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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, 1999 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
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(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. $891,099,128 (based on the October 15, 1999, 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, 1999, 42,307,377 shares of Common Stock were outstanding.
Documents incorporated by reference:
1. 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. [ X ]
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Form 10-K
Item No. Name of Item Page
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<S> <C> <C>
Part I
Item 1 Business 3
Item 2 Properties 8
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 12
Item 6 Selected Financial Data 13
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Item 7(A) Quantitative and Qualitative Disclosures About
Market Risk 23
Item 8 Financial Statements and Supplementary Data 23
Item 9 Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure 23
Part III
Item 10 Directors and Executive Officers of the
Registrant 24
Item 11 Executive Compensation 26
Item 12 Security Ownership of Certain Beneficial
Owners and Management 26
Item 13 Certain Relationships and Related
Transactions 26
Part IV
Item 14 Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 27
Signatures 28
Exhibit Index 51
</TABLE>
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Wallace Computer Services, Inc. Fiscal 1999 10-K
Part I
Item 1 Business
(a) General Development of Business
Wallace Computer Services, Inc. (the "Company") was founded in 1908 as an
Illinois commercial printer under the name "Wallace Press, Inc." It was
reorganized in June 1963 as "Wallace Business Forms, Inc.", a Delaware
corporation. The name was changed in November 1981 to "Wallace Computer
Services, Inc." to reflect the broad array of products sold by the Company to
computer users.
In fiscal year 1998, the Company expanded its commercial printing capabilities
with the acquisition of the 20 Graphic Industries, Inc. ("Graphic") companies in
November 1997. Graphic was the largest network of sheet-fed commercial printing
plants in the United States. They focus on high-quality, short-to-medium run
collateral and high color marketing materials and annual reports for the
Company's target Fortune 2000 customers. The Graphic acquisition was made
through an all cash purchase of Graphic's shares of common stock. The
acquisition price was $308.3 million, based on outstanding shares, options and
converted indenture notes valued at $21.75 per share, plus $6.1 million of
transaction costs, and net debt totalling $123.4 million. In June 1998, the
Company also expanded its product line in the fast growing label market with the
acquisition of Good Decal Co., in Englewood Colorado. Good Decal makes pressure
sensitive labels, decals and screen printed graphic overlays. This acquisition
was made for $12.3 million of cash and a note payable for $1.0 million.
In February 1999, the Company sold Mercury Printing, acquired as part of the
Graphic Industries acquisition, for $7.0 million. In December 1998, the Company
sold substantially all of the assets of Visible Computer Supply, our contract
stationers business, in a transaction that approximated book value. Both of the
divestitures sold product lines that were not compatible with the Company's
strategic direction.
In May 1999, the Company acquired Commercial Press, Inc., a West-Coast
commercial printer. The addition of Commercial Press brings the Company up to 27
commercial print facilities across the U.S. This acquisition was made for $20.1
million of cash, the assumption of debt totalling $2.2 million, and a note
payable of $2.3 million. The Company also acquired Denver Graphic, Inc., a small
prime label company, in May 1999. The acquisition was made for $3.0 million of
cash and a note payable of $150,000.
(b) Financial Information About Segments
The Company is reporting its results in two business segments which reflect the
Company's operations and strategies: Print Management Segment, and Forms and
Labels Segment. Financial information about the Company's segments is contained
in footnote 12, Notes to Consolidated Financial Statements, on pages 45 - 47 of
this report.
(c) Narrative Description of Business
The Company is recognized as a leading provider of supplies and print management
services to Fortune 2000 customers. The Company is evolving to manage all the
printing needs of large organizations. Products include commercial printing,
business forms, labels, direct response printing and office products. The
Company's strategy is to utilize its information management and distribution
systems to offer customers a solutions-based approach to increasing efficiencies
and reducing costs.
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Item 1 Business, Continued
In 1998 the Company created an entirely new service to help buyers of
high-quality, high-color commercial printing that ensures consistent print
quality, outsources materials management workload and maximizes promotional
budget efficiency. This service is Total Print Management.
This service would not be possible without an enterprise wide information
system. Proprietary mainframe and midrange enterprise applications and an
extensive communications architecture give the Company the ability to
effectively manage half a million stock keeping units (SKUs) and millions of
customer transactions. The Company's systems also allow us to tailor
relationships to each customer's unique business needs and processes. We
continue to expand and enhance these systems to offer new services and stay
ahead of growing demand.
Central to our services is Wallace Information Network(TM) (W.I.N.(TM)), which
was introduced seven years ago and is continually evolving. Our suite of W.I.N.
management tools improves, simplifies and streamlines many customer processes
including inventory management, end-user ordering, version control, tracking,
and follow-up. Its value is based on the Company's capability to provide
complete and timely data from its enterprise applications through the W.I.N.
system. The recognition of the W.I.N. system's value is proven by the nearly 470
customers who use the system today.
Logistics and distribution represent the largest cost-saving opportunities we
can deliver to our customers, and outstanding distribution capabilities are
essential to delivering total print management services. Like our information
technology, the Company's distribution system is also proprietary, developed
from the ground-up, specifically for the highly transactional, custom nature of
our business.
The W.I.N. system was originally created to attack the process costs associated
with forms. Because our customers see first-year cost savings averaging 15% to
20%, they want to leverage our services into additional areas. The Company's
broad range of products gives our customers many opportunities to reduce their
vendor base and total costs. We provide the primary products required by our
customers for a total print management relationship.
Print Management Segment (Integrated Graphics Segment)
Product / Service offering and Markets Served
The principal products and services supplied by the Print Management Segment
include the design and manufacture of high color, high-quality marketing and
promotional printing, variable imaging, digital printing, and the manufacture of
direct response printing materials. Typical products include corporate image
materials, promotional literature, product brochures, product documentation
literature, retail point-of-sale materials, sweepstakes mailings, credit card
offers, high-quality brochures, industrial and consumer catalogs, directories,
and price lists. The products and services are supplied to the full spectrum of
Fortune 2000 customers.
The Company provides a full-service, quick response, value-added resource to its
customers, and supplies national coverage and state-of-the-art imaging
capabilities and service options, which are designed to increase promotion
response rates and reduce customer costs.
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Item 1 Business, Continued
The Company's Total Print Management ("TPM") program gained momentum during
fiscal 1999 by allowing customers to control their high-color print sourcing
costs. The objective of TPM is to utilize the Company's distribution, logistics,
and systems to provide an alternative to the Fortune 2000 customer base for
outsourcing high color marketing and promotional printing. The TPM approach
provides an integrated set of services and information tools that allow
customers' to control all of their print-related costs. This strategy, while
early in its development, will allow the Company to become a premier supplier
for total management sourcing for the high color marketing and promotional
printing product category.
The Company's direct response business, which now primarily serves corporate
marketing organizations, has been repositioned by reducing its emphasis on the
mass mailer market and refocusing on one-to-one marketing opportunities in
Fortune 2000 marketing organizations.
The predominant distribution channel for this segment is the Company's national
direct sales force and the Integrated Graphic's direct sales force.
The Print Management market served by the Company totals approximately $38
billion. The Company primarily competes with local printers and direct mail
promotional printers, therefore, the market is highly fragmented.
Forms and Labels Segment
Product / Service offering and Markets Served
The principal products and services supplied by the Forms and Labels Segment
include the design, manufacture and sale of both paper based and electronic
business forms, the manufacture of both electronic data processing (EDP) labels
and prime labels, and the manufacture of a standard line of office products.
Typical products include air freight package forms, monthly billing statements,
healthcare forms, mortgage applications, bar-coded shipping labels, consumer
product labels, airline bag tags, blank stock labels, electronic article
surveillance tags, labeling software, legal pads, computer paper, ribbons, and
cash register paper rolls.
The Company is one of the few firms that is positioned to accommodate the needs
of large, forms-intensive customers with multiple locations. The products and
services are supplied primarily for businesses, government agencies, healthcare,
not-for-profit and educational institutions.
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 also sells business forms to customers that are not large,
forms-intensive firms with multiple locations. These customers typically have a
choice from among different acceptable vendors, and the Company faces more
competition than it does in sales to large, forms-intensive customers with
multiple locations.
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Item 1 Business, Continued
The predominant distribution channel for this segment is the direct sales force.
Sales representatives are located in one of the Company's 125 sales offices
located throughout the United States and are assigned a specific geographic
territory. Within this assigned territory, a sales representative sells all of
the Company's products to any customer. Sales support for the direct sales force
is provided by the Corporate Marketing department.
EDP labels usually include some computer generated information, such as bar
coding, and are designed to meet the needs of key market segments, including
retail, health care, small package delivery, manufacturing and required
regulatory compliance. Prime labels are high quality promotional and product
identification labels used on items such as shampoo bottles and food packages.
In January 1998, The Company entered into a joint marketing arrangement with
Boise Cascade Office Products ("BCOP"), a subsidiary of Boise Cascade
Corporation, whereby each company will introduce the other company to its top
200 customers and allow each company to market its products and services to
those customers (the "BW Single Source Program"). The Company expanded its
relationship with BCOP by selling its contract stationers business, Visible
Computer Supply, to BCOP thereby increasing its joint marketing efforts.
Wallace and BCOP will continue to work with customers jointly, with Wallace
providing custom printed products and central management services, and Boise
providing stock office products and related supplies. In addition, the companies
will continue to integrate their systems to bring further value and more
services to customers.
BCOP is known for the added-value services it provides in supplying stock office
consumables to large organizations. Wallace is known for the added-value
services it provides in supplying the broadest scope of custom-printed products
to large organizations. With BW Single Source, companies can effectively
outsource the work of managing supplies, reducing the purchasing department's
workload and cutting supplies costs, with mechanisms that let them retain
control. Because customers can place a single order for many items with one
source, instead of multiple orders with multiple vendors, BW Single Source can
cut distribution costs as well as the costs associated with ordering, billing
and vendor management.
The remaining office products business represents products manufactured by the
Company. These products include primarily paper-based stock products such as
pads, stock forms, ATM and impact printer ribbons.
The Forms and Labels market served by the Company totals approximately $46
billion and is highly competitive.
Business in General
Raw Materials
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
anticipated customer demand.
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Item 1 Business, Continued
Working Capital
The Company continues to maintain a strong working capital position, with a
current ratio of 2.3 at July 31, 1999, slightly higher than last fiscal year.
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 67.5% of total inventory at July 31, 1999.
Substantially all of the Company's sales are made on terms of Net 30 days. The
accounts receivable balance at July 31, 1999, increased by 12.2%, mainly
attributable to increased sales volume and an increase in days sales
outstanding. Further information on liquidity and capital resources is contained
in Management's Discussion and Analysis of Financial Condition and Results of
Operations on pages 19 - 21 of this report.
Patents and Trademarks
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.
Seasonal
The Company does experience some minimal level of seasonality in its Integrated
Graphics' operations in the fiscal third quarter related to the seasonal demand
of printed annual reports for publicly traded companies. Because many customers'
fiscal year ends coincide with the calendar year end, the Company experiences
increased sales in the March to April period of each year.
Customer
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 sales.
Research and Development
The Company is continuously involved in research activities relating to
development of new products and technologies and improvement of existing
products and technologies. The amount that the Company spends on research
activities are not significant in relation to the annual sales volume.
Environmental Protection
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.
Employees
The total number of persons employed by the Company was 8,464 as of July 31,
1999.
(d) Financial Information About Geographic Areas
Wallace attributes substantially all of its revenues to customers within the
United States. Long-lived assets are domiciled within the United States.
7
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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 and adequate for the purposes for
which they are used. All locations are owned by the Company except as
otherwise noted.
The following principal properties are used by the Print Management Segment
(Integrated Graphics Segment):
<TABLE>
<CAPTION>
Approximate
Square
Location Footage Description
- -------- ----------- -----------
<S> <C> <C>
LaPalma, California 81,300 Manufacturing Plant
(Leased)
San Diego, California 60,600 Manufacturing Plant
(Leased)
Hartford, Connecticut 44,000 Manufacturing Plant
(Leased)
Orlando, Florida 165,500 Manufacturing Plant
Distribution Center
(Leased)
Pompano Beach, Florida 40,000 Manufacturing Plant
Tampa, Florida 34,500 Manufacturing Plant
Atlanta, Georgia 266,600 Manufacturing Plant
Chamblee, Georgia 193,600 Manufacturing Plant
Doraville, Georgia 42,500 Prepress Operations
(Leased)
Clinton, Illinois 217,100 Manufacturing Plant
Elk Grove Village, Illinois 276,800 Manufacturing Plants
Printing Fulfillment Center
(Leased)
Hillside, Illinois 231,450 Manufacturing Plant
Engineering and Research Offices
(Both are Leased)
</TABLE>
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Item 2 Properties, Continued
<TABLE>
<CAPTION>
Approximate
Square
Location Footage Description
- -------- ------- -----------
<S> <C> <C>
New Orleans, Louisiana 44,000 Manufacturing Plant
Silver Springs, Maryland 83,700 Manufacturing Plant
Bedford, Massachusetts 73,100 Manufacturing Plant
Rochester, New York 87,700 Manufacturing Plants (Leased)
Warehouses
Tonawanda, New York 111,400 Manufacturing Plant
Charlotte, North Carolina 95,000 Manufacturing Plant
Cleveland, Ohio 44,000 Manufacturing Plant (Leased)
Philadelphia, Pennsylvania 55,600 Manufacturing Plant
Pittsburgh, Pennsylvania 135,600 Manufacturing Plant
Columbia, South Carolina 58,900 Manufacturing Plant
Austin, Texas 37,000 Manufacturing Plant
Dallas, Texas 107,600 Manufacturing Plant
Houston, Texas 273,500 Manufacturing Plant
Printing Fulfillment
Center (Leased)
West Bend, Wisconsin 26,600 Manufacturing Plant
The following principal properties are used by the Forms and Labels segment:
Lodi, California 138,100 Manufacturing Plant and
Distribution Center
San Luis Obispo, California 110,000 Manufacturing Plant
Denver, Colorado 20,000 Manufacturing Plant (Leased)
</TABLE>
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Item 2 Properties, Continued
<TABLE>
<CAPTION>
Approximate
Square
Location Footage Description
- -------- ------- -----------
<S> <C> <C>
Englewood, Colorado 48,500 Manufacturing Plants
(Includes four facilities)
(Leased)
Metter, Georgia 221,000 Manufacturing Plant and
Distribution Center
St. Charles, Illinois 386,800 Manufacturing Plant
Distribution Center
Osage, Iowa 256,900 Manufacturing Plants
Lebanon, Kentucky 88,600 Manufacturing Plant
Gastonia, North Carolina 120,000 Manufacturing Plant
Wilson, North Carolina 127,200 Manufacturing Plant
Cincinnati, Ohio 21,800 Manufacturing Plant
Streetsboro, Ohio 81,400 Manufacturing Plant
Covington, Tennessee 242,000 Manufacturing Plant and
Distribution Center
Brenham, Texas 127,700 Manufacturing Plant and
Distribution Center
Marlin, Texas 115,700 Manufacturing Plant
Manchester, Vermont 162,300 Manufacturing Plant
Luray, Virginia 162,300 Manufacturing Plant
</TABLE>
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Item 2 Properties, Continued
<TABLE>
<CAPTION>
Approximate
Square
Location Footage Description
- -------- ------- -----------
<S> <C> <C>
Additional Distribution Centers and Corporate Offices:
Ontario, California 114,500 Distribution Center (Leased)
Bellwood, Illinois 28,300 Engineering and Research Facility
(Leased)
Lisle, Illinois 105,000 Corporate Headquarters
Lisle, Illinois 72,100 Technology Center (Leased)
Columbus, Ohio 154,000 Distribution Center (Leased)
Allentown, Pennsylvania 100,000 Distribution Center
</TABLE>
Remaining public warehouses and sales offices throughout the United States are
leased.
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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 estimable. 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
No matters were submitted to a vote of Security Holders during the
quarter ended July 31, 1999
Part II
Item 5 Market for the Registrant's Common Equity and Related Stockholder
Matters
The Company's common shares are traded on the New York Stock Exchange. The total
number of holders of record of the Company's common stock was 2,995 as of
October 15, 1999. Information about quarterly prices of common stock and
dividends paid for the two years ended July 31, 1999 is contained in the table
below:
<TABLE>
<CAPTION>
MARKET PRICE PER SHARE DIVIDENDS PAID PER SHARE
=========================================================================================
FISCAL 1999 FISCAL 1998 FISCAL 1999 FISCAL 1998
=========================================================================================
QUARTER HIGH LOW HIGH LOW
=========================================================================================
<S> <C> <C> <C> <C> <C> <C>
First $ 22.75 $ 15.44 $ 39.50 $ 30.50 $ .1550 $ .1400
Second 27.25 19.75 40.38 33.69 .1600 .1550
Third 24.63 17.75 40.00 34.00 .1600 .1550
Fourth 26.44 22.00 36.25 18.56 .1600 .1550
=========================================================================================
</TABLE>
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Item 6 Selected Financial Data
Selected financial data for each of the five years ended July 31, 1999 is
contained in the table below:
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998 1997 1996 1995
==============================================================================================================
<S> <C> <C> <C> <C> <C>
OPERATIONS
==============================================================================================================
Net sales $ 1,530,523 $ 1,356,052 $ 906,290 $ 862,287 $ 712,838
Net income 76,069 74,208 81,282 72,999 55,297
Net income per share (basic) 1.80 1.72 1.88 1.60 1.23
Net income per share (diluted) 1.80 1.71 1.86 1.59 1.23
Dividends per share .64 .62 .56 .43 .37
FINANCIAL CONDITION
==============================================================================================================
Total assets $ 1,297,659 $ 1,257,463 $ 720,442 $ 695,850 $ 592,702
Long-term debt 416,653 428,224 24,500 30,600 25,600
Capital expenditures 50,311 59,632 39,225 59,506 51,487
Working capital 256,509 236,857 149,234 206,238 193,150
SIGNIFICANT RATIOS
==============================================================================================================
Net income:
Return on net sales 5.0% 5.5% 9.0% 8.5% 7.8%
Return on average assets 6.0% 7.5% 11.5% 11.3% 9.8%
Return on average equity 13.5% 14.3% 16.2% 15.1% 12.8%
Current ratio 2.3 2.2 2.1 3.1 3.9
Long-term debt/debt plus equity 41.7% 43.9% 4.7% 5.7% 5.3%
Book value per share $ 13.82 $ 12.65 $ 11.45 $ 11.20 $ 10.05
Sales per employee* $ 183.4 $ 188.8 $ 207.4 $ 218.4 $ 195.4
OTHER
==============================================================================================================
Number of employees 8,464 8,228 4,610 4,131 3,765
Number of stockholders of record 3,355 3,559 3,680 3,863 4,383
==============================================================================================================
</TABLE>
*Based on average number of employees during the fiscal year
NOTES TO FIVE YEAR SUMMARY
A. ACQUISITIONS AND DIVESTITURES: On May 21, 1999, the Company acquired the
assets of Denver Graphic, Inc. The acquisition price was $3.0 million of cash
and a note payable of $150,000. Effective May 1, 1999, the Company acquired
Commercial Press, Inc. The acquisition price was $20.1 million of cash, the
assumption of debt totalling $2.2 million, and a note payable of $2.3 million.
On February 28, 1999, the Company sold Mercury Printing, acquired as part of the
Graphic Industries acquisition, for $7.0 million. On December 31, 1998, the
Company sold substantially all of the assets of Visible Computer Supply, our
contract stationers business, in a transaction that approximated book value. On
June 17, 1998, the Company acquired the assets of Good Decal Co. The acquisition
price was $12.3 million of cash and a note payable of $1.0 million. Effective
November 3, 1997, the Company acquired Graphic Industries, Inc. The acquisition
was made through an all cash purchase of Graphic's shares of common stock. The
acquisition price was $308.3 million, based on outstanding shares, options and
converted indenture notes valued at $21.75 per share, plus $6.1 million of
transaction costs, and net debt totalling
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Item 6 Selected Financial Data, Continued
$123.4 million. See note 2 for further disclosure on the Graphic acquisition. On
July 24, 1997, the Company acquired the assets of 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 the
assets of Post Printing, Inc. The acquisition price was $6.6 million of cash. On
February 1, 1996, the Company sold the LaserMax division to a subsidiary of
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 the assets of Retterbush and Sauer Label Corporation.
The acquisition price included $10.1 million of cash and a note payable of $2.0
million. On November 29, 1994, the Company acquired Lampro Graphics, Inc. The
acquisition price included $4.6 million of cash, a note payable of $0.3 million,
and the assumption of debt totalling $1.9 million.
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 SPLIT: All share and per share amounts have been adjusted for the 2 for
1 stock split effective July, 1996.
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
FISCAL 1999 VERSUS FISCAL 1998
Net sales for fiscal 1999 increased 12.9% over fiscal 1998. There were several
acquisitions and divestitures which affected the results. In the second quarter
of fiscal 1998, Graphic Industries ("Graphic") was acquired, making fiscal 1999
the first full fiscal year that included its results. During the third quarter
of fiscal 1999, the Company divested Mercury Printing, which was acquired as
part of the Graphic acquisition. In the second quarter of fiscal 1999, the
Company divested the operations of Visible Computer Supply, our contract
stationers business. Both of the divestitures sold product lines that were not
compatible with the Company's strategic direction. In the fourth quarter of
fiscal 1999, the Company acquired a small prime label company, and a commercial
printing operation which expands the geographic coverage of our commercial
printing network to the West Coast of the United States. Pro forma sales growth,
after adjusting for acquisitions and divestitures was 4.7%.
The breakdown of net sales for fiscal 1999 within our two business segments
was as follows:
<TABLE>
<CAPTION>
BUSINESS SEGMENT % OF TOTAL REVENUE % REVENUE INCREASE
================================================================
<S> <C> <C>
Forms and Labels 49.9% 1.3%
----------------------------------------------------------------
Print Management 50.1% 27.4%
================================================================
</TABLE>
After adjusting for acquisitions and divestitures, the Forms and Labels segment
grew 3.0% and the Print Management segment grew 6.4%. Commencing in fiscal 2000,
we will begin to refer to the Print Management segment as the Integrated
Graphics segment to reflect the integrated nature of services we provide the
customer.
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Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations, Continued
Over the last five years, sales have grown at a compound annual rate of
21.1%, with most of the growth coming from acquisitions. A significant portion
of the increased sales in the Print Management segment were generated by the
Wallace direct sales force, which began selling high color marketing and
promotional printing shortly after the acquisition. Products sold by the Wallace
direct sales force that were manufactured in the Graphic facilities increased
tenfold from fiscal 1998 to fiscal 1999. Based upon the fourth quarter, the run
rate for Print Management sales made by the Wallace direct sales force exceeds
$60 million annually. This is equivalent to 13% of the Graphic Industries sales
in the twelve months prior to acquisition. We estimate year-over-year unit
growth in both the Forms and Labels Segment, and the Print Management segment to
be around 10%.
Paper is the basic raw material for 95% of our products. In the Forms and
Labels segment, paper represents 40% to 45% of sales. In the Print Management
segment, paper represents about 20% to 25% of sales.
The majority of paper used by the Company comes from three paper grades -
uncoated free sheet, tablet and offset. Using 20 pound white uncoated free sheet
as a proxy for the paper market, published prices during the last two fiscal
years have continued to show variability. Prices rose over 20% from the spring
of 1997 to November 1997, then fell more than 15% by the end of fiscal 1998.
