownership interest in the Corporation
or a successor to the Corporation.
(iv) "Date of Termination" shall mean (A) in the event of a
discharge of the Executive by the Board for Cause, the date the Executive
receives a Notice of Termination, or any later date specified in such Notice of
Termination, as the case may be, (B) in the event of a discharge of the
Executive without Cause or a resignation by the Executive, the date specified
in the written notice to the Executive (in the case of discharge) or the
Corporation (in the case of resignation), which date shall be no less than
thirty (30) days from the date of such written notice, (C) in the event of the
Executive's death, the date of the Executive's death, and (D) in the event of
termination of the Executive's employment by reason of disability pursuant to
Paragraph 9(a), the date the Executive receives written notice of such
termination.
(v) "Good Reason" shall mean the occurrence of any of the following
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without the Executive's consent: (A) the failure to maintain (I) the Executive
in the positions set forth in Paragraph 1(a) above, (II) as a director of the
Corporation, or (III) following Executive's election as Chairman of the Board,
as Chairman of the Board; (B) the assignment to the Executive of any duties
inconsistent in any respect with the Executive's positions with the Corporation
as set forth in this Agreement (including status, offices, titles and reporting
requirements), authority, duties or responsibilities as contemplated by
Paragraph 2, or any action by the Corporation which results in substantial
diminution in such positions, authority, duties or responsibilities, excluding
for this purpose any isolated, insubstantial and inadvertent action not taken
in bad faith and which is remedied by the Corporation promptly after receipt of
written notice thereof given by the Executive in accordance with Paragraph 16;
or (C) any failure by the Corporation to comply with any of the provisions of
this Agreement, other than any isolated, insubstantial and inadvertent failure
not occurring in bad faith and which is remedied by the Corporation promptly
after receipt of written notice thereof given by the Executive in accordance
with Paragraph 16; or (D) the Corporation giving notice to the Executive
pursuant to Paragraph 1(b) that the term of this Agreement shall not be
extended upon the expiration of the then-current term; or (E) the Corporation
requiring the Executive to be based at an office or location which is more than
50 miles from the Executive's office as of July 1, 1997; or (F) the Corporation
giving notice to the Executive that the term of the Change of Control Agreement
which is described in Paragraph 23, below, shall not be extended upon the
expiration of its then current term.
(vi) "Notice of Termination" shall mean a written notice which (A)
indicates the specific termination provision in this Agreement relied upon, (B)
sets forth in reasonable detail the facts and circumstances claimed to provide
a basis for termination of the Executive's employment under the provision so
indicated and (C) if the Date of Termination is to be other than the date of
receipt of such notice, specifies the termination date.
10. Obligations of the Corporation Upon Termination. The following
provisions describe the obligations of the Corporation to the Executive under
this Agreement upon termination of his employment. However, except as
explicitly provided in this Agreement, nothing in this Agreement shall limit or
otherwise adversely affect any rights which the Executive may have under
applicable law, under any other agreement with the Corporation or any of its
subsidiaries, or under any compensation or benefit plan, program, policy or
practice of the Corporation or any of its subsidiaries.
(a) Death, Disability, Discharge for Cause, or Resignation Without Good
Reason. In the event this Agreement terminates pursuant to Paragraph 9(a) by
reason of the death or disability of the Executive, or pursuant to Paragraph
9(b) by reason of the discharge of the Executive by the Corporation for Cause,
or pursuant to Paragraph 9(c) by reason of the resignation of the Executive
other than for Good Reason, the Corporation shall pay to the Executive, or his
heirs or estate, in the event of the Executive's death, all Accrued Obligations
in a lump sum in cash within thirty (30) days after the Date of Termination;
provided, however, that any portion of the Accrued Obligations which consists
of bonus, deferred compensation, incentive compensation, insurance benefits or
other employee benefits shall be determined and paid in
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accordance with the terms of the relevant plan or policy as applicable to the
Executive; and, provided further, that all long-term incentive compensation
awards (such as (i) options to purchase stock of the Corporation, (ii)
restricted stock of the Corporation, or (iii) similar equity-based units or
interests, shall, if not otherwise vested, vest in full upon such termination
of this Agreement due to death or disability.
(b) Discharge Without Cause or Resignation with Good Reason. In the
event that this Agreement terminates pursuant to Paragraph 9(c) by reason of the
discharge of the Executive by the Corporation other than for Cause or
disability or by reason of the resignation of the Executive for Good Reason:
(i) The Corporation shall pay all Accrued Obligations to the
Executive in a lump sum in cash within thirty (30) days after the Date of
Termination; provided, however, that any portion of the Accrued Obligations
which consists of bonus, deferred compensation, incentive compensation,
insurance benefits or other employee benefits shall be determined and paid in
accordance with the terms of the relevant plan or policy as applicable to the
Executive;
(ii) Within thirty (30) days after the Date of Termination, the
Corporation shall pay to the Executive a cash bonus for the year during which
termination occurs, calculated as a prorata portion of his then current target
annual bonus amount;
(iii) Continuation for a period of two (2) years of his then current
annual base salary and his then current target annual bonus amount, both
payable in substantially equal installments in accordance with the
Corporation's regular payroll practices;
(iv) For a period of two (2) years after the Date of Termination, the
Corporation shall continue to provide benefits to the Executive and/or the
Executive's family at least equal to those which would have been provided to
them in accordance with the plans, programs and arrangements referred to in
Paragraph 7(a) of this Agreement if the Executive's employment with the
Corporation had continued for those two (2) years;
(v) All long-term incentive compensation awards to the Executive,
including (but not by way of limitation) all equity-based incentive
compensation awards (such as (A) options to purchase stock of the Corporation,
(B) restricted stock of the Corporation, or (C) similar equity-based units or
interests) shall, if not otherwise vested, vest in full upon such termination
of this Agreement, and Executive shall be considered to have terminated his
employment by reason of retirement for purposes of determining the exercise
period applicable to any options following such termination of this Agreement;
and
(vi) The Corporation shall, at its sole expense, provide the
Executive with outplacement services the scope and provider of which shall be
selected by the Executive.
11. Certain Additional Payments by the Corporation.
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(a) Anything in this Agreement to the contrary notwithstanding, in the
event it shall be determined that any payment or distribution by the
Corporation to or for the benefit of the Executive (whether paid or payable or
distributed or distributable pursuant to the terms of this Agreement or
otherwise, but determined without regard to any additional payments required
under this Paragraph 11) (a "Payment") would be subject to the excise tax
imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, (the
"Code") or if any interest or penalties are incurred by the Executive with
respect to such excise tax (such excise tax, together with any such interest
and penalties, being hereinafter collectively referred to as the "Excise Tax"),
then the Executive shall be entitled to receive an additional payment (a
"Gross-Up Payment") in an amount such that, after payment by the Executive of
all taxes (including any interest or penalties imposed with respect to such
taxes), including, without limitation, any income taxes (and any interest and
penalties imposed with respect thereto) and Excise Tax imposed upon the
Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal
to the Excise Tax imposed upon the Payment.
(b) Subject to the provisions of paragraph (c), below, all
determinations required to be made under this Paragraph 11, including whether
and when a Gross-Up Payment is required and the amount of such Gross-Up Payment
and the assumptions to be utilized in arriving at such determination, shall be
made by the accounting firm then serving as the Corporation's independent
auditing firm (the "Accounting Firm"), which shall provide detailed supporting
calculations both to the Corporation and the Executive within fifteen (15)
business days of the receipt of notice from the Executive that there has been a
Payment, or such earlier time as is requested by the Corporation. In the event
that the Accounting Firm is serving as accountant or auditor for the
individual, entity or group effecting the Change of Control, the Executive
shall appoint another nationally recognized accounting firm to make the
determinations required hereunder (which accounting firm shall then be referred
to as the Accounting Firm hereunder). All fees and expenses of the Accounting
Firm shall be borne solely by the Corporation. Any Gross-Up Payment, as
determined pursuant to this Paragraph 11, shall be paid by the Corporation to
the Executive within five (5) days of the receipt of the Accounting Firm's
determination. If the Accounting Firm determines that no Excise Tax is payable
by the Executive, it shall furnish the Executive with a written opinion that
failure to report the Excise Tax on the Executive's applicable federal income
tax return would not result in the imposition of a negligence or similar
penalty. Any good faith determination by the Accounting Firm shall be binding
upon the Corporation and the Executive. As a result of the uncertainty in the
application of Section 4999 of the Code at the time of the initial
determination by the Accounting Firm hereunder, it is possible that Gross-Up
Payments which will not have been made by the Corporation should have been made
("Underpayment"), consistent with the calculations required to be made
hereunder. In the event that the Corporation exhausts its remedies pursuant to
paragraph (c), below, and the Executive thereafter is required to make a
payment of any Excise Tax, the Accounting Firm shall determine the amount of
the Underpayment that has occurred and any such Underpayment shall be promptly
paid by the Corporation to or for the benefit of the Executive.
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(c) The Executive shall notify the Corporation in writing of any claim
by the Internal Revenue Service that, if successful, would require the payment
by the Corporation of a Gross-Up Payment. Such notification shall be given as
soon as practicable but no later than fifteen (15) business days after the
Executive is informed in writing of such claim and shall apprise the
Corporation of the nature of such claim and the date on which such claim is
requested to be paid. The Executive shall not pay such claim prior to the
expiration of the thirty (30)-day period following the date on which Executive
gives such notice to the Corporation (or such shorter period ending on the date
that any payment of taxes with respect to such claim is due). If the
Corporation notifies the Executive in writing prior to the expiration of such
period that it desires to contest such claim, the Executive shall:
(i) Give the Corporation any information reasonably requested by the
Corporation relating to such claim,
(ii) Take such action in connection with contesting such claim as the
Corporation shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such claim
by an attorney reasonably selected by the Corporation,
(iii) Cooperate with the Corporation in good faith in order
effectively to contest such claim, and
(iv) Permit the Corporation to participate in any proceedings
relating to such claim;
provided, however, that the Corporation shall bear and pay directly all costs
and expenses (including additional interest and penalties) incurred in
connection with such contest and shall indemnify and hold the Executive
harmless, on an after-tax basis, for any Excise Tax or income tax (including
interest and penalties with respect thereto) imposed as a result of such
representation and payment of costs and expenses. Without limiting the
foregoing provisions of this paragraph (c), the Corporation shall control all
proceedings taken in connection with such contest and, at its sole option, may
pursue or forego any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may, at its
sole option, either direct the Executive to pay the tax claimed and sue for a
refund or contest the claim in any permissible manner; and the Executive agrees
to prosecute such contest to a determination before any administrative
tribunal, in a court of initial jurisdiction and in one or more appellate
courts, as the Corporation shall determine; provided, however, that if the
Corporation directs the Executive to pay such claim and sue for a refund, the
Corporation shall advance the amount of such payment to the Executive on an
interest-free basis and shall indemnify and hold the Executive harmless, on an
after-tax basis, from any Excise Tax or income tax (including interest or
penalties with respect thereto) imposed with respect to such advance or with
respect to any imputed income with respect to such advance; and further
provided that any extension of the statute of limitations relating to payment
of taxes for the taxable year of the Executive with respect to which such
contested amount is claimed to be due is limited solely to
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such contested amount. Furthermore, the Corporation's control of the contest
shall be limited to issues with respect to which a Gross-Up Payment would be
payable hereunder and the Executive shall be entitled to settle or contest, as
the case may be, any other issue raised by the Internal Revenue Service or any
other taxing authority.
(d) If, after the receipt by the Executive of an amount advanced by the
Corporation pursuant to paragraph (c), above, the Executive becomes entitled to
receive any refund with respect to such claim, the Executive shall (subject to
the Corporation's complying with the requirements of said paragraph (c))
promptly pay to the Corporation the amount of such refund (together with any
interest paid or credited thereon, after taxes applicable thereto). If, after
the receipt by the Executive of an amount advanced by the Corporation pursuant
to said paragraph (c), a determination is made that the Executive shall not be
entitled to any refund with respect to such claim and the Corporation does not
notify the Executive in writing of its intent to contest such denial of refund
prior to the expiration of thirty (30) days after such determination, then such
advance shall be forgiven and shall not be required to be repaid; and the
amount of such advance shall offset, to the extent thereof, the amount of the
Gross-Up Payment required to be paid.
12. No Mitigation. In no event shall the Executive be obligated to seek
other employment or take any other action by way of mitigation of the amounts
payable to the Executive under any of the provisions of this Agreement, and
such amounts shall not be reduced whether or not the Executive obtains other
employment.
13. Payment of Certain Expenses. The Corporation agrees to pay promptly
as incurred, to the fullest extent permitted by law, all legal fees and
expenses which the Executive may reasonably incur in connection with the
preparation of this Agreement or as a result of any contest by the Corporation,
the Executive or others of the validity or enforceability of, or liability
under, any provision of this Agreement (including as a result of any contest
initiated by the Executive about the amount of any payment due pursuant to this
Agreement) (together with an additional amount such that after payment by the
Executive of Executive's applicable Federal, state and local taxes on such
additional amount, Executive shall retain an amount equal to the total of
Executive's applicable Federal, state and local taxes arising due to the
payment of legal fees and expenses under this Paragraph 13), plus in each case
interest on any delayed payment at the interest rate applicable from time to
time under the Corporation's primary revolving credit agreement, or in the
absence of such a rate, at the applicable federal rate provided for in Section
7872(f)(2)(A) of the Code; provided, however, that the Corporation shall not be
obligated to make such payment of fees and expenses with respect to any contest
in which the Corporation prevails over the Executive.
14. Indemnification. To the fullest extent permitted by law, the
Corporation shall, during and after the Executive's term of employment,
indemnify the Executive (including the advancement of expenses) for any
judgments, fines, amounts paid in settlement and reasonable expenses, including
attorneys' fees, incurred by the Executive in connection with the defense of
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any lawsuit or other claim to which he is made a party by reason of being or
having been an officer, director or employee of the Corporation or any of its
subsidiaries.
15. Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the heirs and representatives of the Executive and the successors
and assigns of the Corporation. The Corporation shall require any successor
(whether direct or indirect, by purchase, merger, reorganization,
consolidation, acquisition of property or stock, liquidation, or otherwise) to
all or a substantial portion of its assets, by agreement in form and substance
reasonably satisfactory to the Executive, expressly to assume and agree to
perform this Agreement in the same manner and to the same extent that the
Corporation would be required to perform this Agreement if no such succession
had taken place. Regardless of whether such an agreement is executed, this
Agreement shall be binding upon any successor of the Corporation in accordance
with the operation of law, and such successor shall be deemed the "Corporation"
for purposes of this Agreement.
16. Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered by hand or by reputable commercial delivery service or mailed within
the continental United States by first class certified mail, return receipt
requested, postage prepaid, addressed as follows:
(a) If to the Board or the Corporation, to:
Wallace Computer Services, Inc.
2275 Cabot Drive
Lisle, Illinois 60532
Attention: Corporate Secretary
(b) If to the Executive, to:
Mr. Robert J. Cronin
603 Ridgewood Court
Oak Brook, Illinois 60523
with a copy to:
Sonnenschein Nath & Rosenthal
8000 Sears Tower
Chicago, Illinois 60606
Attn: Roger C. Siske
Such addresses may be changed by written notice sent to the other party at the
last recorded address of that party.
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17. Tax Withholding. The Corporation shall provide for the withholding of
any taxes required to be withheld by federal, state, or local law with respect
to any payment in cash, shares of stock and/or other property made by or on
behalf of the Corporation to or for the benefit of the Executive under this
Agreement or otherwise. The Corporation may, at its option: (a) withhold such
taxes from any cash payments owing from the Corporation to the Executive, (b)
require the Executive to pay to the Corporation in cash such amount as may be
required to satisfy such withholding obligations and/or (c) make other
satisfactory arrangements with the Executive to satisfy such withholding
obligations.
18. Arbitration. Except as to actions described in Paragraph 8(d), any
controversy or claim arising out of or relating to this Agreement or the breach
hereof shall be settled by arbitration in Chicago, Illinois in accordance with
the laws of the State of Illinois, without regard to the choice of law
provisions of such laws. The arbitration shall be conducted in accordance with
the rules of the American Arbitration Association before an arbitrator
appointed by the then President of The Chicago Bar Association. The costs and
expenses of the arbitrator shall be borne by the Corporation. The award of the
arbitrator shall be binding upon the parties. Judgment upon the award rendered
by the arbitrator may be entered in any court having jurisdiction.
19. No Assignment. Except as otherwise expressly provided herein, this
Agreement is not assignable by any party and no payment to be made hereunder
shall be subject to anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance or other charge.
20. Execution in Counterparts. This Agreement may be executed by the
parties hereto in two (2) or more counterparts, each of which shall be deemed
to be an original, but all such counterparts shall constitute one and the same
instrument, and all signatures need not appear on any one counterpart.
21. Jurisdiction and Governing Law. Except as provided in Paragraph 18,
jurisdiction over disputes with regard to this Agreement shall be exclusively
in the courts of the State of Illinois, and this Agreement shall be construed
and interpreted in accordance with and governed by the laws of the State of
Illinois, without regard to the choice of laws provisions of such laws.
22. Severability. If any provision of this Agreement shall be adjudged by
any court of competent jurisdiction to be invalid or unenforceable for any
reason, such judgment shall not affect, impair or invalidate the remainder of
this Agreement. Furthermore, if the scope of any restriction or requirement
contained in this Agreement is too broad to permit enforcement of such
restriction or requirement to its full extent, then such restriction or
requirement shall be enforced to the maximum extent permitted by law, and the
Executive consents and agrees that any court of competent jurisdiction may so
modify such scope in any proceeding brought to enforce such restriction or
requirement.
23. Effect of Change of Control. Upon the occurrence of a Change of
Control (as defined in Paragraph 9(d)(iii), above), this Agreement shall
automatically terminate and be
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superseded by a separate Change of Control Agreement made and entered into as
of July 1, 1997 by the Executive and the Corporation, in substantially the form
attached hereto as Exhibit A.
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24. Prior Understandings. This Agreement embodies the entire
understanding of the parties hereto, and supersedes all prior oral or written
agreements or understandings between them, regarding the subject matter hereof.
No change, alteration or modification hereof may be made except in a writing,
signed by each of the parties hereto. The headings in this Agreement are for
convenience and reference only and shall not be construed as part of this
Agreement or to limit or otherwise affect the meaning hereof.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
Attest: WALLACE COMPUTER SERVICES, INC.
/s/ Steven L. Carson By: /s/ William N. Lane III
- -------------------------- ----------------------------------------
Title:Chairman of the Compensation Committee
--------------------------------------
ROBERT J. CRONIN
/s/ Robert J. Cronin
--------------------------------------------
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EXHIBIT 10.17B
CHANGE OF CONTROL AGREEMENT
AGREEMENT made and entered into as of July 1, 1997 by and between WALLACE
COMPUTER SERVICES, INC., a Delaware corporation, (the "Corporation") and ROBERT
J. CRONIN (the "Executive").
The Board of Directors of the Corporation (the "Board") has determined
that it is in the best interests of the Corporation and its stockholders to
assure that the Corporation will have the continued dedication of the
Executive, notwithstanding the possibility, threat or occurrence of a Change of
Control (as defined below) of the Corporation. The Board believes it is
imperative to diminish the inevitable distraction of the Executive by virtue of
the personal uncertainties and risks created by a pending or threatened Change
of Control and to encourage the Executive's full attention and dedication to
the Corporation currently and in the event of any threatened or pending Change
of Control, and to provide the Executive with compensation and benefits
arrangements upon a Change of Control which ensure that the compensation and
benefits expectations of the Executive will be satisfied and which are
competitive with those of other corporations. Therefore, in order to
accomplish these objectives, the Board has caused the Corporation to enter into
this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Certain Definitions. (a) The "Effective Date" shall mean the first
date during the Change of Control Period (as defined in Section l(b)) on which
a Change of Control (as defined in Section 2) occurs. Anything in this
Agreement to the contrary notwithstanding, if a Change of Control occurs and if
the Executive's employment with the Corporation is terminated prior to the date
on which the Change of Control occurs, and if it is reasonably demonstrated by
the Executive that such termination of employment (i) was at the request of a
third party who had taken steps reasonably calculated to effect a Change of
Control, (ii) otherwise arose in connection with or anticipation of a Change of
Control, or (iii) would not have occurred or would be substantially less likely
to have occurred in the absence of a Change of Control, then for all purposes
of this Agreement the "Effective Date" shall mean the date immediately prior to
the date of such termination of employment.
