<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, 2000 1-6528
- -------------------------------------- -----------------------------------
For the quarterly period ended Commission file number
WALLACE COMPUTER SERVICES, INC.
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(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 40,353,470
- ----------------------------------- ----------------------------------------
(Registrant's Telephone Number, (Number of Common Shares Outstanding
Including Area Code) as of March 1, 2000)
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
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<PAGE> 2
Wallace Computer Services, Inc. Page 2
FORM 10-Q
For Quarterly Period Ended January 31, 2000
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, 2000, 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 Six Months Ended
January 31
-----------------------------------------------------------------
% %
2000 Sales 1999 Sales
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $771,864,000 100.0 $761,221,000 100.0
Cost and Expenses
Cost of goods sold (Note 1) 536,634,000 69.5 525,264,000 69.0
Selling and administrative expenses 133,518,000 17.3 123,522,000 16.2
Provision for depreciation and
amortization 39,322,000 5.1 37,985,000 5.0
--------------- ------ --------------- ------
Total costs and expenses 709,474,000 91.9 686,771,000 90.2
--------------- ------ --------------- ------
Operating Income 62,390,000 8.1 74,450,000 9.8
--------------- ------ --------------- ------
Interest income (1,602,000) (0.2) (591,000) (0.1)
Interest expense 15,915,000 2.1 15,000,000 2.0
--------------- ------ --------------- ------
Income before Income Taxes 48,077,000 6.2 60,041,000 7.9
Provision for Income Taxes 19,231,000 2.5 24,016,000 3.2
--------------- ------ --------------- ------
Net Income $ 28,846,000 3.7 $ 36,025,000 4.7
=============== ====== =============== ======
Basic Earnings per Share $0.69 $0.85
=============== ===============
Diluted Earnings per Share $0.69 $0.85
=============== ===============
Average Common Shares Outstanding 41,866,000 42,264,000
=============== ===============
Diluted Common Shares Outstanding 41,999,000 42,466,000
=============== ===============
Dividends Declared Per Share $0.33 $0.32
=============== ===============
</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 January 31, 2000
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, 2000, 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
January 31
-----------------------------------------------------------------
% %
2000 Sales 1999 Sales
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $384,248,000 100.0 $376,306,000 100.0
Cost and Expenses
Cost of goods sold (Note 1) 271,915,000 70.8 258,128,000 68.6
Selling and administrative expenses 67,710,000 17.6 60,134,000 16.0
Provision for depreciation and
amortization 19,736,000 5.1 19,249,000 5.1
--------------- ------ --------------- ------
Total costs and expenses 359,361,000 93.5 337,511,000 89.7
--------------- ------ --------------- ------
Operating Income 24,887,000 6.5 38,795,000 10.3
--------------- ------ --------------- ------
Interest income (661,000) (0.2) (290,000) (0.1)
Interest expense 8,435,000 2.2 7,426,000 2.0
--------------- ------ --------------- ------
Income before Income Taxes 17,113,000 4.5 31,659,000 8.4
Provision for Income Taxes 6,845,000 1.8 12,664,000 3.4
--------------- ------ --------------- ------
Net Income $ 10,268,000 2.7 $ 18,995,000 5.0
=============== ====== =============== ======
Basic Earnings per Share $0.25 $0.45
==== ====
Diluted Earnings per Share $0.25 $0.45
==== ====
Average Common Shares Outstanding 41,377,000 41,782,000
=============== ===============
Diluted Common Shares Outstanding 41,455,000 42,059,000
=============== ===============
Dividends Declared Per Share $0.165 $0.16
====== ======
</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>
January 31, 2000 July 31, 1999
(Unaudited) (Audited)
Assets ----------------- ---------------
- ------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 0 $ 8,033,000
Accounts receivable 302,287,000 297,677,000
Less-allowance for doubtful accounts 5,419,000 5,582,000
-------------- --------------
Net receivables 296,868,000 292,095,000
Inventories (Note 1) 116,557,000 107,540,000
Prepaid taxes 33,472,000 37,422,000
Advances and prepaid expenses 5,328,000 3,284,000
-------------- --------------
Total current assets 452,225,000 448,374,000
-------------- --------------
Property, plant and equipment, at cost 880,518,000 846,898,000
Less-reserves for depreciation and amortization 439,593,000 409,891,000
-------------- --------------
Net property, plant and equipment 440,925,000 437,007,000
-------------- --------------
Intangible assets arising from acquisitions 310,768,000 306,117,000
Cash surrender value of life insurance 60,560,000 58,796,000
Systems development costs 53,764,000 43,337,000
Other assets 4,045,000 4,028,000
-------------- --------------
Total assets $1,322,287,000 $1,297,659,000
============== ==============
Liabilities and Stockholders' Equity
Current Liabilities
Current portion long-term debt $ 2,635,000 $ 2,290,000
Short-term notes payable 43,586,000 21,222,000
Accounts payable 79,565,000 85,577,000
Accrued salaries, wages, profit sharing and other 74,731,000 82,776,000
-------------- --------------
Total current liabilities 200,517,000 191,865,000
-------------- --------------
Long-term debt 448,759,000 416,653,000
Deferred income taxes 63,855,000 64,438,000
Deferred compensation and retirement benefits 32,658,000 31,992,000
Other long-term liabilities 8,396,000 9,144,000
Stockholders' equity
Common stock (Note 2)- issued shares of
45,764,054 at January 31, 2000 and July 31, 1999 45,764,000 45,764,000
Additional capital 37,737,000 37,528,000
Deferred compensation 4,771,000 3,883,000
Retained earnings 590,517,000 581,392,000
Treasury stock (at cost)- 5,263,462 shares at
January 31, 2000 and 3,546,243 shares at
July 31, 1999 (110,687,000) (85,000,000)
-------------- --------------
Total stockholders' equity 568,102,000 583,567,000
-------------- --------------
Total liabilities and stockholders' equity $1,322,287,000 $1,297,659,000
============== ==============
</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 Six Months Ended
January 31
----------------------------
2000 1999
Cash Flows from Operating Activities: ------------ ------------
<S> <C> <C>
Net income from operations $ 28,846,000 $ 36,025,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 39,322,000 37,985,000
Deferred taxes (168,000) (5,550,000)
Gain on disposal of property (326,000) (556,000)
Changes in assets and liabilities
Accounts receivable (2,861,000) (24,047,000)
Inventories (8,730,000) 4,753,000
Advances and prepaid expenses (1,985,000) (328,000)
Prepaid taxes 3,950,000 (288,000)
Other assets (15,745,000) (21,431,000)
Accounts payable and other liabilities (15,320,000) (10,412,000)
