<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
April 30, 1999 1-6528
- ---------------------------------- -----------------------------
For the quarterly period ended Commission file number
WALLACE COMPUTER SERVICES, INC.
-----------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 36-2515832
- ---------------------------------- ---------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2275 Cabot Drive Lisle, Illinois 60532
----------------------------------------------- -------------
(Address of Principal Executive Offices) (ZIP CODE)
(630) 588-5000 41,915,754
- ------------------------------------- --------------------------------------
(Registrant's Telephone Number, (Number of Common Shares Outstanding
Including Area Code) as of May 28, 1999)
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
------ ------
<PAGE> 2
Wallace Computer Services, Inc. Page 2
FORM 10-Q
For Quarterly Period Ended April 30, 1999
Part I Financial Information
Item 1. Financial Statements
The information furnished herein reflects all adjustments which are, in
the opinion of the management, necessary to a fair statement of the
results of operations and financial position for the nine months ended
April 30, 1999, subject to year-end audit by independent public
accountants. These adjustments are of a normal, recurring nature.
Wallace Computer Services, Inc. and Subsidiaries
Consolidated Income Statement (Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
April 30
----------------------------------------------------------
% %
1999 Sales 1998 Sales
----------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $ 1,145,953,000 100.0 $988,117,000 100.0
Cost and Expenses
Cost of goods sold (Note 1) 787,502,000 68.7 659,780,000 66.8
Selling and administrative expenses 184,631,000 16.1 165,973,000 16.8
Provision for depreciation and
amortization 57,199,000 5.0 48,903,000 4.9
--------------- ------ ------------ ------
Total costs and expenses 1,029,332,000 89.8 874,656,000 88.5
--------------- ------ ------------ ------
Operating Income 116,621,000 10.2 113,461,000 11.5
--------------- ------ ------------ ------
Interest income (875,000) (0.1) (2,045,000) (0.2)
Interest expense 23,146,000 2.0 15,817,000 1.6
--------------- ------ ------------ ------
Income before Income Taxes 94,350,000 8.2 99,689,000 10.1
Provision for Income Taxes (Note 4) 37,740,000 3.3 39,702,000 4.0
--------------- ------ ------------ ------
Net Income $ 56,610,000 4.9 $ 59,987,000 6.1
=============== ====== ============ ======
Basic Earnings per Share $ 1.34 $ 1.39
=============== ============
Fully Diluted Earnings per Share $ 1.34 $ 1.37
=============== ============
Average Common Shares Outstanding 42,166,000 43,176,000
=============== ============
Fully Diluted Common Shares Outstanding 42,373,000 43,647,000
=============== ============
Dividends Declared Per Share $ 0.48 $ 0.465
=============== ============
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 3
Wallace Computer Services, Inc. Page 3
FORM 10-Q
For Quarterly Period Ended April 30, 1999
Part I Financial Information
Item 1. Financial Statements
The information furnished herein reflects all adjustments which are, in
the opinion of the management, necessary to a fair statement of the
results of operations and financial position for the three months ended
April 30, 1999 subject to year-end audit by independent public
accountants. These adjustments are of a normal, recurring nature.
Wallace Computer Services, Inc. and Subsidiaries
Consolidated Income Statement (Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
April 30
------------------------------------------------------
% %
1999 Sales 1998 Sales
----------------------- -----------------------
<S> <C> <C> <C> <C>
Net Sales $384,731,000 100.0 $375,649,000 100.0
Cost and Expenses
Cost of goods sold (Note 1) 262,238,000 68.2 257,624,000 68.6
Selling and administrative expenses 61,108,000 15.9 63,042,000 16.8
Provision for depreciation and
amortization 19,213,000 5.0 17,443,000 4.6
------------ ------ ------------ ------
Total costs and expenses 342,559,000 89.0 338,109,000 90.0
------------ ------ ------------ ------
Operating Income 42,172,000 11.0 37,540,000 10.0
------------ ------ ------------ ------
Interest income (283,000) (0.1) (322,000) (0.1)
Interest expense 8,146,000 2.1 7,602,000 2.0
------------ ------ ------------ ------
Income before Income Taxes 34,309,000 8.9 30,260,000 8.1
Provision for Income Taxes (Note 4) 13,724,000 3.6 12,104,000 3.2
------------ ------ ------------ ------
Net Income $ 20,585,000 5.4 $ 18,156,000 4.8
============ ====== ============ ======
Basic Earnings per Share $ 0.49 $ 0.42
============ ============
Fully Diluted Earnings per Share $ 0.49 $ 0.41
============ ============
Average Common Shares Outstanding 41,964,000 43,421,000
============ ============
Fully Diluted Common Shares Outstanding 42,182,000 43,886,000
============ ============
Dividends Declared Per Share $ 0.16 $ 0.155
============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 4
Wallace Computer Services, Inc. and Subsidiaries Page 4
Consolidated Balance Sheet
<TABLE>
<CAPTION>
April 30, 1999 July 31, 1998
(Unaudited) (Audited)
-------------- --------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 0 $ 3,501,000