(b) The "Change of Control Period" shall mean the period commencing on
the date hereof and ending on the third anniversary of the date hereof;
provided, however, that commencing on the date one (1) year after the date
hereof, and on each annual anniversary of such date (such date and each annual
anniversary thereof being hereinafter referred to as a "Renewal Date"), the
Change of Control Period shall be automatically extended so as to terminate
three (3) years from such Renewal Date, unless at least sixty (60) days prior
to such Renewal Date the Corporation shall give notice to the Executive that
the Change of Control Period shall not be so extended.
<PAGE> 2
2. Change of Control. For purposes of this Agreement, a "Change of
Control" shall mean:
(a) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of thirty-five
percent (35%) or more of either (i) the then outstanding shares of capital
stock of the Corporation (the "Outstanding Corporation Capital Stock") or (ii)
the combined voting power of the then outstanding voting securities of the
Corporation entitled to vote generally in the election of directors (the
"Corporation Voting Securities"); provided, however, that (X) any acquisition
by or from the Corporation or any of its subsidiaries, (Y) any acquisition by
any employee benefit plan (or related trust) sponsored or maintained by the
Corporation or any of its subsidiaries or (Z) any acquisition by any
corporation with respect to which, following such acquisition, more than
sixty-five percent (65%) of the then outstanding shares of capital stock of
such corporation and the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election of
directors is then beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Corporation Capital Stock and
Corporation Voting Securities immediately prior to such acquisition, in
substantially the same proportion as their ownership, immediately prior to such
acquisition, of the Outstanding Corporation Capital Stock and Corporation
Voting Securities, as the case may be, shall not constitute a Change of
Control; or
(b) Individuals who, as of September 6, 1995, constituted the Board of
Directors of the Corporation (the "Incumbent Board") cease for any reason to
constitute at least a majority of such Board; provided, however, that any
individual who becomes a member of the Board of Directors of the Corporation
subsequent to such date whose election, or nomination for election by the
stockholders of the Corporation, was approved by a vote of at least a majority
of the directors then comprising the Incumbent Board shall be deemed to be a
member of the Incumbent Board; but provided further, that no individual whose
election or initial assumption of office as a director of the Corporation
occurs as a result of an actual or threatened election contest (as such terms
are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act)
with respect to the election or removal of directors, or any other actual or
threatened solicitation of proxies or consents by or on behalf of any person
other than the Board of Directors of the Corporation, shall be deemed to be a
member of the Incumbent Board; or
(c) Approval by the stockholders of the Corporation of a reorganization,
merger or consolidation (a "Business Combination") with respect to which all or
substantially all of the individuals and entities who were the respective
beneficial owners of the Outstanding Corporation Capital Stock and Corporation
Voting Securities immediately prior to such Business Combination do not,
following such Business Combination, beneficially own, directly or indirectly,
more than sixty-five percent (65%) of, respectively, the then outstanding
shares of capital stock and the combined voting power of the then outstanding
voting securities entitled to vote generally in the election of directors, as
the case may be, of the corporation resulting from
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the Business Combination, in substantially the same proportion as their
ownership immediately prior to such Business Combination of the Outstanding
Corporation Capital Stock and Corporation Voting Securities, as the case may
be; or
(d) Approval by the stockholders of the Corporation of a sale or other
disposition of all or substantially all of the assets of the Corporation other
than to a corporation with respect to which, following such sale or
disposition, more than sixty-five percent (65%) of, respectively, the then
outstanding shares of capital stock and the combined voting power of the then
outstanding voting securities entitled to vote generally in the election of
directors is then owned beneficially, directly or indirectly, by all or
substantially all of the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Corporation Capital Stock and
Corporation Voting Securities immediately prior to such sale or disposition, in
substantially the same proportion as their ownership of the Outstanding
Corporation Capital Stock and Corporation Voting Securities, as the case may
be, immediately prior to such sale or disposition; or
(e) A complete liquidation or dissolution of the Corporation.
Any other provision of this Agreement to the contrary notwithstanding, "Change
of Control" shall not include any transaction described in subparagraphs (a),
(c) or (d) of this Section 2 where, in connection with such transaction, the
Executive or any party acting in concert with the Executive substantially
increases his or its, as the case may be, ownership interest in the Corporation
or a successor to the Corporation.
3. Employment Period. The Corporation hereby agrees to continue the
Executive in its employ, and the Executive hereby agrees to remain in the
employ of the Corporation subject to the terms and conditions of this
Agreement, for the period commencing on the Effective Date and ending on the
third anniversary of such date (the "Employment Period").
4. Terms of Employment.
(a) Position and Duties.
(i) During the Employment Period, (A) the Executive's position
(including status, offices, titles and reporting requirements), authority,
duties and responsibilities shall be at least commensurate in all material
respects with the most significant of those held, exercised and assigned at any
time during the twelve (12)-month period immediately preceding the Effective
Date and (B) the Executive's services shall be performed at the location where
the Executive was employed immediately preceding the Effective Date or at any
office or location less than fifty (50) miles from such location.
(ii) During the Employment Period, and excluding any periods of
vacation and sick leave to which the Executive is entitled, the Executive
agrees to devote reasonable attention and time during normal business hours to
the business and affairs of the
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Corporation and, to the extent necessary to discharge the responsibilities
assigned to the Executive hereunder, to use the Executive's reasonable best
efforts to perform faithfully and efficiently such responsibilities. During
the Employment Period it shall not be a violation of this Agreement for the
Executive to (A) serve on corporate, civic or charitable boards or committees,
(B) deliver lectures, fulfill speaking engagements or teach at educational
institutions and (C) manage personal investments, so long as such activities do
not significantly interfere with the performance of the Executive's
responsibilities as an employee of the Corporation in accordance with this
Agreement. It is expressly understood and agreed that to the extent that any
such activities have been conducted by the Executive prior to the Effective
Date, the continued conduct of such activities (or the conduct of activities
similar in nature and scope thereto) subsequent to the Effective Date shall not
thereafter be deemed to interfere significantly with the performance of the
Executive's responsibilities to the Corporation.
(b) Compensation.
(i) Base Salary. During the Employment Period, the Executive shall
receive an annual base salary ("Annual Base Salary"), which shall be paid at a
monthly rate at least equal to the highest monthly base salary paid or payable,
including any base salary which has been earned but deferred, to the Executive
by the Corporation and its affiliated companies with respect to the twenty-four
(24)-month period immediately preceding the month in which the Effective Date
occurs. During the Employment Period, the Annual Base Salary shall be reviewed
no more than twelve (12) months after the last salary increase awarded to the
Executive prior to the Effective Date and thereafter at least annually. Any
increase in Annual Base Salary shall not serve to limit or reduce any other
obligation to the Executive under this Agreement. Annual Base Salary shall not
be reduced after any such increase and the term Annual Base Salary as utilized
in this Agreement shall refer to Annual Base Salary as so increased. As used
in this Agreement, the term "affiliated companies" shall include any
corporation controlled by, controlling or under common control with the
Corporation.
(ii) Annual Bonus. In addition to Annual Base Salary, the Executive
shall be awarded, for each fiscal year ending during the Employment Period, an
annual bonus (the "Annual Bonus") in cash at least equal to the Executive's
average annual bonus paid or payable under the Corporation's annual incentive
plans for the last two (2) full fiscal years prior to the Effective Date (the
"Recent Annual Bonus"). Each such Annual Bonus shall be paid no later than the
end of the first month of the fiscal year next following the fiscal year for
which the Annual Bonus is awarded, unless the Executive shall elect to defer
the receipt of such Annual Bonus.
(iii) Payment of Bonuses. Whenever any annual bonus or any other
cash bonus is awarded to Executive, payment of such bonus shall be made in
accordance with the following provisions:
(A) Prior to the commencement of any fiscal year, Executive may
advise the Compensation Committee of the Board of his election to be paid any
annual bonus or any other cash bonus to be awarded to him for such fiscal year
on a current or deferred
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basis. If no such election is made, Executive shall be deemed to have elected
to be paid such bonus on a current basis.
(B) Any bonus payable on a current basis shall be paid to
Executive within sixty (60) days of the date of the award, subject to normal
withholdings and deductions.
(C) Any bonus payable on a deferred basis shall be accrued and
paid to Executive as follows:
(1) Effective as of the date of the award, the Corporation
shall credit the amount of any deferred bonus to the book reserve account known
as the "Deferred Compensation Account of Robert J. Cronin" (hereinafter
referred to as the "Deferred Compensation Account"). There shall also be
credited to the Deferred Compensation Account, effective as of the Effective
Date, all deferred bonuses and interest accrued thereon credited to Executive
prior to such date.
(2) Interest shall accrue on all amounts credited to the
Deferred Compensation Account from the date credited to such account until the
date paid to Executive as provided in paragraph (3), below. Such interest
shall be computed quarterly on the last day of each calendar quarter based upon
the interest rate payable on ninety (90) day certificates of deposit of The
First National Bank of Chicago prevailing as of the first day of such calendar
quarter. Interest shall be credited to the Deferred Compensation Account, and
thereafter accrue interest as provided in this paragraph (2), effective as of
the first day of each calendar year. Any other provision of this subparagraph
(ii) to the contrary notwithstanding, in the event the Corporation shall
implement deferred compensation provisions in connection with its incentive
compensation programs which provide for deferred payments thereunder in the
form of , or based on the rate of return of the Corporation's common stock, the
Executive shall be provided with a similar opportunity with regard to the
Deferred Compensation Account.
(3) The amounts of deferred bonus and other amounts
credited to the Deferred Compensation Account shall be paid to Executive,
subject to normal withholdings and deductions, in one hundred twenty (120)
equal monthly installments, with interest on the unpaid balance at the rate
specified in paragraph (2), above, commencing in the month immediately
following the termination of Executive's employment with the Corporation;
provided, however, that if Executive should die before all amounts credited to
the Deferred Compensation Account have been paid to him, the full unpaid amount
then credited to the Deferred Compensation Account and all interest accrued
thereon shall be immediately paid in a lump sum to his designated beneficiary
or, if no beneficiary is designated, to his estate.
(D) Any other provision of this Agreement to the contrary
notwithstanding, Executive may at any time or from time to time request the
payment to him of all or any portion of the amounts then credited to the
Deferred Compensation Account, but the Corporation shall make a payment to
Executive pursuant to such a request only if and to the
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extent that such request is approved by the Board.
(E) Immediately after the Effective Date, the Corporation
shall, if it has not already done so, deliver to the trustee of the Wallace
Computer Services, Inc. Benefit Trust (the "Benefit Trust"), cash or
marketable securities or other property having a fair market value (or any
combination thereof) equal to the amount then credited to the Deferred
Compensation Account.
(iv) Incentive, Savings and Retirement Plans. During the Employment
Period, the Executive shall be entitled to participate in all incentive,
savings and retirement plans, practices, policies and programs applicable
generally to other senior executives of the Corporation and its affiliated
companies, but in no event shall such plans, practices, policies and programs
provide the Executive with incentive opportunities (measured with respect to
both regular and special incentive opportunities, to the extent, if any, that
such distinction is applicable), savings opportunities and retirement benefit
opportunities, in each case, less favorable, in the aggregate, than the most
favorable for the Executive of those provided by the Corporation and its
affiliated companies for the Executive under such plans, practices, policies
and programs as in effect at any time during the twelve (12)-month period
immediately preceding the Effective Date or, if more favorable to the
Executive, those provided generally at any time after the Effective Date to
other senior executives of the Corporation and its affiliated companies;
provided, however, that the Executive shall not participate during the
Employment Period or thereafter in the Supplemental Retirement Plan of the
Corporation. For purposes of this paragraph (iv), the reference to incentive
plans, practices, policies and programs covers all forms of short-term or
long-term incentive compensation arrangements, including but not by way of
limitation arrangements providing for stock options, warrants, stock
appreciation rights and/or other cash payments.
(v) Other Employee Benefits. During the Employment Period, the
Executive and/or the Executive's family, as the case may be, shall be eligible
for participation in and shall receive all benefits under all welfare benefit,
fringe benefit, expense reimbursement, and executive perquisite plans,
practices, policies and programs provided by the Corporation and its affiliated
companies (including, without limitation, medical, supplemental medical
reimbursement, prescription, dental, disability, employee life, group life,
accidental death and travel accident insurance plans and programs) to the
extent applicable generally to other senior executives of the Corporation and
its affiliated companies, but in no event shall such plans, practices, policies
and programs provide the Executive with benefits which are less favorable for
the Executive, in the aggregate, than the most favorable of such plans,
practices, policies and programs in effect for the Executive at any time during
the twelve (12)-month period immediately preceding the Effective Date or, if
more favorable to the Executive, those provided generally at any time after the
Effective Date to other senior executives of the Corporation and its affiliated
companies.
(vi) Office and Support Staff. During the Employment Period, the
Executive shall be entitled to an office or offices of a size and with
furnishings and other appointments, and to exclusive personal secretarial and
other assistance, at least equal to the most favorable of the foregoing
provided to the Executive by the Corporation and its affiliated companies at
any time during the twelve (12)-month period immediately preceding the
Effective
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Date or, if more favorable to the Executive, as provided generally at any time
thereafter with respect to other senior executives of the Corporation and its
affiliated companies.
(vii) Vacation. During the Employment Period, the Executive shall be
entitled to paid vacation in accordance with the most favorable plans,
policies, programs and practices of the Corporation and its affiliated
companies as in effect for the Executive at any time during the twelve
(12)-month period immediately preceding the Effective Date or, if more
favorable to the Executive, as in effect generally at any time thereafter with
respect to other senior executives of the Corporation and its affiliated
companies.
5. Uninsured Medical Expenses. Continuing until Executive's death (or, if
later, the death of the Executive's spouse), in addition to participating in
any medical insurance or other medical benefit program of the Corporation, the
Executive shall be entitled to reimbursement from the Corporation for expenses
incurred by Executive for or in respect of medical care (as defined in Section
213 of the Internal Revenue Code of 1986, as amended (the "Code")) of Executive
and his spouse; provided, however, that Executive shall be entitled to
reimbursement of medical expenses as set forth in this Section 5 if and so long
as (and only if and so long as) (a) Executive does not, at any time while he is
an employee of the Corporation or at any time thereafter, violate the
confidentiality or nonsolicitation covenants set forth in Section 7, below, and
(b) Executive does not commit any action that would permit the Corporation to
terminate his employment for "Cause" (as defined in Section 8(d)(ii), below).
The Corporation may, in its discretion, pay any such medical expenses directly
in lieu of making reimbursement therefor. The reimbursement or payment of such
medical expenses on behalf of Executive and/or his spouse shall be limited to
an aggregate of $500,000, and reimbursement or payment of such medical expenses
shall be made by the Corporation only in the event and to the extent that such
reimbursement or payment is not then provided under any insurance policy or
policies, whether owned by the Corporation or Executive, or under any other
private or public health and accident plan or program under which Executive or
his spouse, as the case may be, is then eligible for benefits. Upon the
request of the Corporation, Executive shall submit to the Corporation
hospitalization, doctor, dental or other medical bills, including premium
notices for accident or health insurance, for verification by the Corporation.
6. Supplemental Retirement Benefit. Except as described in Section
9(b)(ii)(D), below, the Corporation shall pay to the Executive after the
termination of his employment a Supplemental Retirement Benefit ("SRB")
determined and paid as follows:
(a) The monthly amount of the SRB shall be the excess of (i) fifty
percent (50%) of the Executive's Recent Average Monthly Compensation (as
described in paragraph (b), below) over (ii) the sum (not to exceed 70% of the
amount determined under the immediately preceding clause (i)) of (A) the
Executive's monthly Social Security retirement benefits, if any, and (B) the
monthly amount payable under a single-life annuity for the Executive's life
which is the actuarial equivalent of the benefits payable to the Executive
under any retirement or profit-sharing plan or program provided by the
Corporation, to the extent such benefits are attributable to contributions
by the Corporation other than contributions by the Corporation on behalf of the
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Executive under a salary reduction agreement.
(b) The Executive's Recent Average Monthly Compensation shall be the
monthly average of his cash compensation for the last sixty (60) months of his
full-time employment by the Corporation. Cash compensation shall consist of
salary, current and deferred bonuses, and contributions paid on the Executive's
behalf by the Corporation pursuant to a salary reduction agreement but shall
not include amounts attributable to equity-participation awards or to payments
made during that sixty (60)-month period pursuant to deferral from a previous
period.
(c) The SRB shall be payable in monthly installments for the life of the
Executive but in any event for a minimum period of ten (10) years after the
termination of employment. If the Executive dies before the completion of one
hundred twenty (120) monthly payments, the remaining payments shall be made to
his designated beneficiary or, if none is designated, to his estate. If the
Executive dies prior to termination of employment, the SRB shall be calculated
as of the date of the Executive's death and shall be paid for a period of ten
(10) years to the Executive's designated beneficiary or, if none is designated,
to his estate.
Immediately after the Effective Date, the Corporation shall, if it has not
already done so, deliver to the trustee of the Benefit Trust cash or marketable
securities or other property having a fair market value (or any combination
thereof) equal to the amount described in Section 9(b)(ii)(D) below.
7. Covenants of the Executive. In order to induce the Corporation to
enter into this Agreement, the Executive hereby agrees as follows:
(a) Confidentiality. Except for and on behalf of the Corporation with
the consent of or as directed by the Board, the Executive shall keep
confidential and shall not divulge to any other person or entity, during the
term of employment or thereafter, any of the business secrets or other
confidential information regarding the Corporation and its subsidiaries which
has not otherwise become public knowledge; provided, however, that nothing in
this Agreement shall preclude the Executive from disclosing information (i) to
an appropriate extent to parties retained to perform services for the
Corporation or its subsidiaries or (ii) under any other circumstances to the
extent such disclosure is, in the reasonable judgment of the Executive,
appropriate or necessary to further the best interests of the Corporation or
its subsidiaries or (iii) as may be required by law.
(b) Records. All papers, books and records of every kind and
description relating to the business and affairs of the Corporation and its
subsidiaries, whether or not prepared by the Executive, other than personal
notes prepared by or at the direction of the Executive, shall be the sole and
exclusive property of the Corporation, and the Executive shall surrender them
to the Corporation at any time upon request by the Board.
(c) Noncompetition and Nonsolicitation. The Executive hereby agrees
with
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the Corporation that during the term of his employment hereunder, and in
certain instances, as provided below, for a period of two (2) years following
termination of his employment with the Corporation, (i) he shall not, directly
or indirectly, engage in, or be employed by, or act as a consultant to, or be a
director, officer, owner or partner of, or acquire a substantial interest in,
any business activity or entity which competes significantly with the
Corporation or any of its subsidiaries; provided that, after the termination of
his employment with the Corporation, "significant" competition shall not
include involvement in any line of business that contributes less than five
percent (5%) of the gross revenues of the Corporation and its subsidiaries or
contributes less than five percent (5%) of the gross revenues of another
business entity or activity with which Executive becomes associated, (ii) he
shall not solicit any employee of the Corporation or any of its subsidiaries to
leave the employment thereof or in any way interfere with the relationship of
such employee with the Corporation or its subsidiaries, unless he believes in
good faith that such action during the term of his employment by the
Corporation is in the best interests of the Corporation, and (iii) he shall not
induce or attempt to induce any customer, supplier, licensee or other
individual, corporation or other business organization having a business
relation with the Corporation or its subsidiaries to cease doing business with
the Corporation or its subsidiaries or in any way interfere with the
relationship between any such customer, supplier, licensee or other person and
the Corporation or its subsidiaries; provided, however, that as to the period
after termination of the Executive's employment with the Corporation, the
restrictive covenants set forth in part (i) of this paragraph (c) shall apply
only if such termination results from the Executive's discharge for Cause (as
defined in Section 8(d)(ii), below).
