<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[x] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended July 31, 2000 Commission File Number 1-6528
Wallace Computer Services, Inc.
-------------------------------
(Exact name of the Company as specified in its charter)
Delaware 36-2515832
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2275 Cabot Drive Lisle, Illinois 60532
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(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: (630) 588-5000
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Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of each class Name of each exchange on which registered
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<S> <C>
Common Stock, $1.00 par value New York Stock Exchange
Series A Preferred Stock Purchase Rights New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Company: (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 Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes No
--- ---
State the aggregate market value of the voting stock held by nonaffiliates of
the Company.
$583,334,122 (based on the October 10, 2000, closing price of these shares on
the New York Stock Exchange)
Indicate the number of shares outstanding of each of the Company's classes of
common stock, as of the latest practicable date.
As of October 10, 2000, 40,404,095 shares of Common Stock were outstanding.
Documents incorporated by reference:
1. Definitive Proxy Statement - Part III of this Form 10-K
Indicate by check mark if the disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Form 10-K
Item No. Name of Item Page
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<S> <C> <C>
Part I
Item 1 Business 3
Item 2 Properties 9
Item 3 Legal Proceedings 13
Item 4 Submission of Matters to a Vote of
Security Holders 13
Part II
Item 5 Market for the Company's Common Equity and
Related Stockholder Matters 13
Item 6 Selected Financial Data 14
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Item 7(A) Quantitative and Qualitative Disclosures About
Market Risk 26
Item 8 Financial Statements and Supplementary Data 26
Item 9 Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure 26
Part III
Item 10 Directors and Executive Officers of the
Company 27
Item 11 Executive Compensation 29
Item 12 Security Ownership of Certain Beneficial
Owners and Management 29
Item 13 Certain Relationships and Related
Transactions 29
Part IV
Item 14 Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 30
Signatures 31
Exhibit Index 57
</TABLE>
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Part I
Item 1 Business
(a) General Development of Business
Wallace Computer Services, Inc. (the "Company") was founded in 1908 as an
Illinois corporation under the name "Wallace Press, Inc." It was reorganized in
June 1963 as "Wallace Business Forms, Inc.", a Delaware corporation. The name
was changed in November 1981 to "Wallace Computer Services, Inc." to reflect the
broad array of products sold by the Company to computer users.
In fiscal year 1998, the Company expanded its commercial printing capabilities
with the acquisition of the 20 Graphic Industries, Inc. ("Graphic") companies in
November 1997. Graphic was the largest network of sheet-fed commercial printing
plants in the United States. They focus on high-quality, short-to-medium run
collateral and high color marketing materials and annual reports for the
Company's target Fortune 1000 customers. The Graphic acquisition was made
through an all cash purchase of Graphic's shares of common stock. The
acquisition price was $308.3 million, based on outstanding shares, options and
converted indenture notes valued at $21.75 per share, plus $6.1 million of
transaction costs, and net debt totalling $123.4 million. In June 1998, the
Company also expanded its product line in the fast growing label market with the
acquisition of Good Decal Co., in Englewood, Colorado. Good Decal makes pressure
sensitive labels, decals and screen printed graphic overlays. This acquisition
was made for $12.3 million of cash and a note payable for $1.0 million.
In December 1998, the Company sold substantially all of the assets of Visible
Computer Supply, its contract stationers business, in a transaction that
approximated book value. Both of the divestitures sold product lines that were
not compatible with the Company's strategic direction. In February 1999, the
Company sold Mercury Printing, acquired as part of the Graphic Industries
acquisition, for $7.0 million.
In May 1999, the Company acquired Commercial Press, Inc., a West Coast
commercial printer. This acquisition was made for $20.1 million of cash, the
assumption of debt totalling $2.2 million, and a note payable of $2.3 million.
The Company also acquired Denver Graphic, Inc., a small prime label company, in
May 1999. The acquisition was made for $3.0 million of cash and a note payable
of $150,000.
On January 18, 2000, the Company acquired Metro Printing, Inc. The acquisition
price was $12.2 million of cash and a note payable of $1.3 million. On October
31, 1999, the Company sold Quadras, Inc., acquired as a part of the Graphics
acquisition, in a transaction that approximated book value.
In the third quarter of fiscal 2000, the Company announced a restructuring plan
and undertook initiatives to reduce the overall cost base of the Company. The
fiscal year results include a pretax charge of $41.6 million related to the
restructuring plan. The Company implemented the restructuring program because of
continued softness in the high-quality color marketing and promotional printing
market, along with other issues relating to the integration of the Graphic
acquisition. Management reviewed its operations and developed action plans
relating to both segments that dealt with under-performing facilities,
underutilized assets, and rationalization of certain product lines. The
restructuring resulted in the closing of four plants. The charge includes the
write off of goodwill associated with plants that were closed, the write off of
abandoned software, the write down to net realizable value of property and
equipment to be sold, and severance and outplacement costs. The amount of
allocated goodwill written off related to plants acquired in the Graphics
acquisition. Looking forward, the Company believes the restructuring will
generate savings in both cost of goods sold and selling and administrative costs
which should increase Company profitability. The Company is continually looking
for ways to reduce its overall cost base.
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Item 1 Business, Continued
(b) Financial Information About Segments
The Company is reporting its results in two business segments which reflect the
Company's operations and strategies: Integrated Graphics segment, and Forms and
Labels segment. Financial information about the Company's segments is contained
in footnote 13, Notes to Consolidated Financial Statements, in item 14(a) of
Part IV of this report.
(c) Narrative Description of Business
The Company is recognized as a leading provider of printed products and print
management services to Fortune 1000 customers. The Company is evolving to manage
all the printing needs of large organizations. Products include commercial
printing, high color promotional printing, high color marketing printing,
digital printing, direct response printing, business forms, labels and office
products. The Company's systems, service, delivery, and distribution
capabilities have allowed it to increase its emphasis on services as part of its
offering. Services offered include distribution, outsourcing, custom
programming, kitting, fulfillment and Web development. Currently, services such
as inventory control and product distribution are sold with the printed product
the Company provides. The Company believes inventory and distribution services,
along with kitting, custom programming, and sourcing on non-printed goods can be
sold independently of the printed product and offer an opportunity for revenue
growth.