Accrued income taxes (750,000) 9,328,000
Deferred compensation and retirement benefits 666,000 914,000
------------ ------------
Net cash provided by operating activities 26,899,000 26,393,000
------------ ------------
Cash Flows from Investing Activities:
Capital expenditures (34,305,000) (26,359,000)
Proceeds from disposal of property 2,457,000 5,226,000
Net construction funds held by trustee 0 1,280,000
Other capital investments-acquisitions (9,496,000) 0
------------ ------------
Net cash used in investing activities (41,344,000) (19,853,000)
------------ ------------
Cash Flows from Financing Activities:
Treasury stock transactions (30,872,000) (21,837,000)
Cash dividends paid (13,699,000) (13,372,000)
Net proceeds from short-term debt 21,864,000 9,748,000
Retirement of long-term debt (10,432,000) (38,580,000)
Proceeds from issuance of long-term debt 39,551,000 54,000,000
------------ ------------
Net cash provided by/(used in) financing activities 6,412,000 (10,041,000)
------------ ------------
Net changes in cash and cash equivalents (8,033,000) (3,501,000)
Cash and cash equivalents at beginning of year 8,033,000 3,501,000
------------ ------------
Cash and cash equivalents at January 31 $ 0 $ 0
============ ============
Supplemental Disclosure:
Interest paid (net of interest capitalized) $ 11,911,000 $ 10,557,000
Income taxes paid (net of refunds received) 18,397,000 15,815,000
</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
January 31, 2000
(Unaudited)
Note 1 - Inventories
Inventories at January 31, 2000, and July 31, 1999, were as follows:
January 31, 2000 July 31, 1999
---------------- --------------
Raw materials $12,936,000 $18,043,000
Work in process 18,468,000 16,948,000
Finished products 85,153,000 72,549,000
---------------- --------------
$116,557,000 $107,540,000
================ ==============
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 January 31, 2000, options to purchase 2,472,090 shares of common
stock were outstanding and 3,437,088 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, 2000. Of these shares, 5,263,462
were held in treasury as of January 31, 2000. The number of shares held
in treasury at July 31, 1999 was 3,546,243.
Note 3 - Segment Reporting
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 Integrated
Graphics.
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 Integrated Graphics Segment
include the design and manufacture of high-color, high quality
marketing and promotional materials, and the manufacture of direct
response printing materials.
<PAGE> 7
Wallace Computer Services, Inc. and Subsidiaries Page 7
Notes to Consolidated Financial Statements
January 31, 2000
(Unaudited)
Note 3 - Segment Reporting (continued)
The Company's accounting policies for the segments are the same as
those described in the Summary of Significant Accounting Policies in
the Company's 1999 Annual Report. 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.
Summarized segment data and a reconciliation to the consolidated totals
for the six months ended January 31, 2000, and January 31, 1999 and
three months ended January 31, 2000, and January 31, 1999 as follows:
Six Months Ended January 31, 2000 External Income before
(Amounts in Thousands) Sales Income Taxes
- -------------------------------------------------------------------
Forms and Labels Segment $395,356 $ 46,199
Integrated Graphics Segment 376,508 16,191
- -------------------------------------------------------------------
Segment Total 771,864 62,390
- -------------------------------------------------------------------
Net Interest Expense 0 (14,313)
- -------------------------------------------------------------------
Consolidated $771,864 $ 48,077
===================================================================
Six Months Ended January 31, 1999 External Income before
(Amounts in Thousands) Sales Income Taxes
- -------------------------------------------------------------------
Forms and Labels Segment $392,914 $ 54,640
Integrated Graphics Segment 368,307 19,810
- -------------------------------------------------------------------
Segment Total 761,221 74,450
- -------------------------------------------------------------------
Net Interest Expense 0 (14,409)
- -------------------------------------------------------------------
Consolidated $761,221 $ 60,041
===================================================================
Three Months Ended January 31, 2000 External Income before
(Amounts in Thousands) Sales Income Taxes
- -------------------------------------------------------------------
Forms and Labels Segment $193,691 $ 20,796
Integrated Graphics Segment 190,557 4,091
- -------------------------------------------------------------------
Segment Total 384,248 24,887
- -------------------------------------------------------------------
Net Interest Expense 0 (7,774)
- -------------------------------------------------------------------
Consolidated $384,248 $ 17,113
===================================================================
<PAGE> 8
Wallace Computer Services, Inc. and Subsidiaries Page 8
Notes to Consolidated Financial Statements
January 31, 2000
(Unaudited)
Note 3 - Segment Reporting (continued)
Three Months Ended January 31, 1999 External Income before
(Amounts in Thousands) Sales Income Taxes
- -------------------------------------------------------------------
Forms and Labels Segment $193,624 $ 30,037
Integrated Graphics Segment 182,682 8,758
- -------------------------------------------------------------------
Segment Total 376,306 38,795
- -------------------------------------------------------------------
Net Interest Expense 0 (7,136)
- -------------------------------------------------------------------
Consolidated $376,306 $ 31,659
===================================================================
There are no material changes in Segment Assets from Fiscal Year-End 1999.
Note 4 - Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use
In fiscal 2000, the Company adopted 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. Implementation of this standard
has not affected the Company's financial condition or results of
operations.
Note 5 - Reporting on the Costs of Start-up Activities
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 adopted this standard in the first
quarter of fiscal 2000. Implementation of this standard has not
affected the Company's financial condition or results of operations.
Note 6 - Accounting for Derivative Instruments and Hedging Activities
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.
Note 7 - Subsequent Events - Restructuring and Other
On February 29, 2000, the Company announced a plan to restructure its
operations to increase long-term profitability. In conjunction with
this program four manufacturing facilities will be closed,
approximately 300 employees will be eliminated and certain
underutilized and abandoned equipment and software will be written off.