After remaining steady for the first half of fiscal 1999, the published prices
have increased by 16% from January 1, 1999 to July 31, 1999.
The Company continues to reduce its exposure to volatility in the paper
market. The continual product mix shift toward high color marketing and
promotional printing as well as growth in digital print and market-to-one
programs further mitigate the overall impact of paper on operating margins.
In the second quarter of the current fiscal year the Company divested its
contract stationer business, which had annual revenues of approximately $40
million, because it did not fit with the long-term strategic objectives of the
Company. In conjunction with the sale of this business to Boise Cascade Office
Products ("BCOP"), the Company expanded its alliance with BCOP in order to
better serve the needs of our contract customers. As the margins on this type of
product are generally lower, exiting this business had the impact of increasing
operating margins in the Forms and Labels segment.
Label and related products continued to show solid growth with a sales
increase of 15% for the fiscal year, and unit growth of approximately 17%. The
Company plans to continue pursuing acquisitions in this growth area.
Traditionally, the majority of the sales in the Print Management segment
are made on an order-by-order basis, although the Company is creating a new
service model for large corporations that is expected to continue to increase
contract business in this segment. Selling prices, therefore, reflect market
conditions for paper more immediately than in the Forms and Labels segment. The
impact of lower paper prices reduced sales by about 4% for the fiscal year;
however, this was more than offset by unit growth and acquisitions. Sales
declined slightly in the Direct Response portion of this segment as the Company
is repositioning itself by reducing its emphasis on the mass mailer market and
refocusing its variable imaging technology to meet the needs of our large
customers' marketing organizations. The benefits of this repositioning are
already being recognized as the Direct Response group showed favorable
year-over-year comparisons in the fourth quarter.
The number of new W.I.N. and Select Services customers was 77 for fiscal
1999, representing a 20% increase from the end of fiscal 1998. The 467 customers
using these systems at year-end collectively represented 38.7% of fiscal 1999
consolidated net sales. Approximately 80% of these sales were in Forms and
Labels, with the balance in Print Management. The divestiture of the contract
stationers business slowed the growth in volume of W.I.N. and
15
<PAGE> 16
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations, Continued
Select Services sales in the Forms and Labels segment. High color marketing and
promotional printing sales to W.I.N. and Select Services customers in fiscal
1999 more than doubled the fiscal 1998 volume, which accounted for the rapid
growth in the Print Management segment.
Net income for the year increased by $1.9 million or 2.5%. The after-tax
ratio for fiscal 1999 was 5.0%. For the last five years, net income has grown at
an average compound rate of 9.7%. The breakdown of operating income for fiscal
1999 within our two business segments was as follows:
<TABLE>
<CAPTION>
BUSINESS SEGMENT OPERATING INCOME % % OPERATING INCOME
TO SALES INCREASE
=================================================================
<S> <C> <C>
Forms and Labels 14.2% 9.5%
-----------------------------------------------------------------
Print Management 6.2% 3.8%
=================================================================
</TABLE>
Operating income decreased from 10.7% of sales in fiscal 1998 to 10.2% in
fiscal 1999. The most significant reason for the drop in operating income as a
percent to sales is the anticipated shift in product mix between the segments.
The Print Management segment includes a full year of the Graphic results in
fiscal 1999 versus only three quarters last year.
Cost of goods sold as a percent to sales for fiscal 1999 was 68.7% versus
67.5% in fiscal 1998. Print Management currently has higher cost of goods sold
as a percent to sales than the Forms and Labels segment. That fact, coupled with
the extra quarter of operating results for Graphic and the faster growth in the
Print Management segment, was the most significant factor for the increase. The
Company views margin expansion in the Print Management segment as a significant
opportunity, as contract business for high color marketing and promotional
printing accelerates. The LIFO impact year over year was comparable.
Selling and administrative expenses as a percent to sales were 16.2% in
fiscal 1999 and 16.8% in fiscal 1998. We had anticipated these expenses as a
percent to sales would decrease this fiscal year as the Company leverages its
national sales force, systems and shared services across a broader sales base.
Selling and administrative expense as a percent to sales has been lower each
quarter in the fiscal year than the previous comparable quarter.
Year 2000 related software expenses were $2.0 million in fiscal 1999 and
$2.7 million in fiscal 1998. Any additional expenses in fiscal 2000 are expected
to be minimal. The Company does not anticipate that the cost of remediation will
have a material effect on its financial condition.
The Company's effort to address Year 2000 compliance issues included (i)
evaluating internal computing infrastructure, business applications and
production systems for Year 2000 compliance, and (ii) replacing or remediating
systems and applications as necessary to assure such compliance. The Company's
efforts in these respects are substantially complete. The Company has completed
an inventory of all potentially affected software, firmware and hardware
(including embedded chips) material to its operations. The Company has
remediated the problem by modifying its software and in certain cases,
purchasing new software, firmware and hardware.
16
<PAGE> 17
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations, Continued
The Company has completed Phases 1 and 2 of its Year 2000 project. In Phase
1, the Company assessed and remediated all material date and logic errors in
applications and databases running on its internal mainframe, AS400 and UNIX
systems. Phase 1 culminated with a successful two-week, on-site test by one of
our largest customers: a major financial institution. During testing, the
Company simulated operations on 20 dates ranging from September 9, 1999 to
January 3, 2001 without any material interruption.
In Phase 2, the Company certified the compliance of all mission critical
manufacturing and operational equipment (e.g. printing presses, conveyors, and
heating and cooling systems).
As part of the final phase of the Year 2000 project, the Company
implemented internal administration systems which have been tested by the
Company or that have been certified by the outside provider as being Year 2000
compliant. Implementation was completed as of July 31, 1999.
In addition, the Company has focused on an initiative to upgrade and
standardize the information technology of its newly acquired high color
marketing and promotional printing facilities, which had the incidental effect
of addressing certain Year 2000 compliance issues.
Based on communications with vendors and, where deemed appropriate,
internal testing, the Company believes that substantially all of its equipment
used in its printing operations, including its pre-press and press equipment and
its equipment used to finish and deliver its products, will not be materially
affected by a Year 2000 related failure.
In addition to its internal remediation activities, the Company is
continuing to evaluate compliance by key suppliers and customers whose systems
interact with those of the Company (collectively, "Trading Partners"). The
Company has received confirmation from many of its significant Trading Partners
regarding Year 2000 readiness and is evaluating the need for other action with
respect to such information. These evaluations will be followed, where
appropriate, by the development of contingency plans.
There are many suppliers of paper, ink and other materials used in printing
operations. Thus, the Company believes that it is not materially dependent on
any one supplier. Nonetheless, the Company relies upon utility companies,
telecommunication services providers, delivery services, the financial services
industry and other suppliers outside of its control and there can be no
assurance that such suppliers or other third parties will not suffer a Year 2000
business disruption. The failure of the systems or equipment of one or more
third parties (which the Company believes is the most likely "worst case"
scenario) could result in the reduction or suspension of one or more of the
Company's operations and could have a material adverse effect on the Company.
Due to the multiple locations of the Company's manufacturing facilities and
redundancy of capabilities, localized interruptions would not be expected to
have a material adverse effect on the Company. However, in the case of a
systemic failure, such as wide-spread and prolonged telecommunications or
electrical failures, the primary business risks of the Company would include,
but not be limited to, loss of customers or orders, increased operating costs,
inability to obtain supplies and inventory on a timely basis, disruptions in
product shipments or other business interruptions of a material nature, as well
as possible legal actions, any of which could have a material, adverse effect on
the Company's business, results of operations and financial condition.
The Company has also identified Trading Partners with whom it exchanges
electronic transmissions and has tested successfully the material means of
transmission utilized in such exchanges. The failure of customers to place EDI
orders or to remit EDI payments could have a short-term impact on the operations
of the Company.
17
<PAGE> 18
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations, Continued
The Company will evaluate future acquisition candidates for Year 2000
compliance prior to acquisition, where feasible, and will conduct appropriate
assessment, remediation, testing and contingency planning following completion
of any such acquisition.
The provision for depreciation and amortization was 4.9% to sales in fiscal
1999 and 5.0% in fiscal 1998. The current year's total includes $7.9 million of
goodwill amortization, and $5.4 million in software amortization. We are
projecting a range of $85 to $90 million in depreciation and amortization for
fiscal 2000.
Interest expense for fiscal 1999 increased by $7.5 million due primarily to
having four full quarters of interest expense related to the Graphic
acquisition. Also, interest rates are higher due to fixing $200 million of debt
in long-term notes.
The effective income tax rate for fiscal 1999 was 40.0% versus 39.9% in
fiscal 1998. We are projecting an effective rate for fiscal 2000 of around
40.0%.
FISCAL 1998 VERSUS FISCAL 1997
Fiscal 1998 was a year of significant change for Wallace. Sales surpassed $1
billion for the first time, ending the year at $1.4 billion. Of this total,
28.4% came from acquisitions made from June 1997 to July 1998. The acquisitions
also changed the Company's capital structure. Total debt to debt plus equity
increased to 46.0% at July 31, 1998 from 10.9% at July 31, 1997. Our product mix
also changed during fiscal 1998, with the addition of twenty commercial printing
facilities. The breakdown of net sales for fiscal 1998 within our two business
segments was as follows:
<TABLE>
<CAPTION>
BUSINESS SEGMENT % OF TOTAL REVENUE % REVENUE INCREASE
================================================================
<S> <C> <C>
Forms and Labels 55.6% 8.7%
----------------------------------------------------------------
Print Management 44.4% 183.0%
================================================================
</TABLE>
For fiscal 1998, sales were up 49.6% over fiscal 1997. Excluding
acquisitions, sales would have been up 7.2%. We estimate unit growth for fiscal
1998 for the Forms and Labels segment was in line with its sales dollar
increase. The majority of the revenue increase for the Print Management segment
came from acquisitions.
Paper price changes have a material effect on the Company's reported sales
dollars and operating results. For the 52% of the Forms and Labels segment that
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 net sales. In fiscal 1998, paper prices
had started to fall before all of the increases from the first half of the
fiscal year had been passed on to contract customers. Unlike prior periods, the
Company was not able to pass on the full effect of the paper price increase from
the first half of the year. In addition, competitive pressures kept selling
prices for non-contract business and for certain contract renewals at or below
fiscal 1997 levels.
18
<PAGE> 19
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations, Continued
Forms and Labels have also been effected by changes in technology. Sales of
the higher margin mailer products have decreased between years by more than 20%,
replaced by growing, but lower margin, cut sheet products.
Most sales in the Print Management segment are currently made on an
order-by-order basis. Selling prices will, therefore, reflect market conditions
for paper sooner than in the Forms and Labels segment.
The number of new W.I.N. and Select Services customers was 76 for fiscal
1998, representing a 24% increase from the end of fiscal 1997. These 390
customers collectively represented 37.8% of fiscal 1998 consolidated net sales.
Net income for fiscal 1998 decreased $7.1 million, or 8.7%. As expected,
the Graphic acquisition was break-even for the nine months ended July 31, 1998
after deducting goodwill amortization and acquisition-related interest expense.
The after-tax ratio for fiscal 1998 was 5.5%. Without acquisitions, the
after-tax ratio would have been 7.7%.
Cost of goods sold as a percent to sales for fiscal 1998 was 67.5% versus
61.4% in fiscal 1997. Without acquisitions, cost of goods sold would have been
65.0% for fiscal 1998. Cost of Goods Sold as a percent to sales for the Forms
and Labels segment was higher between years due to lower margins on the mailer
and the stock product lines. In addition, the growing percentage of sales from
large contract customers, with whom the Company historically has lower margins
than small quantity spot orders, contributed to the increased cost of goods sold
percentage. During fiscal 1998, the Company recorded a LIFO credit of $0.9
million versus a credit of $2.1 million in 1997.
Selling and administrative expenses as a percent to sales were 16.8% in
fiscal 1998 and 18.3% in 1997. We expect selling and administrative expenses as
a percent to sales to decrease further in fiscal 1999 with a full year of
Graphic Industries included. Year 2000 related software expenses were $2.7
million in fiscal 1998 and $264,000 in fiscal 1997.
The provision for depreciation and amortization was 5.0% to sales in fiscal
1998 and 5.4% in fiscal 1997. The current year's total includes $5.9 million of
goodwill amortization, and $5.5 million for the amortization of capitalized
software.
Operating income for fiscal 1998 was up 7.1%. Without the acquisitions,
operating income would have been down 9.6% from fiscal 1997.
Interest expense for fiscal 1998 increased by $20.8 million due primarily
to the acquisitions. Interest income of $2.1 million was earned in the first
part of the year.
The effective income tax rate for fiscal 1998 was 39.9% versus 39.5% in
fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
In fiscal 1999, total debt decreased $25.7 million to $440.2 million. During the
year, the Company issued $200 million of Senior Notes with $65 million maturing
in 7 years, and $135 million maturing in 10 years. The proceeds were used to pay
down variable rate debt. The ratio of total debt to debt plus equity at July 31,
1999 was 43.0% versus 46.0% at the end of fiscal 1998.
19
<PAGE> 20
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations, Continued
Working capital increased $19.6 million to $256.5 million as of July 31,
1999. While improvements were made in inventories, payables, short-term debt and
cash, accounts receivable expanded by $31.8 million. Increased sales volume in
the fourth quarter accounted for $14.7 million of the accounts receivable growth
with the balance being attributable to an increase in days sales outstanding.
Inventory levels have been reduced as management has focused on more timely
management of inventories. The current ratio at July 31, 1999 was 2.3.
Capital expenditures for the year were $50.3 million. There were no major
construction projects in process at fiscal year-end. In addition to the capital
expenditures, the Company continues to invest in its information technology
infrastructure. Information systems expenditures of $18.5 million have been
capitalized in fiscal 1999. The Company is in the midst of its most aggressive
systems initiatives to date. These efforts are approaching the final stages and
are expected to be fully implemented around the end of fiscal year 2000.
Over the last five years, capital expenditures have totalled $260.2
million. Of these expenditures, $8.5 million were financed by industrial revenue
bonds, with the balance being funded through internally generated funds. Over
the past five years, the Company has also spent $58.7 million for software
development. For fiscal year 2000, we are estimating capital expenditures of
approximately $60 million and capitalized software expenditures of approximately
$20 million.
During fiscal 1999, the Company purchased $30.0 million of its common stock
in open market transactions at an average price of $18.12.
Of the outstanding debt as of July 31, 1999, $200 million has been borrowed
under a five-year credit agreement ("Credit Facility"), which provides for a
maximum aggregate principal amount available to be borrowed of $500 million. On
January 15, 1999, the Company offered $200 million of Senior Notes, and at that
time, settled on the treasury rate lock agreement related to the issuance of the
Senior Notes. The proceeds of the note issue were used to pay down borrowings
under the Credit Facility. The borrowings under the Credit Facility are
classified as long-term debt since the Company has the intent and ability to
carry that debt long-term.
In addition to the Credit Facility, the Company has unsecured money market
lines of $125 million, under which $21.0 million was borrowed at July 31, 1999.
The $21.0 million from the unsecured money market lines is classified as
short-term debt. The maximum amount as authorized by the Board of Directors for
total borrowings is currently limited to $600 million.
In the third quarter of fiscal 1998, the Company filed a shelf registration
to issue up to $300 million of unsecured debt and equity securities. The $200
million in Senior Notes issued this fiscal year reduced the amount available
under the shelf registration to $100 million. The Company has received a BBB+
rating from Standard & Poor's and a Baa2 rating from Moody's for both the $300
million universal shelf registration and the $500 million revolving credit
facility.
The Company is exposed to market risk from changes in interest rates. That
risk has been reduced by the issuance of the fixed rate long-term Senior Notes.
As of July 31, 1999, 46.4% of total debt is fixed rate debt. To mitigate
interest rate risk that may occur in the fourth calendar quarter due to Year
2000 concerns in the financial markets, the Company, in the first quarter of
fiscal year 2000, extended $120 million of its Credit Facility until May 26,
2000 at a fixed rate of 6.11%.
20
<PAGE> 21
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations, Continued
The Company believes that it has adequate financing and cash flows to make
acquisitions, repurchase stock, pay dividends, make capital expenditures and pay
down debt during fiscal 2000. We plan to maintain or improve our investment
grade ratings. Over the next few years, our strong cash flows should reduce our
leverage from the current 43% level to our targeted range of 30% to 35%.
COMMON STOCK
Dividends were raised for the 27th consecutive year in September 1998 to $0.64
per share, an increase of 3.2%.
During fiscal 1999, 605,430 shares of common stock were issued in
connection with the Company's Employee Stock Purchase Plan and the 1989 and 1997
Stock Option Plans. Also during the year, accrued deferred bonus amounts were
converted into 198,241 shares of common stock and placed into a grantor trust
for the benefit of certain executives. While these shares are accounted for as
treasury stock, they are considered outstanding and incorporated in the
computation of both basic and diluted earnings per share. The balance of $3.9
million of deferred compensation in the equity section of the balance sheet
represents the total fixed liability that the 198,241 shares satisfies.
The Company also repurchased 1,655,500 shares during the year under the
$100 million share repurchase program approved by the Board of Directors in May
1997. Those repurchases bring the total purchases made under this program to
$49.9 million. These treasury shares will be used for future acquisitions or for
employee benefit plans.
RISK FACTORS
The following factors should be considered carefully in evaluating an investment
in debt or equity securities of the Company.
GROWTH THROUGH ACQUISITIONS: The Company's business strategy includes growth
through the acquisition of businesses complementary to the Company's business.
The Company has made a number of acquisitions in the past and believes that it
has been successful, and will be successful, in integrating the acquired assets
and businesses into the Company's operations. There can be no assurance,
however, that any acquired assets or business will be successfully integrated
into the Company's operations. While the Company evaluates acquisition
opportunities on an ongoing basis, it has no current commitments or agreements
with respect to any material acquisitions.
21
<PAGE> 22
COST AND AVAILABILITY OF PAPER: The cost of paper represents a significant
portion of the Company's cost of materials. Increases in paper costs could have
a material adverse effect on the Company's results of operations and financial
condition. The Company attempts to maintain gross profit margins when paper
prices increase by passing paper price increases onto its customers. There can
be no assurance, however, that the Company will be able to pass on increases in
the cost of paper in the future. The Company's failure to pay on paper price
increases in the future could have a material adverse effect on the Company's
gross profits. Due to the significance of paper in the manufacture of most of
the Company's products, the Company is dependent upon the availability of paper.
During periods of tight paper supply, many paper producers allocate shipments of
paper based on the historical purchase levels of customers. As a result of the
Company's large volume paper purchases from several paper producers, the Company
generally has not experienced difficulty in obtaining adequate quantities of
paper, although occasionally the Company has experienced minor delays in
delivery. Although management believes that the Company's large volume paper
purchases and strong relationships with vendors will continue to enable the
Company to receive adequate supplies of paper in the future, there can be no
assurance in this regard.
COMPETITION: The markets for the Company's products are highly competitive and
relatively fragmented, with a large number of competitors. Some of the Company's
competitors are larger than the Company and have greater financial, marketing
and technical resources. The Company has invested significant resources in
computer technology and distribution facilities in an attempt to differentiate
itself from certain of its competitors. There can be no assurance that
competitors will not take actions, including developing new technologies,
products and services, which could adversely affect the Company's sales and
operating results.
DEPENDENCE ON KEY PERSONNEL: The Company's performance depends in large part on
the continued service of its key sales and management personnel and on its
ability to continue to attract, retain and motivate highly qualified personnel.
Competition for such personnel is intense, and the process of locating key
personnel with the combination of skills and attributes required to execute the
Company's strategy is often lengthy. There can be no assurance that the Company
will be able to attract or retain such personnel in the future, and the
inability to do so could have a material adverse effect upon the Company's
business, operating results or financial condition.
22
<PAGE> 23
EFFECTIVE SUBORDINATION: The Company operates a portion of its business through
subsidiaries, including substantially all of its commercial printing operations.
The Company and its subsidiaries may incur additional indebtedness in the
future, subject to certain limitations contained in the Company's Indenture and
the Credit Agreement and certain of such indebtedness may be secured. Any right
of the Company to participate in any distribution of the assets of its
subsidiaries upon the liquidation, reorganization or insolvency of any such
subsidiary (and the consequent right of the holders of the Notes to participate
in the distribution of those assets) will be subject to the prior claims of the
respective subsidiary's creditors. As a result of the foregoing, holders of the
Notes may recover less ratably than other creditors of the Company's
subsidiaries in the event of any liquidation, reorganization or insolvency of
the Company.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: Certain statements in this filing and elsewhere (such as in other filings
by the Registrant with the Securities and Exchange Commission, press releases,
presentations by the Registrant or its management, and oral statements) may
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. All statements, other than statements
of historical facts, that address activities, events, or developments that the
Registrant expects or anticipates may occur in the future, including such things
as future capital expenditures (including the amount and nature thereof),
business strategy and measures to implement strategy, competitive strengths,
goals, expansion and growth of the Registrant's and its subsidiaries' business
and operations, plans, references to future success and other such matters are
forward-looking statements. These forward-looking statements involve known and
unknown risks, uncertainties, and other factors which may cause the actual
results, performance or achievements of the Registrant to materially differ from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among other things, general
economic, market or business conditions, changes in laws or regulations; the
opportunities (or lack thereof) that may be presented to and pursued by the
Registrant and its subsidiaries; successful integration of acquisitions; labor
market conditions; changes in postal rates and paper prices; the ability of the
Registrant to retain its customers who generally do not operate under long-term
contracts with the Registrant; the potential unpredictability of the
Registrant's net sales due to seasonal and other factors which can lead to
fluctuations in quarterly and annual operating results; the ability of the
Registrant to keep pace with technological advancements in the industry; the
effect of technical advancements on the demand for the Registrant's goods and
services; and the risk of damage to the Registrant's data centers and
manufacturing facilities or interruptions in the Registrant's telecommunications
links.
Item 7(A) Quantitative and Qualitative Disclosures About Market Risk
None
Item 8 Financial Statements and Supplementary Data
The financial information required by Item 8 is contained in Item 14
of Part IV (page 27) of this report.
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
23
<PAGE> 24
Part III
Item 10 Directors and Executive Officers of the Registrant
The biography of Richard F. Doyle is listed below:
<TABLE>
<CAPTION>
NAME AND AGE PRINCIPAL OCCUPATION FOR PAST FIVE DIRECTOR SINCE COMMITTEE MEMBERSHIP
------------ ---------------------------------- -------------- --------------------
YEARS
-----
<S> <C> <C> <C>
Richard F. Doyle (71) Retired Senior Vice October 26, 1971 Audit (Chairman)
President-Finance &
Administration of Texas Oil & Gas
Corp., a developer of oil and gas
interests.
</TABLE>
Information concerning continuing directors and director nominees of the
Company and their respective terms is contained in the Company's definitive
Proxy Statement dated November 3, 1999, on pages 2-5, and is incorporated
herein by reference.
Information concerning Section 16 (a) Beneficial Ownership Reporting
Compliance is contained on pages 21-22 of the Company's definitive Proxy
Statement dated November 3, 1999, and is incorporated herein by reference.