Accounts receivable 300,744,000 265,519,000
Less-allowance for doubtful accounts 5,454,000 5,195,000
-------------- --------------
Net receivables 295,290,000 260,324,000
Inventories (Note 1) 119,200,000 120,196,000
Prepaid taxes 35,115,000 34,818,000
Advances and prepaid expenses 5,063,000 7,920,000
-------------- --------------
Total current assets 454,668,000 426,759,000
-------------- --------------
Property, plant and equipment, at cost 833,428,000 807,588,000
Less-reserves for depreciation and amortization 397,654,000 353,181,000
-------------- --------------
Net property, plant and equipment 435,774,000 454,407,000
-------------- --------------
Intangible assets arising from acquisitions 290,235,000 290,568,000
Cash surrender value of life insurance 57,807,000 48,064,000
Systems development costs 40,331,000 31,887,000
Other assets 4,882,000 5,778,000
-------------- --------------
Total assets $1,283,697,000 $1,257,463,000
============== ==============
Liabilities and Stockholders' Equity
Current Liabilities
Current portion long-term debt $ 1,911,000 $ 1,934,000
Short-term notes payable 39,975,000 35,718,000
Accounts payable 91,871,000 77,057,000
Accrued salaries, wages, profit sharing and other 85,760,000 75,193,000
-------------- --------------
Total current liabilities 219,517,000 189,902,000
-------------- --------------
Long-term debt 413,797,000 428,224,000
Deferred income taxes 48,062,000 51,971,000
Deferred compensation and retirement benefits 32,872,000 30,552,000
Other long-term liabilities 9,241,000 9,341,000
Stockholders' equity
Common stock (Note 2)- issued shares of
45,764,054 at April 30, 1999 and July 31, 1998 45,764,000 45,764,000
Additional capital 36,703,000 36,390,000
Retained earnings 571,455,000 537,751,000
Treasury stock (at cost)- 3,849,338 shares at
April 30, 1999 and 2,496,173 shares at
July 31, 1998 (93,714,000) (72,432,000)
-------------- --------------
Total stockholders' equity 560,208,000 547,473,000
-------------- --------------
Total liabilities and stockholders' equity $1,283,697,000 $1,257,463,000
============== ==============
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 5
Wallace Computer Services, Inc. and Subsidiaries Page 5
Consolidated Statement of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
April 30
---------------------------------
1999 1998
-------------- ---------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income from operations $ 56,610,000 $ 59,987,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 57,199,000 48,903,000
Deferred taxes (3,909,000) (3,261,000)
(Gain)/loss on disposal of property (584,000) 684,000
Changes in assets and liabilities
Accounts receivable (38,086,000) (7,627,000)
Inventories 300,000 (13,084,000)
Advances and prepaid expenses 2,759,000 10,717,000
Prepaid taxes (297,000) (9,096,000)
Other assets (27,247,000) (15,218,000)
Accounts payable and other liabilities 10,068,000 (7,155,000)
Accrued income taxes 15,383,000 (14,000)
Deferred compensation and retirement benefits 2,320,000 1,269,000
-------------- ---------------
Net cash provided by operating activities 74,516,000 66,105,000
-------------- ---------------
Cash Flows from Investing Activities:
Capital expenditures (36,788,000) (44,240,000)
Proceeds from sales of short-term investments 0 1,866,000
Proceeds from disposal of property 5,597,000 6,517,000
Net construction funds held by trustee 1,280,000 0
Other capital divestitures/(investments-acquisitions) 7,044,000 (437,830,000)
-------------- ---------------
Net cash used in investing activities (22,867,000) (473,687,000)
-------------- ---------------
Cash Flows from Financing Activities:
Treasury stock transactions (23,780,000) 9,950,000
Cash dividends paid (20,095,000) (19,415,000)
Net proceeds from short-term debt 4,257,000 7,637,000
Retirement of long-term debt (69,532,000) (9,853,000)
Proceeds from issuance of long-term debt 54,000,000 415,884,000
-------------- ---------------
Net cash (used in) provided by financing activities (55,150,000) 404,203,000
-------------- ---------------
Net changes in cash and cash equivalents (3,501,000) (3,379,000)
Cash and cash equivalents at beginning of year 3,501,000 14,168,000
-------------- ---------------
Cash and cash equivalents at April 30 $ 0 $ 10,789,000
============== ===============
Supplemental Disclosure:
Interest paid (net of interest capitalized) $ 17,852,000 $ 13,925,000
Income taxes paid (net of refunds received) 24,257,000 42,514,000
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 6
Wallace Computer Services, Inc. and Subsidiaries Page 6
Notes to Consolidated Financial Statements
April 30, 1999
(Unaudited)
Note 1 - Inventories
Inventories at April 30, 1999, and July 31, 1998, were as follows:
April 30, 1999 July 31, 1998
----------------- -----------------
Raw materials $ 17,202,000 $ 26,200,000
Work in process 22,060,000 19,539,000
Finished products 79,938,000 74,457,000
----------------- -----------------
$119,200,000 $120,196,000
================= =================
Certain inventories are stated on the last-in, first-out (LIFO) basis
for their labor and material content, and other inventories are stated
on the first-in, first-out (FIFO) basis.