The Company estimates the total cost of the program will be in the
range of $35 million to $45 million with the majority of costs being
incurred in the third quarter of fiscal 2000. No charges were incurred
related to this restructuring in the second quarter of fiscal 2000.
<PAGE> 9
Wallace Computer Services, Inc. and Subsidiaries Page 9
Notes to Consolidated Financial Statements
January 31, 2000
(Unaudited)
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, 2000, net sales increased
2.1% to $384.2 million. Adjusting for acquisitions and divestitures,
net sales were up 4.2% over the same quarter a year ago. The Company
estimates unit growth for the quarter was flat, while increasing paper
prices had the effect of increasing sales by approximately 4%. For the
six-month period ended January 31, 2000, net sales increased 1.4% to
$771.9 million. Adjusting for acquisitions and divestitures, net sales
were up 3.6% over the same period a year ago. The estimated unit growth
for the six-month period was approximately 1%.
Roughly one third of sales are sold to customers under a written
contract with the Company, which is consistent with the second quarter
a year ago. Contract sales provide the Company a stable sales base
which leads to an increased, more consistent asset utilization of its
facilities. A significant portion of contract sales are sales to
customers managed by the W.I.N. system.
The Company is also hiring experienced sales representatives to
continue to capitalize on local transactional business. The combination
of higher transactional sales and increased contract sales is important
in providing stability to the Company's profitability and utilization
rates.
Net income for the second quarter decreased 45.9% to $10.3 million or
25 cents per share (both basic and diluted), down from $19.0 million or
45 cents per share (both basic and diluted) in the same quarter a year
ago. Net income for the six-month period ending January 31, 2000
decreased 19.9% to $28.8 million or 69 cents per share (both basic and
diluted), down from $36.0 million or 85 cents per share (both basic and
diluted).
Cost of sales for the quarter was 70.8% of sales for the quarter as
compared to 68.6% in the second quarter of last year. The second
quarter includes a LIFO charge of $1,119,000 or 1.6 cents per share
versus a LIFO credit of $592,000 or 0.9 cents per share in the second
quarter of last year. Cost of sales for the six-month period ended
January 31, 2000 was 69.5% of sales as compared to 69.0% in the same
period a year ago. Total LIFO charges in the first half of fiscal year
2000 were $1,690,000 or 2.4 cents per share versus LIFO credits of
$592,000 or 0.9 cents per share in the same period a year ago.
Year over year, the Forms and Labels segment's sales were unchanged at
$193.7 million, with operating income of $20.8 million and operating
margin of 10.7%, down from the prior year quarter of $30.0 million and
operating margin of 15.5%. Adjusting for acquisitions and divestitures,
net sales in this segment increased 4.1%. For the six-month period
ended January 31, 2000, segment sales increased slightly from $392.9
million to $395.4 million, with operating income of $46.2 million and
operating margin of 11.7%, down from prior year-to-date of $54.6
million and operating margin of 13.9%. Adjusting for acquisitions and
divestitures, net sales in this segment increased 5.8% from the same
period a year ago. The impact of rising paper prices continues to
adversely affect operating margins in this segment. The majority of the
LIFO impact discussed in the preceding paragraph relates to this
segment. In January, the Company started to see the benefits of
increased sales prices arising from the September 1999 paper price
increase.
<PAGE> 10
Wallace Computer Services, Inc. and Subsidiaries Page 10
Notes to Consolidated Financial Statements
January 31, 2000
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
- --------------------------------------------------------------------
Year over year, the Integrated Graphics segment's sales increased from
$182.7 million to $190.6 million, with operating income of $4.1 million
and operating margin of 2.1%, down from prior year quarter of $8.8
million and operating margin of 4.8%. Adjusting for acquisitions and
divestitures, net sales in this segment increased 4.4%. For the
six-month period ended January 31, 2000, segment sales increased
slightly from $368.3 million to $376.5 million, with operating income
of $16.2 million and operating margin of 4.3%, down from prior
year-to-date operating income of $19.8 million and operating margin of
5.4%. Adjusting for the acquisitions and divestitures, net sales in
this segment increased 1.5% from the same period a year ago. While
sales did grow over the prior year, they did not grow in line with
Company expectations. At the same time, manufacturing expenses
increased in anticipation of higher sales volumes. A portion of the
restructuring plan announced in February 2000 is aimed at addressing
the build-up of expenses. The closing of certain under-performing
plants has been announced and workforce reductions in other areas
within the segment will take place in the third quarter.
Selling and administrative expenses for the quarter were 17.6% of sales
versus 16.0% in the second quarter of last year. For the six months
ended January 31, the ratio to sales was 17.3% versus 16.2%. Included
in the current quarter is a one-time charge of $2.3 million for
executive retirement benefits. The majority of the remaining increase
continues to relate to the expansion in the Company's information
technology infrastructure and positioning for business-to-business
eCommerce. There has also been an increase in year over year expenses
in the financial division as the Company has added personnel and
improved financial systems. Selling expense has increased as the
Company has hired a number of sales representatives, including
experienced sales representatives, in order to increase the
transactional business. The restructuring previously mentioned and
other cost reduction opportunities have been identified which should
bring these expenses back to historical levels by the fourth fiscal
quarter of this year.
Fiscal year 1999 year-to-date total selling & administrative
expenditures includes $1,053,000 of Year 2000 related programming
expenses, of which $541,000 relates to the second quarter fiscal year
1999, compared to no charges in the current fiscal year period to date.
Total Year 2000 costs are the same as disclosed in the Company's 1999
Annual Report.
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 were completed as
of December 31, 1999.
Substantially all of the Company's Software, firmware, hardware
(including embedded chips) and equipment used in its printing
operations, including its pre-press and press equipment and its
equipment used to finish and deliver its products, were not materially
affected by a Year 2000 related failure. Also, the Company did not
experience any Year 2000 related problems caused by key suppliers or
customers whose systems interact with those of the Company
(collectively, "Trading Partners'). In addition, the Company did not
experience any Year 2000 related failure caused by utility companies,
telecommunication services providers, delivery services, the financial
services industry and other suppliers outside of its control.