Executive Officers of the Company
(a) Names, ages and positions of the executive officers:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Michael A. Anderson 37 Vice President - Direct Response Group
Thomas G. Brooker 41 Vice President - Corporate Sales
Steven L. Carson 36 Secretary, Vice President - General Counsel
Robert J. Cronin 54 Chairman of the Board and Chief Executive
Officer
Michael O. Duffield 47 President and Chief Operating Officer
Douglas W. Fitzgerald 45 Vice President - Marketing
Gary K. Haman 41 Assistant Treasurer
</TABLE>
24
<PAGE> 25
Executive Officers of the Company, Continued
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Robert J. Kelderhouse 44 Assistant Secretary, Vice President - Treasurer
Michael T. Leatherman 46 Executive Vice President, Chief Financial
Officer, and Chief Administrative Officer
Marc A. Loomer 49 Vice President - Business Forms Manufacturing
William J. Montanez 47 Assistant Treasurer
Wayne E. Richter 43 Senior Vice President - Forms and Labels Segment
</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:
Mr. Anderson has been with the Company since 1985. He was elected Vice
President - General Manager - Direct Response Group in 1998. Mr. Anderson
was previously Vice President - General Manager - Commercial Printing from
1997 to 1998, Vice President - General Manager - Tops from 1995 to 1997,
and Director of Distribution from 1992 to 1995.
Mr. Brooker has been with the Company since 1981. He was elected Vice
President - Corporate Sales in 1998. Mr. Brooker was previously Vice
President - General Manager - Office Products from 1995 to 1998, Vice
President - General Manager - Tops Division from 1993 to 1995, and Vice
President - Sales - Tops Division from 1992 to 1993.
Mr. Carson has been with the Company since 1995 as General Counsel. He was
elected Secretary, Vice President - General Counsel in 1999. Mr. Carson was
previously Assistant Secretary from 1997 to 1999. Mr. Carson was previously
an attorney with Chapman and Cutler, and Katten, Muchin & Zavis.
Mr. Cronin has been with the Company since 1967. He was elected Chairman of
the Board in 1998 and elected Chief Executive Officer in 1993. Mr. Cronin
was previously President from 1993 to 1998, and Chief Operating Officer in
1992. Mr. Cronin has been a director of the Company since 1992.
Mr. Duffield has been with the Company since 1974. He was elected President
and Chief Operating Officer in 1998. Mr. Duffield was previously Senior
Vice President - Operations from 1992 to 1998.
Mr. Fitzgerald has been with the Company since 1976. He was elected Vice
President - Marketing in 1996. Mr. Fitzgerald was previously Director of
Marketing from 1989 to 1996.
25
<PAGE> 26
(b) Business Experience of the Executive Officers, Continued
Mr. Haman has been with the Company since 1998 as Assistant Treasurer. Mr.
Haman was previously employed by Eagle Industries, Inc. as Director of
Treasury Operations from 1993 to 1998.
Mr. Kelderhouse joined the Company in 1999 as Assistant Secretary, Vice
President - Treasurer. Mr. Kelderhouse was previously employed by Heller
International Corporation as Senior Vice President, Finance and Capital
Markets, Sales Finance Group from 1997 to 1999, and Senior Vice President,
Finance and Capital Markets, Vendor Finance Division from 1994 to 1997.
Mr. Leatherman has been with the Company since 1990. He was elected Chief
Financial Officer in 1999 and elected Executive Vice President and Chief
Administrative Officer in 1998. Mr. Leatherman was previously Senior Vice
President - Integrated Graphics and President of Graphic Industries from
1997 to 1998, Senior Vice President / Chief Information Officer from 1995
to 1997 and Senior Vice President - Management Information Services from
1990 to 1995.
Mr. Loomer has been with the Company since 1996 as Vice President. Mr.
Loomer was elected Vice President - Business Forms Manufacturing in 1997.
He was previously employed with Duplex Products, Inc. as Vice President of
Operations from 1994 to 1996 and Vice President of Continuous Improvement
from 1992 to 1994.
Mr. Montanez has been with the Company since 1992. He was elected Assistant
Treasurer in 1996. Mr. Montanez was previously Director / Manager of
Benefits and Risk Management from 1992 to 1996.
Mr. Richter has been with the Company since 1979. He was elected Senior
Vice President - Forms and Labels Segment in 1998. Mr. Richter was
previously Vice President - General Manager - Label Division from 1992 to
1998.
There are no family relationships between these executives.
Item 11 Executive Compensation
Information concerning management remuneration and transactions, and
compensation of directors for the year ended July 31, 1999 is contained in
the Company's definitive Proxy Statement dated November 3, 1999, on pages
4-18, 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
November 3, 1999, on pages 21-22, 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 November 3,
1999, and is incorporated herein by reference.
26
<PAGE> 27
Wallace Computer Services, Inc. Fiscal 1999 10-K
Part IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following consolidated financial statements and schedules of
the Company are set forth on the following pages of this report.
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Consolidated Statements of Income for the years ended
July 31, 1999, 1998, and 1997 29
Consolidated Statements of Stockholders' Equity for the years ended
July 31, 1999, 1998, and 1997 30 - 31
Consolidated Balance Sheets as of July 31, 1999 and 1998 32
Consolidated Statements of Cash Flows for the years ended
July 31, 1999, 1998, and 1997 33
Notes to Consolidated Financial Statements 34 - 47
Report of Independent Public Accountants 48
Quarterly Financial Data for the years ended July 31, 1999 and 1998 49
Schedule - II, Valuation and Qualifying Accounts 50
</TABLE>
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.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the Company during the
quarter ended July 31, 1999.
(c) Exhibit Index
The exhibits as shown in "Index of Exhibits" (pages 51 - 55) are
filed as part of this report.
27
<PAGE> 28
Wallace Computer Services, Inc. Fiscal 1999 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 28, 1999.
Wallace Computer Services, Inc.
By /s/ Michael T. Leatherman
-------------------------------------
Michael T. Leatherman
Executive Vice President, Chief Financial
Officer, and Chief Administrative Officer
(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 28, 1999.
/s/ Robert J. Cronin /s/ Andrew J. McKenna, Jr.
- ----------------------------- --------------------------
Robert J. Cronin Andrew J. McKenna, Jr.
Chairman of the Board, and Director
Chief Executive Officer
/s/ Richard F. Doyle /s/ John C. Pope
- ----------------------------- --------------------------
Richard F. Doyle John C. Pope
Director Director
/s/ William N. Lane, III /s/ Neele E. Stearns, Jr.
- ----------------------------- --------------------------
William N. Lane, III Neele E. Stearns, Jr.
Director Director
/s/ Bettye Martin Musham
- --------------------------
Bettye Martin Musham
Director
28
<PAGE> 29
Item 14 (a) Consolidated Financial Statements and Schedules
CONSOLIDATED STATEMENTS OF INCOME
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED JULY 31, 1999, 1998 and 1997 1999 1998 1997
=========================================================================================================
<S> <C> <C> <C>
Net sales $ 1,530,523 $ 1,356,052 $ 906,290
- ---------------------------------------------------------------------------------------------------------
Cost and expenses:
Cost of goods sold 1,051,917 915,927 556,073
Selling and administrative expenses 247,227 227,898 165,918
Provision for depreciation and amortization 75,431 67,479 49,205
- ---------------------------------------------------------------------------------------------------------
Total costs and expenses 1,374,575 1,211,304 771,196
- -------------------------------------------------------------------------- ------------------------------
Operating income 155,948 144,748 135,094
Interest income (1,842) (2,108) (1,876)
Interest expense, net of capitalized interest 31,009 23,466 2,619
- ---------------------------------------------------------------------------------------------------------
Income before income taxes 126,781 123,390 134,351
- ---------------------------------------------------------------------------------------------------------
Provision for income taxes: (Note 7)
Current:
Federal 35,383 38,267 42,825
State 7,081 7,826 8,210
Deferred 8,248 3,089 2,034
- ---------------------------------------------------------------------------------------------------------
Total income taxes 50,712 49,182 53,069
- ---------------------------------------------------------------------------------------------------------
Net income $ 76,069 $ 74,208 $ 81,282
- ---------------------------------------------------------------------------------------------------------
Net income per share: (Note 11)
Basic $ 1.80 $ 1.72 $ 1.88
Diluted $ 1.80 $ 1.71 $ 1.86
=========================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
29
<PAGE> 30
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK COMMON
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) PREFERRED STOCK ADDITIONAL
FOR THE YEARS ENDED JULY 31, 1999, 1998 and 1997 ISSUED IN TREASURY STOCK PAR VALUE CAPITAL
==========================================================================================================================
<S> <C> <C> <C> <C> <C>
Balance, July 31, 1996 45,764 (177) $ - $ 45,764 $ 32,616
==========================================================================================================================
Net income - - - - -
Cash dividends ($.56 per share) - - - - -
Sale of stock under employee
stock purchase plan (Note 5) - 324 - - (337)
Stock options exercised net of shares
exchanged in lieu of cash (Note 5) - 230 - - (1,165)
Stock transferred to profit sharing and
retirement fund - 217 - - 1,502
Tax benefit from early disposition by employees
of stock issued under stock option plans
and exercise of non-qualified stock options - - - - 1,869
Amortization of difference between market price
and option price for 1997 option plan (Note 5) - - - - 254
Treasury stock purchased - (3,288) - - -
Unrealized security gain (Note 10) - - - - -
==========================================================================================================================
Balance, July 31, 1997 45,764 (2,694) - 45,764 34,739
==========================================================================================================================
Net income - - - - -
Cash dividends ($.62 per share) - - - - -
Sale of stock under employee
stock purchase plan (Note 5) - 457 - - (2,185)
Stock options exercised net of shares
exchanged in lieu of cash (Note 5) - 107 - - (247)
Stock transferred to profit sharing and
retirement fund - 206 - - 2,432
Tax benefit from early disposition by employees
of stock issued under stock option plans
and exercise of non-qualified stock options - - - - 1,219
Amortization of difference between market price
and option price for 1997 option plan (Note 5) - - - - 432
Treasury stock purchased - (572) - - -
Unrealized security gain (Note 10) - - - - -
==========================================================================================================================
Balance, July 31, 1998 45,764 (2,496) - 45,764 36,390
==========================================================================================================================
Net income - - - - -
Cash dividends ($.64 per share) - - - - -
Sale of stock under employee
stock purchase plan (Note 5) - 553 - - -
Stock options exercised net of shares
exchanged in lieu of cash (Note 5) - 53 - - -
Deferred compensation liability of shares held
in grantor trust (Note 5) - - - - -
Tax benefit from early disposition by employees
of stock issued under stock option plans
and exercise of non-qualified stock options - - - - 721
Amortization of difference between market price
and option price for 1997 option plan (Note 5) - - - - 417
Treasury stock purchased - (1,656) - - -
==========================================================================================================================
Balance, July 31, 1999 45,764 (3,546) $ - $ 45,764 $ 37,528
==========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
30
<PAGE> 31
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, Continued
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
UNREALIZED COST OF
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) DEFERRED RETAINED SECURITY TREASURY
FOR THE YEARS ENDED JULY 31, 1999, 1998 and 1997 COMPENSATION EARNINGS GAIN/(LOSS) STOCK
========================================================================================================================
<S> <C> <C> <C> <C>
Balance, July 31, 1996 $ - $ 437,459 $ (220) $ (5,176)
========================================================================================================================
Net income - 81,282 - -
Cash dividends ($.56 per share) - (23,993) - -
Sale of stock under employee
stock purchase plan (Note 5) - (291) - 8,939
Stock options exercised net of shares
exchanged in lieu of cash (Note 5) - (2,738) - 6,572
Stock transferred to profit sharing and
retirement fund - - - 5,998
Tax benefit from early disposition by employees
of stock issued under stock option plans
and exercise of non-qualified stock options - - - -
Amortization of difference between market price
and option price for 1997 option plan (Note 5) - - - -
Treasury stock purchased - - - (95,272)
Unrealized security gain (Note 10) - - 125 -
========================================================================================================================
Balance, July 31, 1997 - 491,719 (95) (78,939)
========================================================================================================================
Net income - 74,208 - -
Cash dividends ($.62 per share) - (26,823) - -
Sale of stock under employee
stock purchase plan (Note 5) - (326) - 12,641
Stock options exercised net of shares
exchanged in lieu of cash (Note 5) - (1,027) - 2,891
Stock transferred to profit sharing and
retirement fund - - - 5,567
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 - - - (14,592)
Unrealized security gain (Note 10) - - 95 -
========================================================================================================================
Balance, July 31, 1998 - 537,751 - (72,432)
========================================================================================================================
Net income - 76,069 - -
Cash dividends ($.64 per share) - (26,904) - -
Sale of stock under employee
stock purchase plan (Note 5) - (4,477) - 15,910
Stock options exercised net of shares
exchanged in lieu of cash (Note 5) - (1,047) - 1,525
Deferred compensation liability of shares held
in grantor trust (Note 5) 3,883 - - -
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 - - - (30,003)
========================================================================================================================
Balance, July 31, 1999 $ 3,883 $ 581,392 $ - $ (85,000)
========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
31
<PAGE> 32
CONSOLIDATED BALANCE SHEETS
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS) JULY 31, 1999 and 1998 1999 1998
============================================================================================================
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 8,033 $ 3,501
Accounts receivable, less allowance for doubtful accounts
of $5,582 in 1999 and $5,195 in 1998 292,095 260,324
Inventories (Note 3) 107,540 120,196
Prepaid taxes 37,422 34,818
Advances and prepaid expenses 3,284 7,920
- ------------------------------------------------------------------------------------------------------------
Total current assets 448,374 426,759
- ------------------------------------------------------------------------------------------------------------
Property, plant and equipment, at cost:
Land and buildings 177,983 182,399
Machinery, equipment, furniture and fixtures 663,507 623,343
Leasehold improvements 5,408 1,846
- ------------------------------------------------------------------------------------------------------------
Total property, plant and equipment 846,898 807,588
Less: reserves for depreciation and amortization (409,891) (353,181)
- ------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 437,007 454,407
Intangible assets arising from acquisitions 306,117 290,568
Cash surrender value of life insurance 58,796 48,064
System development costs 43,337 31,887
Other assets 4,028 5,778
- ------------------------------------------------------------------------------------------------------------
Total Assets $ 1,297,659 $ 1,257,463
============================================================================================================
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term debt $ 2,290 $ 1,934
Short-term notes payable 21,222 35,718
Accounts payable 85,577 77,057
Dividends payable 6,808 6,707
Accrued compensation and related expenses 42,675 37,891
Other accrued expenses 17,720 14,822
Contribution to profit sharing and retirement fund (Note 9) 15,573 15,773
- ------------------------------------------------------------------------------------------------------------
Total current liabilities 191,865 189,902
- ------------------------------------------------------------------------------------------------------------
Deferred compensation and retirement benefits (Note 8) 31,992 30,552
Deferred income taxes (Note 7) 64,438 51,971
Long-term debt (Note 4) 416,653 428,224
Other long-term liabilities 9,144 9,341
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 37,528 36,390
Deferred Compensation (Note 5) 3,883 -
Retained earnings 581,392 537,751
Treasury stock (85,000) (72,432)
- ------------------------------------------------------------------------------------------------------------
Total stockholders' equity 583,567 547,473
- ------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 1,297,659 $ 1,257,463
============================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
32
<PAGE> 33
CONSOLIDATED STATEMENTS OF CASH FLOW
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED JULY 31, 1999, 1998 AND 1997 1999 1998 1997
================================================================================================================
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 76,069 $ 74,208 $ 81,282
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 75,431 67,479 49,205
Deferred taxes 12,467 1,053 409
(Gain) loss on disposal of property (770) 676 (21)
Changes in assets and liabilities, net of effect
of acquisitions and divestitures:
Accounts receivable (34,720) 1,808 (11,433)
Inventories 11,808 (3,996) (9,276)
Prepaid taxes (2,222) (18,084) (1,218)
Advances and prepaid expenses 3,501 11,841 1,459
Other assets (34,169) (22,220) (15,588)
Accounts payable and other liabilities 19,913 (10,085) 1,009
Deferred compensation and retirement benefits 1,440 1,723 4,079
Realized security loss - - 106
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 128,748 104,403 100,013
- ----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (50,311) (59,632) (39,225)
Purchases of short-term investments - - (14,000)
Proceeds from sales of short-term investments - 1,866 51,420
Proceeds from disposal of property 10,254 7,400 313
Net construction funds held by trustee 1,280 - 1,044
Other capital investments, including acquisitions/divestitures (14,803) (451,139) (40,981)
- ----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (53,580) (501,505) (41,429)
- ----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Cash dividends paid (26,802) (26,146) (22,864)
Amounts paid on long-term debt (76,461) (18,326) -
Net (retirements of)/proceeds from issuance of short-term debt (14,496) 7,218 28,500
Proceeds from issuance of long-term debt 64,075 416,884 1,000
Proceeds from issuance of common stock 13,051 21,397 20,602
Purchase of treasury stock (30,003) (14,592) (95,272)
- ----------------------------------------------------------------------------------------------------------------
Net cash (used in)/provided by financing activities (70,636) 386,435 (68,034)
- ----------------------------------------------------------------------------------------------------------------
Net changes in cash and cash equivalents 4,532 (10,667) (9,450)
Cash and cash equivalents at beginning of year 3,501 14,168 23,618
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 8,033 $ 3,501 $ 14,168
================================================================================================================
Supplemental disclosure:
Interest paid (net of interest capitalized) $ 21,177 $ 21,887 $ 917
Income taxes paid 36,342 60,782 51,712
================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
33
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1999
1. SUMMARY OF SIGNIFICANT 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.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities and reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those
estimates.
RECLASSIFICATIONS: Certain prior year amounts have been reclassified to conform
to the 1999 presentation.
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.
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>
1999 $ 32,245 $ 1,236
1998 24,821 1,355
1997 3,940 1,321
================================================================================
</TABLE>
Amortization expense for interest capitalized was $1,035,000 in 1999; $903,000
in 1998; and $912,000 in 1997.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is recorded at
historical cost. 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>
34
<PAGE> 35
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
$7,927,000 in 1999, $5,857,000 in 1998 and $1,205,000 in 1997. The unamortized
balance relating to Graphic Industries was $220,360,000 at July 31, 1999 and
$221,375,000 at July 31, 1998. The balance relating to all other acquisitions
was $85,757,000 at July 31, 1999, and $69,193,000 at July 31, 1998.
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 $5,410,000 in
fiscal 1999; $4,238,000 in fiscal 1998; and $3,029,000 in fiscal 1997. 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 and was amortized over two to five 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. All Platforms' software was completely amortized as of July 31,
1998. Amortization of Platforms' software was $0 in fiscal 1999; $1,210,000 in
fiscal 1998; and $2,229,000 in fiscal 1997. The unamortized balance of all
capitalized computer software was $43,337,000 in 1999 and $31,887,000 in 1998.
In fiscal 2000, the Company will adopt Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". The statement requires that certain costs, such as preliminary
project costs and training, related to internally developed software must be
expensed as incurred. Based on current circumstances, the Company does not
believe that application of Statement of Position 98-1 will have a material
effect on the Company's financial condition or results of operations.
LONG-LIVED ASSETS: In accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
the Company reviews its long-lived assets for impairments when events or changes
in circumstances indicate the carrying amount may not be recoverable. As a
result of this review, the Company does not believe any impairment write-down is
necessary.
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
$167,000 in 1999 and $195,000 in 1998.
FINANCIAL INSTRUMENTS: The Company had used a treasury rate lock agreement to
modify interest rate exposure with the intent to reduce risk. The Company had
only limited involvement with derivative financial instruments and does not use
them for trading purposes.
The Company accounts for financial instruments under SFAS No. 80,
"Accounting for Futures Contracts". Under this standard, for instruments that
properly qualify for hedge accounting, the gain or loss realized on an interest
rate hedge is deferred and amortized as a yield adjustment over the life of the
related debt issuance. Amortization begins at the time of the debt issuance.
35
<PAGE> 36
NET INCOME PER SHARE: The Company computes earnings per share in accordance with
SFAS No. 128, "Earnings per Share". Accordingly, basic earnings per share
amounts are computed based on the weighted-average number of common shares
outstanding. Diluted earnings per share amounts are based on the increased
number of common shares that would be outstanding assuming the exercise of
certain outstanding stock options, when such conversion would have the effect of
reducing earnings per share. See Note 11 for the computation of earnings per
share.
RECENT ACCOUNTING PRONOUNCEMENTS: In June 1997, the Financial Accounting
Standards Board issued SFAS No. 130, "Reporting Comprehensive Income". The
provisions of SFAS No. 130 were adopted in the first quarter of fiscal 1999.
This statement establishes standards for the reporting and display of
comprehensive income and its components in a full set of financial statements.
This statement is intended to report a measure of all changes in shareholders'
equity that result from either recognized transactions and other economic events
from non-owner sources, excluding capital stock transactions, that impact
shareholders' equity. Implementation of this disclosure standard has not
affected the Company's financial position, results of operations or the manner
in which financial information is currently presented.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". The
provisions of SFAS No. 131, which have been adopted by the Company for fiscal
1999, establishes standards for reporting information on operating segments
based on a "Management Approach". This approach requires companies to report, by
segment, financial and descriptive information that is used by management for
making decisions for allocating resources and assessing performance. The
adoption did not affect the Companies financial condition or results of
operations but did affect the disclosure of segment reporting. See Note 12 for
the required disclosure.
In February 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employers' Disclosure about Pensions and Other Postretirement Benefits",
which standardizes the disclosure requirements for pensions and other
postretirement benefits. SFAS No. 132 requires additional information on changes
in the benefit obligations and fair values of plan assets to be disclosed. The
adoption did not affect the Company's financial condition or results of
operations. The Company adopted this statement for fiscal year-end 1999. See
Note 8 for the required disclosure.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". This standard
requires that an entity recognize derivatives as either assets or liabilities on
its balance sheet and measure those instruments at fair value. As a result of
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of SFAS No. 133", the Company will adopt this
standard in the first quarter of fiscal 2001. Based on current circumstances,
the Company does not believe that application of SFAS No. 133 will have a
material effect on the Company's financial condition or results of operations.
In April 1998, the American Institute of Certified Public Accountants issued
SOP 98-5, "Reporting on the Costs of Start-up Activities", which requires costs
of start-up activities and organization costs to be expensed as incurred. The
Company will adopt this standard in the first quarter of fiscal 2000. Based on
current circumstances, the Company does not believe that application of SOP 98-5
will have a material effect on the Company's financial condition or results of
operations.
36
<PAGE> 37
2. ACQUISITION OF GRAPHIC INDUSTRIES:
On November 3, 1997, a wholly-owned subsidiary of the Company completed a tender
offer for all of the shares of common stock of Graphic Industries, Inc.
("Graphic"), a commercial printing company. On December 22, 1997, the
wholly-owned subsidiary was merged with and into Graphic, with Graphic becoming
a wholly-owned subsidiary of the Company as a result of the merger. The
transaction has been accounted for as a purchase. The Company acquired
13,405,828 shares of common stock at a purchase price of $21.75 per share. The
purchase price of $437.8 million is comprised of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
================================================================================
<S> <C>
Market value of shares, including options exercised
and convertible debt $ 308,306
Assumed debt, net of acquired cash 123,449
Transaction costs 6,075
- --------------------------------------------------------------------------------
Total purchase price $ 437,830
================================================================================
</TABLE>
The results of operations for Graphic are included in the income statement of
the Company for the last 3 quarters of fiscal year 1998 and all of fiscal year
1999. Goodwill in the amount of $230.5 million, based on the final allocation of
the purchase price, is being amortized on a straight-line basis over 40 years.