Because the inventory determination under the LIFO method can only be
made at the end of each fiscal year based on the inventory levels and
costs at that time, interim period LIFO determinations must necessarily
be based upon management's estimates of expected year-end inventory
levels and costs.
Note 2 - Stock Options
As of April 30, 1999, options to purchase 2,165,495 shares of common
stock were outstanding and 2,481,942 shares of common stock were
available for future grants under the Company's Stock Incentive and
Employee Stock Purchase Plans.
The Company has authorized 100,000,000 shares of common stock and
issued 45,764,054 as of April 30, 1999. Of these shares, 3,849,338 were
held in treasury as of April 30, 1999. The number of shares held in
treasury at July 31, 1998 was 2,496,173.
Note 3 - Comprehensive Income
In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS No. 130) was issued. 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 nonowner 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.
Note 4 - Income Taxes
Effective November 1, 1997, the Company increased its effective tax
rate from 39.5% to 40.0%. The income tax rate had been 39.5% since
August 1, 1996. The effective tax rate increased due to higher goodwill
amortization expense, which is not tax deductible.
<PAGE> 7
Wallace Computer Services, Inc. and Subsidiaries Page 7
Notes to Consolidated Financial Statements
April 30, 1999
(Unaudited)
Note 5 - Financial Instruments
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. Of the total $200 million, $65 million mature in 7
years and $135 million mature in 10 years. The notes carry an
all-inclusive effective rate of 8.3% for the $65 million of Senior
Notes and 8.9% for the $135 million of Senior Notes.
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 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.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
For the three-month period ended April 30, 1999, net sales increased
2.4% to $384,731,000. Adjusting for the divestitures of the contract
stationers business to Boise Cascade Office Products, which occurred in
the second quarter of fiscal 1999, and Mercury Printing to Consolidated
Graphics, Inc, which occurred in the third quarter of fiscal 1999, and
for the acquisition of Good Decal, which occurred in the fourth quarter
of fiscal 1998, sales would have been up 5.8%. The Company estimates
that unit growth for the quarter was around 10%, while lower paper
prices had the effect of reducing sales by approximately 4%. For the
nine months ended April 30, 1999, net sales increased 16.0%. The
Graphic Industries ("Graphic") acquisition, which was effective in the
second quarter of last fiscal year, accounts for the majority of the
increase over prior fiscal year. The unit growth for the nine-month
period was also around 10%.
Net income for the third quarter increased 13.4% to $20,585,000 or 49
cents per share (both basic and fully diluted), from $18,156,000 or 42
cents per share (basic) and 41 cents per share (fully diluted) in the
third quarter fiscal 1998. Net income for the nine-month period
decreased 5.6% to $56,610,000 or 1.34 cents per share (both basic and
fully diluted). In the second quarter of fiscal 1999, the results of
the Print Management Segment reflected a non-recurring pre-tax charge
of approximately $1.6 million, or 2.3 cents per share for physical
inventory adjustments at Graphic facilities.
Cost of sales for the quarter was 68.2% of sales as compared to 68.6%
in the third quarter of last year. The third quarter includes a LIFO
credit of $639,000 or 0.9 cents per share versus a charge of $213,000
or 0.3 cents per share in the third quarter of last year. Total LIFO
credits for the nine months ending April 30, 1999 were $1,231,000 or
1.8 cents per share versus charges of $1,243,000 or 1.7 cents per
share.
Year over year, the Forms and Labels segment's sales decreased 2.0% to
$181.6 million. Adjusting for acquisitions and divestitures, sales
would have increased 2.9% for the segment. Operating income for the
current quarter increased 27.1% to $27.0 million from the third quarter
of last fiscal year and increased 5.4% year-to-date over the same
period last year. The increase in operating margins was the result of
efforts to improve margins by management of margin levels on new
business, efforts to negotiate improved levels of service revenues on
certain existing accounts and continued cost reduction activities.
<PAGE> 8
Wallace Computer Services, Inc. and Subsidiaries Page 8
Notes to Consolidated Financial Statements
April 30, 1999
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
The operating margin for the segment improved to 14.9% in the current
quarter from 11.5% in the third quarter of the prior fiscal year. The
operating margin is down from the 15.5% reported in the second quarter
of fiscal 1999 primarily because of increased paper costs in the third
quarter which decreases margins until the paper price increases can be
passed along to contract customers. The lag is typically one quarter
for any market price increase. A second paper price increase is
expected to take effect in the fourth quarter of fiscal 1999.
The Print Management segment's sales increased 6.7% to $203.1 million.