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. The passing of December 31,
1999 and other high-risk dates (i.e. February 29, 2000) with no major
negative Year 2000 impact from a
<PAGE> 11
Wallace Computer Services, Inc. and Subsidiaries Page 11
Notes to Consolidated Financial Statements
January 31, 2000
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
- -------------------------------------------------------------------------
U.S. standpoint mitigates the risk of any future major Year 2000
related disruptions. Nonetheless, the Company relies upon utility
companies, telecommunication service 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 (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 unlikely case of a systemic failure,
such as widespread 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.
Depreciation and amortization for the quarter was $19.7 million or 5.1%
of sales versus $19.2 million or 5.1% of sales in the second quarter a
year ago. For the six-month period ended January 31, 2000, depreciation
and amortization was $39.3 million or 5.1% of sales versus $38.0
million or 5.0% of sales in the same period a year ago. Of the total,
software amortization and development represents $1.8 million for the
quarter versus $1.4 million in the second quarter a year ago. For the
six-month period ended January 31, 2000, software amortization and
development was $3.3 million versus $2.5 million in the same period a
year ago. The unamortized balance of all capitalized computer software
at January 31, 2000 was $53.8 million, a 24.1% increase from fiscal
year-end, due primarily to ongoing enhancements to the Company's order
entry, customer service, and inventory management system.
Interest expense for the quarter was $8.4 million, up from $7.4 million
last year. For the six months ended January 31, 2000, interest expense
increased slightly from $15.0 million to $15.9 million. The increase is
primarily due to slightly increased debt levels along with rising
interest rates as compared to a year ago. Interest income for the
quarter increased $371,000 from the second quarter of last year and
increased $1.0 million for the six-month period to date. Most of the
increase is related to increased returns on the cash surrender value of
life insurance policies.
Some of the financial ratios for the twelve months ended January 31,
2000 were: Return on Net Sales of 4.5%, Return on Average Assets of
5.3%, and Return on Equity of 12.3%.
Liquidity and Capital Resources
-------------------------------
Working capital decreased by $4.8 million from July 31, 1999, primarily
due to the increase in short-term notes payable, the proceeds of which
were used to fund the stock repurchase program. The current ratio at
January 31, 2000 was 2.3 to 1.
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.
<PAGE> 12
Wallace Computer Services, Inc. and Subsidiaries Page 12
Notes to Consolidated Financial Statements
January 31, 2000
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
- ------------------------------------------------------------------------
Of the outstanding debt as of January 31, 2000, $230.0 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. The borrowings under the Credit Facility are
classified as long-term debt as of January 31, 2000 since the Company
has the intent and ability to carry that debt long-term. The Company
has $200 million of Senior Term Notes with institutional investors with
a book value of $183.1 million classified as long-term debt with the
earliest maturity in 2006.
In addition to the credit facility and the senior notes, the Company
has unsecured money market lines of $185.0 million under which $43.6
million was borrowed at January 31, 2000, and is classified as
short-term debt.
Of the remaining long-term debt, $23.5 million is made up of industrial
revenue bonds at rates ranging from 3.3% to 3.4%. The balance of $14.8
million relates to acquisitions, $6.5 million to the former owners of
acquired businesses, with the rest being long-term debt from the
Graphic acquisition.
Total debt currently represents 46.6% of total capitalization. The
maximum amount as authorized by the Board of Directors for total
borrowings is limited to $600 million.
Capital expenditures for the first six months of this year totaled
$34.3 million. For the full fiscal year, capital expenditures are
expected to be in the range of $62 to $64 million, which are expected
to be financed through internally generated funds and by borrowing
against our revolving credit facility.
Stockholders' equity decreased 2.7% to $568.1 million at January 31,
2000.
Common Stock
------------
On September 8, 1999, the Board of Directors increased the annualized
dividend rate to $0.66 per share, a 3.1% increase from fiscal 1999.
During the first six months of fiscal 2000, the Company purchased
2,187,000 shares of Wallace common stock. Total repurchases through
January 31, 2000 against the $100 million authorized by the Board in
June 1997 have been $87.8 million.
<PAGE> 13
Wallace Computer Services, Inc. and Subsidiaries Page 13
Notes to Consolidated Financial Statements
January 31, 2000
(Unaudited)
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 3, 1999. The
results of the three proposals put to a shareholder vote are as follows:
1) Election of directors for the class of directors
For Withheld
---------- ----------
Robert J. Cronin 34,895,928 412,936
Neele E. Stearns Jr 34,910,844 398,020
Michael T. Riordan 34,901,582 407,282
2) Approval of an amendment to the 1997 Stock Incentive Plan to increase the
number of shares of Common Stock reserved for issuance thereunder
For Against Abstain
-------------- ------------ ---------
30,281,870 4,881,074 145,920
3) Ratification of the appointment of Arthur Andersen LLP as the Company's
independent public accountants for the fiscal year 2000
For Against Abstain
-------------- ------------ ---------
35,147,099 97,635 64,130
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
<PAGE> 14
Wallace Computer Services, Inc. and Subsidiaries Page 14
Notes to Consolidated Financial Statements
January 31, 2000
(Unaudited)
Part II Other Information (continued)
-------------------------------------
Item 5 Other Information (continued)
- ---------------------------------------
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.
<PAGE> 15
Wallace Computer Services, Inc. and Subsidiaries Page 15
Notes to Consolidated Financial Statements
January 31, 2000
(Unaudited)
Item 6 Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
10.1 Wallace Computer Services, Inc. Separation Agreement and General
Release between the Company and Robert J. Cronin, dated January 18,
2000, filed herewith.
10.2 2000 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).
10.3 2000 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).
10.4 Wallace Computer Services, Inc. Consulting Agreement between the Company
and Robert J. Cronin, dated January 18, 2000, filed herewith.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
(1) A report on Form 8-K was filed on January 19, 2000
announcing the retirement of Robert J. Cronin from the
position of Chairman of the Board and Chief Executive
Officer of the Registrant and the appointment of Neele E.
Stearns as Chairman of the Board and Michael O. Duffield as
Interim Chief Executive Officer.