(d) Enforcement. The Executive recognizes that the provisions of this
Section 7 are vitally important to the continuing welfare of the Corporation
and its subsidiaries and that money damages would constitute an inadequate
remedy for any violation thereof. Accordingly, in the event of any such
violation by the Executive, the Corporation and its subsidiaries, in addition
to any other remedies they may have, shall have the right to compel specific
performance thereof or to seek an injunction restraining any action by the
Executive in violation of this Section 7.
8. Termination. Unless earlier terminated in accordance with the
following provisions of this Section 8, the Corporation shall continue to
employ the Executive and the Executive shall remain employed by the Corporation
during the Employment Period as set forth in Section 3. Section 9 hereof sets
forth certain obligations of the Corporation in the event that the Executive's
employment hereunder is terminated. Certain capitalized terms used in this
Section 8 and in Section 9 hereof are defined in Section 8(d), below.
(a) Death or Disability. Except to the extent otherwise provided in
Section 9 with respect to certain post-Date of Termination payment obligations
of the Corporation, this Agreement shall terminate immediately as of the Date
of Termination in the event of the Executive's death or in the event that the
Executive becomes disabled. The Executive will be deemed to be disabled upon
the earlier of (i) the end of a six (6)-consecutive month period, or of an
aggregate period of nine (9) months out of any consecutive twelve (12) months,
during which, by reason of physical or mental injury or disease, the Executive
has been unable to perform
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substantially all of his usual and customary duties under this Agreement or
(ii) the date that a reputable physician selected by the Board, and as to whom
the Executive has no reasonable objection, determines in writing that the
Executive will, by reason of physical or mental injury or disease, be unable to
perform substantially all of the Executive's usual and customary duties under
this Agreement for a period of at least six (6) consecutive months. If any
question arises as to whether the Executive is disabled, upon reasonable
request therefor by the Board, the Executive shall submit to reasonable medical
examination for the purpose of determining the existence, nature and extent of
any such disability. The Board shall promptly give the Executive written
notice of any such determination of the Executive's disability and of any
decision of the Board to terminate the Executive's employment by reason
thereof. In the event of disability, until the Date of Termination, the base
salary payable to the Executive under Section 4(b)(i) hereof shall be reduced
dollar-for-dollar by the amount of disability benefits, if any, paid to the
Executive in accordance with any disability policy or program of the
Corporation.
(b) Discharge for Cause. In accordance with the procedures hereinafter
set forth, the Board may discharge the Executive from his employment hereunder
for Cause. Except to the extent otherwise provided in Section 9 with respect to
certain post-Date of Termination obligations of the Corporation, this Agreement
shall terminate immediately as of the Date of Termination in the event the
Executive is discharged for Cause. Any discharge of the Executive for Cause
shall be communicated by a Notice of Termination to the Executive given in
accordance with Section 15 of this Agreement.
(c) Termination for Other Reasons. The Corporation may discharge the
Executive without Cause by giving written notice to the Executive in accordance
with Section 15 at least thirty (30) days prior to the Date of Termination.
The Executive may resign from his employment, without liability to the
Corporation, by giving written notice to the Corporation in accordance with
Section 15 at least thirty (30) days prior to the Date of Termination. Except
to the extent otherwise provided in Section 9 with respect to certain post-Date
of Termination obligations of the Corporation, this Agreement shall terminate
immediately as of the Date of Termination in the event the Executive is
discharged without Cause or resigns.
(d) Definitions. For purposes of this Agreement, the following
capitalized terms shall have the meanings set forth below:
(i) "Accrued Obligations" shall mean, as of the Date of Termination,
the sum of (A) the Executive's base salary under Section 4(b)(i) through the
Date of Termination to the extent not theretofore paid, (B) the amount of any
bonus, incentive compensation, deferred compensation and other cash
compensation accrued by the Executive as of the Date of Termination to the
extent not theretofore paid, (C) any vacation pay, expense reimbursements and
other cash entitlements accrued by the Executive as of the Date of Termination
to the extent not theretofore paid, and (D) all other benefits which have
accrued as of the Date of Termination, including any applicable retiree
benefits (including, but not by way of limitation, medical expense
reimbursement benefits under Section 5, above, and supplemental retirement
benefits under Section 6, above) and including any applicable life insurance
or disability insurance benefits. For
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the purpose of this Section 8(d)(i), amounts shall be deemed to accrue ratably
over the period during which they are earned, but no discretionary compensation
shall be deemed earned or accrued until it is specifically approved by the
Board in accordance with the applicable plan, program or policy.
(ii) "Cause" shall mean (A) the Executive's willful and continued
failure to perform substantially the duties of his employment; or (B) the
Executive's willful engaging in illegal conduct or gross misconduct which is
materially and demonstrably injurious to the Corporation; or (C) the
Executive's conviction of a felony involving moral turpitude, but specifically
excluding any conviction based entirely on vicarious liability (with "vicarious
liability" meaning liability based on acts of the Corporation for which the
Executive is charged solely as a result of his offices with the Corporation and
in which he was not directly involved and did not have prior knowledge of such
actions or intended actions); provided, however, that no act or failure to act,
on the part of the Executive, shall be considered "willful" unless it is done,
or omitted to be done, by the Executive in bad faith or without reasonable
belief that the Executive's action or omission was in the best interests of the
Corporation; and provided further that no act or omission by the Executive
shall constitute Cause hereunder unless the Corporation has given detailed
written notice thereof to the Executive, and the Executive has failed to remedy
such act or omission within 30 days after receiving such notice. Termination
for Cause must be evidenced by a specific resolution adopted by at least a
three-fourths vote of the Board after the Executive is given an opportunity
prior to the expiration of such 30-day period, together with his legal counsel,
to be heard before the Board.
(iii) "Date of Termination" shall mean (A) in the event of a
discharge of the Executive by the Board for Cause, the date the Executive
receives a Notice of Termination, or any later date specified in such Notice of
Termination, as the case may be, (B) in the event of a discharge of the
Executive without Cause or a resignation by the Executive, the date specified
in the written notice to the Executive (in the case of discharge) or the
Corporation (in the case of resignation), which date shall be no less than
thirty (30) days from the date of such written notice, (C) in the event of the
Executive's death, the date of the Executive's death, and (D) in the event of
termination of the Executive's employment by reason of disability pursuant to
Section 8(a), the date the Executive receives written notice of such
termination.
(iv) "Good Reason" shall mean the occurrence of any of the following
without the Executive's consent: (A) the failure to maintain (i) the Executive
in the positions set forth in Paragraph 4(a) above, (II) as a director of the
Corporation, or (III) following Executive's election as Chairman of the Board,
as Chairman of the Board; (B) (B) the assignment to the Executive of any duties
inconsistent in any respect with the Executive's positions with the Corporation
as set forth in this Agreement (including status, offices, titles and reporting
requirements), authority, duties or responsibilities as contemplated by Section
4(a), or any action by the Corporation which results in substantial diminution
in such positions, authority, duties or responsibilities, excluding for this
purpose any isolated, insubstantial and inadvertent action not taken in bad
faith and which is remedied by the Corporation promptly after receipt of
written notice thereof given by the Executive in accordance with Section 15;
or (C) any failure by the
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Corporation to comply with any of the provisions of this Agreement, other than
any isolated, insubstantial and inadvertent failure not occurring in bad faith
and which is remedied by the Corporation promptly after receipt of written
notice thereof given by the Executive in accordance with Section 15; or (D) the
Corporation requiring the Executive to be based at an office or location which
is more than fifty (50) miles from the Executive's office as of July 1, 1997.
Any good faith determination by the Executive that Good Reason exists shall be
conclusive. In addition, any termination by the Executive during the thirty
(30)-day "window period" beginning six (6) months after a Change of Control
shall be deemed to be for "Good Reason."
(v) "Notice of Termination" shall mean a written notice which (A)
indicates the specific termination provision in this Agreement relied upon, (B)
sets forth in reasonable detail the facts and circumstances claimed to provide
a basis for termination of the Executive's employment under the provision so
indicated and (C) if the Date of Termination is to be other than the date of
receipt of such notice, specifies the termination date.
9. Obligations of the Corporation Upon Termination. The following
provisions describe the obligations of the Corporation to the Executive under
this Agreement upon termination of his employment during the Employment Period.
However, except as explicitly provided in this Agreement, nothing in this
Agreement shall limit or otherwise adversely affect any rights which the
Executive may have under applicable law, under any other agreement with the
Corporation or any of its subsidiaries, or under any compensation or benefit
plan, program, policy or practice of the Corporation or any of its
subsidiaries.
(a) Death, Disability, Discharge for Cause, or Resignation Without Good
Reason. In the event this Agreement terminates pursuant to Section 8(a) by
reason of the death or disability of the Executive, or pursuant to Section 8(b)
by reason of the discharge of the Executive by the Corporation for Cause, or
pursuant to Section 8(c) by reason of the resignation of the Executive other
than for Good Reason, the Corporation shall pay to the Executive, or his heirs
or estate, in the event of the Executive's death, all Accrued Obligations in a
lump sum in cash within thirty (30) days after the Date of Termination;
provided, however, that any portion of the Accrued Obligations which consists
of bonus, deferred compensation, incentive compensation, insurance benefits or
other employee benefits shall be determined and paid in accordance with the
terms of the relevant plan or policy as applicable to the Executive; and,
provided further, that all long-term incentive compensation awards (such as (i)
options to purchase stock of the Corporation, (ii) restricted stock of the
Corporation, or (iii) similar equity-based units or interests) shall, if not
otherwise vested, vest in full upon such termination of this Agreement due to
death or disability.
(b) Discharge Without Cause or Resignation with Good Reason. In the
event that this Agreement terminates pursuant to Section 8(c) by reason of the
discharge of the Executive by the Corporation other than for Cause or
disability or by reason of the resignation of the Executive for Good Reason:
(i) The Corporation shall pay all Accrued Obligations to the
Executive
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in a lump sum in cash within ten (10) days after the Date of Termination;
provided, however, that any portion of the Accrued Obligations which consists
of bonus, deferred compensation, incentive compensation, insurance benefits or
other employee benefits shall be determined and paid in accordance with the
terms of the relevant plan or policy as applicable to the Executive;
(ii) Within ten (10) days after the Date of Termination, the
Corporation shall pay to the Executive a lump sum including the following
amounts:
(A) A cash bonus for the year of termination, calculated as a
pro rata portion of his then current target annual bonus amount;
(B) The full amount then credited to the Deferred Compensation
Account described in Section 4(b)(iii), above;
(C) A "Severance Amount" equal to three (3) times the sum of the
Executive's (1) then current annual base salary and (2) then current target
annual bonus amount; reduced by any amounts payable to the Executive under the
Corporation's Executive Severance Pay Plan or any similar plan or program; and
(D) In lieu of the Supplemental Retirement Benefit ("SRB")
described in Section 6, above, a "Supplemental Retirement Amount" equal to the
present value of a monthly SRB payable after the termination of employment for
the life of the Executive but in any event for a minimum period of ten (10)
years, with such value being calculated as follows:
(1) The monthly amount of the SRB shall be the excess of
(a) 50% of the Executive's Recent Average Monthly Compensation (as described
in paragraph (2), below) over (b) the sum of (i) the Executive's projected
monthly Social Security retirement benefits, if any, and (ii) the monthly
amount payable under a single-life annuity for the Executive's life which is
the actuarial equivalent of the benefits payable to the Executive under any
retirement or profit-sharing plan or program provided by the Corporation, to
the extent such benefits are attributable to contributions by the Corporation
other than contributions by the Corporation on behalf of the Executive under a
salary reduction agreement.
(2) The Executive's Recent Average Monthly Compensation
shall be the amount determined by dividing sixty (60) into the sum of (a) the
Severance Amount described in paragraph (C), above, and (b) the Executive's
cash compensation for the last twenty-four (24) months of his full-time
employment by the Corporation. Cash compensation shall consist of salary,
current and deferred bonuses, and contributions paid on the Executive's behalf
by the Corporation pursuant to a salary reduction agreement but shall not
include amounts attributable to equity-participation awards or to payments made
during that twenty-four (24)-month period pursuant to deferral from a previous
period.
(3) The Executive's Social Security retirement benefits
shall be projected as if the Executive began receiving such benefits at the
earliest date available to
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him under then current law.
(4) The computation of present value shall use the then
current Pension Benefit Guaranty Corporation interest rate for valuing
immediate annuities under single-employer pension plans.
(iii) For a period of three (3) years after the Date of
Termination, the Corporation shall continue to provide benefits to the
Executive and/or the Executive's family at least equal to those which would
have been provided to them in accordance with the plans, programs and
arrangements referred to in Section 4(b)(v) of this Agreement if the
Executive's employment with the Corporation had continued for those three (3)
years; provided, however, that such benefits shall be at least equal to the
most favorable for the Executive which were provided for the Executive at any
time during the twelve (12)-month period immediately preceding the termination
of employment.
(iv) All long-term incentive compensation awards to the
Executive, including (but not by way of limitation) all equity-based incentive
compensation awards (such as (A) options to purchase stock of the Corporation,
(B) restricted stock of the Corporation, or (C) similar equity-based units or
interests) shall, if not otherwise vested, vest in full upon such termination
of this Agreement and Executive shall be considered to have terminated his
employment by reason of retirement for purposes of determining the exercise
period applicable to any options following such termination of this Agreement;
and
(v) The Corporation shall, at its sole expense, provide the
Executive with outplacement services the scope and provider of which shall be
selected by the Executive.
10. Certain Additional Payments by the Corporation.
(a) Anything in this Agreement to the contrary notwithstanding, in the
event it shall be determined that any payment or distribution by the
Corporation to or for the benefit of the Executive (whether paid or payable or
distributed or distributable pursuant to the terms of this Agreement or
otherwise, but determined without regard to any additional payments required
under this Section 10) (a "Payment") would be subject to the excise tax imposed
by Section 4999 of the Internal Revenue Code of 1986, as amended, (the "Code")
or if any interest or penalties are incurred by the Executive with respect to
such excise tax (such excise tax, together with any such interest and
penalties, being hereinafter collectively referred to as the "Excise Tax"),
then the Executive shall be entitled to receive an additional payment (a
"Gross-Up Payment") in an amount such that, after payment by the Executive of
all taxes (including any interest or penalties imposed with respect to such
taxes), including, without limitation, any income taxes (and any interest and
penalties imposed with respect thereto) and Excise Tax imposed upon the
Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal
to the Excise Tax imposed upon the Payment.
(b) Subject to the provisions of paragraph (c), below, all
determinations
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<PAGE> 15
required to be made under this Section 10, including whether and when a
Gross-Up Payment is required and the amount of such Gross-Up Payment and the
assumptions to be utilized in arriving at such determination, shall be made by
the accounting firm serving as the Corporation's independent auditing firm
immediately prior to the Effective Date (the "Accounting Firm"), which shall
provide detailed supporting calculations both to the Corporation and the
Executive within fifteen (15) business days of the receipt of notice from the
Executive that there has been a Payment, or such earlier time as is requested
by the Corporation. In the event that the Accounting Firm is serving as
accountant or auditor for the individual, entity or group effecting the Change
of Control, the Executive shall appoint another nationally recognized
accounting firm to make the determinations required hereunder (which accounting
firm shall then be referred to as the Accounting Firm hereunder). All fees and
expenses of the Accounting Firm shall be borne solely by the Corporation. Any
Gross-Up Payment, as determined pursuant to this Section 10, shall be paid by
the Corporation to the Executive within five (5) days of the receipt of the
Accounting Firm's determination. If the Accounting Firm determines that no
Excise Tax is payable by the Executive, it shall furnish the Executive with a
written opinion that failure to report the Excise Tax on the Executive's
applicable federal income tax return would not result in the imposition of a
negligence or similar penalty. Any good faith determination by the Accounting
Firm shall be binding upon the Corporation and the Executive. As a result of
the uncertainty in the application of Section 4999 of the Code at the time of
the initial determination by the Accounting Firm hereunder, it is possible that
Gross-Up Payments which will not have been made by the Corporation should have
been made ("Underpayment"), consistent with the calculations required to be
made hereunder. In the event that the Corporation exhausts its remedies
pursuant to paragraph (c), below, and the Executive thereafter is required to
make a payment of any Excise Tax, the Accounting Firm shall determine the
amount of the Underpayment that has occurred and any such Underpayment shall be
promptly paid by the Corporation to or for the benefit of the Executive.
(c) The Executive shall notify the Corporation in writing of any claim
by the Internal Revenue Service that, if successful, would require the payment
by the Corporation of a Gross-Up Payment. Such notification shall be given as
soon as practicable but no later than fifteen (15) business days after the
Executive is informed in writing of such claim and shall apprise the
Corporation of the nature of such claim and the date on which such claim is
requested to be paid. The Executive shall not pay such claim prior to the
expiration of the thirty (30)-day period following the date on which Executive
gives such notice to the Corporation (or such shorter period ending on the date
that any payment of taxes with respect to such claim is due). If the
Corporation notifies the Executive in writing prior to the expiration of such
period that it desires to contest such claim, the Executive shall:
(i) Give the Corporation any information reasonably requested by the
Corporation relating to such claim,
(ii) Take such action in connection with contesting such claim as
the Corporation shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with respect to
such claim by an attorney reasonably selected by the
-15-
<PAGE> 16
Corporation,
(iii) Cooperate with the Corporation in good faith in order
effectively to contest such claim, and
(iv) Permit the Corporation to participate in any proceedings
relating to such claim;
provided, however, that the Corporation shall bear and pay directly all costs
and expenses (including additional interest and penalties) incurred in
connection with such contest and shall indemnify and hold the Executive
harmless, on an after-tax basis, for any Excise Tax or income tax (including
interest and penalties with respect thereto) imposed as a result of such
representation and payment of costs and expenses. Without limiting the
foregoing provisions of this paragraph (c), the Corporation shall control all
proceedings taken in connection with such contest and, at its sole option, may
pursue or forego any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may, at its
sole option, either direct the Executive to pay the tax claimed and sue for a
refund or contest the claim in any permissible manner; and the Executive agrees
to prosecute such contest to a determination before any administrative
tribunal, in a court of initial jurisdiction and in one or more appellate
courts, as the Corporation shall determine; provided, however, that if the
Corporation directs the Executive to pay such claim and sue for a refund, the
Corporation shall advance the amount of such payment to the Executive on an
interest-free basis and shall indemnify and hold the Executive harmless, on an
after-tax basis, from any Excise Tax or income tax (including interest or
penalties with respect thereto) imposed with respect to such advance or with
respect to any imputed income with respect to such advance; and further
provided that any extension of the statute of limitations relating to payment
of taxes for the taxable year of the Executive with respect to which such
contested amount is claimed to be due is limited solely to such contested
amount. Furthermore, the Corporation's control of the contest shall be limited
to issues with respect to which a Gross-Up Payment would be payable hereunder
and the Executive shall be entitled to settle or contest, as the case may be,
any other issue raised by the Internal Revenue Service or any other taxing
authority.
(d) If, after the receipt by the Executive of an amount advanced by the
Corporation pursuant to paragraph (c), above, the Executive becomes entitled to
receive any refund with respect to such claim, the Executive shall (subject to
the Corporation's complying with the requirements of said paragraph (c))
promptly pay to the Corporation the amount of such refund (together with any
interest paid or credited thereon, after taxes applicable thereto). If, after
the receipt by the Executive of an amount advanced by the Corporation pursuant
to said paragraph (c), a determination is made that the Executive shall not be
entitled to any refund with respect to such claim and the Corporation does not
notify the Executive in writing of its intent to contest such denial of refund
prior to the expiration of thirty (30) days after such determination, then such
advance shall be forgiven and shall not be required to be repaid; and the
amount of such advance shall offset, to the extent thereof, the amount of the
Gross-Up Payment required to be paid.