Adjusting for the divestiture of Mercury Printing, the sales increase
would have been 8.4%. Operating income for the current quarter
decreased 7.0% to $15.2 million from the third quarter of last fiscal
year. Operating margins decreased from 8.6% in the third quarter of
last year to 7.5% in the current quarter. While the year over year
comparisons are down, the current quarter shows an improvement from the
first quarter's margin of 6.0% and the second quarter's margin of 4.8%.
Commercial Printing continues to increase its share of sales to the
company's W.I.N. and Select Services customers. In the current quarter
over 13% of the sales to these customers came from commercial printing
versus only 7% in the third quarter of last year. This is a positive
indicator of the Company's strategy of increasing asset utilization in
this segment by selling to national contract customers. Poor
performance in the segment's Southern region in the second quarter had
impacted the overall margin and more than offset the gains made in the
other regions. In that region sales of local transaction by transaction
business has dropped from prior quarters and significant national
contractual business has not been established. In the third quarter,
sales in the Southern region had recovered somewhat and actually
increased from the third quarter of the prior year.
Selling and administration expenses for the quarter were 15.9% versus
16.8% in the third quarter of last year. For the nine months ended
April 30, the ratio to sales was 16.1% versus 16.8% last year. The
Company continues to leverage its selling and administrative expenses
over the larger sales base. This quarter's total includes $319,000 of
Year 2000 related programming expenses compared to $770,000 in the
third quarter of last year. Total Year 2000 expenses through the third
quarter 1999 were $4.3 million. We anticipate expensing a total of
$300,000 during the fourth quarter of fiscal year 1999. The Company
does not anticipate that the costs of remediation will have a material
effect on its financial condition.
The Company's effort to address Year 2000 compliance issues includes
(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 well under way.
The Company has completed an inventory of all potentially affected
software, firmware and hardware (including imbedded chips) material to
its operations. The Company is remediating the problem by modifying its
software and in certain cases, purchasing new software, firmware, and
hardware.
The Company has completed the Phase 1 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, 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.
<PAGE> 9
Wallace Computer Services, Inc. and Subsidiaries Page 9
Notes to Consolidated Financial Statements
April 30, 1999
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
The Company completed Phase 2 on April 30, 1999, which entails
certification 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 is
currently implementing internal administration systems which have been
tested by the Company or that have been certified by the outside
provider as Year 2000 compliant. Implementation is expected to be
completed by July 31, 1999.
In addition, the Company is focused on an initiative to upgrade and
standardize the information technology of its newly acquired commercial
printing facilities, which has 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. Remediation and testing of other material systems, including
production and physical plant systems, was completed by April 30, 1999.
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.
<PAGE> 10
Wallace Computer Services, Inc. and Subsidiaries Page 10
Notes to Consolidated Financial Statements
April 30, 1999
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
The Company will evaluate recent and 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.
Depreciation and amortization for the quarter was $19,213,000 or 5.0%
of sales versus $17,443,000 or 4.6% of sales in the third quarter a
year ago. For the nine months ended April 30, 1999, depreciation and
amortization was $57,199,000 or 5.0% of sales versus $48,903,000 or
4.9% of sales. The dollar increase from the first quarter year over
year is related to Graphic depreciation and goodwill amortization.
While the total dollar amount for depreciation and amortization is
increasing due to acquisitions (mostly Graphic), and capital
expenditures, the percent to sales has remained relatively consistent.
This is keeping with the objective of the Company's Print Management
segment to leverage the asset base acquired in the Graphic transaction
and improve the utilization of those assets.
Interest expense for the quarter increased by $544,000 from the same
period one year ago. For the nine months ended, interest expense
increased $7,329,000 to $23,146,000. The increase is primarily due to
the Graphic acquisition becoming effective in the second quarter of
last fiscal year. Interest expense was impacted as a result of a higher
fixed rate on long-term notes. See Note 5 for further discussion
related to the debt offering. Interest income for the quarter decreased
$39,000 from the third quarter of last fiscal year.
Some of the financial ratios for the twelve months ended April 30, 1999
were: Return on Net Sales of 4.7%, Return on Average Assets of 5.6%,
and Return on Equity of 12.8%.
Liquidity and Capital Resources
Working capital decreased by $1,706,000 from July 31, 1998 to
$235,151,000. The current ratio at April 30, 1999 was 2.1 to 1.
Of the outstanding debt as of April 30, 1999, $200,000,000 has been
borrowed under a five-year credit agreement ("Credit Facility"), which
provides for a maximum aggregate principal amount available to be
borrowed of $500,000,000. On January 15, 1999, the Company offered
$200,000,000 of Senior Notes, and at that time, settled on the treasury
rate lock agreement related to the issuance of the Senior Notes. See
Note 5 to the Consolidated Financial Statements for further discussion
related to the treasury rate lock agreement and the related debt
offering. 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 as of April 30, 1999 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 $125,000,000, under which $39,975,000 was borrowed at
April 30, 1999. The $39,975,000 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
$600,000,000.