The pro forma financial results of operations below assume the transaction
was completed at the beginning of the periods presented and include adjustments
for increased interest costs associated with the transaction, as well as
increased depreciation, amortization, and effective income tax rates to reflect
the effects of the purchase price allocation:
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997
================================================================================
<S> <C> <C>
Net sales $ 1,473,494 $ 1,363,337
Net income 72,718 81,540
Net income per share (basic) 1.68 1.88
Net income per share (diluted) 1.68 1.87
================================================================================
</TABLE>
3. 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.
Inventories at July 31, were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1999 1998
================================================================================
<S> <C> <C>
Raw materials $ 18,043 26,200
Work in process 16,948 19,539
Finished products 72,549 74,457
- --------------------------------------------------------------------------------
$ 107,540 $ 120,196
================================================================================
</TABLE>
37
<PAGE> 38
At July 31, 1999 and 1998, the cost of inventories aggregating $54,451,000
and $59,542,000, respectively, was determined on the LIFO method.
Inventories would have been $11,800,000 higher in fiscal 1999 and
$12,985,000 higher in fiscal 1998, if the FIFO method had been used for all
inventories.
4. FINANCING ARRANGEMENTS:
SHORT-TERM DEBT: Unsecured money market lines of $125 million were available as
of July 31, 1999. Total borrowings outstanding as of that date were $21.0
million, with a weighted average interest rate of 5.38%. The remaining $0.2
million represents payments due to the former principals of an acquired
business.
LONG-TERM DEBT: Long-term debt consisted of the following at July 31:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1999 1998
================================================================================
<S> <C> <C>
Average 5.49% revolving credit
agreement due 2003 $ 200,000 $ 396,000
8.93% senior term notes due 2009 121,762 -
8.31% senior term notes due 2006 60,648 -
Average 3.32% floating rate industrial
revenue bonds due 2007 7,000 7,000
Average 3.22% floating rate industrial
revenue bonds due 2009 8,000 8,000
Average 3.33% floating rate industrial
revenue bonds due 2019 8,500 8,500
8.43% lease agreement due 2004 1,736 -
5.10% promissory note due 2004 2,300 -
5.80% promissory note due 1999 - 1,000
6.00% promissory note due 2001 667 1,000
Average 8.77% property mortgages
due 2003 - 2013 7,911 7,755
Other 419 903
- --------------------------------------------------------------------------------
$ 418,943 $ 430,158
Less-current portion 2,290 1,934
- --------------------------------------------------------------------------------
$ 416,653 $ 428,224
================================================================================
</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, after adjusting for the $17.6 million
deferred expense related to the treasury lock, 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.
38
<PAGE> 39
Principal payments due on long-term debt, exclusive of the treasury lock of
$17.6 million, are as follows: $2,290,000 in 2000, $1,953,000 in 2001, $973,000
in 2002, $201,026,000 in 2003, and $230,291,000 in 2004 and beyond.
In fiscal 1999, the Company offered $200 million of Senior Notes to
institutional investors in a private placement. The transaction closed and was
funded on January 15, 1999. The proceeds of the note were used to pay down
borrowings under the revolving credit agreement ("Credit Facility"). The Company
settled the treasury rate lock agreement related to the issuance of the $200
million Senior Notes. A settlement of $18.3 million relating to the treasury
lock expense plus fees related to the transaction are being amortized using the
effective interest method over the term of the 7 and 10 year Notes and have been
included in the rates noted above. The most restrictive covenant requires the
Company to maintain a debt to capitalization ratio not greater than 65%.
The Company has a $500 million revolving Credit Facility. The borrowings
under the Credit Facility were $200 million and $396 million as of July 31, 1999
and 1998, respectively. The borrowings under the Credit Facility are classified
as long-term debt since the Company has the intent and ability to carry that
debt long-term. Under the most restrictive of the covenants, the Company must
maintain a minimum interest coverage of at least 2.5 to 1, and a funded debt to
EBITDA ratio not greater than 3 to 1.
The Company was in compliance with all debt covenants at July 31, 1999 and
1998.
The maximum amount as authorized by the Board of Directors for total
borrowings is limited to $600 million. The Company has no compensating balance
requirements.
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"). The 1989 Plan expired on
September 12, 1999.
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 than 100% of the
market value of the stock at the date of grant. For Non-Qualified Options, the
grant price may not be less than 85% of the market value; however, to date no
options have been granted at less than 100% of market value. The option price
may be paid in cash or by exchanging previously acquired Company common stock
with a market value equal to the purchase price. Options 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.
39
<PAGE> 40
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) 1999 1998 1997
=====================================================================================
<S> <C> <C> <C>
Net income:
As reported $76,069 $74,208 $81,282
Pro forma 71,857 69,426 78,333
- -------------------------------------------------------------------------------------
Earnings per share (Basic):
As reported 1.80 1.72 1.88
Pro forma 1.71 1.60 1.81
Earnings per share (Diluted):
As reported 1.80 1.71 1.86
Pro forma 1.70 1.60 1.79
=====================================================================================
</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
OPTIONS EXERCISE PRICE
=====================================================================================
<S> <C> <C>
Outstanding at July 31, 1997 1,496,843 $ 23.94
- -------------------------------------------------------------------------------------
Granted 380,541 34.19
Forfeited (21,800) 31.61
Exercised (124,539) 18.42
=====================================================================================
Outstanding at July 31, 1998 1,731,045 $ 26.49
- -------------------------------------------------------------------------------------
Granted 581,750 17.39
Forfeited (98,800) 27.96
Exercised (75,132) 13.48
- -------------------------------------------------------------------------------------
Outstanding at July 31, 1999 2,138,863 $ 24.41
=====================================================================================
<CAPTION>
JULY 31 JULY 31
1999 1998
- -------------------------------------------------------------------------------------
<S> <C> <C>
Options available for future grants 647,646 1,130,596
Options exercisable 840,913 658,825
=====================================================================================
</TABLE>
40
<PAGE> 41
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 from the date of
grant. 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 is being reflected as expense in the
Company's operations statement over the vesting period. This expense of $417,000
is included in fiscal 1999 and $432,000 is included in fiscal 1998. The
remaining options granted in 1997 did not have performance vesting provisions.
The Employee Stock Purchase Plan, adopted in 1974, expires on December 31,
2004. A total of 6,600,000 shares of common stock have been reserved for
purchase by employees through semi-annual offerings. The option price is the
lower of 85% of the market price of the shares on the commencement date or the
termination date of each offering period. Employees participate in the plan
through payroll deductions and the plan qualifies for certain tax advantages
under section 423 of the Internal Revenue Code of 1986, as amended. Options were
exercised to purchase 552,552 shares at $20.69 in fiscal 1999, 456,880 shares at
$22.17 in fiscal 1998 and 324,002 shares at $25.65 in fiscal 1997. There were
1,544,064 shares available at July 31, 1999 and 2,096,616 shares available at
July 31, 1998 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 4.6% to 6.1% depending
on the expected life of the option; expected dividend yield of 2.4% to 3.9%;
expected lives of 5.3 years for options granted through the stock option plan
and 0.5 years for options granted through the Employee Stock Purchase Plan; and
expected volatility of 27.6% to 30.5% for options granted through the stock
option plan, and 40.6% to 46.2% for options granted through the employee stock
purchase plan.
During fiscal year 1999, previously earned and accrued deferred bonus
amounts were converted into 198,241 shares of the Company's common stock and
placed into a grantor trust, a "Rabbi Trust", for the benefit of certain
executives. The value of these shares is included as treasury stock within the
equity section of the financial statements, however, the shares are considered
outstanding and incorporated into the computation of both basic and diluted
earnings per share. The weighted-average number of these shares included in the
earnings per share calculation at year-end is 50,000. The balance of $3.9
million of deferred compensation is also included in the equity section of the
balance sheet and represents the total fixed liability that the 198,241 shares
represent. Dividends accrued on these "Rabbi Trust" shares are recognized as
compensation expense in the income statement. These shares will be remitted to
the executives upon retirement or termination, or their beneficiaries upon
death.
6. LEASE COMMITMENTS:
Total rent expense for manufacturing facilities, sales offices and equipment
amounted to $15,175,000 in 1999, $11,797,000 in 1998 and $6,225,000 in 1997. The
minimum future rental commitments under non-cancelable lease arrangements are
$9,722,000 in 2000; $8,197,000 in 2001; $6,613,000 in 2002; $5,326,000 in 2003;
and $17,662,000 for 2004 and beyond.
41
<PAGE> 42
7. INCOME TAXES:
The significant deferred tax assets and liabilities at July 31 were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1999 1998
========================================================================================
<S> <C> <C>
Deferred tax liabilities:
Accelerated depreciation $ 52,390 $ 48,201
Software development 16,328 11,934
Capitalized interest 1,833 1,903
Other 8,577 8,187
- ----------------------------------------------------------------------------------------
Total Deferred Tax Liabilities 79,128 70,225
- ----------------------------------------------------------------------------------------
Deferred tax assets:
Deferred compensation 8,992 9,370
Postretirement benefits 1,432 1,252
Inventory capitalization 6,248 4,206
Accrued vacation 4,901 4,423
Supplemental profit sharing 2,116 1,917
Bad debt reserve 2,211 2,301
Other 4,219 9,160
- ----------------------------------------------------------------------------------------
Total Deferred Tax Assets 30,119 32,629
- ----------------------------------------------------------------------------------------
Net Deferred Tax Liabilities $ 49,009 $ 37,596
========================================================================================
</TABLE>
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
1999 1998 1997
========================================================================================
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
State and local income taxes 4.2 4.6 4.4
Goodwill amortization 2.2 1.7 0.3
Tax credits and other (1.4) (1.4) (0.2)
- ----------------------------------------------------------------------------------------
Effective tax rate 40.0% 39.9% 39.5%
========================================================================================
</TABLE>
8. POSTRETIREMENT BENEFITS:
Effective July 31, 1999, the Company adopted SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits". The information
for 1999, 1998 and 1997 has been presented in conformity with the requirements
of SFAS No. 132.
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 retired as of
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.
42
<PAGE> 43
The net accrual basis expense for postretirement benefits as of July 31 was as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1999 1998 1997
===========================================================================================
<S> <C> <C> <C>
Components of net periodic
postretirement benefit costs:
- -------------------------------------------------------------------------------------------
Service cost $ 6 $ 11 $ 10
Interest cost 266 253 278
Loss due to change in actuarial assumptions 985 229 -
- -------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $1,257 $ 493 $ 288
===========================================================================================
</TABLE>
The increase in the actuarial loss in fiscal 1999 is primarily related to
the impact of employees between the ages of 50 and 54 who have 20 years of
service as of December 31, 1993 and who elected to retire as of December 31,
1998. The number of employees that elected to retire was greater than the
estimate used to calculate the accumulated postretirement benefit.
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) 1999 1998
===========================================================================================
<S> <C> <C>
Change in benefit obligation:
- -------------------------------------------------------------------------------------------
Projected benefit obligation, beginning of year $ 3,144 $ 3,483
Service cost 6 11
Interest cost 266 253
Actuarial loss 985 229
Benefits paid (840) (832)
- -------------------------------------------------------------------------------------------
Projected benefit obligation, end of year $ 3,561 $ 3,144
- -------------------------------------------------------------------------------------------
Change in plan assets:
- -------------------------------------------------------------------------------------------
Plan assets at fair value, beginning of year $ - $ -
Employer contribution 840 832
Benefits paid (840) (832)
- -------------------------------------------------------------------------------------------
Plan assets at fair value, end of year $ - $ -
- -------------------------------------------------------------------------------------------
Funded status of plan:
- -------------------------------------------------------------------------------------------
Funded status $ 3,561 $ 3,144
- -------------------------------------------------------------------------------------------
Net amount recognized on balance sheet $ 3,561 $ 3,144
- -------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE> 44
For financial reporting purposes, the actuarial computations assumed a
discount rate of 7.5% in 1999 and 7.0% in 1998 and 1997. The assumed health care
cost trend rate used in measuring the benefit obligations for pre-age 65
employees is 6.5% in 1999 declining to 5% by the year 2002 and thereafter. For
post-age 65 employees the health care cost trend rate is 6% in 1999 declining to
5% in 2001 and thereafter. 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 $14,000 and
the postretirement benefit obligation as of July 31, 1999 by $185,000. A one
percentage point decrease in the assumed health care cost trend would decrease
the aggregate of the service cost and interest cost components of the annual
postretirement expense by $14,000 and the postretirement benefit obligation as
of July 31, 1999 by $176,000.
9. PROFIT SHARING AND RETIREMENT PLAN:
The Company has a contributory profit sharing and retirement plan covering most
employees, excluding the employees that were part of the Graphic acquisition.
The plan provides for Company contributions based on 19% of earnings excluding
Graphics' results before profit sharing contributions. Graphic employees are
covered under separate profit sharing and retirement plan agreements.
Substantially all of the Graphic employees are covered under a plan which
provides for Company contributions based on 50% of the first 4% of the covered
employees contribution.
Company contributions to all plans charged to operations were $17,118,000 in
fiscal 1999, $17,018,000 in fiscal 1998, and $17,620,000 in fiscal 1997.
10. 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 has had no impact on
shareholders' equity at July 31, 1999 or July 31, 1998.
The long-term investment of $1.4 million and $1.6 million at July 31, 1999
and July 31, 1998, respectively, is included in the `Other Assets' section of
the balance sheet. There is no unrealized holding gain or loss on this
investment.
Proceeds on the sale of securities were $0 for fiscal 1999, and $1.9 million
for fiscal 1998.
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.
44
<PAGE> 45
11. EARNINGS PER SHARE:
Below is the computation of basic and diluted earnings per share for the fiscal
years ended July 31, 1999, 1998, and 1997.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998 1997
================================================================================================================
<S> <C> <C> <C>
COMPUTATION OF BASIC EARNINGS PER SHARE
Net income $ 76,069 $ 74,208 $ 81,282
Weighted-average number of shares outstanding 42,118 43,213 43,322
Weighted-average number of shares held in grantor trust (Note 5) 50 - -
- ----------------------------------------------------------------------------------------------------------------
Shares applicable to basic earnings 42,168 43,213 43,322
Basic earnings per share 1.80 1.72 1.88
- ----------------------------------------------------------------------------------------------------------------
COMPUTATION OF DILUTED EARNINGS PER SHARE
Net income $ 76,069 $ 74,208 $ 81,282
Shares applicable to basic earnings 42,168 43,213 43,322
Add net shares from assumed exercise of options 207 184 343
- ----------------------------------------------------------------------------------------------------------------
Shares applicable to diluted earnings 42,375 43,397 43,665
Diluted earnings per share 1.80 1.71 1.86
================================================================================================================
</TABLE>
12. SEGMENT REPORTING:
As described in Note 1, Summary of Significant Accounting Policies, the Company
adopted SFAS No. 131 for fiscal year-ended 1999. The Company operates in two
business segments. Each segment offers distinctive products and services and are
managed separately because of their unique production, distribution, and
marketing requirements. The Company's two reportable segments are Forms and
Labels, and Print Management.
The principal products and services supplied by the Forms and Labels Segment
include the design, manufacture and sales of both paper based and electronic
business forms, the manufacture of both electronic data processing (EDP) labels
and prime labels, and the manufacture and distribution of a standard line of
office products. The principal products and services supplied by the Print
Management Segment include the design and manufacture of high-color, high
quality marketing and promotional materials, and the manufacture of direct
response printing materials.
The Company's accounting policies for the segments are the same as those
described in the Summary of Significant Accounting Policies. Management
evaluates segment performance based on segment profit or loss before interest
and income taxes. Net interest expense and income taxes are not allocated to
segments. Transfers between segments, which are not significant, are accounted
for at standard cost. The Company has no significant non-cash items other than
depreciation and amortization.
45
<PAGE> 46
Summarized segment data and a reconciliation to the consolidated totals for
fiscal years 1999, 1998, and 1997 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR 1999 EXTERNAL DEPRECIATION & INCOME BEFORE SEGMENT CAPITAL
SALES AMORTIZATION INCOME TAXES ASSETS(A) EXPENDITURES
(AMOUNTS IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Forms and Labels Segment $ 763,791 $ 32,712 $ 108,648 $ 471,884 $ 33,755
Print Management Segment 766,732 42,719 47,300 721,510 16,556
- ---------------------------------------------------------------------------------------------------------------
Segment Total 1,530,523 75,431 155,948 1,193,394 50,311
- ---------------------------------------------------------------------------------------------------------------
Corporate - - - 104,265 -
Net Interest Expense - - (29,167) - -
- ---------------------------------------------------------------------------------------------------------------
Consolidated $1,530,523 $ 75,431 $ 126,781 $1,297,659 $ 50,311
===============================================================================================================
<CAPTION>
FISCAL YEAR 1998 EXTERNAL DEPRECIATION & INCOME BEFORE SEGMENT CAPITAL
SALES AMORTIZATION INCOME TAXES ASSETS(A) EXPENDITURES
(AMOUNTS IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Forms and Labels Segment $ 754,167 $ 33,243 $ 99,182 $ 457,871 $ 25,875
Print Management Segment 601,885 34,236 45,566 708,859 33,757
- ---------------------------------------------------------------------------------------------------------------
Segment Total 1,356,052 67,479 144,748 1,166,730 59,632
- ---------------------------------------------------------------------------------------------------------------
Corporate - - - 90,733 -
Net Interest Expense - - (21,358) - -
- ---------------------------------------------------------------------------------------------------------------
Consolidated $1,356,052 $ 67,479 $ 123,390 $1,257,463 $ 59,632
===============================================================================================================
<CAPTION>
FISCAL YEAR 1997 EXTERNAL DEPRECIATION & INCOME BEFORE SEGMENT CAPITAL
SALES AMORTIZATION INCOME TAXES ASSETS(A) EXPENDITURES
(AMOUNTS IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Forms and Labels Segment $ 693,574 $ 33,530 $ 115,862 $ 424,546 $ 22,803
Print Management Segment 212,716 15,675 19,232 227,628 16,422
- ---------------------------------------------------------------------------------------------------------------
Segment Total 906,290 49,205 135,094 652,174 39,225
- ---------------------------------------------------------------------------------------------------------------
Corporate - - - 68,268 -
Net Interest Expense - - (743) - -
- ---------------------------------------------------------------------------------------------------------------
Consolidated $ 906,290 $ 49,205 $ 134,351 $ 720,442 $ 39,225
===============================================================================================================
</TABLE>
46
<PAGE> 47
(A) Corporate represents general corporate assets that are not allocated
to the segments. This amount includes items such as cash, prepaid
taxes and cash surrender value of life insurance.
Fiscal Years 1999 and 1998 include the acquisition of Graphic
Industries, which was effective November 1997.
GEOGRAPHIC INFORMATION:
Wallace attributes substantially all of its revenues to customers within the
United States. Long-lived assets are domiciled within the United States.
MAJOR CUSTOMER INFORMATION:
Wallace is not dependent upon any 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.
47
<PAGE> 48
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, 1999
and 1998, 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, 1999. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three Fiscal years in the period
ended July 31, 1999 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois
September 7, 1999
48
<PAGE> 49
<TABLE>
<CAPTION>
QUARTERLY RESULTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
===============================================================================================================
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
===============================================================================================================
1999
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $384,915 $376,306 $384,731 $384,571
Cost of goods sold (excluding depreciation) 267,136 258,128 262,238 264,415
Operating income 35,655 38,795 42,172 39,326
Income before income taxes 28,382 31,659 34,309 32,431
Net income 17,029 18,995 20,585 19,460
Net income per share:
Basic $ .40 $ .45 $ .49 $ .46
Diluted $ .40 $ .45 $ .49 $ .46
- ---------------------------------------------------------------------------------------------------------------
1998
- ---------------------------------------------------------------------------------------------------------------
Net sales $246,112 $366,356 $375,649 $367,935
Cost of goods sold (excluding depreciation) 155,206 246,951 257,624 256,146
Operating income 34,425 41,495 37,540 31,288
Income before income taxes 34,724 34,705 30,260 23,701
Net income 21,008 20,823 18,156 14,221
Net income per share:
Basic $ .49 $ .48 $ .42 $ .33
Diluted $ .48 $ .48 $ .41 $ .33
===============================================================================================================
</TABLE>
49
<PAGE> 50
Wallace Computer Services, Inc. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
For the years ended July 31
(Amounts in Thousands)
Total Reserve for Bad Debts
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- --------
<S> <C> <C> <C>
Balance at Beginning of Year $ 5,195 $ 3,481 $ 3,215
Provision for Doubtful Accounts 2,341 700 1,189
Accounts Written Off Against Allowance (2,709) (863) (1,180)
Recoveries Credited to Allowance 755 182 257
Other Credits (1) -- 1,695 --
------- ------- -------
Balance at End of Year $ 5,582 $ 5,195 $ 3,481
======= ======= =======
</TABLE>
(1) Credits from the acquisition of Graphic Industries, Inc. as of
November 3, 1997.
50
<PAGE> 51
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
(previously filed as part of Exhibit 3 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended July 31, 1997, and
incorporated herein by reference to such Report).
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
July 1, 1998 (previously filed as part of Exhibit 10 to
the Registrant's Annual Report on Form 10-K for the fiscal year
ended July 31, 1998, and incorporated herein by reference to such
Report).
4.1A Indenture between Wallace Computer Services, Inc. and Bank of New
York as Indenture Trustee (previously filed as Exhibit 4.7 to
Amendment No. 1 to Form S-3 Registration Statement, Registration
No. 333-46807, dated April 10, 1998 and incorporated herein by
reference to such Report).
4.1B First Supplemental Indenture between Wallace Computer Services,
Inc. and Bank of New York as Indenture Trustee, dated January 15,
1999, filed herewith.
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).
10.2 The Wallace Computer Services, Inc. 1997 Stock Incentive Plan
(previously filed as Exhibit 10.3 to the Company's Quarterly
Report on Form 10-Q for the quarter ended January 31, 1997, and
incorporated herein by reference to such Report).
51
<PAGE> 52
Exhibit Index, Continued
Exhibit
Number Description
------ -----------
10.3 The Wallace Computer Services, Inc. Amended and Restated Executive
Incentive Plan, dated as of August 1, 1997 (previously filed as
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q
dated January 31, 1998, and incorporated herein by reference to
such Report).
10.4 Form of Deferred Compensation/Capital Accumulation Plan of the
Registrant for each of the years 1988, 1989, 1990, 1991, 1993,
1994, 1995, 1996, 1997, 1998, and 1999 (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).
10.5 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).
10.6A 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).
10.6B 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).
10.7 The Wallace Computer Services, Inc. Annual Bonus Plan (previously
filed as Appendix A to the Proxy Statement of the Registrant for
Annual Meeting of Stockholders filed on October 6, 1997, and
incorporated herein by reference to such Statement).
10.8 Form of Deferred Compensation/Capital Accumulation Plan for
Directors of the Registrant for each of the years 1988, 1989,
1993, 1994, 1995, 1996, 1997, 1998, and 1999 (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).
10.9 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).
10.10A 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).
52
<PAGE> 53
Exhibit Index, Continued
Exhibit
Number Description
------ -----------
10.10B 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).
10.11A Form of Indemnification Agreement with Director between the
Registrant and each of the following: Robert J. Cronin, Richard F.