<PAGE> 16
Page 16
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 16, 2000 /s/ Michael O. Duffield
----------------------------- ------------------------------------------
Date Michael O. Duffield
Acting Chief Executive Officer, President,
and Chief Operating Officer
March 16, 2000 /s/ John J. DeCoster
----------------------------- ------------------------------------------
Date John J. DeCoster
Vice-President, Controller
(Principal Accounting Officer)
<PAGE> 1
EXHIBIT 10.1
CONFIDENTIAL SEPARATION AGREEMENT
AND
GENERAL RELEASE
This Confidential Separation Agreement and General Release ("Agreement") is
entered into as of January 18, 2000, between WALLACE COMPUTER SERVICES, INC.
("Wallace") and ROBERT J. CRONIN ("Cronin"). The purpose of this Agreement is to
acknowledge and clarify the understandings and agreements of the parties
relating to Cronin's separation from service with Wallace.
1. Termination of Employment. Cronin shall resign from all offices,
directorships and fiduciary positions with Wallace, its affiliates and their
respective benefit plans, including, without limitation, from the positions of
Chairman and Chief Executive Officer of Wallace and as a member of Wallace's
Board of Directors, effective as of January 18, 2000 (hereinafter referred to as
the "Termination Date"). Cronin's employment with Wallace shall terminate as of
such date. The parties acknowledge and agree that such resignation by Cronin
shall be deemed to be with Good Reason within the meaning of Paragraph 10(b) of
the Employment Agreement entered into between the parties as of July 1, 1997
(the "Employment Agreement"). Wallace hereby waives notice of that resignation.
The parties further acknowledge and agree that the Termination Date hereunder
shall constitute the Termination Date for purposes of the Employment Agreement.
2. Obligations of the Parties Under the Employment Agreement, Including
Wallace's Obligations Under Paragraph 10(b) Thereof. The parties acknowledge
their respective obligations under the Employment Agreement, including, without
limitation, Wallace's obligations under Paragraph 10(b) thereof. With regard to
Paragraphs 10(b)(i) and 10(b)(ii) of the Employment Agreement, on January 25,
2000 (being the date determined under Paragraph 15 hereof) (the "Initial Payment
Date"), Wallace shall make payment of the Accrued Obligations as defined in the
Employment Agreement (including, but not limited to, accrued vacation pay) and
Wallace shall make payment of a prorated cash bonus for the fiscal year ending
in 2000 in the amount of $180,000 (being six-twelfths of a target bonus of 60%
of Cronin's base compensation). As regards Paragraph 10(b)(iii) of the
Employment Agreement, the parties agree that in lieu of any payments to which
Cronin would otherwise be entitled thereunder, Wallace shall pay Cronin in a
single lump sum on the Initial Payment Date, the amount of $1,920,000. Under
Paragraph 10(b)(iv) of the Employment Agreement, Wallace shall continue to
provide benefits to Cronin for a period of two (2) years after the Termination
Date, as provided in said Paragraph 10(b)(iv), including, without limitation,
health benefits under Wallace's group health plan. At the termination of said
two-year period, Cronin shall be offered the opportunity to elect continuation
coverage under Wallace's group health plan in accordance with Internal Revenue
Code ("Code") Section 4980B(f), as it or a successor Code section may exist at
such time. With respect to Paragraph 10(b)(vi) of the Employment Agreement,
Cronin agrees to waive his rights to outplacement services thereunder and
Wallace agrees to pay him in lieu thereof $50,000, which Wallace shall pay to
Cronin on the Initial Payment Date.
3. Uninsured Medical Expenses. In connection with the benefits to which
Cronin is entitled under Paragraph 7(b) of the Employment Agreement (relating to
uninsured Medical
<PAGE> 2
Expenses), the parties acknowledge and agree that, as of the Termination Date,
Cronin is age 55 and, therefore, the reimbursement or payment of medical
expenses on behalf of Cronin and/or his spouse under said Paragraph 7(b) shall
be limited to an aggregate of $150,000, exclusive of the benefits referred to in
the fourth sentence of Paragraph 2.
4. Supplemental Retirement Benefit. With respect to Paragraph 7(c) of the
Employment Agreement (relating to Supplemental Retirement Benefit), the parties
further acknowledge and agree that Cronin's Supplemental Retirement Percentage
shall be 27.5%. Such benefits shall be paid not less frequently than monthly in
accordance with Wallace's customary practices; and shall not be reduced by
monthly Social Security Retirement benefits prior to Cronin's Social Security
retirement age.
5. Equity Compensation. Wallace shall pay any amounts to Cronin to which he
is entitled under Wallace's phantom stock plan in accordance with its terms,
based on the price of Wallace's stock on January 14, 2000, which the parties
agree was $16.25 per share, with the number of shares of phantom stock held by
Cronin to be determined as of the date hereof. Similarly, Cronin shall be
entitled to exercise any stock options in accordance with the terms of any
Wallace stock option plan in which he participates, any applicable award
agreement under such a plan, and the Employment Agreement, with the number of
shares which are subject to such options, and the respective exercise prices, to
be as determined by further written agreement of Cronin and Wallace based upon
their customary records as to stock option awards previously made to Cronin;
provided that, with respect to any and all stock options which are exercisable
and have exercise prices less than $13.00 per share, Cronin shall, in return for
cancellation of all such options on the Termination Date, receive on the Initial
Payment Date a lump sum cash payment from Wallace equal to the excess of (a) the
aggregate amount of $16.25 per share over (b) the aggregate exercise price for
the option, as reflected on the records of Wallace relating to the stock options
as previously reported by Wallace to Cronin; and all of Cronin's other options,
all of which shall be vested as of the Termination Date pursuant to the
Employment Agreement, shall be exercisable for a period of two years after the
Termination Date.
6. Public Announcements and Non-Disparagement. Cronin and Wallace shall
mutually agree upon the content of any voluntary statements, whether oral or
written, to be made by Cronin or Wallace to any third party or parties regarding
Cronin's termination of employment, including, without limitation, any press
release or other statements to the press, except that this Paragraph 6 shall not
apply to any statements required to be made by reason of law, regulation, or any
judicial or other similar proceeding or order. Cronin and Wallace each hereby
covenant and agree not to make any public or private statements to any third
party, including, without limitation, to any representative of any news
organization, regarding the other party hereto that are intended to, or can
reasonably be expected to, cause such other party's reputation to be damaged in
any material respect.