-16-
<PAGE> 17
11. No Mitigation. In no event shall the Executive be obligated to seek
other employment or take any other action by way of mitigation of the amounts
payable to the Executive under any of the provisions of this Agreement, and
such amounts shall not be reduced whether or not the Executive obtains other
employment.
12. Payment of Certain Expenses. The Corporation agrees to pay promptly as
incurred, to the fullest extent permitted by law, all legal fees and expenses
which the Executive may reasonably incur in connection with the preparation of
this Agreement or as a result of any contest by the Corporation, the Executive
or others of the validity or enforceability of, or liability under, any
provision of this Agreement (including as a result of any contest initiated by
the Executive about the amount of any payment due pursuant to this Agreement)
(together with an additional amount such that after payment by the Executive of
Executive's applicable Federal, state and local taxes on such additional
amount, Executive shall retain an amount equal to the total of Executive's
applicable Federal, state and local taxes arising due to the payment of legal
fees and expenses under this Section 12), plus in each case interest on any
delayed payment at the interest rate applicable from time to time under the
Corporation's primary revolving credit agreement, or in the absence of such a
rate, at the applicable federal rate provided for in Section 7872(f)(2)(A) of
the Code; provided, however, that the Corporation shall not be obligated to
make such payment of fees and expenses with respect to any contest in which it
is determined that such contest was initiated or maintained by Executive in bad
faith.
13. Indemnification. To the fullest extent permitted by law, the
Corporation shall, during and after the Executive's term of employment,
indemnify the Executive (including the advancement of expenses) for any
judgments, fines, amounts paid in settlement and reasonable expenses, including
attorneys' fees, incurred by the Executive in connection with the defense of
any lawsuit or other claim to which he is made a party by reason of being or
having been an officer, director or employee of the Corporation or any of its
subsidiaries.
14. Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the heirs and representatives of the Executive and the successors
and assigns of the Corporation. The Corporation shall require any successor
(whether direct or indirect, by purchase, merger, reorganization,
consolidation, acquisition of property or stock, liquidation, or otherwise) to
all or a substantial portion of its assets, by agreement in form and substance
reasonably satisfactory to the Executive, expressly to assume and agree to
perform this Agreement in the same manner and to the same extent that the
Corporation would be required to perform this Agreement if no such succession
had taken place. Regardless of whether such an agreement is executed, this
Agreement shall be binding upon any successor of the Corporation in accordance
with the operation of law, and such successor shall be deemed the "Corporation"
for purposes of this Agreement.
-17-
<PAGE> 18
15. Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered by hand or by reputable commercial delivery service or mailed within
the continental United States by first class certified mail, return receipt
requested, postage prepaid, addressed as follows:
(a) If to the Board or the Corporation, to:
Wallace Computer Services, Inc.
2275 Cabot Drive
Lisle, Illinois 60532
Attention: Corporate Secretary
(b) If to the Executive, to:
Mr. Robert J. Cronin
603 Ridgewood Court
Oak Brook, Illinois 60523
With a copy to:
Sonnenschein Nath & Rosenthal
8000 Sears Tower
Chicago, Illinois 60606
Attention: Roger C. Siske
Such addresses may be changed by written notice sent to the other party at the
last recorded address of that party.
16. Tax Withholding. The Corporation shall provide for the withholding of
any taxes required to be withheld by federal, state, or local law with respect
to any payment in cash, shares of stock and/or other property made by or on
behalf of the Corporation to or for the benefit of the Executive under this
Agreement or otherwise. The Corporation may, at its option: (a) withhold such
taxes from any cash payments owing from the Corporation to the Executive, (b)
require the Executive to pay to the Corporation in cash such amount as may be
required to satisfy such withholding obligations and/or (c) make other
satisfactory arrangements with the Executive to satisfy such withholding
obligations.
17. Arbitration. Except as to actions described in Section 7(d), any
controversy or claim arising out of or relating to this Agreement or the breach
hereof shall be settled by arbitration in Chicago, Illinois in accordance with
the laws of the State of Illinois, without regard to the choice of law
provisions of such laws. The arbitration shall be conducted in accordance with
the rules of the American Arbitration Association before an arbitrator
appointed by the then President of The Chicago Bar Association. The costs and
expenses of the arbitrator shall be borne by the Corporation. The award of the
arbitrator shall be binding upon the parties. Judgment upon the award rendered
by the arbitrator may be entered in any court having
-18-
<PAGE> 19
jurisdiction.
18. No Assignment. Except as otherwise expressly provided herein, this
Agreement is not assignable by any party and no payment to be made hereunder
shall be subject to anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance or other charge.
19. Execution in Counterparts. This Agreement may be executed by the
parties hereto in two (2) or more counterparts, each of which shall be deemed
to be an original, but all such counterparts shall constitute one and the same
instrument, and all signatures need not appear on any one counterpart.
20. Jurisdiction and Governing Law. Except as provided in Section 17,
jurisdiction over disputes with regard to this Agreement shall be exclusively
in the courts of the State of Illinois, and this Agreement shall be construed
and interpreted in accordance with and governed by the laws of the State of
Illinois, without regard to the choice of laws provisions of such laws.
21. Severability. If any provision of this Agreement shall be adjudged by
any court of competent jurisdiction to be invalid or unenforceable for any
reason, such judgment shall not affect, impair or invalidate the remainder of
this Agreement. Furthermore, if the scope of any restriction or requirement
contained in this Agreement is too broad to permit enforcement of such
restriction or requirement to its full extent, then such restriction or
requirement shall be enforced to the maximum extent permitted by law, and the
Executive consents and agrees that any court of competent jurisdiction may so
modify such scope in any proceeding brought to enforce such restriction or
requirement.
-19-
<PAGE> 20
22. Relationship to Employment Agreement. The Executive and the
Corporation acknowledge that, prior to the Effective Date, the Executive's
employment shall be governed by the Employment Agreement between the Executive
and the Corporation dated as of July 1, 1997, as it may be amended and/or
restated from time to time (the "Prior Agreement"). From and after the
Effective Date, this Agreement shall supersede the Prior Agreement and any
other agreement between the parties with respect to the subject matter hereof.
23. Prior Understandings. This Agreement embodies the entire understanding
of the parties hereto, and supersedes all prior oral or written agreements or
understandings between them, regarding the subject matter hereof. No change,
alteration or modification hereof may be made except in a writing, signed by
each of the parties hereto. The headings in this Agreement are for convenience
and reference only and shall not be construed as part of this Agreement or to
limit or otherwise affect the meaning hereof.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
Attest: WALLACE COMPUTER SERVICES, INC.
/s/ Steven L. Carson By: /s/ William N. Lane III
- ---------------------------- ----------------------------------------
Title:Chairman of the Compensation Committee
--------------------------------------
ROBERT J. CRONIN
/s/ Robert J. Cronin
--------------------------------------------
-20-
<PAGE> 1
WALLACE 1997 ANNUAL REPORT
WALLACE MAKES IT
SIMPLE
<PAGE> 2
[BACKGROUND PICTURE]
COPIER PAPER
INVOICES
ENVELOPES
INDUSTRIAL CATALOGS
LABELING SOFTWARE
ATM ROLLS
DISKETTES
STOCK LABELS
TELECOM SERVICE NOTICES
MARKERS
PRINTER CARTRIDGES
NOTEPADS
PENS
PHONE MESSAGE PADS
PAPER CLIPS
STATEMENTS
ELECTRONIC ARTICLE SURVEILLANCE LABELS
AIRLINE BAG TAGS
BOTTLE LABELS
STOCK FORMS
TAPE
PACKAGE DELIVERY FORMS
LEGAL PADS
HMO DIRECTORIES
STAPLERS
COMPUTER PAPER
FILE FOLDERS
INTERCOMPANY FORMS
MARKETING BROCHURES
DIRECT MAIL OFFERS
BAR-CODED SHIPPING LABELS
INTRACOMPANY FORMS
P.O.S. DISPLAYS
CREDIT CARD OFFERS
<PAGE> 3
WALLACE AT A GLANCE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PERCENTAGE PRODUCT
PRODUCT SEGMENT EXAMPLES OF CORPORATE SALES REVENUE GROWTH
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FORMS - Air freight package forms --------------------- ---------------------
- Monthly billing $305.6 MILLION 1997 2 Year
statements --------------------- GROWTH CAGR
- Mortgage applications 34% ---------------------
- Healthcare forms --------------------- -5.7% 4.5%
- Credit card statements PIE GRAPH ---------------------
- Point-of-sale transaction forms --------------------- $323.9
$305.6
$280.0
---------------------
BAR GRAPH
---------------------
1995 1996 1997
---------------------
(IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------------------
PRINT - Sweepstakes mailings --------------------- ---------------------
- Credit card offers $242.0 MILLION 1997 2 YEAR
- Retail point-of-sale materials --------------------- GROWTH CAGR
- Product brochures 27% ---------------------
- Healthcare plan directories --------------------- 11.4% 23.1%
- On-demand, individual mailings PIE CHART ---------------------
$242.0
$217.2
$159.6
---------------------
1995 1996 1997
---------------------
(IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------------------
OFFICE PRODUCTS - Legal pads --------------------- ---------------------
- Computer paper $221.3 MILLION 1997 2 YEAR
- Printer ribbons and --------------------- GROWTH CAGR
cartridges 24% ---------------------
- ATM and cash register paper rolls --------------------- 9.9% 14.5%
- Brand-name office supplies PIE CHART ---------------------
- Standardized business forms --------------------- $221.3
$201.4
$168.8
---------------------
1995 1996 1997
---------------------
(IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------------------
LABELS - Bar-coded shipping labels --------------------- ---------------------
- Consumer product labels $137.4 MILLION 1997 2 YEAR
- Airline bag tags --------------------- GROWTH CAGR
- Blank stock labels 15% ---------------------
- Label software, printers and --------------------- 14.7% 14.7%
applicators PIE CHART ---------------------
- Electronic article surveillance --------------------- $137.4
(EAS) tags $119.8
$104.4
----------------------
1995 1996 1997
----------------------
(IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 4
[GRAPH]
<TABLE>
<CAPTION>
WALLACE AT A GLANCE
- ------------------------------------------------------------------------------------------------------------------
PRODUCT SEGMENT FISCAL 1997 HIGHLIGHTS GROWTH STRATEGY
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FORMS - Unit sales of forms grew %5, - The outsourcing trend will continue
but in dollars were 5.7% below to produce new opportunities
last year due to paper prices that to penetrate the Fortune 1000.
were as much as 40% below
fiscal 1996 levels.
- Communicate the proven results
- Wallace became the recognized we have achieved for 314 W.I.N.
leader in forms management and Select Services customers
services, and the strong market to continue market share gains.
appeal of W.I.N. (TM) and Select
Services(TM) drove the number - Further expand and enhance forms
of new forms contracts up 29.2% management services to maintain a
superior customer value offering.
- Began rolling-out the third phase
of MIPS establishing digital order - Focus special attention on key
entry and pricing to speed vertical markets.
customer price estimating, and
a new automated planning and - Introduce Priorities(TM), a
scheduling system in the plants. structured program that provides
a potential new customer with a
- Launched QUEST, a quality and comprehensive audit of all forms
productivity enhancement program and departments to identify cost
in all forms plants. reduction opportunities.
- Developed @W.I.N. Direct(TM), - Continue to leverage Wallace's
an internet ordering system information systems' strengths
that makes it faster and easier to develop and implement programs
for end-users to order their that increase customer service
forms and supplies. and savings, as well as
manufacturing efficiency and
quality.
- -----------------------------------------------------------------------------------------------------------------------------------
PRINT - Direct response and commercial - The way most large organizations
printing sales grew 11.4% to currently purchase and manage
$242.0 million over fiscal 1996. materials such as marketing
brochures represents a sizable
opportunity to apply Wallace's
- Launched a new commercial services and expertise, resulting
printing strategy aimed at in reduced overall costs for
becoming the supplier of the customer and new sales
printed promotional items, opportunities for Wallace.
such as brochures and marketing
materials, to large - Roll-out W.I.N. 3.0 to leverage
organizations. existing account relationships to
generate commercial print and
- Developed W.I.N. 3.0 which adds direct response sales
the capabilities needed to manage . opportunities.
all commercial printing supplies
and generate cost and work savings - Make further acquisitions to
increase geographic availability
- Acquired Post Printing and Moran of high-end commercial printing
Printing to add to Wallace's capability.
high-end commercial printing
capabilities. - Continue developing additional
customer applications for The
- The Daily Mail(TM) service Daily Mail's unique benefits.
doubled in size. This exclusive
product offers new on-demand - Emphasize and strengthen direct
solutions to customer response capabilities for smaller
notification and marketing quantity, more targeted direct
programs. mail campaigns for which demand is
rebounding.
- ------------------------------------------------------------------------------------------------------------------------------------
OFFICE PRODUCTS - Aggregate office product sales - Based on superior supplies
grew 9.9% over fiscal 1996. management services and the trend
forcustomers to consolidate vendors,
- The number of contract stationer continue to acquire contract
customers tripled and finished stationery accounts.
the year with 143 agreements
to supply brand-name office - Together(TM), Wallace's integrated
products. supply management service, will
increase the number of stock
- TOPS expanded its lines of products that customers buy from
designed pad products which Wallace.
are attractive to mass
merchandise retailers, and - Maintain Wallace's position as the
obtained product placement industry's low-cost producer and
in the nation's largest mass continue its cost advantage in the
merchandiser. marketplace.
- Became exclusive supplier of - TOPS will introduce additional
pads to one of the largest special design pad products to
contract stationers and also increase appeal and penetration
to the nation's largest office in the mass market retail channel.
products wholesaler.
- Focus marketing efforts for
- TOPS did an outstanding job contract stationery on existing
of increasing unit sales W.I.N. accounts.
to mostly offset the effects
of dramatically lower paper
prices from the prior year.
- Introduced W.I.N. Office(TM),
a software tool that allows
end-users to order office
supplies directly from Wallace.
- ------------------------------------------------------------------------------------------------------------------------------------
LABELS - Label product sales increased - Leverage established W.I.N. and
14.7% over 1996. Select Services account relationships
to increase label sales.
- Joined the Digital Label
Alliance to develop digital - Further expand product lines, such
label printing technologies as linerless labels, to become our
for shorter run applications customers' one-stop shop for all
and lower pre-press costs. labeling needs.
- Established Wallace's Label - Continue developing the Sensormatic
Design Center to do custom relationship to increase retail
programming and design bar security tag sales and integrate
coded labels for customers. EAS technology into other types of
labels forsource-tagging.
- Formed an alliance with
Sensormatic Electronics Corp. - Introduce new airline bag tag
for the production of EAS materials which will provide
tags and joint development enhanced performance and better
of new technologies. values.
- Leverage material supplier
- Implemented a re-engineering relationships for new product
process, the Press Ready development, just-in-time delivery
Organization (PRO) System, and lower costs.
to reduce make-ready time
in the manufacturing plants. - Fully implement PRO in all plants.
- Wallace was selected as the
American OEM of the Year
by Zebra Technologies
Corporation, whose bar-code
label printers we resell and
integrate.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 5
<PAGE> 6
WALLACE MAKES
SAVING MONEY
ON INFORMATION
MANAGEMENT SUPPLIES
SIMPLE
1
<PAGE> 7
FINANCIAL HIGHLIGHTS
(in thousands except per share amounts)
<TABLE>
<CAPTION>
=======================================================================
FISCAL YEARS ENDED JULY 31 1997 1996 CHANGE
=======================================================================
<S> <C> <C> <C>
Net sales $906,290 $862,287 5%
- -----------------------------------------------------------------------
Net income $ 81,282 $ 72,999 11%
- -----------------------------------------------------------------------
Net income per share $ 1.88 $ 1.60 17%
- -----------------------------------------------------------------------
Dividends per share $ 0.56 $ 0.43 30%
- -----------------------------------------------------------------------
Working capital $149,234 $206,238 (28%)
- -----------------------------------------------------------------------
Stockholders' equity $493,188 $510,443 (3%)
- -----------------------------------------------------------------------
Stockholders' equity per share $ 11.45 $ 11.20 2%
- -----------------------------------------------------------------------
Average common shares outstanding 43,322 45,582 (5%)
=======================================================================
</TABLE>
[LINE GRAPH]
<TABLE>
<CAPTION>
===================================================
SALES (IN THOUSANDS)
---------------------------------------------------
2 year CAGR 12.8%
5 year CAGR 12.1%
===================================================
93 94 95 96 97
---------------------------------------------------
<S> <C> <C> <C> <C>
$ 545,315 $ 588,173 $ 712,838 $ 862,287 $ 906,290
</TABLE>
[LINE GRAPH]
<TABLE>
<CAPTION>
==================================================
EARNINGS PER SHARE
--------------------------------------------------
2 year CAGR 23.6%
5 year CAGR 16.4%
==================================================
93 94 95 96 97
--------------------------------------------------
<S> <C> <C> <C> <C>
$ .92 $ 1.08 $ 1.23 $ 1.60 $ 1.88
</TABLE>
[LINE GRAPH]
<TABLE>
<CAPTION>
==================================================
DIVIDENDS PER SHARE
--------------------------------------------------
2 year CAGR 23.0%
5 year CAGR 15.7%
==================================================
93 94 95 96 97
--------------------------------------------------
<S> <C> <C> <C> <C>
$ .29 $ .32 $ .37 $ .43 $ .56
</TABLE>
2
<PAGE> 8
LETTER TO OUR SHAREHOLDERS
FOR ORGANIZATIONS THAT WANT TO
CUT COSTS AND INCREASE PRODUCTIVITY,
WALLACE IS THE BUSINESS SUPPLIES SOURCE THAT
PROVIDES THE SIMPLEST SOLUTIONS
WITH THE MAXIMUM ADMINISTRATIVE CONTROL
AND COST SAVINGS. OUR ABILITY TO DO
THIS BETTER THAN ANYONE ELSE IS GENERATING GROWTH
AND SHAREHOLDER VALUE.
TED DIMITRIOU BOB CRONIN
Chairman President and
Chief Executive Officer
[PICTURE]
Nineteen ninety-seven was a year of continued growth. We fortified our core
competitive advantages, made good progress on near-term growth opportunities
and initiated a new strategy for longer-term growth. We are confident that
Wallace will continue to be the best opportunity for large organizations to cut
costs by outsourcing the work of purchasing and managing forms and other
supplies. More than any other vendor, we can take on more of the day-to-day
work; give the customer the greatest control; and deliver the greatest cost
savings. As a result, the company posted its 36th consecutive record year in
sales, and our market position and the opportunities we see ahead have never
been stronger.
MET CORPORATE OBJECTIVES
Results for fiscal 1997 continue to reflect the best performance in the
industry and met our operating and financial objectives excluding the impact of
paper price changes. For the fiscal year ended July 31, 1997, unit sales
increased 12 percent which generated a 5.1 percent increase in dollar sales to
$906.3 million. Falling paper prices had the effect of understating our real
sales growth. Compounded over the last three years, which averages the swings
in paper prices, the company's annual growth rates were 15.5 percent in sales
and 20.3 percent in earnings per share.
Reported fiscal 1997 net income increased 11.3 percent to $81.3 million,
or $1.88 per share, compared to $73.0 million, or $1.60 per share in fiscal
1996.
3
<PAGE> 9
LETTER TO OUR SHAREHOLDERS
Excluding takeover expenses from the prior year, fiscal 1997 net income
increased 2.6 percent. Ratios of financial performance remained strong,
although affected by paper prices and acquisitions. Return on Net Sales reached
9.0 percent, Return on Average Assets was 11.5 percent and Return on Average
Equity was 16.2 percent.