In 1998 the Company developed a new service to help buyers of high-quality,
high-color commercial printing ensure consistent print quality, outsource
materials management and maximize printing budget efficiency. This service is
Total Print Management ("TPM"), which is provided pursuant to exclusive
contracts. In fiscal 2000, the volume of contract sales has increased 7.8% over
the prior year (before divestitures).
Providing TPM services would not be possible without an enterprise wide
information system. Proprietary mainframe and midrange enterprise applications
and an extensive communications architecture give the Company the ability to
effectively manage a half million stock keeping units (SKUs) and millions of
customer transactions. These systems allow the Company to tailor relationships
to each customer's unique business needs and processes.
Central to the Company's services is the Wallace Information Network(TM)
(W.I.N.(TM)), which was introduced eight years ago and is continually evolving.
The suite of W.I.N. management tools improves, simplifies and streamlines many
customer processes including inventory management, end-user ordering, version
control, tracking, and follow-up. Its value is based on the Company's capability
to provide complete and timely data from its enterprise applications through the
W.I.N. system. The Company is in the final stages of its W.I.N. system
enhancement project which began in 1999 and is expected to be completed in the
first half of fiscal 2001.
Logistics and distribution represent one of the largest cost-saving
opportunities the Company can deliver to its customers, and distribution
capabilities are essential to delivering TPM services. Like its information
4
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Item 1 Business, Continued
technology, the Company's distribution system is also proprietary, developed
from the ground-up, specifically for the highly transactional, custom nature of
its business.
The W.I.N. system was originally created to attack the process costs associated
with forms. Because customers who use the system recognize significant
first-year cost savings, they want to leverage the Company's services into
additional areas. The Company's broad range of products and services provide
customers with opportunities to reduce their vendor base and total costs.
Wallace provides the primary products required by our customers for a Total
Print Management relationship.
Integrated Graphics Segment
Product / Service Offering and Markets Served
The Integrated Graphics segment is made up of a nationwide network of commercial
print facilities and the Direct Response division which specializes in variable
imaging and print on demand products used in the promotional printing markets.
The principal products and services supplied by the Integrated Graphics segment
include the design and manufacture of high color marketing and promotional
printing materials, variable imaging, digital printing, and the manufacture of
direct response printing materials. Typical products include corporate image
materials, promotional literature, product brochures, product documentation
literature, retail point-of-sale materials, direct mail offers, high-quality
brochures, industrial and consumer catalogs, directories, and price lists.
Services offered include kitting, fulfillment and Web development. The products
and services are supplied to the full spectrum of Fortune 1000 customers.
The Company provides a full-service, quick response, value-added resource to its
customers, and supplies national coverage and state-of-the-art imaging
capabilities and service options, which are designed to increase promotion
response rates and reduce customer costs. The Company continues to emphasize its
TPM program which allows customers to control their high color print sourcing
costs. The objective of TPM is to provide all types of printed material and
services to major contract customers, with the primary focus being Fortune 1000
customers. The TPM approach provides an integrated set of services and
information tools that allow customers to control all of their print-related
costs.
The Company's Direct Response business, which primarily serves corporate
marketing organizations, has been repositioned by reducing its emphasis on the
mass mailer market and refocusing on one-to-one marketing opportunities in
Fortune 1000 marketing organizations.
The predominant distribution channel for this segment is the Company's national
direct sales force and the Integrated Graphic's direct sales force.
The market served by the Integrated Graphics segment totals approximately $76
billion. The Company primarily competes with local printers and local direct
mail promotional printers in markets that are highly fragmented.
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Item 1 Business, Continued
Forms and Labels Segment
Product / Service Offering and Markets Served
The principal products and services supplied by the Forms and Labels segment
include the design, manufacture and sale of both paper based and electronic
business forms, the manufacture of both electronic data processing (EDP) labels
and prime labels, and the manufacture and distribution of a standard line of
office products. Typical products include air freight package forms, monthly
billing statements, healthcare forms, mortgage applications, bar-coded shipping
labels, consumer product labels, airline bag tags, blank stock labels,
electronic article surveillance tags, security labels, legal pads, computer
paper, ribbons, and cash register paper rolls. Services provided by this segment
include distribution, outsourcing and custom programming.
The Company, through the use of its TPM strategy, is uniquely positioned to
accommodate a wide range of printing and distribution needs of large customers
with multiple locations. The products and services are supplied primarily for
businesses, government agencies, healthcare, not-for-profit and educational
institutions.
These customers typically require a forms vendor with the following
characteristics:
a. sufficient forms manufacturing capacity across several regions of the U.S.
to satisfy their needs;
b. distribution capability, across several regions of the U.S., to deliver
multiple types of forms to hundreds of locations on short notice and;
c. the information services capability to provide centralized billing
reporting, forms management, and control for such shipments.
The Company also sells business forms to customers that are not large,
forms-intensive firms with multiple locations in local transactional business,
on an order by order basis.
The predominant distribution channel for this segment is the national direct
sales force. Sales representatives are located in one of the Company's sales
offices located throughout the United States and are assigned a specific
geographic territory. Within this assigned territory, a sales representative
sells all of the Company's products to any customer. Sales support for the
direct sales force is provided by the Corporate Marketing department.
EDP labels usually include some computer generated information, such as bar
coding, and are designed to meet the needs of key market segments, including
retail, health care, small package delivery, manufacturing and required
regulatory compliance. Prime labels are high quality promotional and product
identification labels used on items such as shampoo bottles and food packages.
In fiscal 2000, the Company entered into a licensing agreement to produce
security labels, a niche label market.
The remainder of the office products include paper-based stock products such as
pads, stock forms, ATM and impact printer ribbons.
The Forms and Labels market served by the Company totals approximately $32
billion and is highly competitive. Due to changes in technology, the business
forms market continues to decline. Forms manufacturers are forced to compete for
a share of the shrinking market which has resulted in lower overall selling
prices. Competitive pressures in the forms industry have compelled many forms
manufacturers to move into the growing label market. This shift has brought
price competition into this arena as well.