7. Payment of Certain Expenses. In addition to any rights which Cronin may
have under Paragraph 13 of the Employment Agreement, Wallace agrees to reimburse
Cronin for reasonable attorney fees incurred in connection with the preparation
of this Agreement and the
2
<PAGE> 3
Consulting Agreement between Cronin and Wallace of even date hereof, subject to
a limit of $15,000.
8. Confidentiality, Records and Nonsolicitation. In addition to his
covenants under Paragraph 8 of the Employment Agreement (relating to
Confidentiality, Records, Nonsolicitation and Enforcement), Cronin further
covenants and agrees that he shall not disclose or discuss, other than with
legal counsel, personal tax or financial advisors, or members of Cronin's
immediate family, either the existence of or any details of this Agreement,
except that which Wallace publicly discloses. Cronin further agrees that,
insofar as he discusses the circumstances of his termination of employment with
anyone other than those parties listed in the previous sentence, he will state
only that he voluntarily retired and that he has agreed with Wallace not to make
any further comment. To the extent Cronin discusses the existence or terms of
this Agreement with any third party as authorized above, Cronin shall inform
such third party of the obligation to maintain confidentiality of all
communications concerning this Agreement and take reasonable and appropriate
efforts to assure such continued confidentiality.
9. Limitations on Compensation and Benefits. Cronin's benefits under the
Wallace deferred income (capital accumulation) plan shall be paid in accordance
with and in the amounts due under the terms of such plan (i.e., in a single sum
annually no later than January 15 of each relevant year). Except as specifically
provided in the Employment Agreement, as modified, supplemented or liquidated by
this Agreement, or in this Agreement, and except as specifically provided by
Wallace's customary practice for payment of accrued Board of Director's fees,
Cronin hereby waives any and all claims to salary, incentives, payments, or
benefits of any kind.
10. Mutual Release of Claims.
(a) Cronin's Release. Except as to the benefits expressly made
available to Cronin hereunder and any accrued vested benefits available to
Cronin under the express terms and conditions of any employee benefit plan
maintained by Wallace or any of its subsidiaries or affiliates, Cronin, as his
free and voluntary act and on behalf of himself, his heirs, administrators,
executors, successors and assigns, hereby releases and discharges Wallace, its
subsidiaries and affiliates and the directors, officers, employees, and agents
of each of them, of and from any and all debts, obligations, claims, demands,
judgments or causes of action of any kind whatsoever in tort, contract, by
statute, or on any other basis for compensatory, punitive or other damages,
expenses, reimbursements or costs of any kind, including but not limited to any
and all claims, demands, rights, and/or causes of action arising out of
allegations relating to a claimed breach of an alleged oral or written contract,
or relating to purported employment discrimination or civil rights violations
(such as, but not limited to, those arising under Title VII of the Civil Rights
Act of 1964 (42 U.S.C. Section 2000e, et seq), the Civil Rights Acts of 1866 and
1871 (42 U.S.C. Sections 1981 and 1983), the Age Discrimination in Employment
Act of 1967 (29 U.S.C. Section 621, et seq.), the Equal Pay Act of 1963 (29
U.S.C. Section 201 et seq.), the Family and Medical Leave Act (29 U.S.C. Section
2691 et seq.), the Americans With Disabilities Act (42 U.S.C. Section 12,101 et
seq.), the Employee Retirement Income Security Act (29 U.S.C. Section 1001 et
seq.), the Illinois Human Rights Act (775 ILCS 5-101 et seq.),
3
<PAGE> 4
the Illinois Wage payment and Collection Act (820 ILCS 115/1 et seq.), or any
other applicable federal, state or local law, regulation, ordinance or order)
which he might have or assert against any of said entities or persons (1) by
reason of his active employment by Wallace or the termination of said employment
relationship and all circumstances related thereto, or (2) by reason of any
other matter, cause or thing whatsoever, from the beginning of time to the date
of execution of this Agreement; provided, however, that this Agreement shall not
limit or impair Cronin's right as a former officer and director of Wallace to
indemnification by Wallace to the full extent provided, by the corporate
governing documents or any employee benefit plan of Wallace or under any
director and officer liability insurance policy maintained by Wallace, for any
incumbent or former officer or director of Wallace; and further provided,
however, that Cronin does not release any rights under the Employment Agreement
(including, without limitation, Paragraph 13 thereof) as applicable to post Date
of Termination payments or benefits under the Employment Agreement, as modified,
supplemented or liquidated by this Agreement.
(b) Wallace's Release. Wallace, on behalf of itself, any predecessors
in interest, whether or not incorporated, its shareholders (in their capacity as
such) and its successors and assigns does hereby irrevocably and unconditionally
release Cronin and his estate, heirs, beneficiaries, executors, personal
representatives or other successors and assigns, from all claims, controversies,
liabilities, demands, causes of action, debts, obligations, promises, acts,
agreements, rights of contribution and/or indemnification, and damages of
whatever kind or nature, whether known or unknown, suspected or unsuspected,
foreseen or unforeseen, liquidated or contingent, actual or potential, joint or
individual, that it or they have had or now have, based on any and all aspects
of Cronin's employment with Wallace or his separation from employment with
Wallace, including but not limited to: all claims arising under the Employment
Agreement; any and all claims for breach of express or implied contracts or the
covenant of good faith and fair dealing (whether written or oral), and any and
all claims for breach of fiduciary duty, breach of promise, detrimental reliance
or tort, whether based on common law or otherwise and any and all claims that
may be asserted on Wallace's behalf by its shareholders or any other third
party. The foregoing list is meant to be illustrative rather than inclusive.
Notwithstanding the foregoing, Wallace does not release any claims that may
hereafter arise.
11. Validity of Agreement. If any provision, or portion thereof, of this
Agreement is determined to be invalid under any applicable statute or rule of
law, only such provision, and only to the extent determined to be invalid, shall
be deemed omitted from this Agreement, the remainder of which shall remain fully
in force and effect.