FORTIFIED COMPETITIVE ADVANTAGES AND
MAPPED FUTURE GROWTH STRATEGY
In fiscal 1997, we strengthened our fundamental competitive position as the
leader in forms management. We added 71 new forms management customers, and at
year-end had an installed base of more than 300. The savings we have documented
for these organizations have become persuasive selling tools and we continue to
increase market share.
This year we also developed additional services that further reduce
customer workload and add savings opportunities. These include W.I.N.
Direct(TM), @W.I.N. Direct(TM), W.I.N. Office(TM), and StatusNow!(TM).
Enhancements to our information systems and manufacturing infrastructure
increased customer service and production efficiency. These internal systems
allow us to be flexible, molding our organization to each customer's unique
systems and business processes. Additionally, we began making all systems Year
2000 compliant and project completion by the end of fiscal 1999.
In fiscal 1997, we took our expertise in new directions and began applying
our forms management services to other product areas, helping companies
generate additional cost savings and consolidation. Office products sales
through our contract stationer program continued to grow. We also
recognized that printed promotional materials, such as brochures and
point-of-sale pieces, can benefit dramatically from our supplies management
services. As a result, we launched a new high-end commercial print strategy to
become the market's only added-value services supplier of these promotional
materials. We made two acquisitions to
[LINE GRAPH]
<TABLE>
<CAPTION>
=================== ========================
SALES PER EMPLOYEE RATE OF
------------------- REINVESTMENT
LATEST FISCAL YEAR ------------------------
SALES PER EMPLOYEE FIVE YEAR AVERAGE
=================== CAPITAL EXPENDITURES AS
(IN THOUSANDS) A PERCENT OF SALES
------------------- ========================
<S> <C> <C> <C> <C>
WALLACE INDUSTRY WALLACE INDUSTRY
$ 207.4 $ 140.2 6.0% 3.9%
=================== ========================
=================== =====================
</TABLE>
4
<PAGE> 10
LETTER TO OUR SHAREHOLDERS
launch this capability; more geographic acquisitions are anticipated to provide
nationwide coverage.
For the future, we are looking at additional custom and stock product
categories where our supplies management services could provide value to large
organizations. Also this year, we mapped out what we believe will develop into
a major growth initiative: integrated supply management. Our unique approach,
which we call Together, is the ultimate execution of our expanding product
offering. We will become a large organization's single source for all the
business supplies used in its office areas. Market conditions are favorable for
this type of comprehensive service and we have strong competitive advantages
that will facilitate evolving and expanding our role with customers. In
conjunction with the launch of our integrated supply strategy in early fiscal
1998, we will roll-out W.I.N. 3.0. This new version is the single tool
customers need to control this broad relationship, and expands Wallace's
leadership in supplies management services.
We are accomplishing all this ahead of our competitors because of the
company's long-standing commitment to reinvesting in the business. Over the
last 10 years, these investments have created the company's primary competitive
assets in information systems, manufacturing, distribution, the salesforce, and
workforce skills, which allow us to offer these advanced services.
OTHER EVENTS
In the first few days of fiscal 1997, the Moore Corporation formally abandoned
its efforts to buy Wallace. Within a day, one of the remaining takeover
speculators launched a proxy fight. At the November annual meeting,
shareholders voted down his slate of dissident board candidates as well as his
two proposals. The few remaining speculators sold their positions within a few
weeks following the annual meeting and the company's shareholder base returned
to normal. With those issues aside, Wallace looks forward to fiscal 1998 and
beyond.
At a special meeting held in February, stockholders increased the number
of authorized common shares from 50 million to 100 million. The additional
shares authorized for future issuance may be used for general corporate
purposes such as any future stock splits, stock dividends, issuance under the
company's employee benefit plans, raising additional capital or in connection
with acquisitions, and other appropriate uses. Stockholders also approved a
stock incentive plan, which will further align the interests of certain
employees, officers and directors with the company's stockholders.
In April of this year, we completed a $100 million share buyback program
under which 3,444,200 shares were repurchased. Subsequently in May, the Board
authorized an additional $100 million program. At fiscal 1997 year-end, 177,400
shares had been repurchased and Wallace had 43.1 million shares outstanding. We
anticipate that the remainder of this authorization could be utilized by the
end of fiscal 1998.
WALLACE MAKES IT SIMPLE FOR CUSTOMERS
Making supplies management easier and less costly for our customers is hard
work. It takes motivated, creative people to take on additional tasks and help
customers change business processes. The talent and motivation of Wallace's
people are clearly illustrated by sales per employee that is almost 50 percent
above the industry average.
As much as Wallace and its customers changed in 1997, it was only the
beginning. Wallace will continue to be the industry's leading agent of change
in how customers manage their business supplies, and further growth and
shareholder value will result. Thank you for your support.
TED DIMITRIOU BOB CRONIN
TED DIMITRIOU BOB CRONIN
Chairman President and
Chief Executive Officer
5
<PAGE> 11
SIMPLE TO
ORDER
SIMPLE TO
DISTRIBUTE
SIMPLE TO
STREAMLINE
6
<PAGE> 12
FINDING QUALIFIED VENDORS
DETERMINING VENDOR REQUIREMENTS
WRITING RFPS
EVALUATING PROPOSALS
NEGOTIATING CONTRACTS
CONSOLIDATING VENDORS
OUTSOURCING OPPORTUNITIES
PLACING ORDER
ESTABLISHING QUANTITIES
MANAGING ITEM SPECIFICATIONS
MONITORING LOCATION ORDERS
RESOLVING PROBLEMS
LOST SHIPMENTS
STREAMLINING WORK FLOW
ITEM OBSOLESCENCE
ELIMINATING DUPLICATIONS
DISTRIBUTING
MONITORING USAGE
IMPLEMENTING SPEC CHANGES
PURCHASING COMPLIANCE
POLICY COMPLIANCE
REPORTING
DESIGN CHANGES
WALLACE MAKES SAVING MONEY
SIMPLE BY LETTING CUSTOMERS
OFF-LOAD THE DAY-TO-DAY ADMINISTRATION OF
INFORMATION MANAGEMENT SUPPLIES.
There's a lot of work in managing supplies. One customer's research found that
while accounting for only 15% of their total purchase costs, supplies took up
78% of their transactions. Wallace provides supplies management services that
make the purchasing manager's job easier and generate significant cost savings
for the company.
The following pages describe how Wallace can assume tasks such as ordering,
distributing and streamlining, and provide examples of how companies
of varying sizes are benefitting.
MANAGING INVENTORIES
OUT-OF-STOCKS
OVERSTOCKS
SHRINKAGE
PLACING ORDERS
ESTABLISHING QUANTITIES
MANAGING ITEM SPECIFICATIONS
MONITORING LOCATION ORDERS
RESOLVING PROBLEMS
LOST SHIPMENTS
ITEM OBSOLESCENCE
DISTRIBUTING
MONITORING USAGE
PURCHASING COMPLIANCE
QUALITY ASSURANCE
LOGISTICS
BUDGETING
REVIEWING COSTS
SORTING BILLING DETAILS
FINDING COST REDUCTION OPPORTUNITIES
PAYING INVOICES
MAINTAINING VENDOR RELATIONSHIPS
EVALUATING VENDOR PERFORMANCE
EXPEDITING ORDERS
UNDERSTANDING USER NEEDS
INVESTIGATING NEW TECHNOLOGIES
<PAGE> 13
[PICTURE]
A wide range of products helps corporations consolidate vendors and reduce
their workload.
[PICTURE]
[PICTURE]
We help purchasing managers control usage and ordering throughout their
organization to reduce costs and increase compliance.
[PICTURE]
[PICTURE]
End-users can order supplies directly by phone, fax, e-mail and the internet.
[PICTURE]
W.I.N., the tool for Purchasing,
provides comprehensive current
information for better cost control.
<PAGE> 14
[PICTURE]
SIMPLE TO ORDER
FLEXIBLE ORDERING SYSTEMS
MAKE IT EASY TO
PLACE AND MANAGE ORDERS
FROM THOUSANDS OF LOCATIONS.
<PAGE> 15
[PICTURE]
SIMPLE TO DISTRIBUTE
CUSTOMERS CUT THEIR COSTS
AND WORKLOAD BY OUTSOURCING
THEIR SUPPLIES
DISTRIBUTION TO WALLACE
<PAGE> 16
[PICTURE]
[PICTURE]
Wallace's distribution system is highly automated to reduce costs and increase
fulfillment speed and accuracy.
[PICTURE]
Wallace's distribution system ships more than 22,000 order line items per day.
[PICTURE]
We ship directly to end-users throughout our customers' organizations.
[PICTURE]
By consolidating many different supply items into one shipment, we can
dramatically reduce shipping costs.
[PICTURE]
[PICTURE]
[PICTURE]
<PAGE> 17
[PICTURE]
[PICTURE]
Leveraging our experience and superior tools, we have generated first-year
savings of 15-20%.
[PICTURE]
Wallace teams conduct department-by-department reviews of forms and other
supplies to identify consolidation, combination, redesign and streamlining
opportunities.
[PICTURE]
[PICTURE]
People in all Wallace departments work with customers to streamline the
supplies management process.
[PICTURE]
Implementation teams input all the data about every form and supply item into
the W.I.N. system to make it easy to track items and changes.
<PAGE> 18
[PICTURE]
SIMPLE TO STREAMLINE
WALLACE DOES THE LEGWORK
TO IDENTIFY STREAMLINING AND
COST REDUCTION OPPORTUNITIES
<PAGE> 19
SIMPLE
TO SAVE
MONEY
By outsourcing these activities to Wallace, customers dramatically reduce their
workload and costs. At year-end, more than 300 companies were leveraging
Wallace's services and saving tens of millions of dollars. The following three
cases illustrate how companies of various sizes have benefitted.
14
<PAGE> 20
SELECT SERVICES(TM) CUSTOMERS
Central to all the customer services we provide is the Wallace Information
Network (TM) (W.I.N.), a software tool that ties customers into Wallace's
corporate information system and centrally organizes and manages all the
customer's data about supplies. Select Services is Wallace's program for
customers who buy more than $400,000 annually. These customers use the W.I.N.
system through their local sales office. There, a Wallace representative
utilizes the W.I.N. system's analysis tools to uncover and recommend cost
saving opportunities. In this way, customers outsource the work of managing
forms and other supplies to Wallace, while retaining decision-making control.
Regional Healthcare Provider
Annual information management supplies purchases:
$500,000
CASE 1
[PICTURE]
REVENUES: $415 MILLION
LOCATIONS: 8
EMPLOYEES: 4,400
DOCUMENTED FIRST YEAR
SAVINGS
19%
SERVICE LEVEL SELECT SERVICES
A regional medical center with one main hospital and seven satellite facilities
wanted to minimize its forms costs. To begin, Wallace conducted its
Consultative Assessment Program(TM), analyzing 19 departments and 870 form and
label items. This review identified key items and processes where costs could
be reduced. Significant findings included: service department personnel were
diverting time to create and maintain these items; consistent design and
workflow standards were not being followed; and the previous vendor had not
enforced compliance with purchasing control measures.
Wallace then took on the production and management of all custom forms and
labels as well as stock forms - more than 500 items. The customer realized
a 19% cost savings the first year through redesigning and consolidating
forms, combining production runs and the re-assignment of its in-house
forms design function. Additional savings have been generated through
more effective use of the hospital's print center, and purchasing compliance
has also increased with a large number of "bootleg" forms being brought under
management.
Based on the forms management program's success, the customer is expanding
the number of product lines it is purchasing and managing through Wallace to
also include stock labels, envelopes, letterhead, business cards, custom
charts, manuals and brochures. Purchasing is also analyzing its current
ordering procedure, with an eye towards upgrading to Wallace's internet
ordering system, @W.I.N. Direct, to allow end-users to order
individual-use quantities directly from Wallace.
15
<PAGE> 21
W.I.N.(TM) CUSTOMERS
Customers that sign multi-year contracts to purchase $1 million or more
annually can choose to have a W.I.N. system placed on-site as well as a Wallace
employee (W.I.N. Administrator) to run it. The additional services are valuable
because these customers have many more supply items, end-users and locations to
manage.
International Manufacturer of Durable Consumer Goods
Annual information management supplies purchases:
$1,600,000
CASE 2
[PICTURE]
SERVICE LEVEL W.I.N.
REVENUES: $ 2.4 BILLION
LOCATIONS: 200
EMPLOYEES: 14,000
DOCUMENTED FIRST YEAR
SAVINGS
26%
In 1995, a large manufacturer embarked on a new program to centralize
purchasing control, reduce supplies costs and eliminate vendors. At the time,
it had more than 8,000 vendors, including 60 forms suppliers. The company's $60
cost to process every invoice was a significant factor behind this drive to
consolidate. Each division was ordering and managing their supplies separately.
Company-wide, tremendous amounts of warehouse space were devoted to supplies
storage and the company experienced high obsolescence costs because there was
no effective system for tracking supplies.
The manufacturer conducted an extensive vendor review based on quality,
technology, price and service. Wallace received the highest score and was
awarded a long-term contract to supply all forms and labels. We then took over
the distribution of these products, freeing up all the previously committed
warehouse space. The sales team, with reps in all major facilities, uses our
W.I.N. system to manage inventories and plan more efficient production runs. As
part of this process, we have standardized forms specs across the organization
to create more opportunities for group production runs. End users now order
directly from Wallace, eliminating all the daily order handling work that
previously bogged down the various Purchasing groups.
Wallace has changed the entire company's process for ordering, producing,
storing and distributing supplies. In the first year we exceeded promised
savings targets, reducing costs by 26%. Subsequently, the customer broadened
the categories it buys from Wallace to 6,000 items, successfully reducing its
vendor base by 200.
16
<PAGE> 22
TOGETHER(TM) CUSTOMERS
Together represents the future of many of our customer relationships. Together
is Wallace's just-introduced service level for customers that want
to outsource and fully integrate the management of all their supplies. To make
this service a reality, a new version of W.I.N. (3.0) was introduced in July
that manages all types of supply items, both stock and custom, in one
easy-to-use system.
National Specialty Retailer
CASE 3
SERVICE LEVEL
TOGETHER
REVENUES: $4.6 BILLION
LOCATIONS: 133 STORES
EMPLOYEES: 8,400
[PICTURE]
Annual information management
supplies purchases: projected
$2,000,000
DOCUMENTED FIRST YEAR
SAVINGS
PROJECTED
19%
In late 1996, a new purchasing philosophy was initiated to go beyond
traditional purchasing models to generate greater cost savings and business
process streamlining for the corporation and its stores. Purchasing executives
began talking with Wallace, which at the time was developing a new, fully
integrated supply management service. In the spring of 1997 a contract was
signed. The retailer's objectives for this newly-formed relationship include:
reduce the unit costs of supply items; improve service levels; reduce the costs
of distributing supplies throughout the organization; and consolidate all
supply items under one vendor.
We have become the retailer's single source and even at this early stage,
nearly every order goes through Wallace. We produce forms, labels, office
products, direct mail and commercial printing. Other third-party items (such as
shirts, bags and signage) are inventoried and distributed by Wallace. Some
orders, for unusual, low-volume items, Wallace hands off to separate vendors
for fulfillment. Whatever the product, however, Wallace provides the central,
coordinated ordering and management for all these supplies. Under Purchasing's
guidance and control, Wallace is doing the day-to-day work that is necessary to
streamline supplies usage across the organization. Wallace is also working as
an extension of Purchasing to drive compliance with this new purchasing model.
Stores are embracing it because it lowers their costs, provides greater
assurance of correct quantities on-hand, and provides billing flexibility to
optimize each store's budget. During the first months' start-up, 12% cost
reductions were generated. For the first full year, aggregate savings of 18-20%
are anticipated.
17
<PAGE> 23
SIMPLER
EVERY DAY
Customers see that the ultimate future of this simplification is for Wallace to
become their integrated supply manager, furnishing and managing all the
supplies used in their offices throughout the organization.
This is a continuous process. To help customers further consolidate
vendors, we are broadening our range of products and are rapidly approaching a
million SKUs under management. At the same time, we continue to add new
services and enhance existing ones to help customers off-load even more work
and drive additional costs out of their supply processes. Our work never stops
to make supplies purchasing and management simple for our customers.
18
<PAGE> 24
FINANCIALS
11 Year Financial Summary................................................ 20
Management's Discussion and Analysis..................................... 22
Consolidated Financial Statements........................................ 28
Notes to Consolidated Financial Statements............................... 32
Corporate and Investor Information...................... INSIDE BACK COVER
19
<PAGE> 25
11 YEAR SUMMARY OF SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1996 1995 1994
==================================================================================================================================
OPERATIONS
==================================================================================================================================
<S> <C> <C> <C> <C>
Net sales $ 906,290 $ 862,287 $ 712,838 $ 588,173
- ----------------------------------------------------------------------------------------------------------------------------------
Net income 81,282 72,999 55,297 47,931
- ----------------------------------------------------------------------------------------------------------------------------------
Net income per share 1.88 1.60 1.23 1.08
- ----------------------------------------------------------------------------------------------------------------------------------
Dividends per share .56 .43 .37 .32
- ----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL CONDITION
==================================================================================================================================
Total assets $ 720,442 $ 695,850 $ 592,702 $ 538,592
- ----------------------------------------------------------------------------------------------------------------------------------
Long-term debt 24,500 30,600 25,600 23,500
- ----------------------------------------------------------------------------------------------------------------------------------
Capital expenditures 39,225 59,506 51,487 34,228
- ----------------------------------------------------------------------------------------------------------------------------------
Working capital 149,234 206,238 193,150 183,432
- ----------------------------------------------------------------------------------------------------------------------------------
SIGNIFICANT RATIOS
==================================================================================================================================
Net income:
- ----------------------------------------------------------------------------------------------------------------------------------
Return on net sales 9.0% 8.5% 7.8% 8.1%
- ----------------------------------------------------------------------------------------------------------------------------------
Return on average assets 11.5% 11.3% 9.8% 9.4%
- ----------------------------------------------------------------------------------------------------------------------------------
Return on average equity 16.2% 15.1% 12.8% 12.3%
- ----------------------------------------------------------------------------------------------------------------------------------
Current ratio 2.1 3.1 3.9 3.8
- ----------------------------------------------------------------------------------------------------------------------------------
Long-term debt/debt plus equity 4.7% 5.7% 5.3% 5.4%
- ----------------------------------------------------------------------------------------------------------------------------------
Book value per share $ 11.45 $ 11.20 $ 10.05 $ 9.16
- ----------------------------------------------------------------------------------------------------------------------------------
Sales per employee* $ 207.4 $ 218.4 $ 195.4 $ 171.0
- ----------------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment per employee* $ 69.0 $ 73.2 $ 70.3 $ 67.7
- ----------------------------------------------------------------------------------------------------------------------------------
OTHER
==================================================================================================================================
Number of employees 4,610 4,131 3,765 3,530
- ----------------------------------------------------------------------------------------------------------------------------------
Number of stockholders of record 3,680 3,863 4,383 4,531
==================================================================================================================================
</TABLE>
*Based on average number of employees during the fiscal year
NOTES TO 11 YEAR SUMMARY
A. ACQUISITIONS: On July 24, 1997, the company acquired Moran Printing Company.
The acquisition price included notes payable of $29.5 million, and the
assumption of net debt totalling $4.9 million. On October 22, 1996, the company
acquired Post Printing, Inc. The acquisition price was $6.6 million of cash. 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
20
<PAGE> 26
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989 1988 1987
=============================================================================================================
=============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
$ 545,315 $ 511,572 $ 458,840 $ 448,700 $ 429,008 $ 383,045 $ 340,504
- -------------------------------------------------------------------------------------------------------------
41,170 39,455 35,009 39,555 36,867 31,610 26,027
- -------------------------------------------------------------------------------------------------------------
.92 .88 .81 .93 .88 .76 .64
- -------------------------------------------------------------------------------------------------------------
.29 .27 .25 .23 .20 .17 .15
- -------------------------------------------------------------------------------------------------------------
=============================================================================================================
$ 480,722 $ 467,142 $ 399,093 $ 375,203 $ 331,830 $ 291,764 $ 260,004
- -------------------------------------------------------------------------------------------------------------
25,210 25,959 19,790 20,155 20,465 20,830 21,180
- -------------------------------------------------------------------------------------------------------------
31,818 33,517 40,540 49,835 30,677 24,948 30,039
- -------------------------------------------------------------------------------------------------------------
157,937 152,246 141,390 137,598 138,218 117,139 100,128
- -------------------------------------------------------------------------------------------------------------
=============================================================================================================
- -------------------------------------------------------------------------------------------------------------
7.5% 7.7% 7.6% 8.8% 8.6% 8.3% 7.6%
- -------------------------------------------------------------------------------------------------------------
8.7% 9.1% 9.0% 11.2% 11.8% 11.5% 10.7%
- -------------------------------------------------------------------------------------------------------------
11.4% 11.9% 11.9% 15.1% 16.2% 16.1% 15.3%
- -------------------------------------------------------------------------------------------------------------
3.9 3.9 4.3 3.8 4.4 4.2 3.9
- -------------------------------------------------------------------------------------------------------------
6.4% 6.8% 6.0% 6.7% 7.7% 9.0% 10.4%
- -------------------------------------------------------------------------------------------------------------
$ 8.34 $ 7.86 $ 7.11 $ 6.52 $ 5.77 $ 5.05 $ 4.41
- -------------------------------------------------------------------------------------------------------------
$ 161.9 $ 160.4 $ 154.2 $ 154.4 $ 154.4 $ 145.8 $ 136.3
- -------------------------------------------------------------------------------------------------------------
$ 67.7 $ 70.7 $ 64.7 $ 59.3 $ 50.3 $ 48.4 $ 46.3
- -------------------------------------------------------------------------------------------------------------
=============================================================================================================
3,350 3,386 2,993 2,957 2,857 2,700 2,554
- -------------------------------------------------------------------------------------------------------------
4,260 4,435 4,347 4,396 4,350 4,038 4,104
=============================================================================================================
</TABLE>
payable of $.3 million, and the assumption of debt totalling $1.9 million.
