<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
January 31, 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 42,014,429
- ------------------------------- ------------------------------------
(Registrant's Telephone Number, (Number of Common Shares Outstanding
Including Area Code) as of February 26, 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
Page 2
Wallace Computer Services, Inc.
FORM 10-Q
For Quarterly Period Ended January 31, 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 six months ended
January 31, 1999, subject to year-end audit by independent public
accountants. These adjustments are of a normal, recurring nature.
<TABLE>
<CAPTION>
Wallace Computer Services, Inc. and Subsidiaries
Consolidated Income Statement (Unaudited)
For the Six Months Ended
January 31
----------------------------------------------------------------
% %
1999 Sales 1998 Sales
------------------------------------ -------------------------
<S> <C> <C> <C> <C>
Net Sales $761,221,000 100.0 $612,468,000 100.0
Cost and Expenses
Cost of goods sold (Note 1) 525,264,000 69.0 402,156,000 65.7
Selling and administrative expenses 123,522,000 16.2 102,931,000 16.8
Provision for depreciation and
amortization 37,985,000 5.0 31,460,000 5.1
------------- ------ ------------- ------
Total costs and expenses 686,771,000 90.2 536,547,000 87.6
------------- ------ ------------- ------
Operating Income 74,450,000 9.8 75,921,000 12.4
------------- ------ ------------- ------
Interest income (591,000) (0.1) (1,723,000) (0.3)
Interest expense 15,000,000 2.0 8,215,000 1.3
------------- ------ ------------- ------
Income before Income Taxes 60,041,000 7.9 69,429,000 11.3
Provision for Income Taxes (Note 4) 24,016,000 3.2 27,598,000 4.5
------------- ------ ------------- ------
Net Income $36,025,000 4.7 $41,831,000 6.8
=========== ===== =========== =====
Basic Earnings per Share $0.85 $ 0.97
==== ====
Fully Diluted Earnings per Share $0.85 $ 0.96
==== ====
Average Common Shares Outstanding 42,264,000 43,058,000
========== ==========
Fully Diluted Common Shares Outstanding 42,466,000 43,541,000
========== ==========
Dividends Declared Per Share $0.32 $0.31
====== ======
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 3
Page 3
Wallace Computer Services, Inc.
FORM 10-Q
For Quarterly Period Ended January 31, 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
January 31, 1999 subject to year-end audit by independent public
accountants. These adjustments are of a normal, recurring nature.
<TABLE>
<CAPTION>
Wallace Computer Services, Inc. and Subsidiaries
Consolidated Income Statement (Unaudited)
For the Three Months Ended
January 31
-----------------------------------------------------------------
% %
1999 Sales 1998 Sales
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $376,306,000 100.0 $366,356,000 100.0
Cost and Expenses
Cost of goods sold (Note 1) 258,128,000 68.6 246,951,000 67.4
Selling and administrative expenses 60,134,000 16.0 59,689,000 16.3
Provision for depreciation and
amortization 19,249,000 5.1 18,221,000 5.0
------------ ------ ------------ ------
Total costs and expenses 337,511,000 89.7 324,861,000 88.7
------------ ------ ------------ ------
Operating Income 38,795,000 10.3 41,495,000 11.3
------------ ------ ------------ ------
Interest income (290,000) (0.1) (506,000) (0.1)
Interest expense 7,426,000 2.0 7,296,000 2.0
------------ ------ ------------ ------
Income before Income Taxes 31,659,000 8.4 34,705,000 9.5
Provision for Income Taxes (Note 4) 12,664,000 3.4 13,882,000 3.8
------------ ------ ------------ ------
Net Income $18,995,000 5.0 $20,823,000 5.7
=========== ===== =========== =====
Basic Earnings per Share $0.45 $0.48
==== ====
Fully Diluted Earnings per Share $0.45 $0.48
==== ====
Average Common Shares Outstanding 41,782,000 43,107,000
=========== ===========
Fully Diluted Common Shares Outstanding 42,059,000 43,632,000
=========== ===========
Dividends Declared Per Share $0.16 $0.155
====== ======
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 4
Page 4
<TABLE>
<CAPTION>
Wallace Computer Services, Inc. and Subsidiaries
Consolidated Balance Sheet
January 31, 1999 July 31, 1998
(Unaudited) (Audited)
Assets ------------------------------------
- ------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 0 $ 3,501,000
Accounts receivable 290,410,000 265,519,000
Less-allowance for doubtful accounts 6,039,000 5,195,000
--------------- ---------------
Net receivables 284,371,000 260,324,000
Inventories (Note 1) 115,443,000 120,196,000
Prepaid taxes 35,106,000 34,818,000
Advances and prepaid expenses 8,248,000 7,920,000
--------------- ---------------
Total current assets 443,168,000 426,759,000
--------------- ---------------
Property, plant and equipment, at cost 828,035,000 807,588,000
Less-reserves for depreciation and amortization 383,194,000 353,181,000
--------------- ---------------
Net property, plant and equipment 444,841,000 454,407,000
--------------- ---------------
Intangible assets arising from acquisitions 292,125,000 290,568,000
Cash surrender value of life insurance 57,495,000 48,064,000
Systems development costs 35,946,000 31,887,000
Other assets 4,152,000 5,778,000
--------------- ---------------