12. Tax Withholding. All payments to Cronin by Wallace under this Agreement
shall be subject to the withholding of any taxes required to be withheld by
federal, state, or local law with respect to any such payment.
13. Applicable Law. The construction, interpretation and performance of
this Agreement shall be governed by the laws of the State of Illinois without
regard to choice of laws principles.
4
<PAGE> 5
14. Headings. The headings of the paragraphs of this Agreement have been
included solely for convenience of reference and are not to be used in the
interpretation of the provisions of this Agreement.
15. OWBPA Rights. Cronin understands that, pursuant to the Older Workers
Benefit Protection Act of 1990, he has the right to consult with an attorney
before signing this Agreement, he has twenty-one (21) days to consider this
Agreement before signing it and may revoke the Agreement within seven (7)
calendar days after signing it. Cronin further understands that the Agreement
will not become effective or enforceable until the seven-day revocation period
has expired and that the benefits provided in this Agreement will not be
provided until such period has expired.
16. Entire Agreement. Subject to the terms of the Consulting Agreement
between Cronin and Wallace of even date herewith, this Agreement constitutes the
entire agreement between Wallace and Cronin with respect to the subject matter
hereof and shall not be amended, modified, or amplified without specific written
provision to that effect, signed by both parties. No oral statement of any
person whosoever shall, in any manner or degree, modify or otherwise affect the
terms and provisions of this Agreement.
17. Additional Representations. By signing this Agreement, Cronin states
that:
(a) He has read it and has had sufficient time to consider its terms;
(b) He understands it and knows that he is giving up important rights;
(c) He agrees with everything in it;
(d) He is aware of his right to consult an attorney before signing it,
and has been so advised; and
(e) He has signed it knowingly and voluntarily.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
Attest: WALLACE COMPUTER SERVICES, INC.
By:
- --------------------- -------------------------------
Title:
5
<PAGE> 6
Witness: ROBERT J. CRONIN
- ---------------------
<PAGE> 1
EXHIBIT 10.4
CONSULTING AGREEMENT
This Agreement is made at Chicago, Illinois this 18th of January, 2000,
between WALLACE COMPUTER SERVICES, INC. ("Wallace") and ROBERT J. CRONIN
("Consultant").
WHEREAS, Wallace is in the business of print management services,
including eCommerce, distribution logistics, digital asset management, inventory
management, and print organization; and
WHEREAS, Consultant has most recently been the Chairman and Chief
Executive Officer of Wallace, and otherwise has extensive knowledge and
experience in the print management service business and knowledge of and
relationships with consumers of print management services; and
WHEREAS, Consultant has decided to retire from his employment with
Wallace; and
WHEREAS, Wallace and Consultant desire to enter into an agreement under
which Wallace may from time to time call upon and utilize the expertise and
knowledge of Consultant and Consultant will be available to consult with
Wallace;
NOW, THEREFORE, in consideration of the foregoing premises and mutual
covenants contained herein, Wallace and Consultant hereby agree as follows:
1. Consulting Services Provided. During the term of this Agreement,
Consultant agrees to make himself available to consult with the directors,
officers, employees and agents of Wallace regarding the business and operations
of Wallace, print management services in general, customer relationships and
contracting, and such other matters within the expertise of Consultant at such
reasonable times and places as Wallace may reasonably request; provided,
however, that Consultant shall not without his prior written consent be required
to provide consulting services on more than five (5) days in any calendar month.
2. Term of Agreement. The term of this Agreement shall begin on the
date hereof and shall continue for a period of twelve (12) calendar months until
the first anniversary of the date hereof.
3. Fees and Other Payments. In exchange for Consultant providing the
consulting services set out in Paragraph I above, and for Consultant's other
undertakings herein, Wallace agrees to pay Consultant the sum of $960,000,
payable in a single lump sum on the first anniversary of the date hereof which
is the last day of the term of this Agreement as described in Paragraph 2 above.
Wallace further agrees to reimburse Consultant for reasonable, direct
out-of-pocket expenses (which shall not include overhead or similar expenses)
actually incurred in the performance of his consulting services hereunder, upon
proper substantiation in accordance with Wallace's normal expense reimbursement
procedures.
4. Confidentiality. Consultant agrees that any and all Confidential
Information is and shall remain the property of Wallace to be held in strict
confidence by Consultant solely for
<PAGE> 2
Wallace's benefit, and shall not be used or otherwise disclosed to any other
parties at any time, whether during the term of this Agreement or thereafter,
without obtaining Wallace's prior written consent. "Confidential Information"
includes all technical, business and personnel information, or other information
that relates to past, present and future research, development and business
activities of Wallace and its subsidiaries and affiliates (including, without
limitation, customer, client and vendor lists and related information), however
communicated or disclosed to Consultant in the performance of any services for
Wallace. Confidential Information shall not include information that becomes
generally available to the public (other than by acts or omissions of
Consultant).
5. Wallace Property. Neither this Agreement nor Wallace's disclosure of
Confidential Information shall be considered, by implication or otherwise, to
transfer to Consultant any rights in any trademark, tradename, invention
(whether patentable or not), procedure, data, copyright, trade secret, or any
other intellectual property or other property of Wallace.
6. Nonsolicitation. Consultant agrees that, during the term of this
Agreement and for one calendar year thereafter, he shall not (a) solicit any
employee of Wallace or any of its subsidiaries to leave the employment thereof
or in any way interfere with the relationship of such employee with Wallace or
its subsidiaries or (b) induce or attempt to induce any customer, supplier,
licensee or other individual, corporation or other business organization having
a business relation with Wallace or its subsidiaries to cease doing business
with Wallace or its subsidiaries or in any way interfere with the relationship
between any such customer, supplier, licensee or other person and Wallace or its
subsidiaries.