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.
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.
21
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL 1997 VERSUS FISCAL 1996
Net sales for fiscal 1997 increased by 5.1% to $906.3 million. A breakdown by
the four major product groups is as follows:
<TABLE>
<CAPTION>
% TO TOTAL % REVENUE
PRODUCT GROUP REVENUE INCREASE
========================================
<S> <C> <C>
Forms 34 (6)
- ----------------------------------------
Print 27 11
- ----------------------------------------
Office Products 24 10
- ----------------------------------------
Labels 15 15
========================================
</TABLE>
Over the last five years, sales have grown at an annual compounded growth
rate of 12.1%.
The company estimates that actual unit growth for the year was 12%, the
same growth rate as fiscal 1996 when sales dollars were up 21.0%. This dramatic
change in sales dollars between years with comparative unit growth is
attributed to paper price changes. Paper is the basic raw material for 75% of
the company's products. Paper price changes, therefore, have a material effect
on reported sales dollars.
The majority of paper used by the company is uncoated free sheet, with
additional large purchases of both tablet and offset grades. Using 20 pound
white uncoated free sheet as a proxy for the paper market, published prices
during the last two fiscal years decreased by 42%.
The effects of paper price changes are felt immediately by the Print
product lines (commercial and promotional printing) and by the stock tab
product lines sold under Forms and Office Products. These products collectively
represent 30% of consolidated net sales.
For the 61% of the Forms product line which is sold under contract, there
is usually a 60 to 90 day lag between the time of a paper price change and its
effect on reported sales. When paper prices first increase, the 60 to 90 day
lag can put pressure on margins. Conversely, when paper prices decrease, the
lag can produce some margin expansion.
Overall, our best estimate for fiscal 1997 is that the impact of lower
paper prices reduced reported sales by 7%.
The number of new W.I.N. and Select Services customers continued to grow
throughout fiscal 1997. The number of customers for these programs increased by
29%. Most are new customers and most sign five year agreements for their forms,
office products, labels and other information management requirements. The 314
W.I.N. and Select Services customers at year-end represented 44% of
consolidated sales for the year.
The Forms product group continues to grow in a product category that is
declining on an industrywide basis. For fiscal 1997, we estimate that Forms'
unit growth was 5%, with lower paper prices reducing sales by 9%. Fiscal 1996
sales had included $7.4 million of sales for a business that was sold in
February, 1996. Stock computer paper represented 8% of Forms sales for 1997,
down from 10% last year.
The Print product category includes commercial and promotional printing.
The commercial printing products include both long-run catalogs and quick
turnaround documents such as medical provider directories. In fiscal 1997, the
company expanded the commercial printing product line with the acquisitions of
Post Printing and Moran Printing. These companies produce collateral marketing
pieces such as brochures and point of sale displays. These two acquisitions
added $8.7 million of sales for fiscal 1997.
The promotional printing products sold through the Colorforms division
include high quality printing and personalization services. The Daily Mail
program for regulated industries and weekly signage services for major retail
customers continued to grow during fiscal 1997. A full year of sales in fiscal
1997 for Forms Engineering Company (FEC) acquired in February, 1996, added $19
million of sales. Without the additive sales from FEC, Colorforms sales results
would have decreased 4% due to lower selling prices related to lower paper
costs and increasing competition. As the forms market declines, more forms
manufacturers have entered the promotional printing market, which is expected
to grow 8-9% per year.
The Office Products group includes commodity items that are produced by
the company such as legal pads, ribbons,
[PIE CHART]
<TABLE>
<CAPTION>
==================================
REVENUE
CONTRIBUTION
==================================
<S> <C>
Forms 34%
Print 27%
Office Products 24%
Labels 15%
==================================
</TABLE>
22
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
standardized business forms, add rolls, and stock computer paper. Manufactured
products represent 70% of office product sales. The balance of 30% represents
products purchased from other vendors for resale. The office products alliance,
which gives the company a presence in the contract stationery
business, grew to an annualized rate of $14 million.
The TOPS division, which manufactures paper based products for the resale
market, performed well despite the paper price decrease. Total sales for the
year were down $2.3 million, including a decrease of $6.0 million in stock
computer paper. Unit growth for TOPS was in line with the company average.
The Label Group had a good year with estimated unit growth of 17% and a
sales dollar increase of 15%. Label raw material costs do not fluctuate as much
as paper costs so the Label Group's results are more consistent year over year.
The Group manufactures both data processing and packaging labels, and sells
proprietary labeling software along with hardware items such as label
applicators. The sale of packaging labels and labeling equipment was up 10%
during fiscal 1997.
Net income for the year increased $8.3 million or 11.3%. Before takeover
expenses of $10.1 million in fiscal 1996, net income would have been up $2.0
million or 2.6%. The after-tax ratio for fiscal 1997 was 9.0%, the highest net
income ratio since the company went public in 1961.
For the last five years, net income has grown at an average annual
compound rate of 15.6%.
Cost of goods sold as a percent to sales for fiscal 1997 was 61.4% versus
62.4% in 1996. Fiscal 1996 had included a LIFO credit of $6.6 million due to
the drop in paper costs in the second half of that year. We recorded another
LIFO credit of $2.1 million in fiscal 1997 because paper prices declined again.
On a per share basis, the LIFO credits added 3 cents to fiscal 1997 and 9 cents
to fiscal 1996. Before the effects of LIFO accounting, cost of goods sold was
61.6% in 1997 and 63.2% in 1996. The margin improvement in fiscal 1997 came
from the replacement of lower margin stock tab product sales with increased
sales to and improved margins from the W.I.N. and Select Services customers.
Selling and administrative expenses increased 9.3% for the year. As a
percent to sales, they were 18.3% in fiscal 1997 and 17.6% in fiscal 1996. One
unusual expense in fiscal 1997 was $800,000 of legal and other fees in
connection with an unsuccessful attempt to place three dissident directors on
the Board at the November, 1996 annual meeting. The biggest expense increase in
the administrative area was an incremental $3.5 million for Information
Systems. We expect increasing IS expenditures in future years to keep the
selling and administrative percentage in the 18-19% range.
Depreciation and amortization expense was 5.4% of sales in fiscal 1997 and
5.2% in fiscal 1996. The increase in 1997 came from higher amortization of
capitalized software development costs.
One additional expense in fiscal 1997 was $264,000 for costs related to
Year 2000 programming. The total cost to make the company's 10,000 programs
Year 2000 compliant is estimated at $7.3 million. $1 million of this total will
go toward new financial software packages which will add additional
functionality and will, therefore, be capitalized. The balance of $6.3 million
will be expensed as incurred. Estimated expense for fiscal years 1998 and 1999
is $3.0 million each year.
Operating income for fiscal 1997 was up 15.5% after takeover expenses and
6.3% before takeover expenses.
Due to the share repurchase program, interest expense for fiscal 1997
exceeded interest income. The company recorded net interest expense of $743,000
in 1997 and net interest income of $1,556,000 in 1996. Interest income from tax
exempt investments was $.5 million in fiscal 1997 and $1.5 million in 1996.
Capitalized interest for the year was $1.3 million in 1997 and $1.4 million in
1996.
The effective income tax rate for fiscal 1997 was 39.5% versus 38.4% in
fiscal 1996. The rate was higher in 1997 due to
[LINE GRAPH]
<TABLE>
<CAPTION>
==================================================
NET INCOME
(IN THOUSANDS)
- --------------------------------------------------
2 year CAGR 21.2%
5 year GAGR 15.6%
==================================================
93 94 95 96 97
- --------------------------------------------------
<S> <C> <C> <C> <C>
41,170 47,931 55,297 72,999 81,282
</TABLE>
23
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
lower tax-exempt investment income and lower tax credits. We expect the
effective rate for fiscal 1998 to remain at 39.5%.
New modules have been developed for the W.I.N. and Select Services
programs, which will further distinguish these services. Early success with
Integrated Supply Management has reinforced the viability of this concept. To
offer ISM on a national basis, the company will create a network of
high-quality regional commercial printers. Our goal will be to make
acquisitions that are accretive to earnings per share in the first year of
operations.
As the company approaches $1 billion in sales, we will be nearing the
volume limitations of our base computer system (known as WCSS) that was
designed in 1984 and has been continually upgraded since then. The company will
spend over $30 million in the next several years to expand WCSS to handle
several billion dollars of sales and to further support the ISM strategy.
A new distribution center in the Ohio Valley has been approved by the
Board of Directors, as have six new presses for the Label division.
The drivers for the company's future growth will be continued reinvestment
in computer systems, distribution facilities, and new manufacturing equipment,
coupled with accretive acquisitions and expansion of the company's 700 person
salesforce, which we believe to be the best in our industry.
FISCAL 1996 VERSUS FISCAL 1995
Net sales for fiscal 1996 increased by 21% to $862.3 million. The breakdown by
major product group is as follows: Forms products, which represented 38% of
total sales, increased by 16%; Print, which represented 25% of sales, increased
36%; Office Products, representing 23% of sales, increased 19%; and Labels,
which represented 14% of sales, increased 15%.
Paper prices, which affect 75% of sales, remained stable through the first
half of fiscal 1996. In the second half of the year, however, paper prices
declined by as much as 40%. For the 59% of the Forms product line which is sold
under contract, there is usually a 60 to 90 day lag between the time of a paper
price change and its effect on our reported sales. For those parts of the
business that are not under contract, the impact of lower paper prices is felt
almost immediately.
The company believes that sales growth in fiscal 1996 was hampered by the
hostile takeover attempt announced by the Moore Corporation on July 31, 1995.
The uncertainty surrounding the Moore tender offer affected our ability to
recruit new employees, especially new salespeople. Several
customers declined to give the company new business due to this uncertainty.
Despite the takeover related issues, sales for the year increased by
$149.4 million through a combination of internal growth and acquisitions.
Approximately $85.5 million of the increase is attributed to 12% unit growth.
Another $18.7 million of sales came from the acquisition of Forms Engineering
Company (FEC) in February, 1996. The remaining $45.2 million of sales increase
came from higher selling prices.
During fiscal 1996, the company added 86 new customers to the W.I.N. and
Select Services programs, bringing the total to 243 customers at year-end.
Collectively, they represented 40% of consolidated net sales for the year.
Net income for fiscal 1996 increased 32% or $17.7 million. The after-tax
ratio to sales was 8.5% in fiscal 1996 and 7.8% in fiscal 1995. Fiscal 1996
results include $10.1 million of one time pre-tax expenses in connection with
the Moore tender offer. On a per share basis, we reported $1.60, which would
have been $1.74 without takeover related expenses, versus $1.23 in fiscal 1995.
Cost of goods sold for fiscal 1996 includes a LIFO credit of $6.6 million
due to the decrease in raw material costs. During fiscal 1995, we had recorded
a LIFO charge of $13.8 million due to dramatically higher paper costs. Before
the effects of LIFO accounting, costs of goods sold as a percent to sales was
63.2% in fiscal 1996 and 62.1% for fiscal 1995.
Selling and administrative expenses increased 13.6% for the
24
[LINE GRAPH]
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
BOOK VALUE
PER SHARE
- --------------------------------------------------------------------------------
2 year CAGR 6.7%
5 year CAGR 7.8%
================================================================================
93 94 95 96 97
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 8.34 $ 9.16 $ 10.05 $ 11.20 $ 11.45
</TABLE>
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
year. As a percent to sales, they were 17.6% in fiscal 1996 and 18.8% in fiscal
1995. In absolute terms, selling and administration expenses increased by $18.1
million. The lower percentage to sales in fiscal 1996 is due primarily to
higher selling prices.
Depreciation and amortization expense increased 20.7% to $45.0 million,
including $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. Capital expenditures of $51.5 million in
fiscal 1995 contributed to the depreciation expense increase in 1996, as did
the $59.5 million of capital expenditures in fiscal 1996.
Investment income decreased between years by $772,000 due to lower
interest rates and lower investable balances following the FEC acquisition. The
company acquired FEC for a combination of cash, notes and the assumption of
debt for a total of $34.8 million.
During fiscal 1996, the company incurred a net expense of $4.2 million for
the continuing development of electronic forms software. The net loss is made
up of several components: sales less cost of goods sold was $0.7 million,
amortization and depreciation of purchased and developed software was $2.3
million, and selling and administrative expenses were $1.2 million. The
comparable pre-tax expense for fiscal 1995 was $3.8 million. Its components
were: sales less cost of goods sold was $1.3 million, amortization and
depreciation of purchased and developed software was $1.1 million, and selling
and administrative expenses were $1.4 million.
The effective income tax rate for fiscal 1996 was 38.4% versus 36.8% in
1995. The rate increased due to lower tax-exempt investment income during
fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1997, the company purchased $95.3 million of its common stock in
open market transactions. Borrowings under our revolving credit agreement to
support the share repurchase program reached a high of $30 million in January,
1997. By fiscal year-end, all borrowings under the revolving credit agreement
had been repaid.
Working capital at July 31, 1997 was $149.2 million, a decrease of $57.0
million from the prior year-end. This year's total includes $15.9 million of
cash and short-term investments, a decrease of $46.8 million from July 31,
1996. The beginning of the year cash and short-term investment balances were
used to purchase stock.
Capital expenditures for the year were $39.2 million, down from $59.5
million in fiscal 1996. Last year's total included $21.4 million for new
buildings and related equipment. Building expenditures during fiscal 1997
totaled $5.0 million. There were no major construction projects in-process at
fiscal year-end.
Over the last five years, capital expenditures have totaled $216.3
million. $7.2 million of these expenditures were financed by industrial revenue
bonds, with the balance being financed through internally generated funds. Over
the last five years, the company has also spent $36.4 million for the
development of proprietary software programs.
Total capital expenditures for fiscal 1998 are estimated at $40.0 million.
Expenditures for software development are estimated at $16.0 million including
$4.0 million for Year 2000 related activities.
The company acquired Post Printing in October, 1996 and acquired Moran
Printing in July, 1997. Post Printing was an all cash purchase for $6.6
million. Moran Printing was purchased for $34.4 million through a combination
of notes payable and the retirement of debt. $28.5 million of short-term
borrowing at July 31, 1997 represents payments due to the Moran principals.
$15.0 million was paid in August, 1997. The balance will be paid early in
calendar 1998.
Long-term debt at July 31, 1997 was $24.5 million. $23.5 million
represents industrial revenue bonds issued in prior years for the construction
of three manufacturing facilities. The remaining balance of $1 million
represents deferred payments in connection with the Moran acquisition. $7.1
million of deferred
<TABLE>
<CAPTION>
===================================================================================================
TOTAL CAPITALIZATION
(IN THOUSANDS)
93 94 95 96 97
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Long-term debt $ 25,210 $ 23,500 $ 25,600 $ 30,600 $ 24,500
Stockholders' equity $ 368,146 $ 410,139 $ 456,118 $ 510,443 $ 493,188
===================================================================================================
</TABLE>
25
<PAGE> 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
payments from acquisitions in fiscals 1995 and 1996 will be paid during fiscal
1998 and are shown as the current portion of long-term debt on the balance
sheet.
The company has a $50 million revolving credit facility with two major
national banks. During fiscal 1997, unsecured money market lines of $50 million
each were added with three national banks, two of which participate in the
revolving credit agreement. The maximum amount of short-term debt outstanding
under the revolver and the money market lines is limited to $50 million. There
are no compensating balance requirements under these agreements.
Stockholders' equity decreased by $17.3 million to $493.2 million. Return
on average stockholders' equity was 16.2% versus 15.1% last year after takeover
expenses. Book value per share was $11.45 at July 31, 1997 and $11.20 at July
31, 1996.
During fiscal 1997, the company completed the $100 million share
repurchase which had been authorized in June, 1996 by the Board of Directors.
Shares were repurchased at an average price of $28.98. Total repurchases during
fiscal 1997 under this authorization were $89.9 million.
In May, 1997, the Board of Directors approved a second $100 million share
repurchase program. Through July 31, 1997, $5.3 million of stock had been
repurchased at an average price of $30.09.
The company anticipates that it will complete the second repurchase
authorization by the end of fiscal 1998. The company also expects to complete
one or more acquisitions for cash during fiscal 1998. The company will have to
increase its credit lines to finance both the share repurchase and
acquisitions.
COMMON STOCK
Dividends were raised for the 25th consecutive year to $.56 per share in
September, 1996, a 30.2 % increase.
During fiscal 1997, 771,000 shares of common stock were issued in
connection with the company's 1989 Stock Option Plan, the Employee Stock
Purchase Plan, and the Profit Sharing and Retirement Plan. In February, 1997,
the stockholders approved an additional 2 million shares for the 1997 Stock
Incentive Plan.
Shares of stock repurchased during fiscal 1997 total 3,111,000 shares
under the fiscal 1996 authorization and 177,000 shares under the fiscal 1997
authorization. These treasury shares will be used for future acquisitions or
for stock purchases under employee benefit programs.
The company's common stock is traded on the New York Stock Exchange under
the symbol WCS.
FORWARD LOOKING STATEMENTS
The written statements made in this annual report by the company may contain
forward-looking statements covered by the Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995. These statements involve
uncertainties and risks and there can be no assurance that actual results will
not differ from the company's expectations. Factors which could cause
materially different results include, among others, customer acceptance of new
product categories and service offerings, the frequency and magnitude of paper
price changes, the pace of new customer sales ramp-ups, changes in software and
communications technologies, general economic and business conditions,
competitive actions, and other risks described in the company's other filings
with the Securities and Exchange Commission.