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Item 1 Business, Continued
Business in General
Raw Materials
The principal raw material used by the Company is paper which is purchased on
the open market from numerous suppliers in a variety of weights, widths, colors
and sizes. The Company believes that it has adequate sources of supply of raw
materials to meet the requirements of its business. The Company's current
inventory and committed consigned inventory levels are in line with the
inventory levels necessary to satisfy anticipated customer demand.
Working Capital
The Company continues to maintain a strong working capital position, with a
current ratio of 2.3 at July 31, 2000, the same as at the end of last fiscal
year. Total working capital decreased $9.8 million to $246.7 million as of July
31, 2000 as the Company has focused on reducing working capital in order to pay
down debt. Business conditions and the Company's TPM strategy, however, require
the Company to produce and store inventories to meet its customers'
requirements. Custom and stock finished goods inventories are stored throughout
the United States in both public and Company-owned warehouses. Finished products
represent 64.8% of total inventory at July 31, 2000.
Substantially all of the Company's sales are made on terms of Net 30 days.
Further information on liquidity and capital resources is contained in
Management's Discussion and Analysis of Financial Condition and Results of
Operations in item 7 of Part II of this report.
Patents and Trademarks
Although certain features of the Company's products and manufacturing processes
are covered by owned or licensed patents, the Company does not consider patents
to be critical to its business.
Seasonal
The Company does experience some minimal level of seasonality in its Integrated
Graphics' operations in the fiscal third quarter related to the seasonal demand
for printed annual reports of publicly traded companies. Because many customers'
fiscal-year-ends coincide with the calendar year end, the Company experiences
increased sales in the March to April period.
Customer
The Company is not dependent upon any one customer or group of customers under
common control. No single customer or group of customers accounts for more than
10% of consolidated sales.
Research and Development
The Company is continuously involved in research activities relating to
development of new products and technologies and improvement of existing
products and technologies. The amount that the Company spends on research
activities is not significant in relation to the annual sales volume.
Environmental Protection
Compliance with federal, state and local provisions governing the discharge of
materials into the environment has not had and is not anticipated to have a
material effect on the Company's capital expenditures, earnings or competitive
position.
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Item 1 Business, Continued
Employees
The total number of persons employed by the Company was 8,167 as of July 31,
2000.
(d) Financial Information About Geographic Areas
Wallace attributes substantially all of its revenues to customers within the
United States. Long-lived assets are domiciled within the United States.
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Item 2 Properties
The Company's corporate offices are located in Lisle, Illinois, a
suburb of Chicago.
The Company believes that all of its properties are well maintained and
in good operating condition and adequate for the purposes for which
they are used. All locations are owned by the Company except as
otherwise noted.
The following principal properties are used by the Integrated Graphics segment:
<TABLE>
<CAPTION>
Approximate
Square
Location Footage Description
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<S> <C> <C>
LaPalma, California 81,300 Manufacturing Plant
(Leased)
San Diego, California 60,600 Manufacturing Plant
(Leased)
Manchester, Connecticut 108,000 Manufacturing Plant
Orlando, Florida 113,000 Manufacturing Plant
Distribution Center
(Leased)
Atlanta, Georgia 123,600 Manufacturing Plant
Chamblee, Georgia 193,600 Manufacturing Plant
Clinton, Illinois 217,100 Manufacturing Plant
Elk Grove Village, Illinois 276,800 Manufacturing Plants
(One is Leased)
Printing Fulfillment Center
(Leased)
Hillside, Illinois 231,450 Manufacturing Plant
Engineering and Research Offices
(Both are Leased)
</TABLE>
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Item 2 Properties, Continued
<TABLE>
<CAPTION>
Approximate
Square
Location Footage Description
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<S> <C> <C>
New Orleans, Louisiana 44,000 Manufacturing Plant
Silver Spring, Maryland 83,700 Manufacturing Plant
Bedford, Massachusetts 73,100 Manufacturing Plant
Rochester, New York 87,700 Manufacturing Plants (Leased)
Warehouses
Tonawanda, New York 111,400 Manufacturing Plant
Charlotte, North Carolina 95,000 Manufacturing Plant
Eden Prairie, Minnesota 44,000 Manufacturing Plant
Philadelphia, Pennsylvania 82,500 Manufacturing Plants
(Includes two facilities)
Pittsburgh, Pennsylvania 135,600 Manufacturing Plant
Columbia, South Carolina 58,900 Manufacturing Plant
Austin, Texas 37,000 Manufacturing Plant
Dallas, Texas 107,600 Manufacturing Plant
Houston, Texas 273,500 Manufacturing Plant
Printing Fulfillment Center (Leased)
West Bend, Wisconsin 26,600 Manufacturing Plant
The following principal properties are used by the Forms and Labels segment:
Lodi, California 138,100 Manufacturing Plant and
Distribution Center
San Luis Obispo, California 110,000 Manufacturing Plant
</TABLE>
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Item 2 Properties, Continued
<TABLE>
<CAPTION>
Approximate
Square
Location Footage Description
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<S> <C> <C>
Englewood, Colorado 48,500 Manufacturing Plants
(Includes four facilities)
(Leased)
Metter, Georgia 221,000 Manufacturing Plant and
Distribution Center
St. Charles, Illinois 386,800 Manufacturing Plant
Distribution Center
(Includes two facilities)
Osage, Iowa 256,900 Manufacturing Plants
(Includes two facilities)
Gastonia, North Carolina 120,000 Manufacturing Plant
Wilson, North Carolina 127,200 Manufacturing Plant
Cincinnati, Ohio 21,800 Manufacturing Plant
Streetsboro, Ohio 81,400 Manufacturing Plant
Covington, Tennessee 242,000 Manufacturing Plant and
Distribution Center
Brenham, Texas 127,700 Manufacturing Plant and
Distribution Center
Marlin, Texas 115,700 Manufacturing Plant
Manchester, Vermont 162,300 Manufacturing Plant
Luray, Virginia 162,300 Manufacturing Plant
</TABLE>
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Item 2 Properties, Continued
<TABLE>
<CAPTION>
Approximate
Square
Location Footage Description
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<S> <C> <C>
Additional Distribution Centers and Corporate Offices:
Ontario, California 114,500 Distribution Center (Leased)
Bellwood, Illinois 28,300 Engineering and Research Facility
(Leased)
Lisle, Illinois 105,000 Corporate Headquarters
Lisle, Illinois 72,100 Technology Center (Leased)
Columbus, Ohio 154,000 Distribution Center (Leased)
Allentown, Pennsylvania 100,000 Distribution Center
</TABLE>
Remaining public warehouses and sales offices throughout the United States are
leased.