Total assets $ 1,277,727,000 $ 1,257,463,000
=============== ===============
Liabilities and Stockholders' Equity
Current Liabilities
Current portion long-term debt $ 1,934,000 $ 1,934,000
Short-term notes payable 45,466,000 35,718,000
Accounts payable 75,256,000 77,057,000
Accrued salaries, wages, profit sharing and other 75,998,000 75,193,000
--------------- ---------------
Total current liabilities 198,654,000 189,902,000
--------------- ---------------
Long-term debt 443,644,000 428,224,000
Deferred income taxes 46,421,000 51,971,000
Deferred compensation and retirement benefits 31,467,000 30,552,000
Other long-term liabilities 9,270,000 9,341,000
Stockholders' equity
Common stock (Note 2)- issued shares of
45,764,054 at January 31, 1999 and July 31, 1998 45,764,000 45,764,000
Additional capital 36,598,000 36,390,000
Retained earnings 557,570,000 537,751,000
Treasury stock (at cost)- 3,750,597 shares at
January 31, 1999 and 2,496,173 shares at
July 31, 1998 (91,661,000) (72,432,000)
--------------- ---------------
Total stockholders' equity 548,271,000 547,473,000
--------------- ---------------
Total liabilities and stockholders' equity $ 1,277,727,000 $ 1,257,463,000
=============== ===============
</TABLE>
The accompanying notes are an integral part of this statement
<PAGE> 5
Page 5
Wallace Computer Services, Inc. and Subsidiaries
Consolidated Statement of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
January 31
--------------------------------------
1999 1998
Cash Flows from Operating Activities: ------------- --------------------
<S> <C> <C>
Net income from operations $ 36,025,000 $ 41,831,000
Adjustments to reconcile net income to net
cash provided by operating
activities:
Depreciation and amortization 37,985,000 31,460,000
Deferred taxes (5,550,000) (1,845,000)
(Gain)/loss on disposal of property (556,000) 19,000
Changes in assets and liabilities
Accounts receivable (24,047,000) 4,487,000
Inventories 4,753,000 (8,997,000)
Advances and prepaid expenses (328,000) 11,145,000
Prepaid taxes (288,000) (9,465,000)
Other assets (21,431,000) (11,729,000)
Accounts payable and other liabilities (10,412,000) (16,946,000)
Accrued income taxes 9,328,000 (14,000)
Deferred compensation and retirement benefits 914,000 (158,000)
Realized security (gain) loss 0 (9,000)
------------ -------------
Net cash provided by operating activities 26,393,000 39,779,000
------------ -------------
Cash Flows from Investing Activities:
Capital expenditures (26,359,000) (27,939,000)
Proceeds from sales of short-term investments 0 1,875,000
Proceeds from disposal of property 5,226,000 (7,000)
Net construction funds held by trustee 1,280,000 0
Other capital investments-acquisitions 0 (437,830,000)
------------ -------------
Net cash used in investing activities (19,853,000) (463,901,000)
------------ -------------
Cash Flows from Financing Activities:
Treasury stock transactions (21,837,000) 9,653,000
Cash dividends paid (13,372,000) (12,685,000)
Net proceeds from short-term debt 9,748,000 29,565,000
Retirement of long-term debt (38,580,000) (5,100,000)
Proceeds from issuance of long-term debt 54,000,000 415,884,000
------------ -------------
Net cash (used in) provided by financing activities (10,041,000) 437,317,000
------------ -------------
Net changes in cash and cash equivalents (3,501,000) 13,195,000
Cash and cash equivalents at beginning of year 3,501,000 14,168,000
------------ -------------
Cash and cash equivalents at January 31 $ 0 $ 27,363,000
============ =============
Supplemental Disclosure:
Interest paid (net of interest capitalized) $ 10,557,000 $ 5,572,000
Income taxes paid (net of refunds received) 15,815,000 29,463,000
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 6
Page 6
Wallace Computer Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
January 31, 1999
(Unaudited)
Note 1 - Inventories
Inventories at January 31, 1999, and July 31, 1998, were as follows:
<TABLE>
<CAPTION>
January 31, 1999 July 31, 1998
--------------- --------------
<S> <C> <C>
Raw materials $19,778,000 $26,200,000
Work in process 23,229,000 19,539,000
Finished products 72,436,000 74,457,000
-------------- -------------
$115,443,000 $120,196,000
============= =============
</TABLE>
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 January 31, 1999, options to purchase 2,181,195 shares of common
stock were outstanding and 2,464,401 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 January 31, 1999. Of these shares, 3,750,597
were held in treasury as of January 31, 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
Page 7
Wallace Computer Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
January 31, 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 January 31, 1999, net sales increased
2.7% to $376,306,000. The Graphic Industries ("Graphic") acquisition
was effective in the second quarter of last fiscal year resulting in
comparable results quarter to quarter. The Company estimates that unit
growth for the quarter was around 10%, while lower paper prices had the
effect of reducing sales by approximately 7%. For the six months ended
January 31, 1999, net sales increased 24.3%. Before Graphic, the
increase was 3.6%. The unit growth for the six month period was also
around 10%.