Of the remaining long-term debt, $23,500,000 is made up of industrial
revenue bonds at rates ranging from 4.00% to 4.10%. The balance of
$10,146,000 relates to acquisitions, $2,000,000 to the former owners of
acquired businesses, with the rest being long-term debt from the
Graphic acquisition. Total debt currently represents 44.9% of total
capitalization.
<PAGE> 11
Wallace Computer Services, Inc. and Subsidiaries Page 11
Notes to Consolidated Financial Statements
April 30, 1999
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Capital expenditures for the first nine months totaled $36,788,000. For
the full fiscal year, capital expenditures are expected to be
approximately $46.0 million, which are expected to be financed through
internally generated funds and by borrowing against our revolving
credit facility.
Stockholders' equity increased 2.3% to $560,208,000 at April 30, 1999.
Current inventory levels are believed to be in line with the inventory
levels necessary to satisfy customer demand. The Company anticipates
having adequate sources of supply of raw materials to meet future
business requirements.
Common Stock
On September 10, 1998, the Board of Directors increased the annualized
dividend rate to $0.64 per share, a 3.2% increase from fiscal 1998.
During the first nine months of fiscal 1999, the Company purchased
1,656,000 shares of Wallace common stock. Total repurchases against the
$100 million authorized by the Board in June, 1997 have been $49.9
million.
Other
The Company anticipates completing the acquisition of Commercial Press,
Inc., a commercial printer in San Diego, by June 11, 1999. The
acquisition will be a cash transaction and will be accounted for using
the purchase method. The acquisition is not expected to materially
impact the Company's results for fiscal 1999.
Part II Other Information
Items 1 through 4 None
<PAGE> 12
Wallace Computer Services, Inc. and Subsidiaries Page 12
Notes to Consolidated Financial Statements
April 30, 1999
(Unaudited)
Item 5 Other Information
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 Company with the Securities and Exchange Commission, press releases,
presentations by the Company 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
Company 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 Company'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 Company 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
Company and its subsidiaries; successful integration of acquisitions; labor
market conditions; changes in postal rates and paper prices; the ability of the
Company to retain its customers who generally do not operate under long-term
contracts with the Company; the potential unpredictability of the Company's net
sales due to seasonal and other factors which can lead to fluctuations in
quarterly and annual operating results; the ability of the Company to keep pace
with technological advancements in the industry; the effect of technical
advancements on the demand for the Company's goods and services; and the risk of
damage to the Company's data centers and manufacturing facilities or
interruptions in the Company's telecommunications links.
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Wallace Computer Services, Inc. Director Retainer Fee Plan, dated
June 2, 1999.
10.2 Indemnification Agreement with Officer between the Company and
Robert J. Kelderhouse dated June 2, 1999 (form 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).
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None
<PAGE> 13
Page 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WALLACE COMPUTER SERVICES, INC.
June 11, 1999 /s/ Robert J. Cronin
-------------------- -------------------------------------------------------
Date Robert J. Cronin
Chairman of the Board and Chief Executive Officer
June 11, 1999 /s/ Michael T. Leatherman
-------------------- -------------------------------------------------------
Date Michael T. Leatherman
Executive Vice President, Chief Administrative Officer,
and Chief Financial Officer
(Principal Accounting Officer)
<PAGE> 1
EXHIBIT 10.1
WALLACE COMPUTER SERVICES, INC.
DIRECTOR RETAINER FEE PLAN
1. Purpose. Wallace Computer Services, Inc., a Delaware corporation
(the "Company"), hereby adopts this Director Retainer Fee Plan (the "Plan") to
promote the long-term growth and financial success of the Company by attracting
and retaining directors of outstanding ability and assisting the Company in
promoting a greater identity of interest between the Company's directors and its
stockholders.
2. Administration.
(1) The Plan shall be administered by the Compensation Committee
of the Board of Directors (the "Board") unless another shall be
appointed by the Board, which Committee shall consist solely of two or
more non-employee directors (the "Committee"). The members of the
Committee shall be appointed by, and may be changed at any time and
from time to time in the discretion of the Board.
(2) The Committee shall have the authority (i) to exercise all of
the powers granted to it under the Plan, (ii) to construe, interpret
and implement the Plan and all documents executed pursuant to the Plan
(including all Election Forms), (iii) to prescribe, amend and rescind
rules relating to the Plan, (iv) to make any determination necessary or
advisable in administering the Plan and (v) to correct any defect,
supply any omission and reconcile any inconsistency in the Plan.
(3) The determination of the Committee on all matters relating to
the Plan or any document executed pursuant to the Plan shall be
conclusive.
(4) No member of the Committee shall be liable for any action or
determination made in good faith with respect to the Plan.
3. Definitions.
"Annual Retainer Fee" shall mean the annual retainer fee then
currently paid to active members of the Board of Directors of the
Company for services rendered as a member of the Board. The Annual
Retainer Fee shall accrue at the rate of 25% of the fee on each
February 1, May 1, August 1, and November 1 during the period of
service of the Director.