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Item 3 Legal Proceedings
The Company and its subsidiaries may from time to time be involved in
claims or lawsuits that arise in the ordinary course of business.
Accruals for claims or lawsuits have been provided for to the extent
that losses are deemed probable and estimable. Although the ultimate
outcome of these claims or lawsuits cannot be ascertained on the basis
of present information and advice received from counsel, it is the
opinion of management that the disposition or ultimate determination of
such claims or lawsuits will not have a material adverse effect on the
Company.
Item 4 Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of Security Holders during the year
ended July 31, 2000.
Part II
Item 5 Market for the Company's Common Equity and Related Stockholder Matters
The Company's common shares are traded on the New York Stock Exchange. The total
number of holders of record of the Company's common stock was 2,892 as of
October 10, 2000. Information about quarterly prices of common stock and
dividends paid for the two fiscal years ended July 31 is contained in the table
below:
<TABLE>
<CAPTION>
MARKET PRICE PER SHARE DIVIDENDS PAID PER SHARE
---------------------------------------- ---------------------------------
FISCAL 2000 FISCAL 1999 FISCAL 2000 FISCAL 1999
------------------ ------------------ ------------- -------------
QUARTER HIGH LOW HIGH LOW
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<S> <C> <C> <C> <C> <C> <C>
First $ 25.00 $ 19.63 $ 22.75 $ 15.44 $ .1600 $ .1550
Second 22.88 10.50 27.25 19.75 .1650 .1600
Third 12.75 9.94 24.63 17.75 .1650 .1600
Fourth 11.44 8.56 26.44 22.00 .1650 .1600
</TABLE>
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Item 6 Selected Financial Data
Selected financial data for each of the five years ended July 31 is contained in
the table below:
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2000 1999 1998 1997 1996
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<S> <C> <C> <C> <C> <C>
OPERATIONS
Net sales $ 1,565,238 $ 1,530,523 $ 1,356,052 $ 906,290 $ 862,287
Net income (Note A) 22,617 76,069 74,208 81,282 72,999
Net income per share (basic) (Note A) .55 1.80 1.72 1.88 1.60
Net income per share (diluted) (Note A) .55 1.80 1.71 1.86 1.59
Dividends per share .66 .64 .62 .56 .43
FINANCIAL CONDITION
Total assets $ 1,249,309 $ 1,297,659 $ 1,257,463 $ 720,442 $ 695,850
Long-term debt 389,413 416,653 428,224 24,500 30,600
Capital expenditures 53,945 50,311 59,632 39,225 59,506
Working capital 246,743 256,509 236,857 149,234 206,238
SIGNIFICANT RATIOS
Net income:
Return on net sales 3.7%* 5.0% 5.5% 9.0% 8.5%
Return on average assets 4.5%* 6.0% 7.5% 11.5% 11.3%
Return on average equity 10.1%* 13.5% 14.3% 16.2% 15.1%
Current ratio 2.3 2.3 2.2 2.1 3.1
Total debt/debt plus equity 42.4% 43.0% 46.0% 10.9% 5.7%
Book value per share $ 13.45 $ 13.82 $ 12.65 $ 11.45 $ 11.20
Sales per employee** $ 188.2 $ 183.4 $ 188.8 $ 207.4 $ 218.4
OTHER
Number of employees 8,167 8,464 8,228 4,610 4,131
Number of stockholders of record 3,138 3,355 3,559 3,680 3,863
</TABLE>
* Fiscal 2000 returns are computed excluding the impact of the restructuring
and one-time charges and use a historical tax rate.
** Based on average number of employees during the fiscal year.
NOTES TO FIVE YEAR SUMMARY
A. RESTRUCTURING AND ONE-TIME CHARGES: Net income in fiscal 2000 includes
restructuring and one-time charges of $45.8 million and reflects a tax rate of
54.5%. The tax rate, which has historically been around 40%, was higher
primarily due to the restructuring charge, a portion of which was not
deductible. These charges and the increased tax rate negatively impacted net
income per share by $0.84. See Management's Discussion and Analysis for further
information as to the nature of the charges and their impact on earnings.
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Item 6 Selected Financial Data, Continued
B. ACQUISITIONS AND DIVESTITURES: On January 18, 2000, the Company acquired
Metro Printing, Inc. The acquisition price was $12.2 million of cash and a note
payable of $1.3 million. On October 31, 1999, the Company sold Quadras, Inc.,
acquired as a part of the Graphics Industries acquisition, in a transaction that
approximated book value. On May 21, 1999, the Company acquired the assets of
Denver Graphic, Inc. The acquisition price was $3.0 million of cash and a note
payable of $150,000. Effective May 1, 1999, the Company acquired Commercial
Press, Inc. The acquisition price was $20.1 million of cash, the assumption of
debt totalling $2.2 million, and a note payable of $2.3 million. On February 28,
1999, the Company sold Mercury Printing, acquired as part of the Graphic
Industries acquisition, for $7.0 million. On December 31, 1998, the Company sold
substantially all of the assets of Visible Computer Supply, our contract
stationers business, in a transaction that approximated book value. On June 17,
1998, the Company acquired the assets of Good Decal Co. The acquisition price
was $12.3 million of cash and a note payable of $1.0 million. Effective November
3, 1997, the Company acquired Graphic Industries, Inc. The acquisition was made
through an all cash purchase of Graphic's shares of common stock. The
acquisition price was $308.3 million, based on outstanding shares, options and
converted indenture notes valued at $21.75 per share, plus $6.1 million of
transaction costs, and net debt totalling $123.4 million. See note 2 for further
disclosure on the Graphic acquisition. On July 24, 1997, the Company acquired
the assets of Moran Printing Company. The acquisition price included notes
payable of $29.5 million, and the assumption of net debt totalling $4.9 million.