Doyle, William N. Lane III, Bettye Martin Musham, Andrew J.
McKenna, Jr., John C. Pope, and Neele E. Stearns, (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).
10.11B 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 Andrew J. McKenna, 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).
10.11C Form of Indemnification Agreement with Director (Member of Profit
Sharing Committee) between the Registrant and Andrew J. McKenna,
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,
1996, and incorporated herein by reference to such Report).
10.12A Form of Indemnification Agreement with Officer between the
Registrant and each of the following: Michael A. Anderson, Thomas
G. Brooker, Steven L. Carson, Robert J. Cronin, Michael O.
Duffield, Douglas W. Fitzgerald, Gary K. Haman, Robert J.
Kelderhouse, Michael T. Leatherman, Marc A. Loomer, William J.
Montanez, 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).
10.12B 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 and Michael T. Leatherman (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).
10.12C Form of Addendum to Indemnification Agreement with Officer (Member
of Profit Sharing Committee) between the Registrant and Michael O.
Duffield, and Robert J. Kelderhouse (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).
10.13 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, Michael O. Duffield, and Robert
J. Kelderhouse (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).
53
<PAGE> 54
Exhibit Index, Continued
Exhibit
Number Description
------ -----------
10.14A Agreement effective as of July 1, 1997 between Registrant and
Robert J. Cronin (Employment Agreement), (previously filed as part
of Exhibit 10 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended July 31, 1997, and incorporated herein by
reference to such Report).
10.14B Agreement effective as of July 1, 1997 between Registrant and
Robert J. Cronin (Change of Control Agreement), (previously filed
as part of Exhibit 10 to the Registrant's Annual Report on Form
10-K for the fiscal year ended July 31, 1997, and incorporated
herein by reference to such Report).
10.15A Agreement effective as of September 9, 1998 between Registrant and
Michael O. Duffield (Employment Agreement), (previously filed as
part of Exhibit 10 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended July 31, 1998, and incorporated herein
by reference to such Report).
10.15B Agreement effective as of September 9, 1998 between Registrant and
Michael O. Duffield (Change of Control Agreement), (previously
filed as part of Exhibit 10 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended July 31, 1998, and
incorporated herein by reference to such Report).
10.16A $500,000,000 Credit Agreement dated as of October 31, 1997, among
Wallace Computer Services, Inc., Bank of America National Trust
and Savings Association, as Administrative Agent and the other
financial institutions party thereto, (previously filed as Exhibit
10.1 to the Registrant's Quarterly Report on Form 10-Q dated
October 31, 1997, and incorporated herein by reference to such
Report).
10.16B First Amendment Credit Agreement dated June 5, 1998 among Wallace
Computer Services, Inc., Bank of America National Trust and
Savings Association, as Administrative Agent and the other
financial institutions party thereto amending the $500,000,000
Credit Agreement dated as of October 31, 1997, (previously filed
as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q
dated April 30, 1998, and incorporated herein by reference to such
Report).
10.17 $200,000,000 Purchase Agreement dated as of January 15, 1999 among
Wallace Computer Services, Inc. and various institutional
investors (previously filed on Registrant's current report) on
Form 8-K dated January 20, 1999, and incorporated herein by
reference to such Report).
10.18 Benefit Trust Agreement between Wallace Computer Services, Inc.
and the Northern Trust Company dated December 8, 1995, (previously
filed as part of Exhibit 10 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended July 31, 1998, and
incorporated herein by reference to such Report) and the First
Amendment to The Wallace Computer Services, Inc. Benefit Trust,
effective as of October 31, 1997, (First Amendment was previously
filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form
10-Q dated January 31, 1998, and incorporated herein by reference
to such Report).
54
<PAGE> 55
Exhibit Index, Continued
Exhibit
Number Description
------ -----------
10.19 The Wallace Computer Services, Inc. Performance Share Plan
(previously filed as Appendix B of the Proxy Statement for Annual
Meeting of Stockholders filed on October 6, 1997, and incorporated
herein by reference to such Statement).
10.20 Director Retainer Fee Plan, dated June 2, 1999, (previously filed
as part of Exhibit 10 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended April 30, 1999, and incorporated herein
by reference to such Report).
21 Subsidiaries of the Company
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
55
<PAGE> 1
EXHIBIT 4.1B
- --------------------------------------------------------------------------------
WALLACE COMPUTER SERVICES, INC.
AND
THE BANK OF NEW YORK, AS TRUSTEE
FIRST SUPPLEMENTAL INDENTURE
Dated as of January 15, 1999
to
INDENTURE
Dated as of January 15, 1999
<PAGE> 2
FIRST SUPPLEMENTAL INDENTURE
FIRST SUPPLEMENTAL INDENTURE dated as of January 15, 1999 (this
"Supplemental Indenture") between WALLACE COMPUTER SERVICES, INC., a corporation
duly organized and validly existing under the laws of the State of Delaware (the
"Company"), and The Bank of New York, a New York banking corporation, as trustee
(the "Trustee"). Capitalized terms not defined herein have the meanings
specified in the Indenture (as hereinafter defined).
RECITALS
The Company and the Trustee have heretofore executed and delivered an
Indenture dated as of January 15, 1999 (the "Indenture"), which provides, inter
alia, for the issuance from time to time by the Company of Securities in one or
more Series.
This Supplemental Indenture establishes a first Series of Securities to
be issuable under the Indenture.
All acts and proceedings necessary to make this Supplemental Indenture
a valid and binding instrument in accordance with its terms for the purposes
herein set forth have been done and performed, and the execution and delivery of
this Supplemental Indenture have in all respects been duly authorized.
NOW, THEREFORE, in consideration of the premises and other valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
each party agrees as follows for the benefit of the other party and for the
equal and ratable benefit of the Holders of the Securities issued under the
Indenture.
ARTICLE I
DEFINITIONS
SECTION 1.01. Definitions. With respect to the Notes (as hereinafter
defined), the definitions in the Indenture of "Affiliate," "Debt," "Default,"
"Person" and "Subsidiary" are hereby deleted in their entirety and the following
definitions shall apply:
"Affiliate" means, at any time, and with respect to any Person: (a) any
other Person that at such time, directly or indirectly, through one or more
intermediaries Controls, or is Controlled by, or is under common Control with,
such first Person, and (b) any Person beneficially owning
<PAGE> 3
or holding, directly or indirectly, 10% or more of any class of voting or equity
interests of the Company or any Subsidiary or any Person of which the Company
and its Subsidiaries beneficially own or hold, in the aggregate, directly or
indirectly, 10% or more of any class of voting or equity interests. As used in
this definition, "Control" means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of a
Person, whether through the ownership of voting securities, by contract or
otherwise. Unless the context otherwise clearly requires, any reference to an
"Affiliate" is a reference to an Affiliate of the Company.
"Attributable Value" in respect of any sale and leaseback transaction
means, as of the date of any determination thereof, the greater of (a) the fair
market value of the property or assets which is or are the subject of such sale
and leaseback transaction (as reasonably determined in good faith by the Board
of Directors at or about the time of the consummation of such sale and leaseback
transaction) and (b) the aggregate amount of Rentals due and to become due
(discounted from the respective due dates thereof at the interest rate implicit
in such Rentals and otherwise in accordance with GAAP) under the lease relating
to such sale and leaseback transaction.
"Called Principal" means, with respect to any Note, the principal of
such Note that is to be prepaid pursuant to Section 2.06 of the First
Supplemental Indenture or has become or is declared to be immediately due and
payable under Section 6.2 of this Indenture, as the context requires.
"Capital Lease" means, at any time, a lease with respect to which the
lessee is required concurrently to recognize the acquisition of an asset and the
incurrence of a liability in accordance with GAAP.
"Capital Stock" means and includes any and all shares, interests,
participations or other equivalents (however designated) of ownership in a
corporation or other Person.
"Change in Control" shall be deemed to have occurred if any person (as
such term is used in Section 13(d) and Section 14(d)(2) of the Exchange Act) or
related persons constituting a group (as such term is used in Rule 13d-5 under
the Exchange Act):
(a) becomes the "beneficial owner" (as such term is used in
Rule 13d-3 under the Exchange Act), directly or indirectly, of more
than 50% of the total voting power of all classes then outstanding of
the Company's voting Capital Stock, or
(b) acquires after the date of the original issuance of the
Notes (i) the power to elect, appoint or cause the election or
appointment of at least a majority of the members of the Board of
Directors through beneficial ownership of the Capital Stock of the
Company or (ii) all or substantially all of the properties and assets
of the Company.
2
<PAGE> 4
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, and the rules and regulations promulgated thereunder from time to time.
"Consolidated Indebtedness" means all Indebtedness of the Company and
its Restricted Subsidiaries, including, without duplication, Exempted Debt,
determined on a consolidated basis in accordance with GAAP after eliminating all
intercompany items.
"Consolidated Net Assets" means the total consolidated assets of the
Company and its Restricted Subsidiaries, less all current liabilities of the
Company and its Restricted Subsidiaries (excluding any Indebtedness for money
borrowed having a maturity of less than 12 months from the date of the most
recent consolidated balance sheet of the Company and its Restricted Subsidiaries
which by its terms is renewable or extendable beyond 12 months from such date at
the option of the borrower).
"Consolidated Net Income" for any period means the gross revenues of
the Company and its Restricted Subsidiaries for such period, less all expenses
and other proper charges (including taxes on income), determined on a
consolidated basis in accordance with GAAP after eliminating earnings or losses
attributable to outstanding Minority Interests, but excluding in any event:
(a) any gains or losses on the sale or other disposition of
investments or fixed or capital assets other than in the ordinary
course of business, and any taxes on such excluded gains and any tax
deductions or credits on account of such excluded losses;
(b) the proceeds of any life insurance policy;
(c) net earnings and losses of any Restricted Subsidiary
accrued prior to the date it became a Restricted Subsidiary;
(d) net earnings and losses of any Person (other than a
Restricted Subsidiary), substantially all the assets of which have been
acquired in any manner by the Company or any Restricted Subsidiary,
realized by such Person prior to the date of such acquisition;
(e) net earnings and losses of any Person (other than a
Restricted Subsidiary) with which the Company or a Restricted
Subsidiary shall have consolidated or which shall have merged into or
with the Company or a Restricted Subsidiary, realized by such Person
prior to the date of such consolidation or merger;
(f) net earnings of any business entity (other than a
Restricted Subsidiary) in which the Company or any Restricted
Subsidiary has an ownership interest unless such net earnings shall
have actually been received by the Company or such Restricted
Subsidiary in the form of cash distributions;
3
<PAGE> 5
(g) any portion of the net earnings of any Restricted
Subsidiary which for any reason is unavailable for payment of dividends
to the Company or any other Restricted Subsidiary;
(h) earnings resulting from any reappraisal, revaluation or
write-up of assets;
(i) any deferred or other credit representing any excess of
the equity in any Subsidiary at the date of acquisition thereof over
the amount invested in such Subsidiary;
(j) any gain arising from the acquisition of any securities
of the Company or any Restricted Subsidiary;
(k) any reversal of any contingency reserve, except to the
extent that provision for such contingency reserve shall have been made
from income arising during such period; and
(l) any other extraordinary gain or loss.
"Consolidated Net Worth" means the amount which, at any date of
determination, in conformity with GAAP consistently applied, would be set forth
under the caption "stockholders' equity" (or any like caption) on the
consolidated balance sheet of the Company and its Restricted Subsidiaries.
"Consolidated Total Capitalization" means, as of the date of any
determination thereof, the sum of Consolidated Indebtedness plus Consolidated
Net Worth.
"Control Event" means:
(a) the execution by the Company or any of its Restricted
Subsidiaries of any agreement or letter of intent with respect to any
proposed transaction or event or series of transactions or events
which, individually or in the aggregate, could reasonably be expected
to result in a Change in Control;
(b) the execution of any written agreement which, when fully
performed by the parties thereto, would result in a Change in Control;
or
(c) the making of any written offer by any person (as such
term is used in Section 13(d) and Section 14(d)(2) of the Exchange Act)
or related persons constituting a group (as such term is used in Rule
13d-5 under the Exchange Act) to the holders of the common stock of the
Company, which offer, if accepted by the requisite number of such
holders, would result in a Change in Control.
4
<PAGE> 6
"Credit Facility" means the Credit Agreement dated October 31, 1997
among the Company, various lenders and Bank of America NT & SA, as agent for
such lenders, as such agreement may be amended (including any amendment and
restatement thereof), supplemented, replaced, refinanced or otherwise modified
from time to time.
"Default" means an event or condition the occurrence or existence of
which would, with the lapse of time or the giving of notice or both, become an
Event of Default.
"Discounted Value" means, with respect to the Called Principal of any
Note, the amount obtained by discounting all Remaining Scheduled Payments with
respect to such Called Principal from their respective scheduled due dates to
the Settlement Date with respect to such Called Principal, in accordance with
accepted financial practice and at a discount factor (applied on the same
periodic basis as that on which interest on the Notes is payable) equal to the
Reinvestment Yield with respect to such Called Principal.
"Environmental Laws" means any and all federal, state, local and
foreign statutes, laws, regulations, ordinances, rules, judgments, orders,
decrees, permits, concessions, grants, franchises, licenses, agreements or
governmental restrictions relating to pollution and the protection of the
environment or the release of any materials into the environment, including but
not limited to those related to hazardous substances or wastes, air emissions
and discharges to waste or public systems.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and the rules and regulations promulgated thereunder
from time to time in effect.
"Exempted Debt" means the following as of any date of determination:
(a) Indebtedness of the Company secured by Liens incurred after the date of the
original issuance of the Notes, other than Indebtedness secured by Liens
permitted by paragraph (b) of Section 4.13 of this Indenture; (b) the
Attributable Value in respect of sale and leaseback transactions entered into by
the Company and its Restricted Subsidiaries after the date of the original
issuance of the Notes, other than sale and leaseback transactions permitted by
paragraph (a) of Section 4.14 of this Indenture; and (c) Indebtedness of the
Company's Restricted Subsidiaries, other than Indebtedness owing to the Company
or a Wholly-Owned Restricted Subsidiary.
"First Supplemental Indenture" means the First Supplemental Indenture
dated as of January 15, 1999 to this Indenture.
"GAAP" means generally accepted accounting principles as in effect from
time to time in the United States of America.
"Guaranty" means, with respect to any Person, any obligation (except
the endorsement in the ordinary course of business of negotiable instruments for
deposit or collection) of such Person guaranteeing or in effect guaranteeing any
Indebtedness, dividend or other obligation of
5
<PAGE> 7
any other Person in any manner, whether directly or indirectly, including
(without limitation) obligations incurred through an agreement, contingent or
otherwise, by such Person:
(a) to purchase such Indebtedness or obligation or any
property constituting security therefor;
(b) to advance or supply funds (i) for the purchase or
payment of such Indebtedness or obligation or (ii) to maintain any
working capital or other balance sheet condition or any income
statement condition of any other Person or otherwise to advance or make
available funds for the purchase or payment of such Indebtedness or
obligation;
(c) to lease properties or to purchase properties or
services primarily for the purpose of assuring the owner of such
Indebtedness or obligation of the ability of any other Person to make
payment of such Indebtedness or obligation; or
(d) otherwise to assure the owner of such Indebtedness or
obligation against loss in respect thereof.
In any computation of the Indebtedness or other liabilities of the obligor under
any Guaranty, the Indebtedness or other obligations that are the subject of such
Guaranty shall be assumed to be direct obligations of such obligor.
"Indebtedness" with respect to any Person means, at any time, without
duplication:
(a) its liabilities for borrowed money and its redemption
obligations in respect of mandatorily redeemable Preferred Stock;
(b) its liabilities for the deferred purchase price of
property acquired by such Person (excluding accounts payable arising in
the ordinary course of business but including all liabilities created
or arising under any conditional sale or other title retention
agreement with respect to any such property);
(c) all liabilities appearing on its balance sheet in
accordance with GAAP in respect of Capital Leases;
(d) all liabilities for borrowed money secured by any Lien
with respect to any property owned by such Person (whether or not it
has assumed or otherwise become liable for such liabilities);
(e) all its liabilities in respect of financial letters of
credit or instruments serving a similar function issued or accepted for
its account by banks and other financial institutions (whether or not
representing obligations for borrowed money);
(f) Swaps of such Person; and
6
<PAGE> 8
(g) any Guaranty of such Person with respect to liabilities
of a type described in any of clauses (a) through (f) above.
Indebtedness of any Person shall include all obligations of such Person of the
character described in clauses (a) through (g) above to the extent such Person
remains legally liable in respect thereof, notwithstanding that any such
obligation is deemed to be extinguished under GAAP. Notwithstanding the
foregoing, in no event shall "Indebtedness" include any obligation or liability
of the Company or any of its Subsidiaries arising in connection with the sale or
transfer by the Company or any of its Subsidiaries to any Person of accounts
receivable or any assets related thereto.
"Lien" means, with respect to any property or assets, any mortgage or
deed of trust, pledge, hypothecation, assignment, security interest, lien or
other security arrangement of any kind or nature whatsoever on or with respect
to such property or assets (including any conditional sale or other title
retention agreement having substantially the same economic effect as any of the
foregoing).
"Make-Whole Amount" means, with respect to any Note, an amount equal to
the excess, if any, of the Discounted Value of the Remaining Scheduled Payments
with respect to the Called Principal of such Note over the amount of such Called
Principal. The Make-Whole Amount may in no event be less than zero.
"Material Adverse Effect" means a material adverse effect on: (a) the
business, operations, affairs, financial condition, assets or properties of the
Company and its Subsidiaries taken as a whole; (b) the ability of the Company to
perform its obligations under the Indenture, this Supplemental Indenture and the
Notes; or (c) the validity or enforceability of the Indenture, this Supplemental
Indenture or the Notes.
"Minority Interests" means any shares of stock of any class of a
Restricted Subsidiary (other than directors' qualifying shares as required by
law) that are not owned by the Company and/or one or more of its Restricted
Subsidiaries.
"Notes," "6.92% Notes" and "7.26% Notes" are defined in Section 2.01 of
the First Supplemental Indenture.
"Outstanding Notes" means, subject to certain exceptions, all Notes
issued under this Indenture, except those theretofore canceled by the Trustee or
delivered to it for cancellation, paid in full or in respect of which substitute
Notes have been authenticated and delivered by the Trustee.
7
<PAGE> 9
"Person" means any individual, corporation, partnership, joint venture,
association, limited liability company, joint-stock company, trust,
unincorporated organization or government, or any agency or political
subdivision thereof.
"Preferred Stock" means any class of capital stock of a corporation
that is preferred over any other class of capital stock of such corporation as
to the payment of dividends or the payment of any amount upon liquidation or
dissolution of such corporation.
"Proposed Prepayment Date" is defined in Section 2.07(c) of the First
Supplemental Indenture.
"Purchase Agreements" means the several Purchase Agreements dated as of
January 15, 1999 between the Company and the institutions named in Schedule A
thereto, respectively, providing for the issue and sale of the Notes.
"Reinvestment Yield" means, with respect to the Called Principal of any
Note, .50% over the yield to maturity implied by (a) the yields reported, as of
10:00 A.M. (New York City time) on the second Business Day preceding the
Settlement Date with respect to such Called Principal, on the display designated
as "Page USD" of the Bloomberg Financial Markets Services Screen (or, if not
available, any other nationally recognized trading screen reporting on-line
intraday trading in U.S. Treasury securities) for actively traded on-the-run
U.S. Treasury securities having a maturity equal to the Remaining Average Life
of such Called Principal as of such Settlement Date, or (b) if such yields are
not reported as of such time or the yields reported as of such time are not
ascertainable, the Treasury Constant Maturity Series Yields reported, for the
latest day for which such yields have been so reported as of the second Business
Day preceding the Settlement Date with respect to such Called Principal, in
Federal Reserve Statistical Release H.15(519) (or any comparable successor
publication) for actively traded U.S. Treasury securities having a constant
maturity equal to the Remaining Average Life of such Called Principal as of such
Settlement Date. Such implied yield will be determined, if necessary, by (a)
converting U.S. Treasury bill quotations to bond-equivalent yields in accordance
with accepted financial practice and (b) interpolating linearly between (i) the
actively traded on-the-run U.S. Treasury security with the maturity closest to
and greater than such Remaining Average Life and (ii) the actively traded
on-the-run U.S. Treasury security with the maturity closest to and less than
such Remaining Average Life. For the purposes of any determination of
"Reinvestment Yield," "Business Day" shall mean a Business Day in The City of
New York.
"Remaining Average Life" means, with respect to the Called Principal of
any Note, the number of years (calculated to the nearest one-twelfth year) that
will elapse between the Settlement Date with respect to such Called Principal
and the scheduled due date of the principal.
"Remaining Scheduled Payments" means, with respect to the Called
Principal of any Note, all payments of such Called Principal and interest
thereon that would be due after the Settlement Date with respect to such Called
Principal if no payment of such Called Principal
8
<PAGE> 10
were made prior to its scheduled due date. However, if the Settlement Date is
not a date on which interest payments are due to be made under the terms of the
Notes, then the amount of the next succeeding scheduled interest payment will be
reduced by the amount of interest accrued to the Settlement Date and required to
be paid on the Settlement Date because of the optional prepayment of the Called
Principal or because of an event of acceleration described in Section 6.2 of
this Indenture, as the context requires.
"Rentals" means and includes, as of the date of any determination
thereof, all fixed payments (including as such all payments which the lessee is
obligated to make to the lessor on termination of the lease or surrender of the
property) payable by the Company or a Restricted Subsidiary, as lessee or
sublessee under a lease of real or personal property, but shall be exclusive of
any amounts required to be paid by the Company or a Restricted Subsidiary
(whether or not designated as rents or additional rents) on account of
maintenance, repairs, insurance, taxes and similar charges. Fixed rents under
any so-called "percentage leases" shall be computed solely on the basis of the
minimum rents, if any, required to be paid by the lessee regardless of sales
volume or gross revenues.
"Responsible Company Officer" means any Senior Financial Officer and
any other officer of the Company with responsibility for the administration of
the relevant portion of this Indenture.
"Restricted Subsidiary" means any Subsidiary of the Company as of the
date of the First Supplemental Indenture and each Subsidiary thereafter created
or acquired, unless expressly excluded by resolution of the Board of Directors
before, or within 120 days following, such creation or acquisition. Unless the
context otherwise clearly requires, any reference to a "Restricted Subsidiary"
is a reference to a Restricted Subsidiary of the Company.
"Senior Financial Officer" means the chief financial officer, principal
accounting officer, treasurer or comptroller of the Company.
"Settlement Date" means, with respect to the Called Principal of any
Note, the date on which such Called Principal is to be prepaid pursuant to
Section 2.06 of the First Supplemental Indenture or has become or is declared to
be immediately due and payable pursuant an event of acceleration described in
Section 6.2 of this Indenture, as the context requires.
"Subsidiary" means, as to any Person, any corporation, association or
other business entity in which such Person or one or more of its Subsidiaries or
such Person and one or more of its Subsidiaries owns sufficient equity or voting
interests to enable it or them (as a group) ordinarily, in the absence of
contingencies, to elect a majority of the directors (or Persons performing
similar functions) of such entity, and any partnership or joint venture if more
than a 50% interest in the profits or capital thereof is owned by such Person or
one or more of its Subsidiaries or such Person and one or
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more of its Subsidiaries (unless such partnership can and does ordinarily take
major business actions without the prior approval of such Person or one or more
of its Subsidiaries). Unless the context otherwise clearly requires, any
reference to a "Subsidiary" is a reference to a Subsidiary of the Company.