<TABLE>
<CAPTION>
======================================================================
CAPITAL EXPENDITURES
AND DEPRECIATION
======================================================================
93 94 95 96 97
<S> <C> <C> <C> <C> <C>
Depreciation 28,543 30,934 33,708 39,473 42,256
Capital Expenditures 31,818 34,228 51,487 59,506 39,225
</TABLE>
26
<PAGE> 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
QUARTERLY RESULTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
====================================================================================================================================
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
====================================================================================================================================
<S> <C> <C> <C> <C>
1997
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $220,793 $225,439 $225,807 $234,251
- ------------------------------------------------------------------------------------------------------------------------------------
Cost of goods sold (excluding depreciation) 132,787 135,569 141,613 146,104
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income 34,858 35,800 32,100 32,336
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 35,009 35,630 31,843 31,869
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 21,180 21,556 19,265 19,281
- ------------------------------------------------------------------------------------------------------------------------------------
Net income per share $ .48 $ .50 $ .45 $ .45
- ------------------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MARKET PRICE PER SHARE DIVIDENDS PAID PER SHARE
====================================================================================================================================
FISCAL 1997 FISCAL 1996 FISCAL 1997 FISCAL 1996
====================================================================================================================================
QUARTER HIGH LOW HIGH LOW
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First $30.38 $26.63 $29.75 $27.88 $.1075 $.0925
- ------------------------------------------------------------------------------------------------------------------------------------
Second 35.50 29.63 29.69 26.44 .14 .1075
- ------------------------------------------------------------------------------------------------------------------------------------
Third 34.38 26.13 30.00 27.31 .14 .1075
- ------------------------------------------------------------------------------------------------------------------------------------
Fourth 33.50 26.88 30.56 27.13 .14 .1075
====================================================================================================================================
</TABLE>
[27]
<PAGE> 33
CONSOLIDATED STATEMENTS OF INCOME
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(in thousands, except per share amounts) For the years ended July 31, 1997, 1996 and 1995 1997 1996 1995
====================================================================================================================================
<S> <C> <C> <C>
Net sales $906,290 $862,287 $712,838
- ------------------------------------------------------------------------------------------------------------------------------------
Cost and expenses:
- ------------------------------------------------------------------------------------------------------------------------------------
Cost of goods sold 556,073 538,373 456,799
- ------------------------------------------------------------------------------------------------------------------------------------
Selling and administrative expenses 165,918 151,846 133,713
- ------------------------------------------------------------------------------------------------------------------------------------
Provision for depreciation and amortization 49,205 45,029 37,296
- ------------------------------------------------------------------------------------------------------------------------------------
Hostile takeover expenses - 10,117 -
- ------------------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 771,196 745,365 627,808
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income 135,094 116,922 85,030
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income (1,876) (2,867) (3,639)
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense, net of capitalized interest 2,619 1,311 1,209
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 134,351 118,478 87,460
- ------------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes: (Note 7)
- ------------------------------------------------------------------------------------------------------------------------------------
Current:
- ------------------------------------------------------------------------------------------------------------------------------------
Federal 42,825 35,385 24,309
- ------------------------------------------------------------------------------------------------------------------------------------
State 8,210 7,390 5,942
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred 2,034 2,704 1,912
- ------------------------------------------------------------------------------------------------------------------------------------
Total income taxes 53,069 45,479 32,163
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $81,282 $72,999 $55,297
- ------------------------------------------------------------------------------------------------------------------------------------
Net income per share $ 1.88 $ 1.60 $ 1.23
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
[28]
<PAGE> 34
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(in thousands) SHARES OF COMMON STOCK COMMON
------------------------ PREFERRED STOCK
For the years ended July 31, 1997, 1996 and 1995 ISSUED IN TREASURY STOCK PAR VALUE
====================================================================================================================================
<S> <C> <C> <C> <C>
Balance, July 31, 1994 22,796 (403) $- $22,796
====================================================================================================================================
Net income - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Cash dividends ($.37 per share) - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Sale of stock under employee
stock purchase plan (Note 5) - 266 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Stock options exercised net of shares
exchanged in lieu of cash (Note 5) - 30 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Tax benefit from early disposition by
employees of stock issued under stock
option plans and exercise of
non-qualified stock options - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Unrealized security gain (loss) (Note 9) - - - -
====================================================================================================================================
Balance, July 31, 1995 22,796 (107) - 22,796
====================================================================================================================================
Net income - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Cash dividends ($.43 per share) - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Sale of stock under employee
stock purchase plan (Note 5) 35 153 - 35
- ------------------------------------------------------------------------------------------------------------------------------------
Stock options exercised net of shares
exchanged in lieu of cash (Note 5) 51 32 - 51
- ------------------------------------------------------------------------------------------------------------------------------------
Tax benefit from early disposition by
employees of stock issued under stock
option plans and exercise of
non-qualified stock options - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Treasury stock purchased - (167) - -
- ------------------------------------------------------------------------------------------------------------------------------------
Two-for-one stock split effective July, 1996 22,882 (88) - 22,882
- ------------------------------------------------------------------------------------------------------------------------------------
Unrealized security gain (loss) (Note 9) - - - -
====================================================================================================================================
Balance, July 31, 1996 45,764 (177) - 45,764
====================================================================================================================================
Net income - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Cash dividends ($.56 per share) - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Sale of stock under employee
stock purchase plan (Note 5) - 324 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Stock options exercised net of shares
exchanged in lieu of cash (Note 5) - 230 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Stock transferred to profit sharing and
retirement fund - 217 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Tax benefit from early disposition by
employees of stock issued under stock
option plans and exercise of
non-qualified stock options - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Amortization of difference between market price
and option price for 1997 option plan (Note 5) - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Treasury stock purchased - (3,288) - -
- ------------------------------------------------------------------------------------------------------------------------------------
Unrealized security gain (loss) (Note 9) - - - -
====================================================================================================================================
Balance, July 31, 1997 45,764 (2,694) $- $45,764
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED COST OF
(in thousands) ADDITIONAL RETAINED SECURITY TREASURY
For the years ended July 31, 1997, 1996 and 1995 CAPITAL EARNINGS GAIN/LOSS STOCK
====================================================================================================================================
<S> <C> <C> <C> <C>
Balance, July 31, 1994 $51,028 $346,626 $- $ (10,311)
====================================================================================================================================
Net income - 55,297 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Cash dividends ($.37 per share) - (16,680) - -
- ------------------------------------------------------------------------------------------------------------------------------------
Sale of stock under employee
stock purchase plan (Note 5) (42) (358) - 6,834
- ------------------------------------------------------------------------------------------------------------------------------------
Stock options exercised net of shares
exchanged in lieu of cash (Note 5) (107) (91) - 789
- ------------------------------------------------------------------------------------------------------------------------------------
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 51,397 $384,794 (181) (2,688)
====================================================================================================================================
Net income - 72,999 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Cash dividends ($.43 per share) - (19,622) - -
- ------------------------------------------------------------------------------------------------------------------------------------
Sale of stock under employee
stock purchase plan (Note 5) 1,100 (414) - 6,465
- ------------------------------------------------------------------------------------------------------------------------------------
Stock options exercised net of shares
exchanged in lieu of cash (Note 5) 1,230 (298) - 925
- ------------------------------------------------------------------------------------------------------------------------------------
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 - - - (9,878)
- ------------------------------------------------------------------------------------------------------------------------------------
Two-for-one stock split effective July, 1996 (22,882) - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Unrealized security gain (loss) (Note 9) - - (39) -
====================================================================================================================================
Balance, July 31, 1996 32,616 437,459 (220) (5,176)
====================================================================================================================================
Net income - 81,282 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Cash dividends ($.56 per share) - (23,993) - -
- ------------------------------------------------------------------------------------------------------------------------------------
Sale of stock under employee
stock purchase plan (Note 5) (337) (291) - 8,939
- ------------------------------------------------------------------------------------------------------------------------------------
Stock options exercised net of shares
exchanged in lieu of cash (Note 5) (1,165) (2,738) - 6,572
- ------------------------------------------------------------------------------------------------------------------------------------
Stock transferred to profit sharing and
retirement fund 1,502 - - 5,998
- ------------------------------------------------------------------------------------------------------------------------------------
Tax benefit from early disposition by
employees of stock issued under stock
option plans and exercise of
non-qualified stock options 1,869 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Amortization of difference between market price
and option price for 1997 option plan (Note 5) 254 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Treasury stock purchased - - - (95,272)
- ------------------------------------------------------------------------------------------------------------------------------------
Unrealized security gain (loss) (Note 9) - - 125 -
====================================================================================================================================
Balance, July 31, 1997 $34,739 $491,719 $ (95) $(78,939)
====================================================================================================================================
The accompanying notes are an integral part of these statements. Prior years have been reclassified to conform with current
year presentation.
</TABLE>
[29]
<PAGE> 35
CONSOLIDATED BALANCE SHEETS
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(dollars in thousands) July 31, 1997 and 1996 1997 1996
===============================================================================================
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 14,168 $ 23,618
- -----------------------------------------------------------------------------------------------
Short-term investments (Note 9) 1,706 39,025
- -----------------------------------------------------------------------------------------------
Accounts receivable, less allowance for doubtful accounts
of $3,481 in 1997 and $3,215 in 1996 167,578 148,918
- -----------------------------------------------------------------------------------------------
Inventories (Note 2) 85,150 71,332
- -----------------------------------------------------------------------------------------------
Prepaid taxes 16,748 15,138
- -----------------------------------------------------------------------------------------------
Advances and prepaid expenses 5,140 6,077
- -----------------------------------------------------------------------------------------------
Total current assets 290,490 304,108
- -----------------------------------------------------------------------------------------------
Property, plant and equipment, at cost:
- -----------------------------------------------------------------------------------------------
Land and buildings 140,930 123,993
- -----------------------------------------------------------------------------------------------
Machinery, equipment, furniture and fixtures 465,878 431,648
- -----------------------------------------------------------------------------------------------
Leasehold improvements 1,678 1,428
- -----------------------------------------------------------------------------------------------
Total property, plant and equipment 608,486 557,069
- -----------------------------------------------------------------------------------------------
Less-reserves for depreciation and amortization (306,994) (268,197)
- -----------------------------------------------------------------------------------------------
Net property, plant and equipment 301,492 288,872
- -----------------------------------------------------------------------------------------------
Intangible assets arising from acquisitions 59,913 43,180
- -----------------------------------------------------------------------------------------------
Cash surrender value of life insurance 39,845 32,244
- -----------------------------------------------------------------------------------------------
System development costs 24,404 21,499
- -----------------------------------------------------------------------------------------------
Other assets 4,298 5,947
- -----------------------------------------------------------------------------------------------
Total Assets $ 720,442 $ 695,850
===============================================================================================
Liabilities and Stockholders' Equity
- -----------------------------------------------------------------------------------------------
Current Liabilities:
- -----------------------------------------------------------------------------------------------
Current maturities of long-term debt $ 7,100 $ -
- -----------------------------------------------------------------------------------------------
Short-term notes payable 28,500 -
- -----------------------------------------------------------------------------------------------
Accounts payable 49,348 46,044
- -----------------------------------------------------------------------------------------------
Dividends payable 6,030 4,900
- -----------------------------------------------------------------------------------------------
Accrued compensation and related expenses 24,458 22,281
- -----------------------------------------------------------------------------------------------
Other accrued expenses 8,200 8,821
- -----------------------------------------------------------------------------------------------
Contribution to profit sharing and retirement fund (Note 4) 17,620 15,824
- -----------------------------------------------------------------------------------------------
Total current liabilities 141,256 97,870
- -----------------------------------------------------------------------------------------------
Deferred compensation and retirement benefits (Note 8) 28,829 24,750
- -----------------------------------------------------------------------------------------------
Deferred income taxes (Note 7) 32,669 32,187
- -----------------------------------------------------------------------------------------------
Long-term debt (Note 3) 24,500 30,600
- -----------------------------------------------------------------------------------------------
Stockholders' equity:
- -----------------------------------------------------------------------------------------------
Preferred stock, $50 par value, authorized 500,000 shares - -
- -----------------------------------------------------------------------------------------------
Common stock, $1.00 par value, authorized 100,000,000 shares* 45,764 45,764
- -----------------------------------------------------------------------------------------------
Additional capital* 34,739 32,616
- -----------------------------------------------------------------------------------------------
Retained earnings* 491,719 437,459
- -----------------------------------------------------------------------------------------------
Unrealized security loss (Note 9) (95) (220)
- -----------------------------------------------------------------------------------------------
Treasury stock* (78,939) (5,176)
- -----------------------------------------------------------------------------------------------
Total stockholders' equity 493,188 510,443
- -----------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 720,442 $ 695,850
===============================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
*Prior year has been reclassified to conform with current year presentation.
30
<PAGE> 36
CONSOLIDATED STATEMENTS OF CASH FLOW
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(dollars in thousands) For the years ended July 31, 1997, 1996 and 1995 1997 1996 1995
====================================================================================================================================
<S> <C> <C> <C>
Cash flows from operating activities:
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 81,282 $ 72,999 $ 55,297
- ------------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to
net cash provided by operating activities:
- ------------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization 49,205 45,029 37,296
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred taxes* 409 5,398 1,481
- ------------------------------------------------------------------------------------------------------------------------------------
(Gain) loss on disposal of property (21) 3 (399)
- ------------------------------------------------------------------------------------------------------------------------------------
Changes in assets and liabilities, net of effects from the purchase of
Lampro Graphics, Retterbush and Sauer, Forms Engineering Company,
Post Printing, and Moran Printing, and the sale of the LaserMax Division:
- ------------------------------------------------------------------------------------------------------------------------------------
Accounts receivable (11,433) (13,863) (30,538)
- ------------------------------------------------------------------------------------------------------------------------------------
Inventories (9,276) 4,820 (9,213)
- ------------------------------------------------------------------------------------------------------------------------------------
Prepaid taxes* (1,218) (6,344) (3,574)
- ------------------------------------------------------------------------------------------------------------------------------------
Advances and prepaid expenses 1,459 (145) 778
- ------------------------------------------------------------------------------------------------------------------------------------
Other assets (15,588) (16,032) (14,145)
- ------------------------------------------------------------------------------------------------------------------------------------
Accounts payable and other liabilities 1,009 26,523 6,328
- ------------------------------------------------------------------------------------------------------------------------------------
Federal and state income taxes - (2,055) (1,886)
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred compensation and retirement benefits 4,079 3,583 3,191
- ------------------------------------------------------------------------------------------------------------------------------------
Realized security (gain) loss* 106 107 (144)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 100,013 120,023 44,472
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
- ------------------------------------------------------------------------------------------------------------------------------------
Capital expenditures (39,225) (59,506) (51,487)
- ------------------------------------------------------------------------------------------------------------------------------------
Purchases of short-term investments* (14,000) (116,378) (56,245)
- ------------------------------------------------------------------------------------------------------------------------------------
Proceeds from sales of short-term investments* 51,420 107,423 85,256
- ------------------------------------------------------------------------------------------------------------------------------------
Proceeds from disposal of property 313 407 455
- ------------------------------------------------------------------------------------------------------------------------------------
Net construction funds held by trustee 1,044 3,137 1,970
- ------------------------------------------------------------------------------------------------------------------------------------
Other capital investments, including acquisitions/divestitures (40,981) (29,165) (17,017)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (41,429) (94,082) (37,068)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
- ------------------------------------------------------------------------------------------------------------------------------------
Cash dividends paid (22,864) (18,919) (16,065)
- ------------------------------------------------------------------------------------------------------------------------------------
Amounts paid on long-term debt - (205) (6,110)
- ------------------------------------------------------------------------------------------------------------------------------------
Proceeds from issuance of short-term debt 58,500 4,216 4,829
- ------------------------------------------------------------------------------------------------------------------------------------
Proceeds from issuance of long-term debt 1,000 5,000 2,100
- ------------------------------------------------------------------------------------------------------------------------------------
Proceeds from issuance of common stock 20,602 10,864 7,544
- ------------------------------------------------------------------------------------------------------------------------------------
Retirement of short-term and acquired debt (30,000) (4,216) (6,474)
- ------------------------------------------------------------------------------------------------------------------------------------
Purchase of treasury stock (95,272) (9,878) -
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (68,034) (13,138) (14,176)
- ------------------------------------------------------------------------------------------------------------------------------------
Net changes in cash and cash equivalents (9,450) 12,803 (6,772)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 23,618 10,815 17,587
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 14,168 $ 23,618 $ 10,815
====================================================================================================================================
Supplemental disclosure:
- ------------------------------------------------------------------------------------------------------------------------------------
Interest paid (net of interest capitalized) $ 917 $ (297) $ (220)
- ------------------------------------------------------------------------------------------------------------------------------------
Income taxes paid 51,712 46,910 35,520
====================================================================================================================================
The accompanying notes are an integral part of these statements. *Prior year has been reclassified to conform with current year
presentation.
</TABLE>
31
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1997
1. SUMMARY OF MAJOR ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION: The accompanying financial statements include the
accounts of the company and its subsidiaries, which are 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.
<TABLE>
<S> <C>
===================================================
Buildings 40 years
- ---------------------------------------------------
Building equipment 10-15 years
- ---------------------------------------------------
Machinery and equipment 3-10 years
- ---------------------------------------------------
Leasehold improvements Lease period
===================================================
</TABLE>
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
$1,205,000 in 1997, $965,000 in 1996 and $491,000 in 1995. The unamortized
balance relating to Moran Printing Company was $17,035,000 at July 31, 1997;
the balance relating to all other acquisitions was $42,878,000 at July 31,
1997, and $43,180,000 at July 31, 1996.
SYSTEM DEVELOPMENT COSTS: Computer software that is either purchased or
developed internally for use by the company is amortized over a useful life of
one to seven years. Amortization of internal use software was $3,029,000 in
fiscal 1997; $2,127,000 in fiscal 1996; and $1,907,000 in fiscal 1995. Certain
computer software costs are capitalized in accordance with Statement of
Financial Accounting Standards (SFAS) No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed," and are reported
at the lower of unamortized cost or net realizable value. This software,
marketed under the name Platforms(TM), has been developed to provide customers
with electronic forms. The software is customized to meet the customer's
requirements. The originally purchased software, which is the base technology
for our Platforms product, is being amortized over five years. Subsequent
software developments are being amortized over two years. All costs incurred to
customize the specific application for a customer are included in cost of goods
sold in the period in which revenue is recognized. Revenues and expenses for
the Platforms' product are included in the statements of operations.
Amortization of Platforms' software was $2,229,000 in fiscal 1997; $2,042,000
in fiscal 1996; and $959,000 in fiscal 1995. The unamortized balance of all
capitalized computer software was $24,404,000 in 1997 and $21,499,000 in 1996.
OTHER ASSETS: $1,280,000 in 1997 and $2,325,000 in 1996 represent the unused
balance of construction funds held for the Lebanon, Kentucky plant.
ACCOUNTING CHANGES: In fiscal 1997, the company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of." The statement requires that long-lived assets, including
related goodwill, be reviewed for impairment and written down to fair value
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. The effect of the accounting change had no impact on
the company's financial statements.
INCOME TAXES: The company accounts for income taxes under SFAS No. 109,
"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
$243,000 in 1997 and $300,000 in 1996.
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.
In 1997, the Financial Accounting Standards Board issued a new standard,
SFAS No. 128 on Earnings Per Share disclosure which is effective for financial
statements for periods ending after December 15, 1997. The company will adopt
this statement and reflect its disclosures in the company's fiscal 1998
financial statements. SFAS No. 128 requires dual presentation of basic and
diluted earnings per share, as defined, for current and prior periods. Earnings
per share were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
======================================================
<S> <C> <C> <C>
Basic $1.88 $1.60 $1.23
- ------------------------------------------------------
Diluted 1.86 1.59 1.23
======================================================
</TABLE>
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 for
the last three years were:
<TABLE>
<CAPTION>
(IN THOUSANDS) INTEREST EXPENSE INTEREST CAPITALIZED
======================================================
<S> <C> <C>
1997 $3,940 $1,321
- ------------------------------------------------------
1996 2,717 1,406
- ------------------------------------------------------
1995 2,717 1,508
======================================================
</TABLE>
Amortization expense for interest capitalized was $912,000 in 1997; $794,000 in
1996; and $681,000 in 1995.
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.