On October 22, 1996, the Company acquired the assets of Post Printing, Inc. The
acquisition price was $6.6 million of cash. On February 1, 1996, the Company
sold the LaserMax division to a subsidiary of Stralfors A.B. of Ljungby, Sweden
in a cash transaction that approximated book value. On February 8, 1996, the
Company acquired Forms Engineering Company. The acquisition price included $27.8
million of cash, a note payable of $5.0 million, and the assumption of net debt
totalling $2.0 million. On April 19, 1995, the Company acquired Retterbush and
Sauer Label Corporation. The acquisition price included $10.1 million of cash
and a note payable of $2.0 million. On November 29, 1994, the Company acquired
Lampro Graphics, Inc. The acquisition price included $4.6 million of cash, a
note payable of $0.3 million, and the assumption of debt totalling $1.9 million.
Effective August 1, 1991, the Company acquired MGI Industries, Inc. and
subsidiaries and substantially all of the assets of Evergreen Realty
(collectively "Colorforms"). The acquisition price included shares of common
stock with a market value of $14 million at the acquisition date, $13 million of
cash and the assumption of debt totalling $17.5 million.
All acquisitions were accounted for as purchases, and, accordingly, their
results of operations are included in the consolidated financial statements from
their respective dates of acquisition.
C. STOCK SPLIT: All share and per share amounts have been adjusted for the 2 for
1 stock splits effective August 1989 and July 1996.
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Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations
OPERATIONAL CHANGES
INTEGRATED GRAPHICS SEGMENT: The Integrated Graphics segment is made up of a
nationwide network of commercial print facilities and the Direct Response
division which specializes in variable imaging and print on demand products used
in the promotional printing market. 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.
During fiscal 2000 and 1999, the Company took decisive action to divest
non-compatible product lines, expand geographic coverage and close
under-performing facilities. The Company significantly increased its commitment
to high color marketing and promotional printing in the second quarter of fiscal
1998 with the acquisition of Graphic Industries, Inc. ("Graphic"). In fiscal
2000, the Company made several operational decisions that affected this segment.
In the third quarter, the Company announced a restructuring that included
closing three under-performing plants in this segment by fiscal year end. Two of
these plants were acquired as part of the Graphic acquisition. Also in fiscal
2000, the Company acquired a small regional commercial printing operation in the
Midwestern United States, and sold Quadras, a design concern that was part of
the Graphic acquisition. In fiscal 1999, the Company acquired a commercial
printing operation which expanded its commercial printing network to the West
Coast of the United States, and divested Mercury Printing, also part of the
Graphic acquisition.
FORMS AND LABELS SEGMENT: The principal products and services supplied by the
Forms and Labels segment included the design, manufacture and sale of both paper
based and electronic business forms, the manufacture of both electronic data
processing (EDP) labels and prime labels, and the manufacture and distribution
of a standard line of office products.
As a result of the restructuring in fiscal 2000, one multiple-use plant in
Lebanon, Kentucky was closed in the fourth quarter with its production being
shifted to other Company facilities. In the fourth quarter of fiscal 1999, the
Company acquired a small prime label company. In the second quarter of fiscal
1999, the Company divested the operations of Visible Computer Supply, a contract
stationers business that did not fit with the long-term strategic direction of
the Company.
RESULTS OF OPERATIONS
FISCAL 2000 VERSUS FISCAL 1999
REVENUE: Net sales for fiscal 2000 increased 2.3% over fiscal 1999. Pro Forma
sales growth, after adjusting for acquisitions, divestitures and closures is
approximately 4%. The breakdown of sales for fiscal 2000 within the two business
segments was as follows:
<TABLE>
<CAPTION>
Business Segment % of total revenue % revenue increase
---------------- ------------------ ------------------
<S> <C> <C>
Integrated Graphics 50.5% 3.1%
Forms and Labels 49.5% 1.4%
</TABLE>
16
<PAGE> 17
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations, Continued
After adjusting for acquisitions and divestitures, the Forms and Labels segment
grew 3.9% and the Integrated Graphics segment grew 4.0%. Over the last five
years, sales have grown at a compound annual rate of 17.0%, with most of the
growth coming from acquisitions. It is estimated that year-over-year unit growth
in the Forms and Labels segment was 1% to 3%, while the Integrated Graphics
segment remained unchanged.
The Company's sales strategy can be broken into two components. The primary
driving force for sales growth is the Company's Total Print Management (TPM)
strategy. The objective of TPM is to provide all types of printed material
produced by both segments to major contract customers, with the primary focus
being Fortune 1000 companies. This is accomplished by the national direct sales
force, which sells all of the Company's product offerings. Contract sales
(before divestitures) have grown 7.8% over the prior year. Contract sales for
the Forms and Labels segment (again before divestitures) were up 4.3% whereas
contract sales for the Integrated Graphics segment were up 18.5%.
The second key component of the sales strategy is the continued success in
capturing the local transactional business. This is especially important in the
Integrated Graphic's segment, where a local sales force captures order by order
business in its local market. The national direct sales force also sells
directly on an order by order basis. The Company has hired a number of
experienced sales representatives in order to recapture market share of
transactional business. Adjusted for acquisitions and divestitures, this
non-contract business grew 2.4%, with growth coming from both segments.
Paper is the basic raw material for 95% of the Company's products. In the Forms
and Labels segment, paper represents approximately 45% of sales. In the
Integrated Graphics segment, paper represents approximately 25% of sales. The
majority of paper used by the Company comes from three paper grades - uncoated
free sheet, tablet and offset. Using 20 pound uncoated free sheet as a proxy for
the paper market, published prices during the last two years have increased
steadily. After increasing 16% from January 1, 1999 to July 31, 1999, prices
continued to increase in fiscal 2000, being up an additional 18% by the end of
fiscal 2000.
The Company continues to reduce its exposure to this volatility in the paper
market. Contracts signed as part of the TPM program contain provisions to
increase or decrease sell prices in line with announced paper price changes.