"Swaps" means, with respect to any Person, payment obligations with
respect to interest rate swaps, currency swaps and similar obligations
obligating such Person to make payments, whether periodically or upon the
happening of a contingency. For the purposes of this Indenture, the amount of
the obligation under any Swap shall be the amount determined in respect thereof
as of the end of the then most recently ended fiscal quarter of such Person,
based on the assumption that such Swap had terminated at the end of such fiscal
quarter and in making such determination, if any agreement relating to such Swap
provides for the netting of amounts payable by and to such Person thereunder or
if any such agreement provides for the simultaneous payment of amounts by and to
such Person, then, in each such case, the amount of such obligation shall be the
net amount so determined.
"Unrestricted Subsidiary" means any Subsidiary which is not a
Restricted Subsidiary.
"Wholly-Owned Restricted Subsidiary" means, at any time, any Restricted
Subsidiary all of the shares of voting Capital Stock and other voting equity
interests (except directors' qualifying shares) and other equity interests of
which are owned by the Company and/or the Company's other Wholly-Owned
Restricted Subsidiaries."
ARTICLE II
ESTABLISHMENT OF FIRST SERIES OF SECURITIES
SECTION 2.01. Establishment of Limited Series of Notes. There is
hereby established a first series of Securities to be designated as the "6.92% -
7.26% Senior Notes" (the "Notes"). The Notes shall be limited to $65,000,000
aggregate principal amount of 6.92% Senior Notes due January 15, 2006 (the
"6.92% Notes") and $135,000,000 aggregate principal amount of 7.26% Senior Notes
due January 15, 2009 (the "7.26% Notes"), except for Notes authenticated and
delivered upon registration of transfer of, in exchange for or in lieu of other
Notes pursuant to Sections 2.7, 2.8, 3.6 or 9.6 of the Indenture. The price at
which the Notes shall be issued is 100% of the principal amount thereof.
SECTION 2.02. Maturity Dates. The principal of the 6.92% Notes
shall be payable on January 15, 2006, and the principal of the 7.26% Notes shall
be payable on January 15, 2009.
SECTION 2.03. Interest Rates and Payment Dates. The 6.92% Notes
shall bear interest at the rate of 6.92% per annum;
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and the 7.26% Notes shall bear interest at the rate of 7.26% per annum. Such
interest shall accrue from January 15, 1999 (or from the most recent interest
payment date to which interest has been paid or provided for). The interest
payment dates on which such interest shall be payable shall be April 1 and
October 1 in each year, commencing April 1, 1999, and at maturity; and the
regular record dates for the interest payable on such interest payment dates
shall be March 15 and September 15 (whether or not a Business Day),
respectively. Interest shall be computed on the basis of a 360-day year of
twelve 30-day months.
SECTION 2.04. Place of Payment. (a) Subject to paragraph (b) of
this Section 2.04, payments of principal, Make Whole Amount, if any, and
interest becoming due and payable on the Notes shall be made at the Corporate
Trust Office.
(b) So long as an original purchaser or its nominee shall be the
Holder of any Note, notwithstanding anything contained in the Indenture, this
Supplemental Indenture or the Notes, the Company will cause all sums becoming
due on such Note for principal, Make-Whole Amount, if any, and interest to be
made by the method and at the address specified for such purpose below such
purchaser's name in Schedule A to the Purchase Agreements, or by such other
method or at such other address as such Holder shall have from time to time
specified to the Company in writing for such purpose, without the presentation
or surrender of such Note or the making of any notation thereon, except that
upon written request of the Company made concurrently with or reasonably
promptly after payment or prepayment in full of any Note, each original
purchaser shall surrender such Note for cancellation, reasonably promptly after
any such request, to the Company at the Corporate Trust Office. Prior to any
sale or other disposition of any Note held by an original purchaser of the Notes
or its nominee, such purchaser will, at its election, either endorse thereon the
amount of principal paid thereon and the last date to which interest has been
paid thereon or surrender such Note to the Trustee in exchange for a new Note or
Notes pursuant to Section 2.7 or 3.6 of the Indenture.
SECTION 2.05. No Mandatory Prepayments. The Notes shall not be
entitled to the benefit of any sinking fund or analogous mandatory redemption
provisions.
SECTION 2.06. Optional Prepayments. (a) The Company may, at its
option, prepay at any time all, or from time to time any part of, the Notes, in
an amount not less than 10% of the aggregate principal amount of the Outstanding
Notes in the case of a partial prepayment, at 100% of the principal amount so
prepaid, together with interest accrued thereon to the date of such prepayment,
plus the Make-Whole Amount determined for the prepayment date with respect to
the principal amount to be prepaid. The Company will give each holder of the
Notes written notice of each optional prepayment not less than 30 days and not
more than 60 days prior to the date fixed for such prepayment.
(b) In the case of each partial prepayment of the Notes, the
principal amount of the Notes to be prepaid shall be allocated among all of the
Outstanding Notes at the time in
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proportion, as nearly as practicable, to the respective unpaid principal amounts
thereof not theretofore called for prepayment.
(c) In the case of each prepayment of the Notes, the principal
amount of each Note to be prepaid shall mature and become due and payable on the
date fixed for such prepayment, together with interest on such principal amount
accrued to such date and the applicable Make-Whole Amount, if any. From and
after such date, unless the Company shall fail to pay such principal amount when
so due and payable, together with interest and the Make-Whole Amount, if any, as
aforesaid, interest on such principal amount shall cease to accrue.
(d) Except for Section 3.6, Article III of the Indenture shall
not apply to the Notes.
SECTION 2.07. Option to Tender after Change in Control. (a) The
Company will, within five Business Days after any Responsible Company Officer
has actual knowledge of the occurrence of any Change in Control or Control
Event, give written notice of such Change in Control or Control Event to each
Holder of the Notes unless notice in respect of such Change in Control (or the
Change in Control contemplated by such Control Event) shall have been given
pursuant to paragraph (b) of this Section 2.07. If a Change in Control has
occurred, such notice shall contain and constitute an offer to prepay the Notes
as described in paragraph (c) of this Section 2.07 and shall be accompanied by
the certificate described in paragraph (g) of this Section 2.07.
(b) The Company will not take any action that consummates or
finalizes a Change in Control unless (i) at least 30 days prior to such action
it shall have given to each Holder of the Notes written notice containing and
constituting an offer to prepay the Notes as described in paragraph (c) of this
Section 2.07, accompanied by the certificate described in paragraph (g) of this
Section 2.07, and (ii) contemporaneously with such action, it prepays all of the
Notes required to be prepaid in accordance with this Section 2.07.
(c) The offer to prepay the Notes contemplated by paragraphs (a)
and (b) of this Section 2.07 shall be an offer to prepay, in accordance with and
subject to this Section 2.07, all, but not less than all, of the Notes held by
each Holder on a date specified in such offer (the "Proposed Prepayment Date").
If such Proposed Prepayment Date is in connection with an offer contemplated by
paragraph (a) of this Section 2.07, such date shall be not less than 30 days and
not more than 120 days after the date of such offer (if the Proposed Prepayment
Date shall not be specified in such offer, the Proposed Prepayment Date shall be
the first Business Day after the 45th day after the date of such offer).
(d) A Holder of the Notes may accept an offer to prepay made
pursuant to this Section 2.07 by causing a notice of such acceptance to be
delivered to the Company not later than 15 days after the receipt by such Holder
of such offer. A failure by a Holder of the Notes to respond within such 15-day
period to an offer to prepay made pursuant to this Section 2.07 shall be deemed
to constitute a rejection of such offer by such Holder.
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(e) Prepayment of the Notes to be prepaid pursuant to this
Section 2.07 shall be at 100% of the principal amount of such Notes, together
with interest on such Notes accrued to the date of prepayment, but without any
Make-Whole Amount or other premium. The prepayment shall be made on the Proposed
Prepayment Date, except as provided in paragraph (f) of this Section 2.07.
(f) The obligation of the Company to prepay the Notes pursuant
to the offers required by paragraph (c) and accepted in accordance with
paragraph (d) of this Section 2.07 is subject to the occurrence of the Change in
Control in respect of which such offers and acceptances shall have been made. In
the event that such Change in Control shall not have occurred on the Proposed
Prepayment Date in respect thereof, the prepayment shall be deferred until, and
shall be made on, the date on which such Change in Control shall occur. The
Company shall keep each Holder of the Notes reasonably and timely informed of
(i) any such deferral of the date of prepayment; (ii) the date on which such
Change in Control and such prepayment are expected to occur; and (iii) any
determination by the Company that efforts to effect such Change in Control have
ceased or been abandoned (in which case the offers and acceptances made pursuant
to this Section 2.07 in respect of such Change in Control shall be deemed
rescinded).
(g) Each offer to repay the Notes pursuant to this Section 2.07
shall be accompanied by a certificate, executed by a Senior Financial Officer
and dated the date of such offer, specifying: (i) the Proposed Prepayment Date;
(ii) that such offer is made pursuant to this Section 2.07; (iii) the principal
amount of each Note offered to be prepaid; (iv) the interest that would be due
on each Note offered to be prepaid, accrued to the Proposed Prepayment Date; (v)
that the conditions of this Section 2.07 have been fulfilled; and (vi) the
nature and date or proposed date of the Change in Control.
(h) All calculations contemplated in this Section 2.07 involving
the Capital Stock of any Person shall be made with the assumption that all
convertible securities of such Person then outstanding and all convertible
securities issuable upon the exercise of any warrants, options and other rights
then outstanding were converted at such time and that all options, warrants and
similar rights to acquire shares of Capital Stock of such Person were exercised
at such time.
SECTION 2.08. Denominations. The Notes shall be originally
issued in denominations of $300,000 and multiples of $50,000 in excess thereof.
The Notes shall be transferable only in denominations of $300,000 and in
multiples of $50,000; provided that if necessary to enable the registration of
transfer by a Holder of its entire holding of the Notes, one Note may be in a
denomination of less than $300,000.
SECTION 2.09. Form of Notes. The Notes shall be issuable only in
fully registered form and shall not be issued as Global Securities. The form
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of the 6.92% Notes is attached hereto as Annex A. The form of the 7.26% Notes is
attached hereto as Annex B. Any terms of the 6.92% Notes and of the 7.26% Notes
set forth in Annex A and Annex B, respectively, which are not expressly stated
in this Article II are incorporated herein by reference.
SECTION 2.10. Notes Payable in Dollars. The Notes shall be
denominated in Dollars. Payment of the principal of, and the Make-Whole Amount,
if any, and interest on, the Notes shall not be payable in a currency or
currency unit other than Dollars.
SECTION 2.11. Restrictions on Transfers. The Notes are subject
to the restrictions on transfer set forth in the second paragraph of Section 2.7
of the Indenture and Section 8.4 of the Purchase Agreements.
SECTION 2.12. Events of Default. The additions to and changes in
the Events of Default set forth in the Indenture with respect to the Notes and
any change in the right of the Trustee or the requisite Holders of the Notes to
declare the principal amount thereof due and payable are set forth in Article
IV.
SECTION 2.13. Covenants. The additions to and changes in the
covenants set forth in Articles IV and V of the Indenture are set forth in
Article III.
SECTION 2.14. No Defeasance. The provisions of Sections 8.3 and
8.4 of the Indenture shall not apply to the Notes.
SECTION 2.15. Deemed Representations and Agreement. Any
transferee of a Note, by its acceptance of a Note registered in its name, or in
the name of its nominee, shall be deemed to have made the representations set
forth in Sections 6.1 and 6.2 of the Purchase Agreements, on and as of the date
of such acceptance, and to have agreed to the confidentiality provisions set
forth in Section 15 of the Purchase Agreements.
ARTICLE III
COVENANTS
SECTION 3.01. Amendment of Section 4.3 of the Indenture. With
respect to the Notes, Section 4.3 of the Indenture is hereby amended by deleting
the number "120" in the first line thereof and substituting the number "105."
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SECTION 3.02. Restatement of Sections 4.5, 4.6 and 5.1 of the
Indenture; Additional Covenants. With respect to the Notes, Sections 4.5, 4.6
and 5.1 of the Indenture are hereby deleted in their entirety and the following
Sections are substituted therefor:
Section 4.5. Corporate Existence, Etc. Subject to Section 5.1,
the Company will at all times preserve and keep in full force and effect its
Corporate existence. The Company will at all times preserve and keep in full
force and effect the corporate existence of each of its Restricted Subsidiaries
(unless merged into the Company or a Restricted Subsidiary) and all rights and
franchises of the Company and its Restricted Subsidiaries unless, in the good
faith judgment of the Company, the termination of or failure to preserve and
keep in full force and effect such corporate existence, right or franchise would
not, individually or in the aggregate, have a Material Adverse Effect.
Section 4.6. Payment of Taxes and Claims. The Company will, and
will cause each of its Restricted Subsidiaries to, file all tax returns required
to be filed in any jurisdiction and to pay and discharge all taxes shown to be
due and payable on such returns and all other taxes, assessments, governmental
charges or levies imposed on them or any of their properties, assets, income or
franchises, to the extent such taxes and assessments have become due and payable
and before they have become delinquent, and all claims for which sums have
become due and payable that have or might become a Lien on properties or assets
of the Company or any Restricted Subsidiary; provided, however, that neither the
Company nor any Restricted Subsidiary need pay any such tax, assessment,
governmental charge, levy or claim if (a) the amount, applicability or validity
thereof is contested by the Company or such Restricted Subsidiary on a timely
basis in good faith and in appropriate proceedings, and the Company or a
Restricted Subsidiary has established adequate reserves therefor in accordance
with GAAP on the books of the Company or such Restricted Subsidiary or (b) the
nonpayment of all such taxes and assessments in the aggregate would not
reasonably be expected to have a Material Adverse Effect.
Section 4.7. Compliance with Law. The Company will, and will
cause each of its Restricted Subsidiaries to, comply with all laws, ordinances
or governmental rules or regulations to which each of them is subject,
including, without limitation, ERISA and all Environmental Laws, and will obtain
and maintain in effect all licenses, certificates, permits, franchises and other
governmental authorizations necessary to the ownership of their respective
properties or to the conduct of their respective businesses, in each case to the
extent necessary to ensure that non-compliance with such laws, ordinances or
governmental rules or regulations or failures to obtain or maintain in effect
such licenses, certificates, permits, franchises and other governmental
authorizations would not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect.
Section 4.8. Insurance. The Company will, and will cause each of
its Restricted Subsidiaries to, maintain, with financially sound and reputable
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insurers, insurance with respect to their respective properties and businesses
against such casualties and contingencies, of such types, on such terms and in
such amounts (including deductibles, co-insurance and self-insurance) as is
customary in the case of entities of established reputations and of similar size
engaged in the same or similar businesses and similarly situated.
Section 4.9. Maintenance of Properties. The Company will, and will
cause each of its Restricted Subsidiaries to, maintain and keep, or cause to be
maintained and kept, their respective properties in good repair, working order
and condition (other than ordinary wear and tear), so that the business carried
on in connection therewith may be properly conducted at all times; provided,
however, that this covenant shall not prevent the Company or any Restricted
Subsidiary from discontinuing the operation and the maintenance of any of its
properties if such discontinuance is desirable in the conduct of its business
and the Company has concluded that such discontinuance would not, individually
or in the aggregate, reasonably be expected to have a Material Adverse Effect.
Section 4.10. Notes to Rank Pari Passu. The Company will, and will
cause each of its Restricted Subsidiaries to, execute all such documents and
take such other actions in order to assure that at all times the Notes shall
rank in right of payment either pari passu or senior to all other Indebtedness
of the Company, except for Indebtedness which is preferred as a result of being
secured (but then only to the extent of such security).
Section 4.11. Consolidated Net Worth. The Company will at all times
keep and maintain Consolidated Net Worth in an amount not less than $383,231,100
plus (b) 25% of Consolidated Net Income computed on a cumulative basis for each
of its elapsed fiscal years ending after July 31, 1998; provided, however, that
notwithstanding that Consolidated Net Income for any such elapsed fiscal year
may be a deficit figure, no reduction as a result thereof shall be made in the
amount of Consolidated Net Worth to be maintained pursuant hereto.
Section 4.12. Limitation on Incurrence of Indebtedness. (a) The Company
will not, and will not permit any Restricted Subsidiary to, create, incur,
issue, assume, guarantee or otherwise become directly or indirectly liable with
respect to any Indebtedness, except:
(1) Indebtedness evidenced by the Notes;
(2) additional Indebtedness of the Company or any Restricted Subsidiary
(including, without limitation, all Indebtedness borrowed or drawn from
time to time under and pursuant to the Credit Facility and any
Indebtedness permitted under Section 4.13 and all Attributable Value
permitted under Section 4.14) if at the time of the creation,
incurrence, assumption or guarantee thereof, or otherwise becoming
liable thereon, and immediately after giving effect thereto, to the
application of the proceeds
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thereof and to the concurrent retirement of any other Indebtedness of
the Company and its Restricted Subsidiaries: (i) Consolidated
Indebtedness shall not exceed 65% of Consolidated Total Capitalization;
and (ii) no Default or Event of Default shall exist; and
(3) any extension, renewal or refunding of any Indebtedness of the
Company and its Restricted Subsidiaries outstanding on the date of
the original issuance of the Notes (including, without limitation,
Indebtedness outstanding under the Credit Facility) or any other
Indebtedness thereafter created, assumed, guaranteed or otherwise
incurred as permitted by this Section 4.12; provided, however, that:
(i) any such extension, renewal or refunding shall not increase the
principal amount of the Indebtedness outstanding at the date of such
extension, renewal or refunding; and (ii) at the time of any such
extension, renewal or refunding, and after giving effect thereto, to
the application of the proceeds thereof and to the concurrent
retirement of any other Indebtedness of the Company and its Restricted
Subsidiaries, no Default or Event of Default shall exist.
(b) Without limiting paragraph (a) of this Section 4.12, the Company
shall not permit any Restricted Subsidiary to create, incur, issue, assume,
guarantee or otherwise become or be directly or indirectly liable with respect
to any Indebtedness unless, in each case, immediately after giving effect
thereto, to the application of the proceeds thereof and to the concurrent
retirement of any other Indebtedness of the Company and its Restricted
Subsidiaries, the sum of: (1) the aggregate principal amount of all outstanding
Indebtedness secured by Liens permitted under paragraph (c) of Section 4.13, (2)
the aggregate Attributable Value of sale and leaseback transactions permitted
under paragraph (b) of Section 4.14 and (3) the aggregate principal amount of
all outstanding unsecured Indebtedness owing by all Restricted Subsidiaries
(excluding Indebtedness owing to the Company or any Wholly-Owned Restricted
Subsidiary) shall not exceed 15% of Consolidated Net Assets.
For the purposes of this Section 4.12, any Indebtedness (i)
which is assumed, extended, renewed or refunded shall be deemed to have been
incurred when assumed, extended, renewed or refunded and (ii) of a Person
outstanding at the time it shall become a Restricted Subsidiary, or at the time
all or substantially all of its assets shall be acquired by the Company or any
Restricted Subsidiary, shall be deemed to have been incurred at such time.
Section 4.13 Limitation on Secured Debt. (a) The Company will
not, and will not permit any Restricted Subsidiary to, create, incur, issue,
assume or guarantee any Indebtedness secured by a Lien of any kind unless such
Lien is created or incurred as permitted by paragraph (b) or (c) of this Section
4.13.
(b) The prohibition contained in paragraph (a) of this Section
4.13 shall not apply to:
(1) Liens existing on the date of the original issuance of
the Notes;
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(2) Liens created or incurred by the Company or any
Restricted Subsidiary upon any property (including, without limitation,
Capital Stock or evidences of Indebtedness issued by any Restricted
Subsidiary), which property is acquired after the date of the original
issuance of the Notes; provided, however, that immediately after the
creation or incurrence of any such Lien: (i) no Default or Event of
Default shall exist; (ii) such Lien shall attach solely to property
acquired, purchased or created after the date of the original issuance
of the Notes; (iii) such Lien shall have been created or incurred at
the time of or within 12 months after the acquisition, purchase or
creation, as the case may be, of such property; (iv) the aggregate
amount of all Indebtedness secured by any such Lien shall not exceed
100% of the cost of acquisition, purchase or creation, as the case may
be, of such property; and (v) the Indebtedness secured by such Lien
shall be permitted by clause (a)(2) of Section 4.12;
(3) Liens affecting the property of a Person at the time it
becomes a Restricted Subsidiary, or at the time it is merged into or
consolidated with the Company or a Restricted Subsidiary, or at the
time all or substantially all of its property is acquired by the
Company or a Restricted Subsidiary; provided, however, that immediately
after the creation or incurrence of any such Lien: (i) no Default or
Event of Default shall exist; (ii) such Lien shall extend solely to the
property so acquired; and (iii) the Indebtedness secured by such Lien
shall be permitted by clause (a)(2) of Section 4.12;
(4) Liens (including Liens arising from sale and leaseback
transactions) on any property existing at the time of acquisition
thereof by the Company or any Restricted Subsidiary, or incurred to
secure payment of all or a part of the purchase price thereof or to
secure Indebtedness incurred prior to, at the time of or within 12
months after the acquisition thereof for the purpose of financing all
or part of the purchase price thereof; provided, however, that
immediately after the creation or incurrence of any such Lien: (i) no
Default or Event of Default shall exist; (ii) such Lien shall extend
solely to the property so acquired; and (iii) the Indebtedness secured
by such Lien shall be permitted by clause (a)(2) of Section 4.12;
(5) Liens on any property to secure all or part of the cost
of alteration, repair or improvement thereof, or to secure Indebtedness
incurred to provide funds for such purpose, in a principal amount not
exceeding the cost of such alterations, repairs or improvements;
provided, however, that immediately after the creation or incurrence of
any such Lien: (i) no Default or Event of Default shall exist; (ii)
such Lien shall extend solely to the property altered, repaired or
improved; (iii) such Lien shall have been created or incurred at the
time of or within 12 months after the date of completion of such
alterations, repairs or improvements; and (iv) the Indebtedness secured
by such Lien shall be permitted by clause (a)(2) of Section 4.12;
(6) Liens which secure Indebtedness owing by a Wholly-Owned
Restricted Subsidiary to the Company or to another Wholly-Owned
Restricted
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Subsidiary; provided, however, that immediately after the creation or
incurrence of any such Lien, no Default or Event of Default shall
exist;
(7) purchase money Liens on personal property; provided,
however, that immediately after the creation or incurrence of any such
Lien: (i) no Default or Event of Default shall exist; (ii) such Lien
shall extend solely to the personal property acquired or purchased;
(iii) such Lien shall have been created or incurred at the time of or
within 12 months after the date of acquisition or purchase, as the case
may be, of such personal property; (iv) the Indebtedness secured by
such Lien shall not exceed an amount equal to the acquisition or
purchase price of such personal property; and (v) the Indebtedness
secured by such Lien shall be permitted by clause (a)(2) of Section
4.12;
(8) Liens (including judgment liens) arising in connection
with legal proceedings, taxes, fees, assessments or other governmental
charges, so long as such proceedings, taxes, fees, assessments or other
governmental charges are being contested in good faith and, in the case
of judgment liens, execution thereon is stayed and any reserves
required in accordance with GAAP have been established;
(9) Liens in favor of the United States of America or any
state thereof, or any department, agency or instrumentality or
political subdivision thereof, to secure partial, progress, advance or
other payments;
(10) carriers', warehousemen's, mechanics', landlords',
materialmens', repairmens' or other similar Liens arising in the
ordinary course of business which are not overdue for a period of more
than 60 days or are being contested in good faith by appropriate
proceedings diligently pursued; provided, however, that (i) any
proceedings commenced for the enforcement of any such Lien shall have
been stayed or suspended within 60 days of the commencement thereof and
(ii) provision for the payment of such Liens has been made to the
extent required by GAAP;
(11) easements, rights-of-way, restrictions and other
similar encumbrances incurred in the ordinary course of business which,
in the aggregate, are not substantial in amount, and which do not in
any case materially detract from the value of the property subject
thereto or interfere with the ordinary conduct of the business of the
Company or any Restricted Subsidiary; and
(12) any extension, renewal, replacement or refunding of any
Lien referred to in the foregoing clauses (1) through (11); provided,
however, that immediately after the consummation of any such extension,
renewal, replacement or refunding: (i) the aggregate principal amount
of Indebtedness secured thereby shall not exceed the aggregate
principal amount of Indebtedness, plus any premium or fee payable in
connection with any such extension, renewal, replacement or refunding,
so secured at the
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time of such extension, renewal, replacement or refunding; (ii)
such Lien shall extend solely to the same property; and
(iii) no Default or Event of Default shall exist.