"Director's Fees" shall mean the sum of (i) the Annual Retainer
Fee, (ii) any board and committee meeting fees, and (iii) any fees
payable to a director by virtue of service as a chairperson.
<PAGE> 2
Director Retainer Fee Plan
"Eligible Director" shall mean any director of the Company or any
affiliate of the Company.
"Payment Date" shall mean January 15th of the year following the
period of service.
"Shares" shall mean shares of common stock, par value $1.00 per
share, of the Company and any other stock into which such common
stock shall thereafter be changed by reason of any merger,
reorganization, recapitalization, consolidation, split-up,
combination of shares or similar event as set forth in and in
accordance with this Section 5.
"Valuation Dates" shall mean each of February 1, May 1, August 1,
and November 1.
4. Common Shares Subject to the Plan.
4.1 Shares Available for Awards. Subject to Section 4.2 (relating to
adjustments upon changes in capitalization), as of any date, the total
number of Shares issuable under the Plan shall be 100,000. Shares that
shall be paid to the Eligible Directors pursuant to the Plan shall be
treasury Shares.
4.2 Adjustments. In the event of any merger, reorganization,
recapitalization, consolidation, sale or other distribution of all or
substantially all of the assets of the Company, any stock dividend, split,
spin-off, split-up, split-off, distribution of securities or other property
by the Company, or other change in the Company's corporate structure
affecting the Shares, the Shares then credited pursuant to Section 5.3 and
the number of Shares issuable under the Plan shall be appropriately
adjusted as determined by the Committee in its sole discretion.
5. Payment of Director's Fees.
5.1 Payment in Shares. On the Payment Date, the Company shall pay to
each Eligible Director, forty percent of their Annual Retainer Fee in
Shares. Shares payable under this Section shall be valued on each Valuation
Date by dividing forty percent of the accrued portion of the Annual
Retainer Fee by the Fair Market Value on such date. Such Shares will be
distributed to the Eligible Directors annually on each Payment Date unless
2
<PAGE> 3
Director Retainer Fee Plan
such Eligible Director has elected to defer receipt of such Shares pursuant
to Section 5.3 below.
5.2 Election To Receive Shares.
(1) An Eligible Director may elect to receive payment of all or
part of accrued Director's Fees (not converted pursuant to Section 5.1)
in Shares valued at the Fair Market Value on the applicable Valuation
Date. The election shall be made by submitting an election form to the
Committee no later than the end of the calendar year prior to the year
for which the election is made. The election shall indicate the
percentage of the Director's Fees that are to be paid in Shares.
Notwithstanding the foregoing to the contrary, any individual who first
becomes an Eligible Director on a date other than the first day of the
calendar year shall make an election for that calendar year promptly
upon becoming an Eligible Director.
(2) Any election made under this Section 5.2 shall continue in
full force and effect until revoked by notice to the Committee, until
superseded by a subsequent election or unless no longer permitted by
law or regulations (including Rule 16b-3), provided, however that no
revocation of an election or supersession of such form by a subsequent
election shall be effective with respect to any Director's Fees which
become payable to the Eligible Director until the end of the calendar
year following date of such revocation or supersession.
(3) Shares elected pursuant to this Section will be distributed
to the Eligible Directors on each Payment Date unless such Eligible
Director has elected to defer receipt of such Shares pursuant to
Section 5.3 below.
(4) Amounts deferred pursuant to other deferred compensation
plans shall not be available for conversion into Shares under this
Plan.
5.3 Elective Deferrals.
(1) An Eligible Director may elect to defer the receipt of the
Director's Fees, to the extent such payments are to be made in the form
of Shares, by submitting an election form (a "Deferred Payment Election
Form") to the
3
<PAGE> 4
Director Retainer Fee Plan
Committee prior to the calendar year of service with respect to which
such Director's Fees are to be paid to the Eligible Director
indicating: (i) the percentage of the Retainer and/or Meeting Fees that
are to be deferred; (ii) the date on which the commencement of payment
of the Deferred Amounts should begin, as contemplated by Section 5.4(a)
(the "Distribution Date"); and (iii) whether distributions shall be
made in a lump sum, installments or a combination thereof.
Notwithstanding the foregoing sentence to the contrary, any individual
who first becomes an Eligible Director during a calendar year shall
make an election for that calendar year promptly upon becoming an
Eligible Director.
(2) A Deferred Payment Election Form shall become effective with
respect to the Eligible Director's Director's Fees becoming payable
with respect to services performed in the calendar year following the
calendar year in which such Deferred Payment Election Form is submitted
to the Committee; provided, that any individual who first becomes an
Eligible Director during a calendar year shall make an election for
that calendar year promptly upon becoming an Eligible Director. An
election under this Section 5.3 shall continue in effect until revoked
by notice in writing to the Committee, until superseded by a new
Deferred Payment Election Form or unless no longer permitted by law or
regulation (including under Rule 16b-3), provided, however, that no
revocation of a Deferred Payment Election Form or supersession of such
form by submission of a new Deferred Payment Election Form shall be
effective to make any change with respect to amounts deferred pursuant
to previously filed Deferred Payment Election Forms or shall be
effective with respect to the Retainer and Meeting Fees to be paid to
the Eligible Director in respect to services in the calendar year in
which such revocation or supersession occurs.