Additionally, the continual shift toward high color marketing and promotional
printing, as well as growth in digital print and market-to-one programs further
mitigates the overall impact of paper on operating margins. Products in the
Integrated Graphics segment have a higher component of value added labor, and
thus rely less on the sale of paper.
The Company continues to grow revenue by exploring new business lines. In fiscal
2000, the Company entered into a licensing agreement to produce security labels.
The Company used its extensive printing know-how to develop a proprietary method
of manufacturing a product not normally associated with a printing operation.
This type of niche market represents an opportunity to increase revenue in the
more profitable label business. Additionally, the Company's exceptional systems,
service delivery, and distribution capabilities have allowed the Company to
increase its emphasis on services as part of its product offering. Currently,
services such as inventory control and product distribution are sold with the
printed product the Company provides. The Company believes inventory and
distribution services, along with kitting, custom programming, and sourcing of
non-printed goods can be sold independently of the printed product and offer an
opportunity for revenue growth.
COST OF GOODS SOLD: Cost of goods sold as a percent to sales for fiscal 2000 was
70.3% versus 68.7% in fiscal 1999. The increase in cost of goods sold as a
percent of sales was seen in both segments of the business. This trend, however,
was more pronounced in the Forms and Labels segment.
17
<PAGE> 18
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations, Continued
In the Integrated Graphics segment, cost of goods sold as a percent of sales
increased by approximately 70 basis points. This increase is largely
attributable to competitive market conditions predominantly in the eastern and
southeastern United States. The increase in cost of goods sold in those regions
was partially offset by a decrease in Direct Response cost of goods sold. The
Direct Response division has increased its sales in market-to-one product, which
has a lower cost of sales due to lower paper content. This value added variable
imaging is the new focal point of the division, which had previously been
targeting the mass mailer market. The Company believes that margins can be
expanded in the Integrated Graphics segment by continuing to increase contract
sales which will increase equipment utilization.
In the Forms and Labels segment, cost of goods sold as a percent of sales
increased by approximately 250 basis points. Seventy basis points of the
increase is related to an unfavorable change in LIFO expense, which was $4.8
million in fiscal 2000 versus $1.2 million of income in fiscal 1999. The LIFO
charge was the result of higher prices on grades of paper primarily used in this
segment. A portion of the increased cost of goods sold is due to the delay in
passing paper price increases along to customers because of pricing constraints
within customers' contracts. For product sold under contract, there is usually a
60 to 90 day lag between the time of a paper price change and its effect on net
sales and, ultimately, on gross margin. The Company is also experiencing gross
margin compression as a result of ongoing competition. Due to changes in
technology, the business forms market has continued to decline. Forms
manufacturers are forced to compete for a share of the shrinking market which
has resulted in lower overall selling prices. Competitive pressures in the forms
industry have compelled many forms manufacturers to move into the growing label
market. This shift has brought price competition into this arena as well. The
Company continually looks for niche markets to continue to expand revenue and
margins in the label market.
SELLING AND ADMINISTRATIVE EXPENSES: Selling and administrative expenses as a
percent of sales were 17.1% in fiscal 2000 versus 16.2% in fiscal 1999. Several
one-time charges recorded in the second and third quarters have significantly
impacted this category. Charges related to executive retirement benefits and
other costs related to management changes totalled $3.3 million. Additional
charges of $4.1 million included an adjustment to the reserve for post
retirement medical costs of $3.0 million that arose from a change in actuarial
assumptions utilized to estimate the benefit, and $1.1 million related to an
adverse judgment in an arbitration proceeding arising from a contractual
obligation of Graphic Industries. Without these one-time charges, selling and
administrative expenses would have been 16.6% of sales. While the total fiscal
2000 expense ratio exceeded fiscal 1999, the fourth quarter was 15.4% of sales.
The fourth quarter benefited significantly from the restructuring and other cost
saving initiatives. The Company expects that selling and administrative expenses
will decrease from fiscal 2000 levels (before one-time charges). There were no
Y2K related software expenses in fiscal 2000, as compared to $2.0 million in
fiscal 1999.
DEPRECIATION AND AMORTIZATION: The provision for depreciation and amortization
was 5.0% of sales in fiscal 2000 and 4.9% in fiscal 1999. The current year's
total includes $8.1 million of goodwill amortization which is consistent with
prior year's level. Software amortization increased to $6.4 million in fiscal
2000 from $5.4 million in fiscal 1999. Most of the increase is related to
amortization of a $46 million system enhancement project which began in fiscal
1999 and is being implemented in phases. This project will be completed in the
first half of fiscal 2001, when the remainder of the cost will begin to be
amortized.
18
<PAGE> 19
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations, Continued
RESTRUCTURING CHARGE: In the third quarter of fiscal 2000, the Company announced
a restructuring plan and undertook initiatives to reduce the overall cost base
of the Company. The fiscal year results include a pretax charge of $41.6 million
related to the restructuring plan. The Company implemented the restructuring
program because of continued softness in the high quality color marketing and
promotional printing market, along with other issues relating to the integration
of the Graphic Industries acquisition. Management reviewed its operations and
developed action plans relating to both segments that dealt with
under-performing facilities, underutilized assets, and rationalization of
certain product lines. The charge includes the write off of goodwill associated
with plants that were closed, the write off of abandoned software, the write
down to net realizable value of property and equipment to be sold, and severance
and outplacement costs. The amount of allocated goodwill written off related to
plants acquired in the Graphics acquisition. The majority of the restructuring
activity, and related charges, occurred in the third quarter. While the
restructuring is substantially complete, the Company will continue to adjust the
reserve account, if necessary, in fiscal 2001.
Looking forward, the Company believes the restructuring will generate savings in
both cost of goods sold and selling and administrative costs which should
increase company profitability. The Company is continually looking for ways to
reduce its overall cost base.
INTEREST EXPENSE: Net interest expense for fiscal 2000 increased $2.0 million
over fiscal 1999. The increase is mostly from higher interest rates on variable
rate debt, along with additional incremental interest expense resulting from the
issuance of $200 million of fixed rate bonds in the second quarter of fiscal
1999 in which the proceeds were used to pay down variable rate debt. The impact
of a 10% increase or decrease in interest rates during fiscal 2000 does not have
a significant impact on total interest expense for the Company.