(c) Notwithstanding paragraphs (a) and (b) of this Section 4.13, the
Company and its Restricted Subsidiaries may create, incur, issue, assume or
guarantee Indebtedness secured by a Lien; provided, however, that at the time of
such creation, incurrence, issuance, assumption or guarantee, and immediately
after giving effect thereto, to the application of the proceeds thereof and to
the concurrent retirement of any other Indebtedness of the Company and its
Restricted Subsidiaries: (1) the aggregate amount of all Exempted Debt
(including the Exempted Debt then being created or incurred) then outstanding
shall not exceed 15% of Consolidated Net Assets; and (2) no Default or Event of
Default shall exist.
Section 4.14. Limitation on Sale and Leaseback Transactions. (a)
Neither the Company nor any Restricted Subsidiary will enter into a sale and
leaseback transaction involving any property unless: (1) such sale and leaseback
transaction shall occur at the time of or within 120 days after the date of
acquisition of such property, the date of completion of the construction thereof
or the date of commencement of full operation thereof, whichever is latest, or
(2) the Company or such Restricted Subsidiary shall apply, or cause to be
applied, to the retirement of its secured Indebtedness, at the time of or within
120 days after the consummation of such sale and leaseback transaction, an
amount not less than the greater of (i) the net proceeds of the sale of such
property or (ii) the fair market value of such property and, whether such sale
and leaseback transaction is consummated within the limitations of clause (1) or
(2) of this paragraph (a), at the time of such consummation no Default or Event
of Default shall exist and the Attributable Value in respect of such sale and
leaseback transaction shall be permitted by clause (a)(2) of Section 4.12. This
paragraph (a) will not apply to a sale and leaseback transaction involving the
taking back of a lease for a period of less than three years or between the
Company and a Restricted Subsidiary or between Restricted Subsidiaries.
(b) Notwithstanding the restriction contained in paragraph (a) of this
Section 4.14, the Company or any Restricted Subsidiary may enter into a sale and
leaseback transaction if at the time of such transaction, and immediately after
giving effect thereto, to the application of the proceeds thereof and to the
concurrent retirement of any Indebtedness of the Company and its Restricted
Subsidiaries: (1) the Attributable Value in respect of such sale and leaseback
transaction shall be permitted by clause (a)(2) of Section 4.12; (2) the
aggregate amount of all Exempted Debt (including the Attributable Value then
being created or incurred) then outstanding shall not exceed 15% of the
Consolidated Net Assets; and (3) no Default or Event of Default shall exist.
Section 4.15. Transactions with Affiliates. The Company will not, and
will not permit any Restricted Subsidiary to, enter into or be a party to any
transaction or arrangement with any Affiliate (other than the Company and its
Restricted Subsidiaries), including, without limitation, the purchase from, the
sale to or the
20
<PAGE> 22
exchange of property with, or the rendering of any service by or for, any
Affiliate, except upon fair and reasonable terms no less favorable to the
Company or such Restricted Subsidiary than would obtain in a comparable
arm's-length transaction with a Person other than an Affiliate.
Section 5.1. Consolidation, Merger and Sale of Assets. The Company may
not consolidate with or merge with or into, or convey, transfer or lease all or
substantially all of its assets to, another Person unless: (a) the successor (if
not the Company) or transferee shall be a corporation, partnership or other
entity organized and validly existing under the laws of the United States of
America, any state thereof or the District of Columbia, and such successor (if
not the Company) or transferee expressly shall assume the Company's obligations
on the Outstanding Notes by a supplemental indenture to this Indenture; (b)
immediately after giving effect to the transaction (1) no Default or Event of
Default shall have occurred and be continuing and (2) the Company could create
or incur $1.00 of additional Indebtedness under clause (a)(2) of Section 4.12;
and (c) the Company shall deliver to the Trustee an Officers' Certificate with
respect to clauses (a) and (b) above and an Opinion of Counsel stating
compliance with clause (a) above."
ARTICLE IV
EVENTS OF DEFAULT AND REMEDIES
SECTION 4.01. Restatement of Sections 6.1 and 6.2 of the
Indenture. With respect to the Notes, Sections 6.1 and 6.2 of the Indenture are
hereby deleted in their entirety and the following Sections are substituted
therefor:
"Section 6.1. Event of Default. "Event of Default," wherever used
herein with respect to the Notes, means any one of the following events:
(a) default in the payment of any principal or Make-Whole
Amount, if any, on any Note when the same becomes due and payable,
whether at maturity or at a date fixed for payment or by declaration or
otherwise; or
(b) default in the payment of any interest on any Note for
more than 10 days after the same becomes due and payable; or
(c) default in the performance of or compliance with any term
contained in the covenants contained in Section 4.11, Section 4.12,
Section 4.13, Section 4.14 and Section 5.1; or
21
<PAGE> 23
(d) default in the performance of or compliance with any term
contained in this Indenture (other than those referred to in clauses
(a), (b) and (c) above and other than a term that has been included in
this Indenture solely for the benefit of a Series of Securities other
than the Notes) and such default is not remedied within 30 days after
the Company receiving written notice of such default from the Trustee
or any Holder of the Notes; or
(e) (i) default by the Company or any Restricted Subsidiary
(as principal or as guarantor or other surety) in the payment of any
principal of or premium or make-whole amount or interest on any
Indebtedness that is outstanding in an aggregate principal amount of at
least $25,000,000 beyond any period of grace provided with respect
thereto, or (ii) default by the Company or any Restricted Subsidiary in
the performance of or compliance with any term of any evidence of any
Indebtedness in an aggregate outstanding principal amount of at least
$25,000,000 or of any mortgage, indenture or other agreement relating
thereto or any other condition exists, and as a consequence of such
default or condition such Indebtedness has become, or has been declared
(or one or more Persons are entitled to declare such Indebtedness to
be), due and payable before its stated maturity or before its regularly
scheduled dates of payment; or
(f) the Company or any Restricted Subsidiary (i) is generally
not paying, or admits in writing its inability to pay, its debts as
they become due, (ii) files, or consents by answer or otherwise to the
filing against it of, a petition for relief or reorganization or
arrangement or any other petition in bankruptcy, for liquidation or to
take advantage of any bankruptcy, insolvency, reorganization,
moratorium or other similar law of any jurisdiction, (iii) makes an
assignment for the benefit of its creditors, (iv) consents to the
appointment of a custodian, receiver, trustee or other officer with
similar powers with respect to it or with respect to any substantial
part of its property, (v) is adjudicated as insolvent or to be
liquidated or (vi) takes corporate action for the purpose of any of the
foregoing; or
(g) a court or governmental authority of competent
jurisdiction enters an order appointing, without consent by the Company
or any of its Restricted Subsidiaries, a custodian, receiver, trustee
or other officer with similar powers with respect to it or with respect
to any substantial part of its property, or
22
<PAGE> 24
constituting an order for relief or approving a petition for relief or
reorganization or any other petition in bankruptcy or for liquidation
or to take advantage of any bankruptcy or insolvency law of any
jurisdiction, or ordering the dissolution, winding-up or liquidation of
the Company or any of its Restricted Subsidiaries, or any such petition
shall be filed against the Company or any of its Restricted
Subsidiaries and such petition shall not be dismissed within 60 days;
or
(h) a final judgment or judgments for the payment of money
aggregating in excess of $25,000,000 (excluding for purposes of such
determination the amount of any insurance proceeds paid by or on behalf
of the Company or any of its Restricted Subsidiaries in respect of such
judgment or judgments or unconditionally acknowledged in writing to be
payable by the insurance carrier that issued the related insurance
policy) are rendered against one or more of the Company and its
Restricted Subsidiaries and which judgments are not, within 60 days
after entry thereof, bonded, discharged or stayed pending appeal, or
are not discharged within 60 days after the expiration of such stay.
Section 6.2. Acceleration of Maturity; Rescission and Annulment.
In case an Event of Default with respect to the Notes shall occur and be
continuing (other than an Event of Default specified in Section 6.1(f) or (g)),
then in every such case the Trustee or the Holders of not less than 51% in
aggregate principal amount of all Outstanding Notes may, by a notice in writing
to the Company (and to the Trustee if given by the Holders of Outstanding
Notes), declare to be due and payable immediately the principal amount of and
the accrued and unpaid interest, if any, on all Notes, plus the Make-Whole
Amount determined in respect of such principal amount. In case an Event of
Default specified in Section 6.1(f) or (g) shall occur and be continuing, the
principal amount of and the accrued and unpaid interest, if any, on all
Outstanding Notes, plus the Make Whole Amount determined in respect of such
principal amount, shall become due and payable immediately without any
declaration or other act on the part of the Trustee or any Holder of the
Outstanding Notes. In case an Event of Default specified in Section 6.1(a) or
(b) shall occur and be continuing, any Holder or Holders of Outstanding Notes
affected by such Event of Default may at any time, at its or their option, by a
notice or notices to the Company and the Trustee, declare to be due and payable
immediately the principal amount of and the accrued and unpaid interest, if any,
on all Notes held by it or them, plus the Make-Whole Amount determined in
respect of such principal amount.
At any time after the Trustee or the Holder or Holders of Outstanding
Notes make a declaration of acceleration with respect to the Notes, but before
the Trustee obtains a judgment or decree for payment of the money due, the
Holders of 65% in aggregate principal amount of the
23
<PAGE> 25
Outstanding Notes, by written notice to the Company and the Trustee, may rescind
and annul such declaration and its consequences if:
(a) the Company has paid or deposited with the Trustee a sum
sufficient to pay
(i) all overdue interest, if any, on the Notes,
(ii) the principal of, and the interest and
Make-Whole Amount, if any, on, any Note which has become due
otherwise than by declaration of acceleration,
(iii) to the extent that payment of such interest is
lawful, interest on any overdue principal, any overdue
interest and any overdue Make-Whole Amount, and
(iv) all sums which the Trustee has paid or advanced,
and the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel; and
(b) all Events of Default with respect to the Notes (other than the
non-payment of accelerated principal) have been cured or waived as provided in
Section 6.13.
No such rescission shall affect any subsequent Default or impair any
right consequent thereon."
SECTION 4.02. Amendment of Section 6.3 of the Indenture. With respect
to the Notes, clause (a) of the first paragraph of Section 6.3 of the Indenture
is hereby amended by deleting the number "30" and replacing it with the number
"10."
SECTION 4.03. Amendment of Section 6.7 of the Indenture. With respect
to the Notes, Section 6.7 of the Indenture is hereby amended by deleting the
words "a majority" in clauses (b) and (e) thereof and replacing them with the
figure "51%."
SECTION 4.04. Amendment of Section 6.13 of the Indenture. With respect
to the Notes, Section 6.13 of the Indenture is hereby amended by deleting the
words "a majority" in the seventh line thereof and replacing them with the
figure "65%."
ARTICLE V
MISCELLANEOUS
24
<PAGE> 26
SECTION 5.01. Amendment of Section 2.9 of the Indenture. The following
paragraph is hereby added at the end of Section 2.9 of the Indenture:
"Solely for the purpose of determining whether the Holders of the
requisite percentage of the aggregate principal amount of the Outstanding Notes
have approved or consented to any amendment, waiver or consent to be given under
this Indenture, or have directed the taking of any action provided for in this
Indenture or in the Notes to be taken upon the direction of the Holders of a
specified percentage of the aggregate principal amount of the Outstanding Notes,
Notes directly or indirectly owned by the Company or any of its Subsidiaries
shall be deemed not to be outstanding."
SECTION 5.02. Restatement of Section 9.1 of the Indenture. With respect
to the Notes, Section 9.1 of the Indenture is hereby deleted in its entirety and
the following Section is substituted therefor:
"Section 9.1. Without Consent of Holders.
The Company and the Trustee may amend or supplement this Indenture or
the Securities of one or more Series without the consent of any Securityholder:
(a) to comply with Article V;
(b) to provide for the issuance of and establish the form and terms
and conditions of Securities of any Series as permitted by this Indenture;
(c) to evidence and provide for the acceptance of appointment
hereunder by a successor Trustee with respect to the Securities of one or more
Series and to add to or change any of the provisions of this Indenture as shall
be necessary to provide for or facilitate the administration of the trusts
hereunder by more than one Trustee; or
(d) to comply with requirements of the SEC in order to effect or
maintain the qualification of this Indenture under the TIA."
SECTION 5.03. Amendment of Section 9.3 of the Indenture. With respect
to the Notes, clause (e) of Section 9.3 of the Indenture is hereby amended by
deleting the words "a majority" and replacing them with the figure "65%."
SECTION 5.04. Trustee Not Responsible. The Trustee shall not be
responsible in any manner whatsoever for or in respect of the validity or
sufficiency of this Supplemental Indenture or the due execution hereof
25
<PAGE> 27
by the Company, or for or in respect of the recitals and statements contained
herein, all of which are made solely by the Company.
SECTION 5.05. No Added Trustee Duties. Except as herein otherwise
expressly provided, no duties, responsibilities or liabilities are assumed, or
shall be construed to be assumed, by the Trustee by reason of this Supplemental
Indenture other than as set forth in the Indenture; and this Supplemental
Indenture is executed and accepted on behalf of the Trustee subject to all the
terms and conditions set forth in the Indenture as fully to all intents as if
the same were herein set forth at length.
SECTION 5.06. Incorporation and Confirmation of the Indenture. Except
as herein otherwise expressly provided, all the provisions, definitions, terms
and conditions of the Indenture shall be deemed to be incorporated in, and made
a part of, this Supplemental Indenture; the Indenture is in all respects
ratified and confirmed; and the Indenture and this Supplemental Indenture shall
be read, taken and construed as one and the same instrument.
SECTION 5.07. Company Successors and Assigns Bound. All covenants and
agreements in this Supplemental Indenture by or on behalf of the Company shall
bind and inure to the benefit of its successors and assigns, whether so
expressed or not.
SECTION 5.08. Governing Law. THIS SUPPLEMENTAL INDENTURE AND THE NOTES
SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS
MADE AND TO BE PERFORMED IN SUCH STATE, WITHOUT REGARD TO THE CONFLICT OF LAWS
PROVISIONS THEREOF.
SECTION 5.09. Execution in Counterparts. This Supplemental Indenture
may be executed in any number of counterparts, each of which when so executed
shall be deemed an original, but all such counterparts shall together constitute
but one and the same instrument.
SECTION 5.10. Severability. In case any provision in this Supplemental
Indenture or in the Notes shall be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.
SECTION 5.11. Table of Contents; Headings. The Table of Contents and
headings of the Articles and Sections of this Supplemental Indenture have been
inserted for convenience of reference only, are not to be considered a part
hereof and shall in no way modify or restrict any of the terms or provisions
hereof.
26
<PAGE> 28
IN WITNESS WHEREOF, the parties hereto have caused this First
Supplemental Indenture to be duly executed as of the day and year first above
written.
WALLACE COMPUTER SERVICES, INC.
By:
-----------------------------------
Name: Michael T. Leatherman
Title: Executive Vice President and
Chief Financial Officer
THE BANK OF NEW YORK, as Trustee
By:
-----------------------------------
Name:
Title:
28
<PAGE> 29
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
FIRST SUPPLEMENTAL INDENTURE .....................................................................................1
RECITALS .........................................................................................................1
ARTICLE I.........................................................................................................1
DEFINITIONS ......................................................................................................1
SECTION 1.01. Definitions......................................................................1
ARTICLE II.......................................................................................................10
ESTABLISHMENT OF FIRST SERIES OF SECURITIES......................................................................10
SECTION 2.01. Establishment of Limited Series of Notes.........................................10
SECTION 2.02. Maturity Dates...................................................................10
SECTION 2.03. Interest Rates and Payment Dates.................................................10
SECTION 2.04. Place of Payment.................................................................11
SECTION 2.05. No Mandatory Prepayments.........................................................11
SECTION 2.06. Optional Prepayments............................................................11
SECTION 2.07. Option to Tender after Change in Control.........................................12
SECTION 2.08. Denominations....................................................................13
SECTION 2.09. Form of Notes....................................................................13
SECTION 2.10. Notes Payable in Dollars. .......................................................13
SECTION 2.11. Restrictions on Transfers. ......................................................14
SECTION 2.12. Events of Default................................................................14
SECTION 2.13. Covenants. .....................................................................14
i
</TABLE>
<PAGE> 30
<TABLE>
<S> <C>
SECTION 2.14. No Defeasance...................................................................14
SECTION 2.15. Deemed Representations and Agreement............................................14
ARTICLE III......................................................................................................14
COVENANTS........................................................................................................14
SECTION 3.01. Amendment of Section 4.3 of the Indenture.......................................14
SECTION 3.02. Restatement of Sections 4.5, 4.6 and 5.1 of the Indenture; Additional Covenants.14
Section 4.5. Corporate Existence, Etc..................................................................14
Section 4.6. Payment of Taxes and Claims...............................................................15
Section 4.7. Compliance with Law.......................................................................15
Section 4.8. Insurance.................................................................................15
Section 4.9. Maintenance of Properties.................................................................15
Section 4.10. Notes to Rank Pari Passu..................................................................16
Section 4.11. Consolidated Net Worth....................................................................16
Section 4.12. Limitation on Incurrence of Indebtedness..................................................16
Section 4.13 Limitation on Secured Debt................................................................17
Section 4.14. Limitation on Sale and Leaseback Transactions.............................................19
Section 4.15. Transactions with Affiliates..............................................................20
Section 5.1. Consolidation, Merger and Sale of Assets..................................................20
ARTICLE IV......................................................................................................21
EVENTS OF DEFAULT AND REMEDIES...................................................................................21
SECTION 4.01. Restatement of Sections 6.1 and 6.2 of the Indenture...........................21
Section 6.1. Event of Default..........................................................................21
Section 6.2. Acceleration of Maturity; Rescission and Annulment........................................23
SECTION 4.02.....................................................................................................24
SECTION 4.03. Amendment of Section 6.7 of the Indenture......................................24
SECTION 4.04. Amendment of Section 6.13 of the Indenture.....................................24
ii
</TABLE>
<PAGE> 31
<TABLE>
<S> <C>
ARTICLE V........................................................................................................24
MISCELLANEOUS....................................................................................................24
SECTION 5.01. Amendment of Section 2.9 of the Indenture.......................................24
SECTION 5.02. Restatement of Section 9.1 of the Indenture.....................................24
SECTION 5.03. Amendment of Section 9.3 of the Indenture......................................25
SECTION 5.04. Trustee Not Responsible.........................................................25
SECTION 5.05. No Added Trustee Duties.........................................................25
SECTION 5.06. Incorporation and Confirmation of the Indenture.................................25
SECTION 5.07. Company Successors and Assigns Bound............................................25
SECTION 5.08. Governing Law...................................................................25
SECTION 5.09. Execution in Counterparts.......................................................26
SECTION 5.10. Severability....................................................................26
SECTION 5.11. Table of Contents; Headings.....................................................26
</TABLE>
iii
<PAGE> 32
Annex A - Form of 6.92% Note
Annex B - Form of 7.26% Note
iv
<PAGE> 33
ANNEX A
[Form of 6.92% Note]
WALLACE COMPUTER SERVICES, INC.
6.92% SENIOR NOTE DUE JANUARY 15, 2006
THIS NOTE IS SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER
No.
$ CUSIP 932270 AB 7
For Value Received, the undersigned, WALLACE COMPUTER
SERVICES, INC. (herein called the "Company"), a corporation organized and
existing under the laws of the State of Delaware, hereby promises to pay
to______________________________________________________________________________
__________________________________ or registered assigns, the principal sum of
____________________________________________ DOLLARS on January 15, 2006, with
interest (computed on the basis of a 360-day year of twelve 30-day months) (a)
on the unpaid balance thereof at the rate of 6.92% per annum from the date
hereof, payable semi-annually on April 1 and October 1 in each year and at
maturity, commencing on April 1, 1999, until the principal hereof shall have
become due and payable and (b) to the extent permitted by law, on any overdue
payment (including any overdue prepayment) of principal, any overdue payment of
interest and any overdue payment of any Make-Whole Amount (as defined in the
First Supplemental Indenture referred to below), payable semi-annually as
aforesaid (or, at the option of the registered Holder, on demand), at a rate per
annum from time to time equal to the greater of (i) 7.92% or (ii) 1% over the
rate of interest publicly announced by Citibank N.A. from time to time in New
York, New York as its "base" or "prime" rate.
The interest so payable, and punctually paid or duly provided
for, shall be paid to the Person in whose name this Note is registered at the
close of business on the March 15 or September 15 (whether or not a Business
Day), as the case may be, next preceding the immediately following interest
payment date. Any such interest not so punctually paid or duly provided for
shall forthwith cease to be payable to the registered Holder on the regular
record date and may either be paid to the Person in whose name this Note is
registered at the close of business on a special record date, which shall be
fixed by the Company, for the payment of such defaulted interest, notice of
which shall be given to the Holders of the Notes not less than 30 days prior to
such special record date, or be paid at any time in any other lawful manner, all
as more fully provided in the Indenture referred to below.
<PAGE> 34
Except as otherwise provided in the Purchase Agreements,
payment of the principal of, and the Make-Whole Amount, if any, and the interest
on, this Note shall be made in Dollars at the Corporate Trust Office, or at such
other place or places (and in such other manner) as the Company and the
registered Holder of this Note shall agree to in writing.
This Note is one of a duly authorized issue of Securities of
the Company, unlimited in aggregate principal amount, issued or to be issued
under the Indenture dated as of January 15, 1999 (herein called the "Indenture")
duly executed and delivered by the Company and The Bank of New York, as trustee
(herein called the "Trustee," which term includes any successor trustee under
the Indenture). Reference is hereby made to the Indenture, all indentures
supplemental thereto and all resolutions of the Board of Directors establishing,
and resolutions or other actions pursuant thereto by which there shall be
established, a Series of Securities (and the forms and terms of each Series so
established) for a statement of the respective rights, limitations of rights,
obligations, duties and immunities thereunder of the Company, the Trustee and
the Holders of the Securities, and of the terms upon which the Securities are,
and are to be, issued. As provided in the Indenture, the Securities are issuable
in Series, which may vary as to aggregate principal amounts, maturity dates,
interest rates and redemption, retirement and repurchase provisions (if any) and
which may be subject to different covenants and Events of Default and may
otherwise vary as therein provided. This Note is one of a Series designated
"6.92%-7.26% Senior Notes" (herein called the "Notes") established by the First
Supplemental Indenture dated as of January 15, 1999 (herein called the "First
Supplemental Indenture") duly executed and delivered by the Company and the
Trustee and limited in aggregate principal amount to $200,000,000.