(3) An Eligible Director may designate, in a Deferred Payment
Election Form, one or more beneficiaries to receive any distributions
under the Plan upon the death of the Eligible Director, and such
designation may be changed at any time by submitting a new designation
to the Committee, which shall become effective immediately upon receipt
by the Committee.
(4) Any dividends or other distributions paid on deferred Shares
will be accumulated and, after applying income thereon and deducting
expenses of the trust, will be used on the last business day of each
year to purchase Shares at the Fair Market Value on such date.
4
<PAGE> 5
Director Retainer Fee Plan
5.4 Distribution of Deferral Amount.
(1) Distribution Date. Each Eligible Director shall designate on
a Deferred Payment Election Form one of the following dates as a
Distribution Date with respect to the Deferred Amount: (i) the first
day of the month following the Eligible Director's death; (ii) the
first day of the month following the termination of service or
retirement of an Eligible Director as a member of the Board; (iii) the
first day of the month following an Eligible Director's Disability (as
defined in Section 7); (iv) a fixed date in the future at least one
year after the date of such deferral as specified by the Eligible
Director on a Deferred Payment Election Form, provided that such date
is within the Eligible Director's life expectancy determined at the
time of the election; or (v) the earliest to occur of (i), (ii), (iii)
or (iv).
(2) Distribution Method. Distributions shall be made in 10 annual
installments, or with the approval of the Committee, in a single
distribution. In either case such distribution will be in the form of
whole Shares, and in the case of a single distribution or 10th
installment, cash representing any fractional interest in a Share
valued at the Fair Market Value on the date as of which such
distribution is made.
6. Fair Market Value. "Fair Market Value" shall mean, with respect
to each Share for any date:
(1) the closing price of the Shares on The New York Stock
Exchange as reported in the Midwest edition of the Wall Street Journal
for such date (or if not then trading on the New York Stock Exchange,
the closing price of the Shares on the stock exchange or
over-the-counter market on which the Shares are principally trading on
such date), or if, there were not sales on such date, on the closest
preceding date on which there were sales of Shares; or
(2) if there shall be no public market for the Shares on such
date, the fair market value of the Shares as determined in good faith
by the Committee based upon a valuation of an independent appraiser.
7. Definition of Disability. "Disability" shall mean any condition
which, in the opinion of a physician selected by the Committee, causes an
Eligible Director to be unable to substantially perform services as a member of
the Board for the remainder of the Eligible Director's lifetime.
5
<PAGE> 6
Director Retainer Fee Plan
8. Issuance of Certificates. Certificates for Shares that have not
been deferred pursuant to Section 5.3 shall be issued as soon as practicable
after the Payment Date.
8.1 Restrictions on Transferability. All Shares delivered under the
Plan shall be subject to such stop-transfer orders and other restrictions as the
Committee may deem advisable or legally necessary under any laws, rules,
regulations and other legal requirements, including, without limitation, those
of any stock exchange upon which the Shares are then listed and any applicable
federal, state or foreign securities law.
8.2 Compliance with Laws. Anything to the contrary herein
notwithstanding, the Company shall not be required to issue any Shares under the
Plan if, in the opinion of the Company's legal counsel, the issuance and
delivery of such Shares would constitute a violation by the Eligible Director or
the Company of any applicable law or regulation of any governmental authority,
including, without limitation, federal and state securities laws and the rules
of any stock exchange on which the Company's securities may then be listed. If
and to the extent that the Committee determines that it would be illegal,
impracticable or inadvisable to issue Shares under the Plan, or to the extent
Shares are unavailable, the Committee shall make any distribution of Shares
otherwise required under the Plan in cash or such other property as may be
reasonably acceptable to the distributee.
9. Withholding and Other Obligations. The Company shall require as a
condition of delivery of any Shares to an Eligible Director that such Eligible
Director remit an amount sufficient to satisfy any foreign, federal, state,
local and other governmental withholding tax requirements relating thereto and
any indebtedness or other obligation of the Eligible Directors to the Company.
10. Plan Amendments and Termination. The Board may suspend or
terminate the Plan at any time and may amend it at any time and from time to
time, in whole or in part, provided that no amendment or termination may
adversely affect any rights of any Eligible Director that have accrued prior to
the date of such amendment or termination.