Sales to W.I.N. and Select Services customers totaled 40% of the second
quarter's sales which has increased from the 38% in the first quarter
of this year and 31% from the second quarter of last fiscal year. An
increase in sales to W.I.N. and Select Services customers provides the
Company with a larger sales base of longer term contracts resulting in
increased asset utilization at our facilities.
Net income for the second quarter decreased 8.8% to $18,995,000 or 45
cents per share (both basic and fully diluted), from $20,823,000 or 48
cents per share (both basic and fully diluted) in second quarter fiscal
1998. The current quarter reflects the benefit from the divestiture of
our contract stationers business to Boise Cascade Office Products which
was effective January 1, 1999. Earnings per share, excluding this
transaction would have remained 45 cents. In addition, the quarterly
results of the Print Management Segment reflect non-recurring pre-tax
charges of approximately $1.6 million, or 2.3 cents per share for
physical inventory adjustments at Graphic facilities. Net income for
the six month period decreased 13.9% to $36,025,000 or 85 cents per
share (both basic and fully diluted).
Cost of sales for the quarter was 68.6% of sales as compared to 67.4%
in the second quarter of last year. The second quarter includes a LIFO
credit of $592,000 or 0.9 cents per share versus a charge of $448,000
or 0.6 cents per share in the second quarter of last year. Total LIFO
credits in the first half of fiscal year 1999 were $592,000 versus
charges of $1,030,000 or 1.4 cents per share. Since the Graphic
acquisition, cost of goods sold as a percent of sales for the Company
has ranged from 67.4% to 69.6%. The current quarter falls within that
range and is lower than the 69.4% reported in the first quarter of
fiscal 1999.
<PAGE> 8
Page 8
Wallace Computer Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
January 31, 1999
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Year over year, the Forms and Labels segment's sales increased 3.9% to
$193.6 million, with operating income of $30.0 million and operating
margin of 15.5%. Adjusting for the gain on the sale of our Contract
Stationers business, operating margin would have been 15.3%. The
operating margin has returned to the levels of the prior year's second
quarter when operating margins in the segment were 15.1%. In the first
quarter, operating margins were 12.3%. 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. The second quarter of the current fiscal year
reflects the full effect of these efforts.
The Print Management segment's sales increased 1.5% to $182.7 million,
with operating income of $8.8 million and operating margin of 4.8%.
Before the physical inventory adjustment previously mentioned, the
operating margin would have been 5.7%, which is more in line with the
first quarter of this fiscal year. Commercial Printing, which accounted
for only 6% of sales to W.I.N. and Select Services customers in the
second quarter of last year, now accounts for over 12% of the sales.
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 has 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.
Since the acquisition of Graphic, selling and administrative expenses
have been in the range of 16.3% to 16.8%. The current quarter resulted
in an improvement over that range to 16.0% for the quarter versus 16.3%
in the same quarter last year. For the six months ended January 31, the
ratio to sales was 16.2% 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 $541,000 of Year 2000 related
programming expenses compared to $596,000 in the second quarter of last
year. Total Year 2000 expenses through the second quarter 1999 were
$4.0 million. We anticipate expensing a total of $650,000 during the
third 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 packages. The
Company completed remediation and testing of its material internal
business systems during 1998.
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.
The Company is working on Phase 2, which entails certification of all
mission critical manufacturing and operational equipment (e.g. printing
presses, conveyors, and heating and cooling systems). Target date for
completion of Phase 2 of the project is April 30, 1999.