The Notes are not entitled to the benefit of any sinking fund
or analogous mandatory prepayment provisions.
The Company may, at its option, prepay at any time all, or
from time to time any part of, the Notes, in an amount not less than 10% of the
aggregate principal amount of the Notes then outstanding in the case of a
partial prepayment, at 100% of the principal amount so prepaid, together with
interest accrued thereon to the date of such prepayment, plus the Make-Whole
Amount determined for the prepayment date with respect to such principal amount.
The Company will give each Holder of the Notes written notice of each optional
prepayment not less than 30 days and not more than 60 days prior to the date
fixed for such prepayment. In the case of each partial prepayment of the Notes,
the principal amount of the Notes to be prepaid shall be allocated among all of
the Notes at the time outstanding in proportion, as nearly as practicable, to
the respective unpaid principal amounts thereof not theretofore called for
prepayment.
From and after any prepayment date, unless the Company shall
fail to pay the principal amount to be prepaid when due and payable, together
with the interest and the Make-Whole Amount, if any, as aforesaid, interest on
such principal amount shall cease to accrue.
-2-
<PAGE> 35
The Company will, within five Business Days after any
Responsible Company Officer has actual knowledge of any Change in Control or
Control Event, give written notice thereof to each Holder of the Notes, all as
more fully specified in the First Supplemental Indenture. Such written notice
shall contain an offer to prepay all, but not less than all, of the Notes held
by each Holder of the Notes at 100% of the principal amount thereof, together
with interest accrued thereon to the date of such prepayment, but without any
Make-Whole Amount or other premium, on the date specified in such written
notice, which shall be given not less than 30 days prior to the consummation of
a Change in Control. A Holder of the Notes may accept such an offer to prepay by
delivering a notice of acceptance to the Company not later than 15 days after
the receipt by such Holder of such an offer. A failure by a Holder of the Notes
so to respond to such an offer shall be deemed to constitute a rejection
thereof. The obligation of the Company to prepay Notes pursuant to an offer
described in this paragraph is subject to the occurrence of the Change in
Control in respect of which such offer shall have been made. In the event that
such Change in Control shall not have occurred on the proposed prepayment date
in respect thereof, any prepayment shall be deferred until, and shall be made
on, the date on which such Change in Control shall occur. The Company shall keep
each Holder of the Notes reasonably informed as to (i) any such deferral and the
date on which such Change in Control and prepayment are expected to occur and
(ii) any determination by the Company that efforts to effect such Change in
Control have ceased or been abandoned, in which case the related offer to prepay
and any acceptances thereof shall be deemed to be rescinded.
If an Event of Default with respect to the Notes shall have
occurred and be continuing, the principal of the Notes may be declared due and
payable in the manner and with the effect provided in the First Supplemental
Indenture and the Indenture.
No reference herein to the First Supplemental Indenture or the
Indenture and no provision of this Note, the First Supplemental Indenture or the
Indenture shall alter or impair the right of each Holder of the Notes, which is
absolute and unconditional, to receive payment of the principal of, and the
Make-Whole Amount, if any, and the interest on, this Note at the times, rate and
place herein prescribed and to institute suit for the enforcement of any such
payment.
To the extent permitted by the Indenture, modifications or
alterations of the Indenture or of any indenture supplemental thereto and of the
rights and obligations of the Company and of the rights of the Holders of the
Securities of any Series may, with the written consent of the Holders of a
majority in principal amount of the outstanding Securities of each Series to be
affected by such modification or alteration, be made at any time by the Company
and the Trustee. Certain rights and obligations of the Company and rights of the
Holders of the Securities of any Series may be modified or altered only with the
consent of each Holder affected. The Indenture also contains provisions
permitting the Holders of a majority in principal amount of the outstanding
Securities of each Series, on behalf of the Holders of all Securities of such
Series, to waive compliance by the Company with any of the provisions of the
Indenture, including the First Supplemental Indenture, and any past Defaults
thereunder and its consequences, except a Default in the payment of the
principal of, or the premium (including
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<PAGE> 36
Make-Whole Amount) or the interest, if any, on, any Securities of such Series
or, if applicable, in respect of any covenant or provision which cannot be
modified or altered without the consent of each affected Holder of the
Securities of such Series then outstanding.
The Company will not directly or indirectly pay or cause to be
paid any remuneration, whether by way of supplemental or additional interest,
fee or otherwise, or grant any security, to any Holder of the Notes as
consideration for or as an inducement to the executing by any Holder of the
Notes of any waiver or consent to the modification or alteration of any of the
terms and provisions of the Notes or the First Supplemental Indenture unless
such remuneration is concurrently paid, or such security is concurrently
granted, on the same terms, ratably to each Holder of the Outstanding Notes even
if such Holder did not execute such waiver or consent.
The Notes are issuable only in registered form and initially
only in denominations of $300,000 and in multiples of $50,000 in excess thereof.
The Notes shall be transferable only in denominations of $300,000 and multiples
of $50,000; provided that if necessary to enable the registration of transfer by
a Holder of its entire holding of the Notes, one Note may be in a denomination
of less than $300,000.
As provided in the Indenture and subject to the limitations
set forth therein and in Section 8.4 of the Purchase Agreements, the transfer or
exchange of this Note shall be registrable in the Note register maintained in
accordance with Section 2.4 of the Indenture. No service charge shall be made
for any registration of transfer or exchange (except as expressly permitted in
the Indenture), but the Company may require payment of a sum sufficient to cover
any transfer tax or similar governmental charge payable in connection therewith
(other than any such transfer tax or similar governmental charge payable upon
exchanges pursuant to Section 3.6 or 9.6 of the Indenture).
Prior to the due presentment of this Note for registration of
transfer, the Company, the Trustee and any agent of the Company or the Trustee
may deem and treat the Person in whose name this Note is registered as the owner
hereof for all purposes; and the Company, the Trustee and any such agent shall
not be affected by any notice to the contrary.
Each Holder of this Note shall be deemed, by its acceptance
hereof: (i) to have made the representations set forth in Sections 6.1 and 6.2
of the Purchase Agreements on and as of the date of such acceptance and (ii) to
have agreed to the confidentiality provisions set forth in Section 15 of the
Purchase Agreements.
No recourse shall be had for the payment of the principal of,
or the Make-Whole Amount, if any, or the interest on, this Note, or for any
claim based hereon or otherwise in respect hereof, or of the Indenture, any
indenture supplemental thereto or any Board Resolution relating to the Notes,
against any incorporator, stockholder, director or officer, past, present or
future, of the Company or of any predecessor or successor corporation, as such,
either directly or
-4-
<PAGE> 37
through the Company or any such predecessor or successor corporation, whether by
virtue of any constitution, statute or rule of law, or by the enforcement of any
assessment or penalty or otherwise, all such liability being, by the acceptance
hereof and as part of the consideration for the issue hereof, expressly waived
and released.
Unless the certificate of authentication hereon shall have
been executed by the Trustee by manual signature, this Note shall not be
entitled to any benefit under the Indenture or the First Supplemental Indenture
or be valid or obligatory for any purpose.
All capitalized terms not defined herein shall have the
respective meanings specified in the Indenture as amended and supplemented by
the First Supplemental Indenture.
THIS NOTE SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW
YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SUCH STATE, WITHOUT
REGARD TO THE CONFLICT OF LAWS PROVISIONS THEREOF.
IN WITNESS WHEREOF, WALLACE COMPUTER SERVICES, INC. has caused
this Note to be signed in its name and on its behalf by the manual signature of
two duly authorized Officers.
Dated:
WALLACE COMPUTER SERVICES, INC.
By:
----------------------------
By:
----------------------------
-5-
<PAGE> 38
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the Series designated therein
referred to in the within-mentioned Indenture and First Supplemental Indenture.
THE BANK OF NEW YORK,
as Trustee
By:
-----------------------------------
Authorized Officer
-6-
<PAGE> 39
ANNEX B
[Form of 7.26% Note]
WALLACE COMPUTER SERVICES, INC.
7.26% SENIOR NOTE DUE JANUARY 15, 2009
THIS NOTE IS SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER
No.
$ CUSIP 932270 AC 5
For Value Received, the undersigned, WALLACE COMPUTER
SERVICES, INC. (herein called the "Company"), a corporation organized and
existing under the laws of the State of Delaware, hereby promises to
pay to__________________________________________________________________________
_________________________________or registered assigns, the principal sum of
____________________________________________ DOLLARS on January 15, 2009, with
interest (computed on the basis of a 360-day year of twelve 30-day months) (a)
on the unpaid balance thereof at the rate of 7.26% per annum from the date
hereof, payable semi-annually on April 1 and October 1 in each year and at
maturity, commencing on April 1, 1999, until the principal hereof shall have
become due and payable and (b) to the extent permitted by law, on any overdue
payment (including any overdue prepayment) of principal, any overdue payment of
interest and any overdue payment of any Make-Whole Amount (as defined in the
First Supplemental Indenture referred to below), payable semi-annually as
aforesaid (or, at the option of the registered Holder, on demand), at a rate per
annum from time to time equal to the greater of (i) 8.26% or (ii) 1% over the
rate of interest publicly announced by Citibank N.A. from time to time in New
York, New York as its "base" or "prime" rate.
The interest so payable, and punctually paid or duly provided
for, shall be paid to the Person in whose name this Note is registered at the
close of business on the March 15 or September 15 (whether or not a Business
Day), as the case may be, next preceding the immediately following interest
payment date. Any such interest not so punctually paid or duly provided for
shall forthwith cease to be payable to the registered Holder on the regular
record date and may either be paid to the Person in whose name this Note is
registered at the close of business on a special record date, which shall be
fixed by the Company, for the payment of such defaulted interest, notice of
which shall be given to the Holders of the Notes not less than 30 days prior to
such special record date, or be paid at any time in any other lawful manner, all
as more fully provided in the Indenture referred to below.
-1-
<PAGE> 40
Except as otherwise provided in the Purchase Agreements,
payment of the principal of, and the Make-Whole Amount, if any, and the interest
on, this Note shall be made in Dollars at the Corporate Trust Office, or at such
other place or places (and in such other manner) as the Company and the
registered Holder of this Note shall agree to in writing.
This Note is one of a duly authorized issue of Securities of
the Company, unlimited in aggregate principal amount, issued or to be issued
under the Indenture dated as of January 15, 1999 (herein called the "Indenture")
duly executed and delivered by the Company and The Bank of New York, as trustee
(herein called the "Trustee," which term includes any successor trustee under
the Indenture). Reference is hereby made to the Indenture, all indentures
supplemental thereto and all resolutions of the Board of Directors establishing,
and resolutions or other actions pursuant thereto by which there shall be
established, a Series of Securities (and the forms and terms of each Series so
established) for a statement of the respective rights, limitations of rights,
obligations, duties and immunities thereunder of the Company, the Trustee and
the Holders of the Securities, and of the terms upon which the Securities are,
and are to be, issued. As provided in the Indenture, the Securities are issuable
in Series, which may vary as to aggregate principal amounts, maturity dates,
interest rates and redemption, retirement and repurchase provisions (if any) and
which may be subject to different covenants and Events of Default and may
otherwise vary as therein provided. This Note is one of a Series designated
"6.92%-7.26% Senior Notes" (herein called the "Notes") established by the First
Supplemental Indenture dated as of January 15, 1999 (herein called the "First
Supplemental Indenture") duly executed and delivered by the Company and the
Trustee and limited in aggregate principal amount to $200,000,000.
The Notes are not entitled to the benefit of any sinking fund
or analogous mandatory prepayment provisions.
The Company may, at its option, prepay at any time all, or
from time to time any part of, the Notes, in an amount not less than 10% of the
aggregate principal amount of the Notes then outstanding in the case of a
partial prepayment, at 100% of the principal amount so prepaid, together with
interest accrued thereon to the date of such prepayment, plus the Make-Whole
Amount determined for the prepayment date with respect to such principal amount.
The Company will give each Holder of the Notes written notice of each optional
prepayment not less than 30 days and not more than 60 days prior to the date
fixed for such prepayment. In the case of each partial prepayment of the Notes,
the principal amount of the Notes to be prepaid shall be allocated among all of
the Notes at the time outstanding in proportion, as nearly as practicable, to
the respective unpaid principal amounts thereof not theretofore called for
prepayment.
From and after any prepayment date, unless the Company shall
fail to pay the principal amount to be prepaid when due and payable, together
with the interest and the Make-Whole Amount, if any, as aforesaid, interest on
such principal amount shall cease to accrue.
-2-
<PAGE> 41
The Company will, within five Business Days after any
Responsible Company Officer has actual knowledge of any Change in Control or
Control Event, give written notice thereof to each Holder of the Notes, all as
more fully specified in the First Supplemental Indenture. Such written notice
shall contain an offer to prepay all, but not less than all, of the Notes held
by each Holder of the Notes at 100% of the principal amount thereof, together
with interest accrued thereon to the date of such prepayment, but without any
Make-Whole Amount or other premium, on the date specified in such written
notice, which shall be given not less than 30 days prior to the consummation of
a Change in Control. A Holder of the Notes may accept such an offer to prepay by
delivering a notice of acceptance to the Company not later than 15 days after
the receipt by such Holder of such an offer. A failure by a Holder of the Notes
so to respond to such an offer shall be deemed to constitute a rejection
thereof. The obligation of the Company to prepay Notes pursuant to an offer
described in this paragraph is subject to the occurrence of the Change in
Control in respect of which such offer shall have been made. In the event that
such Change in Control shall not have occurred on the proposed prepayment date
in respect thereof, any prepayment shall be deferred until, and shall be made
on, the date on which such Change in Control shall occur. The Company shall keep
each Holder of the Notes reasonably informed as to (i) any such deferral and the
date on which such Change in Control and prepayment are expected to occur and
(ii) any determination by the Company that efforts to effect such Change in
Control have ceased or been abandoned, in which case the related offer to prepay
and any acceptances thereof shall be deemed to be rescinded.
If an Event of Default with respect to the Notes shall have
occurred and be continuing, the principal of the Notes may be declared due and
payable in the manner and with the effect provided in the First Supplemental
Indenture and the Indenture.
No reference herein to the First Supplemental Indenture or the
Indenture and no provision of this Note, the First Supplemental Indenture or the
Indenture shall alter or impair the right of each Holder of the Notes, which is
absolute and unconditional, to receive payment of the principal of, and the
Make-Whole Amount, if any, and the interest on, this Note at the times, rate and
place herein prescribed and to institute suit for the enforcement of any such
payment.
To the extent permitted by the Indenture, modifications or
alterations of the Indenture or of any indenture supplemental thereto and of the
rights and obligations of the Company and of the rights of the Holders of the
Securities of any Series may, with the written consent of the Holders of a
majority in principal amount of the outstanding Securities of each Series to be
affected by such modification or alteration, be made at any time by the Company
and the Trustee. Certain rights and obligations of the Company and rights of the
Holders of the Securities of any Series may be modified or altered only with the
consent of each Holder affected. The Indenture also contains provisions
permitting the Holders of a majority in principal amount of the outstanding
Securities of each Series, on behalf of the Holders of all Securities of such
Series, to waive compliance by the Company with any of the provisions of the
Indenture, including the First Supplemental Indenture, and any past Defaults
thereunder and its consequences, except a Default in the payment of the
principal of, or the premium (including
-3-
<PAGE> 42
Make-Whole Amount) or the interest, if any, on, any Securities of such Series
or, if applicable, in respect of any covenant or provision which cannot be
modified or altered without the consent of each affected Holder of the
Securities of such Series then outstanding.
The Company will not directly or indirectly pay or cause to be
paid any remuneration, whether by way of supplemental or additional interest,
fee or otherwise, or grant any security, to any Holder of the Notes as
consideration for or as an inducement to the executing by any Holder of the
Notes of any waiver or consent to the modification or alteration of any of the
terms and provisions of the Notes or the First Supplemental Indenture unless
such remuneration is concurrently paid, or such security is concurrently
granted, on the same terms, ratably to each Holder of the Outstanding Notes even
if such Holder did not execute such waiver or consent.
The Notes are issuable only in registered form and initially
only in denominations of $300,000 and in multiples of $50,000 in excess thereof.
The Notes shall be transferable only in denominations of $300,000 and multiples
of $50,000; provided that if necessary to enable the registration of transfer by
a Holder of its entire holding of the Notes, one Note may be in a denomination
of less than $300,000.
As provided in the Indenture and subject to the limitations
set forth therein and in Section 8.4 of the Purchase Agreements, the transfer or
exchange of this Note shall be registrable in the Note register maintained in
accordance with Section 2.4 of the Indenture. No service charge shall be made
for any registration of transfer or exchange (except as expressly permitted in
the Indenture), but the Company may require payment of a sum sufficient to cover
any transfer tax or similar governmental charge payable in connection therewith
(other than any such transfer tax or similar governmental charge payable upon
exchanges pursuant to Section 3.6 or 9.6 of the Indenture).
Prior to the due presentment of this Note for registration of
transfer, the Company, the Trustee and any agent of the Company or the Trustee
may deem and treat the Person in whose name this Note is registered as the owner
hereof for all purposes; and the Company, the Trustee and any such agent shall
not be affected by any notice to the contrary.
Each Holder of this Note shall be deemed, by its acceptance
hereof: (i) to have made the representations set forth in Sections 6.1 and 6.2
of the Purchase Agreements on and as of the date of such acceptance and (ii) to
have agreed to the confidentiality provisions set forth in Section 15 of the
Purchase Agreements.
No recourse shall be had for the payment of the principal of,
or the Make-Whole Amount, if any, or the interest on, this Note, or for any
claim based hereon or otherwise in respect hereof, or of the Indenture, any
indenture supplemental thereto or any Board Resolution relating to the Notes,
against any incorporator, stockholder, director or officer, past, present or
future, of the Company or of any predecessor or successor corporation, as such,
either directly or
-4-
<PAGE> 43
through the Company or any such predecessor or successor corporation, whether by
virtue of any constitution, statute or rule of law, or by the enforcement of any
assessment or penalty or otherwise, all such liability being, by the acceptance
hereof and as part of the consideration for the issue hereof, expressly waived
and released.
Unless the certificate of authentication hereon shall have
been executed by the Trustee by manual signature, this Note shall not be
entitled to any benefit under the Indenture or the First Supplemental Indenture
or be valid or obligatory for any purpose.
All capitalized terms not defined herein shall have the
respective meanings specified in the Indenture as amended and supplemented by
the First Supplemental Indenture.
THIS NOTE SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW
YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SUCH STATE, WITHOUT
REGARD TO THE CONFLICT OF LAWS PROVISIONS THEREOF.
IN WITNESS WHEREOF, WALLACE COMPUTER SERVICES, INC. has caused
this Note to be signed in its name and on its behalf by the manual signature of
two duly authorized Officers.
Dated:
WALLACE COMPUTER SERVICES, INC.
By:
---------------------------
By:
---------------------------
-5-
<PAGE> 44
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the Series designated therein
referred to in the within-mentioned Indenture and First Supplemental Indenture.
THE BANK OF NEW YORK,
as Trustee
By:
-------------------------------
Authorized Officer
-6-
<PAGE> 1
EXHIBIT 21
Active subsidiaries of the Company:
<TABLE>
<CAPTION>
Subsidiary Additional d/b/a Names State of Parent
Organization
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Wallace Computer Services, Inc. Tops, Colorforms, Retterbush and Delaware N/A
("Company") Sauer Label Corporation,
Continental Ribbon, and Forms
Engineering Company
Wallace Integrated Graphics, Inc. Baum Printing; Carpenter Reserve Georgia Company
Printing, Craftsman; Graphic
Print Services; Heritage Press;
Hoechstetter Printing; IPD
Printing & Distributing; Integrated
Graphic Services; Litho Print; Monroe
Litho; Wetmore & Company; Williams
Printing Company.
Commercial Press, Inc. Commercial Instant Print California Wallace Integrated
Graphics, Inc.
Graphic Direct, Inc., Illinois Illinois Wallace Integrated
Graphics, Inc.
Pearson 1, Inc. Bruce Offset, Graphic Print & Illinois Graphic Direct, Inc.
Fulfillment, Inc.
Harvey Press, Inc. Louisiana Wallace Integrated
Graphics, Inc.
Presstar Printing Corporation Wallace Integrated Graphics Maryland Wallace Integrated
Graphics, Inc.
Quadras Acquisition Company Georgia Wallace Integrated
Graphics, Inc.
Quadras, Inc. Georgia Quadras Acquisition
Company
State Printing Company, Inc. South Carolina Wallace Integrated
Graphics, Inc.
W.E. Andrews Co. Inc. Georgia Wallace Integrated
Graphics, Inc.
A.C. Scanning Inc. Massachusetts W.E. Andrews Co. Inc.
The Central Press of Wallace Integrated Graphics Florida W.E. Andrews Co. Inc.
Miami, Inc.
W.E. Andrews Co., Inc. of Connecticut W.E. Andrews Co. Inc.
Connecticut
Lampro Graphics, Inc. Good Decal Company, Denver Illinois Company
Graphics
Visible Computer Supply, Inc. Consolidated Business Services Illinois Company
Wallace Commercial Printing, Inc. Moran Printing; Klay Printing, Delaware Company
Orlando Envelope
</TABLE>
56
<PAGE> 1
EXHIBIT 23
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation of our
reports, dated September 7, 1999, included 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, File No. 33-86496, and No. 333-56199) and Registration Statement on
Form S-3 (File No. 333-46807).
ARTHUR ANDERSEN LLP
Chicago, Illinois
October 28, 1999
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 of Wallace Computer Services, Inc. included in
this Form 10-K, and have issued our report thereon dated September 7, 1999. Our
audit was made for the purpose of forming an opinion on the consolidated
financial statements taken as a whole. This schedule listed in the index above
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 basic 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 7, 1999
57
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> JUL-31-1999
<CASH> 8,033
<SECURITIES> 0
<RECEIVABLES> 297,677
<ALLOWANCES> (5,582)
<INVENTORY> 107,540
<CURRENT-ASSETS> 448,374
<PP&E> 846,898
<DEPRECIATION> (409,891)
<TOTAL-ASSETS> 1,297,659
<CURRENT-LIABILITIES> 191,865
<BONDS> 416,653
0
0
<COMMON> 45,764
<OTHER-SE> 537,803
<TOTAL-LIABILITY-AND-EQUITY> 1,297,659
<SALES> 1,530,523
<TOTAL-REVENUES> 1,530,523
<CGS> 1,051,917
<TOTAL-COSTS> 1,374,575
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,341
<INTEREST-EXPENSE> 31,009
<INCOME-PRETAX> 126,781
<INCOME-TAX> 50,712
<INCOME-CONTINUING> 76,069
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 76,069
<EPS-BASIC> 1.80
<EPS-DILUTED> 1.80
</TABLE>