11. Listing, Registration and Legal Compliance. If the Committee shall
at any time determine that any Consent (as hereinafter defined) is necessary or
desirable as a condition of, or in connection with, the granting of any award
under the Plan, the issuance of Shares or other rights hereunder or the taking
of any other action hereunder (each such action being hereinafter referred to as
a "Plan Action"), then such Plan Action shall not be taken, in whole or in part,
unless and until such Consent shall have been effected or obtained. The term
"Consent" as used herein with respect to any Plan Action means (i) the listing,
registration or qualification of any Shares issued under the Plan on any
securities exchange or under any foreign, federal, state or local law, rule or
regulation, (ii) any and all consents, clearances and approvals in respect
6
<PAGE> 7
Director Retainer Fee Plan
of a Plan Action by any governmental or other regulatory bodies or (iii) any and
all written agreements and representations by an Eligible Director with respect
to the disposition of Shares or with respect to any other matter which the
Committee shall deem necessary or desirable in order to comply with the terms of
any such listing, registration or qualification or to obtain an exemption from
the requirement that any such listing, qualification or registration be made.
12. Right of Discharge Reserved. Nothing in the Plan shall confer upon
any Eligible Director the right to continue in the service of the Company or
affect any right that the Company may have to terminate the service of such
Eligible Director.
13. Other Payments or Awards. Nothing contained in the Plan shall be
deemed in any way to limit or restrict the Company, any affiliate or the Board
from making any award or payment to any person under any other plan, arrangement
or understanding, whether now existing or hereafter in effect.
14. Rights Not Transferable or Subject to Alienation. No rights
granted to an Eligible Director under this Plan may be sold, assigned or
otherwise transferred by the Eligible Director other than by will or to a
beneficiary as described in Section 5.3 herein; all rights granted to an
Eligible Director under this Plan may be exercised during the Eligible
Director's lifetime only by such Eligible Director. An Eligible Director's
rights to payments under the Plan are not subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, attachment or
garnishment by his creditors or his beneficiaries.
15. Rights as a Shareholder. An Eligible Director shall have no rights
as a shareholder of the Company with respect to any Shares issuable under the
Plan until such Shares have been delivered to the Eligible Director.
16. Indemnification. The Company hereby indemnifies members of the
Committee and the Board for and to hold each of them harmless against any and
all liabilities, losses, costs or expenses (including legal fees and expenses)
of whatsoever kind and nature which may be imposed on, incurred by or asserted
against them at any time by reason of their action under this plan if they did
not act dishonestly or in willful or grossly negligent violation of the law or
regulation under which such liability, loss, cost or expense is not insured
against or exceeds any insurance recovery.
17. Unfunded Plan. The Plan shall be unfunded and shall not create (or
be construed to create) a trust or separate fund. The Plan shall not establish
any fiduciary relationship between the Company and any Eligible Director or
other person and shall constitute a mere promise by the Company to make payments
in the future. The Company may, in its sole discretion, establish a separate
grantor trust to hold assets set aside to provide benefits under the
7
<PAGE> 8
Director Retainer Fee Plan
Plan, provided that no Eligible Director shall have an interest in the assets of
any such trust and the assets of such trust shall be available to pay claims of
the Company's general creditors on such terms and conditions as the trust may
provide. To the extent any person holds any rights by virtue of a pending
deferral under the Plan, such rights shall be no greater than the rights of an
unsecured general creditor of the Company.
18. Governing Law. The Plan shall be governed by, and construed in
accordance with, the laws of the State of Illinois.
19. Severability. If any portion of the Plan is declared by any court
or governmental authority to be invalid, such invalidity shall not affect any
portion not declared to be invalid. Any portion so declared to be invalid shall,
if possible, be construed in a manner which will give effect to the terms of
such portion to the fullest extent possible while remaining valid.
20. Notices. All notices and other communications hereunder shall be
given in writing and shall be personally delivered or sent by registered or
certified mail, return receipt requested or by reputable overnight delivery
service. Any notice shall be deemed given on the date of delivery or mailing,
and if mailed, shall be addressed (a) to the Company, at 2275 Cabot Drive,
Lisle, Illinois 60532, Attention: Board of Directors, and (b) to an Eligible
Director, at the Eligible Director's principal residential address last
furnished to the Company. Either party may, by notice, change the address to
which notice to such party is to be given.
21. Section Headings. The Section headings contained herein are for
convenience only and are not intended to define or limit the contents of said
Sections.
22. Effective Date. This Plan shall become effective as of January 8,
1998.
23. Exculpation. It is understood that the obligations incurred by the
Company with respect to this Plan do not constitute personal obligations of the
Directors, officers, employees or shareholders and shall not create or involve
any claim against, or personal liability on the part of, them or any of them.
The Eligible Directors agree not to seek recourse against any such Directors,
officers, employees or shareholders, or any of them or any of their personal
assets for satisfaction of any liability or with respect to the Plan.
8
<PAGE> 9
Director Retainer Fee Plan
IN WITNESS WHEREOF, Wallace Computer Services, Inc. has caused these
presents to be executed in its name by its proper officers and its duly attested
Corporate Seal to be hereunto affixed pursuant to the authority granted by its
Board of Directors.
WALLACE COMPUTER SERVICES, INC.
By: __________________________
Robert J. Cronin
Chairman and CEO
ATTEST:
____________________________
9
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