OTHER INCOME: Other income includes a one-time credit of $3.2 million which was
recorded in the third quarter and represents the proceeds received from the sale
of stock that the Company received in John Hancock's conversion from a
policyholder owned company to a stockholder based company. The Company received
shares in relation to the amount of corporate owned life insurance policies held
with John Hancock. This item was considered a one-time charge in the fiscal 2000
results.
INCOME TAXES: Due primarily to the restructuring charges, a portion of which is
not deductible, the current year effective tax rate was 54.5%. The tax rate in
fiscal 1999 was 40%. The Company projects an effective rate for fiscal 2001 of
approximately 41%.
YEAR 2000: 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
effort in these respects was 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. 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. The
passing of December 31, 1999 and other high-risk dates (i.e. February 29, 2000)
with no major negative impact from a national standpoint mitigates the risk of
any future major Year 2000 related disruptions.
19
<PAGE> 20
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations, Continued
NET INCOME AND NET INCOME PER SHARE: Net income for the year decreased by $53.5
million, or 70.3%, to $22.6 million or $.55 per share. Before the restructuring
charge of $41.6 million other one-time charges (net of credits) of $4.2
million, and a tax rate consistent with fiscal 1999 of 40%, net income would
have been $34.7 million higher and earnings per share would have been $0.84
higher.
FISCAL 1999 VERSUS FISCAL 1998
Net sales for fiscal 1999 increased 12.9% over fiscal 1998. Several acquisitions
and divestitures discussed in the operational changes section at the beginning
of the Management's Discussion and Analysis affected the results. Pro forma
sales growth after adjusting for acquisitions and divestitures was 4.7%.
The breakdown of net sales for fiscal 1999 within the Company's two business
segments was as follows:
<TABLE>
<CAPTION>
Business Segment % of total revenue % revenue increase
---------------- ------------------ ------------------
<S> <C> <C>
Integrated Graphics 50.1% 27.4%
Forms and Labels 49.9% 1.3%
</TABLE>
After adjusting for acquisitions and divestitures, the Forms and Labels segment
grew 3.0% and the Integrated Graphics segment grew 6.4%.
Over the last five years, sales have grown at a compound annual rate of 21.1%,
with most of the growth coming from acquisitions. A significant portion of the
increased sales in the Integrated Graphics segment were generated by the
national direct sales force, which began selling high color marketing and
promotional printing shortly after the acquisition. Products sold by the
national direct sales force that were manufactured in the Graphic facilities
increased tenfold from fiscal 1998 to fiscal 1999. Based upon a fourth quarter
run rate of $60 million, this was equivalent to 13% of Graphic Industries sales
in the twelve months prior to acquisition. The Company estimates year-over-year
unit growth in both the Forms and Labels segment, and the Integrated Graphics
segment to be around 10%.
Paper price changes have a material effect on the Company's reported sales
dollars and operating results. Prices on 20 pound white uncoated free sheet rose
over 20% from the spring of 1997 to November 1997, then fell more that 15% by
the end of fiscal 1998. After remaining steady for the first half of fiscal
1999, the published prices increased by 16% from January 1, 1999 to July 31,
1999. The Company has continued to reduce its exposure to this volatility. The
product mix shift to high color and promotional printing helps to mitigate the
overall impact of paper on operating margins.
In the second quarter of the fiscal 1999 the Company divested its contract
stationer business, which had annual revenues of approximately $40 million,
because it did not fit with the long-term strategic objectives of the Company.
In conjunction with the sale of this business to Boise Cascade Office Products
("BCOP"), the Company expanded its alliance with BCOP in order to better serve
the needs of its customers. As the margins on this type of product are generally
lower, exiting this business had the impact of increasing operating margins in
the Forms and Labels segment.
20
<PAGE> 21
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations, Continued
With the Company's Total Print Management strategy, more sales are occurring
under contract. Nonetheless, the majority of the sales in the Integrated
Graphics segment are made on an order-by-order basis. Selling prices in this
segment, therefore, reflect market conditions for paper more immediately than in
the Forms and Labels segment. The impact of lower paper prices reduced sales by
about 4% for fiscal 1999; however, this was more than offset by unit growth and
acquisitions.
Net income for the year increased by $1.9 million or 2.5%. The after-tax ratio
for fiscal 1999 was 5.0%. For the last five years, net income has grown at an
average compound rate of 9.7%.
Cost of goods sold as a percent to sales for fiscal 1999 was 68.7% versus 67.5%
in fiscal 1998. Integrated Graphics has higher cost of goods sold as a percent
to sales than the Forms and Labels segment. That fact, coupled with the extra
quarter of operating results for Graphic and the faster growth in the Integrated
Graphics segment, was the most significant element contributing to the increase.
The Company views margin expansion in the Integrated Graphics segment as a
significant opportunity, as contract business for high color marketing and
promotional printing accelerates. The LIFO impact year over year was comparable.
Selling and administrative expenses as a percent to sales were 16.2% in fiscal
1999 and 16.8% in fiscal 1998. It had been anticipated that these expenses as a
percent to sales would decrease in fiscal 1999 as the Company leveraged its
national sales force, systems, and shared services across a broader sales base.
Year 2000 related software expenses were $2.0 million in fiscal 1999 and $2.7
million in fiscal 1998.
Operating income decreased from 10.7% of sales in fiscal 1998 to 10.2% in fiscal
1999. The most significant reason for the drop in operating income as a percent
to sales was the anticipated shift in product mix between the segments. The
Integrated Graphics segment had a full year of Graphic results in fiscal 1999
versus only three quarters in fiscal 1998.
Interest expense for fiscal 1999 increased by $7.5 million due primarily to
incurring four full quarters of interest expense in fiscal 1999 related to the
Graphic acquisition versus only three quarters in fiscal 1998. Also, interest
rates were higher due to fixing $200 million of debt in long-term notes.
The effective income tax rate for fiscal 1999 was 40.0% versus 39.9% in fiscal
1998.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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.