32
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVENTORIES:
Inventories at July 31, were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996
===========================================================
<S> <C> <C>
Raw materials $21,440 $20,470
- -----------------------------------------------------------
Work in process 1,426 1,771
- -----------------------------------------------------------
Finished products 62,284 49,091
- -----------------------------------------------------------
$85,150 $71,332
===========================================================
</TABLE>
At July 31, 1997 and 1996 the cost of inventories aggregating $55,484,000 and
$49,623,000, respectively, was determined on the LIFO method.
Inventories would have been $17,649,000 higher in Fiscal 1997 and
$19,790,000 higher in Fiscal 1996, if the FIFO method had been used for all
inventories.
3. FINANCING ARRANGEMENTS:
Long-term debt consisted of the following at July 31:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996
===========================================================
<S> <C> <C>
Average 3.73% adjustable industrial
revenue bonds due 2007 $ 7,000 $ 7,000
- -----------------------------------------------------------
Average 3.64% adjustable industrial
revenue bonds due 2009 8,000 8,000
- -----------------------------------------------------------
Average 3.73% adjustable industrial
revenue bonds due 2019 8,500 8,500
- -----------------------------------------------------------
Average 5.43% adjustable promissory
note due 1998 2,000 2,000
- -----------------------------------------------------------
Average 4.95% adjustable promissory note
maturing not earlier than 1998 100 100
- -----------------------------------------------------------
Average 5.27% adjustable promissory
note due 1998 5,000 5,000
- -----------------------------------------------------------
Average 5.80% adjustable promissory
note due 1999 1,000 -
- -----------------------------------------------------------
$31,600 $30,600
- -----------------------------------------------------------
Less-current portion 7,100 -
- -----------------------------------------------------------
$24,500 $30,600
===========================================================
</TABLE>
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 $403
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, 1997
and 1996.
Principal payments due on long-term debt during the next five years are as
follows: $7,100,000 in 1998; $1,000,000 in 1999; and $0 in each of 2000 through
2002.
Short-term notes payable of $28.5 million represents payments due to Moran
Printing principals. The notes carry an interest rate of 5.8%. $15 million was
paid in August, 1997, with the balance due in January, 1998.
The company has a $50 million revolving credit facility with The First
National Bank of Chicago as the agent and Bank of America Illinois as co-agent.
Additionally, unsecured money market lines of $50 million each were added in
fiscal 1997. The maximum amount as authorized by the Board of Directors for
short-term borrowings under the revolver and the money market lines is limited
to $50 million. There are no compensating balance requirements under these
agreements. There were no borrowings under these agreements at July 31, 1997
and 1996.
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
$17,620,000 in Fiscal 1997, $15,824,000 in Fiscal 1996, and $11,906,000 in
Fiscal 1995.
5. STOCK OPTIONS:
The company has two stock option plans, the 1997 Stock Incentive Plan ("The
1997 Plan") and the 1989 Stock Option Plan ("The 1989 Plan"), and an employee
stock purchase plan adopted in 1974 ("The 1974 Plan").
Under the terms of the 1997 Plan, which expires September 4, 2006, options
may be granted to employees, as well as to non-employee Directors. Two types of
options to purchase common stock may be granted to officers and others, except
for non-employee Directors: Incentive Options and Non-Qualified Options. In the
case of Incentive Options, the option price may not be less that 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 generally 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 exercisability of options may be
subject to one or more of the following performance measures: Common Stock
value, earnings per share, return to shareholders (including dividends), return
on assets, return on equity, earnings of the company, revenues, market share,
cash flow, cost reduction goals, or any combination of the above.
The 1997 plan additionally provides for options for non-employee
Directors. Immediately following the company's annual meeting, each
non-employee Director will be granted an option to purchase 2,000 shares at a
purchase price per share equal to the fair market value of a share of common
stock on the date of grant of such option. The options will vest at 25% every
three months, such that they will be fully vested within one year, or by the
next annual meeting, whichever occurs first.
Under the terms of the 1989 Plan, which will expire on September 12, 1999,
options may be granted to officers and others. This plan is similar to the 1997
plan except it does not permit grants to non-employee Directors and it does not
provide for performance measures to determine vesting. Currently there are
70,952 options still available under this plan. The company does not intend to
seek authorization for additional shares under this plan.
33
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The company accounts for employee stock options under Accounting
Principles Board Opinion No. 25. The company has adopted the disclosure-only
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the stock option
plans. Had compensation cost for the plans been determined consistent with SFAS
No. 123, the company's net income and earnings per share would have been
reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT EPS) 1997 1996
===========================================================
<S> <C> <C>
Net Income as reported $81,282 $72,999
- -----------------------------------------------------------
Net Income pro forma 78,333 71,743
- -----------------------------------------------------------
Earnings per Share as reported 1.88 1.60
- -----------------------------------------------------------
Earnings per Share pro forma 1.81 1.57
===========================================================
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to August 1, 1995, the resulting pro forma compensation
cost may not be representative of expected compensation cost in future years.
The following table summarizes the activity under the stock option plans
for the last two years:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
=================================================================
<S> <C> <C>
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
- -----------------------------------------------------------------
Granted 845,715 27.18
- -----------------------------------------------------------------
Forfeited (6,300) 28.15
- -----------------------------------------------------------------
Exercised (249,744) 13.04
- -----------------------------------------------------------------
Outstanding at July 31, 1997 1,496,843 $ 23.94
=================================================================
<CAPTION>
July 31 July 31
- -----------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------
<S> <C> <C>
Shares available for future grants 1,489,337 328,752
- -----------------------------------------------------------------
Shares exercisable 757,468 536,657
=================================================================
</TABLE>
Of the 845,715 options granted in fiscal 1997, 567,000 were granted with
performance measure vesting provisions as outlined in the 1997 Plan. The
performance measures for the options are based on revenues, pretax income,
return on equity, and return on assets. Vesting will occur in 3 years to the
extent that the company meets specified performance measures. To the extent
that the measures are not met, the options will vest in 9.5 years. These
options were issued with shareholder approval on February 28, 1997, with a
grant date of September 4, 1996. The difference between market price on
February 28, 1997 and the grant date will be reflected as expense in the
company's operations statement over the vesting period. Fiscal 1997 includes
additional expense of $254,000. The remaining options granted in 1997 did not
have performance vesting provisions.
The Employee Stock Purchase Plan, adopted in 1974, was to end on December
31, 1997. During 1997, the 1974 Plan was amended to add 14 additional 6-month
offering periods, subject to shareholder approval. A total of 6,600,000 shares
of common stock have been reserved for purchase by employees through
semi-annual offerings, of which 1,900,000 shares are subject to shareholder
approval. 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 324,002 shares at $25.65 in
Fiscal 1997, 375,754 shares at $19.12 in Fiscal 1996, and 531,254 shares at
$12.11 in Fiscal 1995. There were 2,553,496 shares available at July 31, 1997
and 977,498 shares available at July 31, 1996 for future issuance under this
plan.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-
average assumptions used for grants: risk-free interest rates of 5.2% to 6.8%
depending on expected life of the option; expected dividend yield of 1.3% to
1.7%; expected lives of 5.4 years for options issued without performance
measures, 7.4 years for options with performance measures, and 0.5 years for
options granted through the Employee Stock Purchase Plan; and expected
volatility of 25.2% to 25.8% for options granted through the stock option plan,
and 9.5% to 43.6% for options granted through the Employee Stock Purchase Plan.
6. LEASE COMMITMENTS:
Total rent expense for manufacturing facilities, sales offices and equipment
amounted to $6,225,000 in 1997, $5,906,000 in 1996 and $5,508,000 in 1995. The
minimum future rental commitments under non-cancellable lease arrangements are
$3,821,000 in 1998; $3,030,000 in 1999; $1,982,000 in 2000; $1,618,000 in 2001;
and $6,368,000 for 2002 and beyond.
7. INCOME TAXES:
The significant deferred tax assets and liabilities at July 31 were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996
=============================================================================================
<S> <C> <C>
Deferred tax liabilities:
- ---------------------------------------------------------------------------------------------
Accelerated depreciation $30,576 $30,053
- ---------------------------------------------------------------------------------------------
Software development 8,661 7,545
- ---------------------------------------------------------------------------------------------
Other 7,871 7,544
- ---------------------------------------------------------------------------------------------
Total Deferred Liabilities 47,108 45,142
- ---------------------------------------------------------------------------------------------
Deferred tax assets:
- ---------------------------------------------------------------------------------------------
Deferred compensation 8,471 7,126
- ---------------------------------------------------------------------------------------------
Postretirement benefits 1,376 1,516
- ---------------------------------------------------------------------------------------------
Inventory capitalization 3,207 2,514
- ---------------------------------------------------------------------------------------------
Accrued vacation 1,548 1,468
- ---------------------------------------------------------------------------------------------
Supplemental profit sharing 1,525 1,121
- ---------------------------------------------------------------------------------------------
Other 5,673 5,702
- ---------------------------------------------------------------------------------------------
Total Deferred Assets 21,800 19,447
- ---------------------------------------------------------------------------------------------
Net Deferred Tax Liabilities $25,308 $25,695
=============================================================================================
</TABLE>
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
1997 1996 1995
=============================================================================================
<S> <C> <C> <C>
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 (0.1) (0.4) (1.0)
- ---------------------------------------------------------------------------------------------
Tax credits and other 0.2 (0.6) (1.6)
- ---------------------------------------------------------------------------------------------
Effective tax rate 39.5% 38.4% 36.8%
=============================================================================================
</TABLE>
34
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 net accrual basis expense for postretirement benefits as of July 31
was as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996 1995
=========================================================================================
<S> <C> <C> <C>
Components of net periodic postretirement benefit costs:
- -----------------------------------------------------------------------------------------
Service cost $ 10 $ 22 $ 22
- -----------------------------------------------------------------------------------------
Interest cost 278 298 308
- -----------------------------------------------------------------------------------------
Amortization of (gain) loss - 134 (985)
- -----------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 288 $ 454 $(655)
=========================================================================================
</TABLE>
The liability at July 31 (included in Deferred Compensation and
Retirement Benefits on the accompanying Consolidated Balance Sheet) for
postretirement benefits is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996
===========================================================================
<S> <C> <C>
Actuarial present value of benefit obligations:
- ---------------------------------------------------------------------------
Retirees $2,175 $2,386
- ---------------------------------------------------------------------------
Fully eligible active plan participants 863 947
- ---------------------------------------------------------------------------
Other active plan participants 245 269
- ---------------------------------------------------------------------------
Life insurance 200 219
- ---------------------------------------------------------------------------
Actuarial present value of benefit obligations $3,483 $3,821
===========================================================================
</TABLE>
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 7.5% and 7.0% for pre-65 and
post-65 medical coverage, respectively, for 1997, declining gradually to 5.0%
in 2002, 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 $21,000 and the postretirement benefit
obligation as of July 31, 1997 by $228,000.
9. INVESTMENTS IN DEBT AND EQUITY SECURITIES:
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," 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. This statement decreased
shareholders' equity by $95,000 at July 31, 1997 and $220,000 at July 31, 1996
(net of tax).
The amortized cost and market value of investments as of July 31, 1996, and
July 31, 1997 were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
=====================================================================================================
July 31, 1996 AMORTIZED UNREALIZED HOLDING MARKET
COST GAINS LOSSES VALUE
=====================================================================================================
<S> <C> <C> <C> <C>
Available-for-sale
- -----------------------------------------------------------------------------------------------------
State, municipal & other gov't debt $ 60 $ - $ 23 $ 37
- -----------------------------------------------------------------------------------------------------
Equity 39,332 - 344 38,988
- -----------------------------------------------------------------------------------------------------
Held-to-maturity
- -----------------------------------------------------------------------------------------------------
State, municipal & other gov't debt - - - -
- -----------------------------------------------------------------------------------------------------
Total short-term investments $ 39,392 $ - $ 367 $39,025
- -----------------------------------------------------------------------------------------------------
Long-term available-for-sale
- -----------------------------------------------------------------------------------------------------
Equity $ 1,880 $ - $ - $ 1,880
=====================================================================================================
<CAPTION>
July 31, 1997 AMORTIZED UNREALIZED HOLDING MARKET
COST GAINS LOSSES VALUE
=====================================================================================================
<S> <C> <C> <C> <C>
Available-for-sale
- -----------------------------------------------------------------------------------------------------
State, municipal & other gov't debt $ - $ - $ - $ -
- -----------------------------------------------------------------------------------------------------
Equity 1,866 - 160 1,706
- -----------------------------------------------------------------------------------------------------
Held-to-maturity
- -----------------------------------------------------------------------------------------------------
State, municipal & other gov't debt - - - -
- -----------------------------------------------------------------------------------------------------
Total short-term investments $ 1,866 $ - $ 160 $ 1,706
- -----------------------------------------------------------------------------------------------------
Long-term available-for-sale
- -----------------------------------------------------------------------------------------------------
Equity $ 1,730 $ - $ - $ 1,730
=====================================================================================================
</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 securities were $51,420,000 for Fiscal 1997, and
$107,423,000 for Fiscal 1996, with gross realized losses of $106,000 in Fiscal
1997, and $107,000 in Fiscal 1996.
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 reduction in net unrealized loss on available-for-sale securities from July
31, 1996 to July 31, 1997 was $125,000 (net of tax).
35
<PAGE> 41
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 Subsidiaries as of July
31, 1997 and 1996 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, 1997. These financial statements are the responsibility
of the company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Wallace Computer Services,
Inc. and Subsidiaries as of July 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three Fiscal years in the
period ended July 31, 1997 in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Chicago, Illinois
September 3, 1997
36
<PAGE> 42
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.
ALBERT W. ISENMAN III (C)
Professor of Management
Kellogg Graduate School
of Management
Northwestern University
WILLIAM N. LANE, III (C) (E)
Chairman, President and
Chief Executive Officer
Lane Industries, Inc.
JOHN C. POPE (A) (C)
Chairman of the Board
MotivePower Industries, Inc.
ROBERT P. RITTEREISER (P)
Chairman and
Chief Executive Officer
Gruntal Financial L.L.C.
Gruntal & Co. L.L.C.
NEELE E. STEARNS, JR. (A)
Former President and
Chief Executive Officer
CC Industries., 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
Business Services
Chief Information Officer
THOMAS G. BROOKER
Vice President, General Manager
Office Products Group
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
Direct Response Group
WAYNE E. RICHTER
Vice President, General Manager
Label Group
SANDRA K. BRANDT
Treasurer, Division Vice President
MICHAEL T. LAUDIZIO
Secretary, Division Vice
President Taxes
WILLIAM J. MONTANEZ
Assistant Treasurer
DIVISION MANAGERS
MICHAEL A. ANDERSON
Vice President Commercial Printing
STEVEN F. ARPAIA
Vice President Colorforms Sales
DAVID W. BERTRAM
Vice President Contract Services
DOUGLAS W. FITZGERALD
Vice President Marketing
JOSEPH J. JUSZAK
Vice President Quality
and Technical Services
MICHAEL D. KEIM
Vice President Manufacturing
Systems
JAMES E. KERSTEN
Vice President Direct Sales - West
MARK J. KOVACH
Vice President Sales, TOPS
MARC A. LOOMER
Vice President Business Forms
Manufacturing
MARK D. MINDRUM
Vice President Direct Sales -
Midwest
MICHAEL A. REPP
Vice President, General Manager
TOPS Division
EDWARD A. RIGUARDI
Vice President Direct Sales - East
DAVID M. ROUSSEAU
Vice President Information
Services
RONALD D. SEAVEY
Vice President Direct Sales -
Southeast
DIANE E. SCHREINER
Vice President Distribution
Services
BARRY L. WHITE
Vice President Human Resources
FACILITIES
Headquarters - Lisle, IL
La Palma, CA
Lodi, CA
Ontario, CA
San Luis Obispo, CA
Orlando, FL (2)
Tampa, FL
Metter, GA
Bellwood, IL
Clinton, IL
Elk Grove Village, IL
Hillside, IL
St. Charles, IL (2)
Osage, IA (2)
Lebanon, KY
Gastonia, NC
Wilson, NC
Tonawanda, NY
Cincinnati, OH
Streetsboro, OH
Allentown, PA
Covington, TN
Brenham, TX
Marlin, TX
Luray, VA
Manchester, VT
West Bend, WI
Sales Offices - Nationwide
CORPORATE INFORMATION
GENERAL COUNSEL
Steven L. Carson
AUDITORS
Arthur Andersen LLP, Chicago, IL
PRODUCT INFORMATION
Information about Wallace's information
management products, services and
solutions is available on our
web site at www.wallace.com.
You may also contact the Marketing
Department at corporate headquarters
in Lisle.
800/323-8447
E-mail: [email protected]
STOCKHOLDER INFORMATION
COMMON STOCK
The company's common shares
are traded on the New York Stock
Exchange, ticker symbol WCS.
TRANSFER AGENT AND REGISTRAR
Questions regarding stock transfer
requirements, lost stock certificates,
dividends or address changes
should be directed to:
Boston EquiServe, L.P.
Investor Relations
MS 45-02-64
P.O. Box 644
Boston, MA 02102-0644
800/733-5001
REPORTS TO THE S.E.C.
Reports to the S.E.C. on forms
10-K and 10-Q are available at
no charge upon written request
to the Corporate Secretary.
COMPANY NEWS
Wallace press releases and
additional company information
are available on Wallace's web
site at www.wallace.com
INVESTOR CONTACT
Brad Samson, Director of
Investor Relations
630/588-5395
E-mail: [email protected]
Printed by Moran Printing
<PAGE> 43
WALLACE LOGO
INFORMATION MANAGEMENT PRODUCTS, SERVICES, SOLUTIONS.
WALLACE COMPUTER SERVICES, INC.
CORPORATE OFFICES
2275 CABOT DRIVE LISLE, IL 60532-3630
630-588-5000
4650-AR-97 Q/R
<PAGE> 1
EXHIBIT 21
The Registrant owns 100% of the Stock of Visible Computer Supply Corporation,
an Illinois corporation and Wallace Commercial Printing, Inc., a Delaware
corporation.
31
<PAGE> 1
EXHIBIT 23
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation of
our reports, dated September 3, 1997, included (or incorporated by reference)
in this Form 10-K, into the Company's previously filed Registration Statements
on Form S-8 (File No. 2-52229, No. 2-52357, No. 2-60252, No. 2-63000, No.
2-70022, No. 2-87821, No. 33-10353, No. 33-32706 and No. 33-86496).
Arthur Andersen LLP
Chicago, Illinois
October 28, 1997
Report of Independent Public Accountants with Respect to Financial Statement
Schedule
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in Wallace Computer Services, Inc.'s
annual report to stockholders incorporated by reference in this Form 10-K, and
have issued our report thereon dated September 3, 1997. Our audit was made for
the purpose of forming an opinion on the consolidated financial statements
taken as a whole. This financial statement schedule is the responsibility of
the Company's management and is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the
consolidated financial statements. The financial statement schedule has been
subjected to the auditing procedures applied in the audit of the consolidated
financial statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in relation to the
consolidated financial statements taken as a whole.
Arthur Andersen LLP
Chicago, Illinois
September 3, 1997
32
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JUL-31-1997
<CASH> 14,168
<SECURITIES> 1,706
<RECEIVABLES> 171,059
<ALLOWANCES> (3,481)
<INVENTORY> 85,150
<CURRENT-ASSETS> 290,490
<PP&E> 608,486
<DEPRECIATION> (306,994)
<TOTAL-ASSETS> 720,442
<CURRENT-LIABILITIES> 141,256
<BONDS> 24,500
0
0
<COMMON> 45,764
<OTHER-SE> 447,424
<TOTAL-LIABILITY-AND-EQUITY> 720,442
<SALES> 906,290
<TOTAL-REVENUES> 906,290
<CGS> 556,073
<TOTAL-COSTS> 771,196
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,189
<INTEREST-EXPENSE> 2,619
<INCOME-PRETAX> 134,351
<INCOME-TAX> 53,069
<INCOME-CONTINUING> 81,282
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 81,282
<EPS-PRIMARY> 1.88
<EPS-DILUTED> 1.86
</TABLE>