<PAGE> 9
Page 9
Wallace Computer Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
January 31, 1999
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
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, is also currently on schedule
for completion prior to 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.
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.
<PAGE> 10
Page 10
Wallace Computer Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
January 31, 1999
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Depreciation and amortization for the quarter was $19,249,000 or 5.1%
of sales versus $18,221,000 or 5.0% of sales in the second quarter a
year ago. For the six months ended January 31, 1999, depreciation and
amortization was $37,985,000 or 5.0% of sales versus $31,460,000 or
5.1% 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 modestly by $130,000 from
the same period one year ago. For the six months ended, interest
expense increased $6,785,000 to $15,000,000. The increase is primarily
due to the Graphic acquisition becoming effective in the second quarter
of last year. Interest income for the quarter decreased $216,000 from
the second quarter of last year. Some of the financial ratios for the
twelve months ended January 31, 1999 were: Return on Net Sales of 4.5%,
Return on Average Assets of 5.4%, and Return on Equity of 12.7%.
Liquidity and Capital Resources
Working capital increased by $7,657,000 from July 31, 1998 to
$244,514,000. The current ratio at January 31, 1999 was 2.2 to 1.
Of the outstanding debt as of January 31, 1999, $230,000,000 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 January 31, 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 $240,000,000, under which $45,466,000 was borrowed at
January 31, 1999. The $45,466,000 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 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 2.75% to 2.85%. The balance of
$10,357,000 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 47.2% of total
capitalization.
Capital expenditures for the first six months totaled $26,359,000. 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.
<PAGE> 11
Page 11
Wallace Computer Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
January 31, 1999
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Stockholders' equity increased 0.1% to $548,271,000 at January 31,
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 six months of fiscal 1999, the Company purchased
1,559,000 shares of Wallace common stock. Total repurchases against the
$100 million authorized by the Board in June, 1997 have been $47.9
million.
Part II Other Information
Items 1 through 3 None
Item 4 Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of stockholders on November 4, 1998. The
results of the two proposals put to a shareholder vote are as follows:
1) Election of two directors for the class of directors.
For Withheld
-------------- ------------
Bettye Martin Musham 37,634,874 338,434
Andrew J. McKenna, Jr. 37,636,458 336,850
2) Ratification of the appointment of Arthur Andersen LLP as the Company's
independent public accountants for the fiscal year 1999.
For Against Abstain
-------------- ------------ ---------
37,825,762 60,339 87,207
<PAGE> 12
Page 12
Wallace Computer Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
January 31, 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 1999 Deferred Compensation/Capital Accumulation Plan of
the Registrant (form previously filed as Exhibit 10.2 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
October 31, 1995, and incorporated herein by reference to such
report).
10.2 1999 Deferred Compensation/Capital Accumulation Plan for
Directors of the Registrant (form previously filed as Exhibit
10.3 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended October 31, 1995, and incorporated herein by
reference to such report).
27.1 Financial Data Schedule.
<PAGE> 13
Page 13
Wallace Computer Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
January 31, 1999
(Unaudited)
Item 6 Exhibits and Reports on Form 8-K (continued)
(b) Reports on Form 8-K
(1) A report on Form 8-K/A was filed on November 6, 1998 (amending
a report filed on November 18, 1997, amended on January 16,
1998, and amended on June 12, 1998). The amended report
contained unaudited pro forma financial statements including,
(i) condensed consolidated statement of operations for the
three months ended October 31, 1997 and nine months ended July
31, 1998, and the fiscal year ended July 31, 1997 presenting
pro forma operating results for the Company as if the
acquisition of Graphic had occurred as of the beginning of the
periods presented, and (ii) condensed consolidated balance
sheet as of October 31, 1997 as if the acquisition of Graphic
had occurred as of October 31, 1997.
(2) A report on Form 8-K was filed on December 1, 1998. The
exhibit filed with the report was a Form of Purchase Agreement
of the Registrant dated November 30, 1998 for the anticipated
issuance of the $200,000,000 of Senior Notes.
(3) A report on Form 8-K was filed on January 18, 1999. The
exhibit filed with the report was the Final Form of Purchase
Agreement of the Registrant dated January 15, 1999 for the
issued $200,000,000 of Senior Notes.
<PAGE> 14
Page 14
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.
March 17, 1999 /s/ Robert J. Cronin
- ------------------ ------------------------------------------------------
Date Robert J. Cronin
Chairman of the Board and Chief Executive Officer
March 17, 1999 /s/ Michael T. Leatherman
- --------------- --------------------------------------------------------
Date Michael T. Leatherman
Executive Vice President, Chief Administrative Officer,
and Chief Financial Officer
(Principal Accounting Officer)
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