7. Noncompetition.
(a) Consultant agrees that this Agreement is an exclusive consulting
agreement and that he will not, during the term of this Agreement, directly or
indirectly engage in, or be employed by, or act as a consultant to, or be a
director, officer, owner or partner of, or acquire a substantial interest in,
any business activity or entity which competes significantly with Wallace or any
of its subsidiaries; provided, however, that "significant" competition shall not
include involvement in any line of business that contributes less than five
percent (5%) of the gross revenues of Wallace and its subsidiaries or
contributes less than five percent (5%) of the gross revenues of another
business entity or activity with which Consultant becomes associated. In
particular, but not by way of limitation, Consultant shall not, during the term
of this Agreement, be employed by, or act as a consultant to, or be a director,
officer, owner or partner of, or acquire a substantial interest in, or otherwise
participate in the business of, any of the following companies or their
subsidiaries or affiliates: (i) Moore Corporation Limited; (ii) Reynolds and
Reynolds, (iii) The Standard Register Company; (iv) Mail-Well, Inc.; (v)
Consolidated Graphics, Inc.; (vi) Workflow Management, Inc.; (vii) Quebecor
Inc.; or (viii) Corporate Express, Inc.
(b) If Consultant desires to be employed by, or otherwise provide
services for, any entity during the term of this Agreement, and is uncertain
whether such employment or the provision of such services might violate
subparagraph (a) above, Consultant may contact the then current Chief Executive
Officer of Wallace in writing by facsimile or overnight courier requesting
approval by Wallace of the proposed employment or the provision of such
services.
2
<PAGE> 3
Wallace agrees to respond in writing to any such request for approval as soon as
reasonably practicable, but in no event later than fourteen (14) days from the
date on which such request was sent or mailed. If Consultant receives no written
response from Wallace within such fourteen (14) day period, the approval of
Wallace with respect to the employment or the provision of services for which
approval was requested shall be deemed to have been given and Wallace shall not
thereafter have a right to assert any claim against Consultant under
subparagraph (a) in connection with such employment or the provision of such
services. Wallace further agrees that any request for approval submitted by
Consultant hereunder shall be kept strictly confidential and only employees of
Wallace directly involved in such approval process shall be privy to the
information contained in any such request for approval.
8. Breaches of Certain Covenants. Consultant expressly acknowledges and
agrees that a breach of either Paragraph 4, 6 or 7 of this Agreement will be
treated as a material breach of this Agreement. Furthermore, any such breach
would not be readily or appropriately compensable in damages, and Consultant
expressly agrees and that each provision, restriction and/or covenant of such
paragraphs shall be enforceable by injunctive relief.
9. Independent Contractor. Consultant shall be an independent
contractor and not an employee or agent of Wallace for any purpose. Consultant
does not have any right to, and will not attempt to, obligate Wallace to any
third party in any manner and will not act in any manner that might lead a third
party to think that Consultant can obligate Wallace. Consultant shall
specifically state that he is an independent contractor and that he cannot
obligate Wallace.
10. Employee Benefits. Consultant represents, warrants and agrees that
he shall not be entitled to, and he waives and disclaims any entitlement to, any
employee benefit, compensation or incentive by virtue of this Agreement other
than the payment specifically provided for in Paragraph 3 of this Agreement.
11. Taxes. Consultant agrees that he shall be exclusively liable for
the payment of all federal and state taxes that may be due as the result of the
compensation paid to him hereunder.
12. Waiver. Any delay or failure of any party hereto at any time to
require performance by any other party of any provision of this Agreement shall
in no way affect the right of such party to require performance of that or any
other provision of this Agreement and shall not be construed as a waiver of any
subsequent breach of any provision, a waiver of the provision itself, or a
waiver of any other right under this Agreement.
13. Payment of Certain Expenses. Wallace agrees to pay promptly as
incurred, to the fullest extent permitted by law, all legal fees and expenses
which the Consultant may reasonably incur as a result of any contest by Wallace,
the Consultant or others of the validity or enforceability of, or liability
under, any provision of this Agreement (including as a result of any contest
initiated by the Consultant about the amount of any payment due pursuant to this
Agreement) (together with an additional amount such that after payment by the
Consultant of Consultant's applicable Federal, state and local taxes on such
additional amount, Consultant shall retain an amount equal to the total of
Consultant's applicable Federal, state and local taxes arising due to the
payment of legal fees and expenses under this Section 13), plus in each case
interest on
3
<PAGE> 4
any delayed payment at the interest rate applicable from time to time under
Wallace's primary revolving credit agreement, or in the absence of such a rate,
at the applicable federal rate provided for in Section 7872(f)(2)(A) of the
Code; provided, however, that Wallace shall not be obligated to make such
payment of fees and expenses with respect to any contest in which Wallace
prevails over the Consultant.
14. Amendment. Except as provided in Paragraph 15 hereof, no provision
of this Agreement shall be deemed amended unless such amendment shall be in
writing and signed by the party against whom the amendment is to be enforced.
15. Entire Agreement. This Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof, and all prior
agreements, representations, statements, negotiations and undertakings on the
subject matter hereof are superseded hereby.
16. Invalidity of any Provision. If any one or more of the provisions
of this Agreement should be determined to be invalid, illegal or unenforceable
in any respect under any applicable statute o r rule of law, they s4all be
deemed to be modified to the minimum extent necessary to cure such invalidity,
illegality or unenforceability, and any court is hereby authorized to determine
the extent of such modification and to enforce this Agreement as so modified.
17. Governing Law. This Agreement shall be construed under and governed
by the internal laws, and not the laws of conflict, of the State of Illinois.
18. Notice. Unless otherwise specified in this Agreement, any notice or
other communication permitted or required hereunder shall be in writing and
provided to the respective parties as set forth below:
(a) If to Consultant to:
Mr. Robert J. Cronin
603 Ridgewood Court
Oak Brook, Illinois 60523
with a copy to:
Sonnenschein Nath & Rosenthal
8000 Sears Tower
Chicago, Illinois 60606
Attn: Roger C. Siske
(b) If to Wallace to:
Wallace Computer Services, Inc.
2275 Cabot Drive
Lisle, Illinois 60532
Attn: Corporate Secretary
4
<PAGE> 5
Such addresses may be changed by written notice sent to the other party at the
last recorded address of that party.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed on the date first set forth above.
Witness: ROBERT J. CRONIN
- ------------------------------ ---------------------------------
Attest: WALLACE COMPUTER SERVICES, INC.
- ------------------------------ By:
------------------------------
Title:
---------------------------
5
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