21
<PAGE> 22
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations, Continued
In July 2000 the Emerging Issue Task Force of the Financial Accounting Standards
Board ("Task Force") issued EITF Issue 00-10, "Accounting for Shipping and
Handling Revenues and Costs". This pronouncement provides new requirements on
how to account for revenues collected from customers to reimburse the seller for
shipping and handling costs. However, no guidance has been given on how to
account for the corresponding freight costs paid by the seller. The Company will
be required to report amounts billed to a customer in a sale transaction related
to shipping and handling, if any, as revenue in the income statement. Although
we believe this pronouncement will have no impact on the Company's financial
condition or results of operations, this pronouncement may have a significant
impact on individual lines within the income statement including sales and
possibly cost of sales. The Company currently aggregates shipping and handling
costs and revenues in the revenue line on the income statement. This statement
requires retroactive restatement and will be adopted by the company in the
fourth quarter of fiscal 2001.
In May 2000 the Task Force issued EITF Issue 00-14, "Accounting for Certain
Sales Incentives", which addresses the recognition, measurement and income
statement classification of sales incentives that a company offers to its
customers for use in a single exchange transaction. Based upon current
circumstances, the Company does not believe that application of EITF Issue 00-14
will have a material effect on the Company's financial condition or results of
operations.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL: Working capital decreased $9.8 million to $246.7 million as of
July 31, 2000. The Company has increased its focus on the balance sheet,
specifically working capital, in order to generate cash to pay down debt. While
actual balances have increased in both accounts receivable and inventory, days
sales outstanding has improved by three days and inventory turns have increased
to 10.2 in fiscal 2000 from 9.2 in fiscal 1999. The Company will continue to
focus on working capital management. The current ratio at July 31, 2000 was 2.3.
CAPITAL EXPENDITURES: Capital expenditures for fiscal 2000 were $53.9 million.
There were no major construction projects in process at fiscal year-end. In
addition to capital expenditures, the Company continues to invest in its
information technology infrastructure. Information systems expenditures of $25.1
million have been capitalized in fiscal 2000. The Company is at the end of its
most aggressive systems initiatives to date. The first two phases of the project
are complete and the final phase of the project will be implemented by the end
of the second quarter of fiscal 2001.
Over the last five years, capital expenditures have totaled $262.6 million.
These expenditures were funded through internally generated funds. Over the past
five years, the Company also spent $75.4 million for software development. For
fiscal year 2001, it is estimated that capital expenditures will be
approximately $40 million. Capital expenditures are expected to be lower than
historical rates in fiscal 2001 as the Company has reallocated assets as part of
its restructuring plan. Capitalized software will also decrease significantly as
the major systems initiative winds down.
DEBT: In fiscal 2000, total debt decreased $35.3 million to $404.9 million.
Strong cash flows from operations have made it possible to repurchase common
stock while reducing the ratio of debt to total capitalization from 43.0% at
July 31, 1999 to 42.4% at July 31, 2000. Several significant events affected the
debt level during the year. During
22
<PAGE> 23
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations, Continued
fiscal 2000, the Company purchased $41.5 million of its common stock in open
market transactions at an average price of $16.52. Company-owned life insurance
policies totaling $28.9 million were surrendered in the second half of the year,
with proceeds being used to reduce debt.
Of the outstanding debt as of July 31, 2000, $180 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 $400 million. On
January 15, 1999, the Company offered $200 million of Senior Notes, and at that
time, incurred an $18.3 million settlement on the treasury rate lock agreement
related to the issuance of the Senior Notes. The proceeds of the note issue were
used to pay down borrowings under the Credit Facility. The borrowings under the
Credit Facility are classified as long-term debt since the Company has the
intent and ability to carry that debt long-term.
In addition to the Credit Facility, the Company has unsecured money market lines
of $125 million, under which $13.0 million was borrowed at July 31, 2000. The
$13.0 million from the unsecured money market lines is classified as short-term
debt. The maximum amount as authorized by the Board of Directors for total
borrowings is currently $600 million.
In fiscal 1998, the Company filed a shelf registration to issue up to $300
million of unsecured debt and equity securities. The $200 million in Senior
Notes issued in fiscal 1999 reduced the amount available under the shelf
registration to $100 million. The Company has a BBB rating from Standard &
Poor's and a Baa2 rating from Moody's for both the $300 million universal shelf
registration and the $400 million revolving credit facility. As a result of the
earnings warning issued by the Company in January 2000, both rating agencies
placed the Company on Credit Watch. After completing their reviews, Moody's
reaffirmed its Baa2 rating, and Standard & Poor's lowered its rating from BBB+
to BBB. Both agencies have subsequently removed the Company from Credit Watch
and placed the Company on Stable Outlook.
The Company is exposed to market risk from changes in interest rates. As of July
31, 2000, 48.6% of total debt is fixed rate debt.
The Company believes that it has adequate financing and cash flows to make
acquisitions, repurchase stock, pay dividends, make capital expenditures and pay
down debt during fiscal 2001 while maintaining its investment grade ratings.
Over the coming year, strong cash flows should reduce leverage from the current
42.4% to a targeted mid-30% level.
COMMON STOCK
Dividends were raised for the 28th consecutive year in September 1999 to $0.66
per share, an increase of 3.1%.
During fiscal 2000, 869,000 shares of common stock were issued in connection
with the Company's Employee Stock Purchase Plan and the 1989 and 1997 Stock
Option Plans. Also during the year, deferred bonus amounts were placed into a
grantor trust for the benefit of certain executives. While these shares are
accounted for as treasury stock, they are considered outstanding and
incorporated in the computation of both basic and diluted earnings per share.
The balance of $3.2 million of deferred compensation in the equity section of
the balance sheet reflects the total fixed liability that the 156,000 trust
shares represent.
The Company also repurchased 2,509,200 shares during the year under the $100
million share repurchase program approved by the Board of Directors in May 1997.
Those repurchases bring the total purchases made under this
23
<PAGE> 24
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations, Continued
program to $91.4 million. In January 2000 the Board of Directors authorized the
purchase of an additional $100 million of stock. In the short term, the Company
only intends to repurchase shares to the extent necessary to offset the dilutive
effects of shares issued pursuant to employee benefit plans. The treasury shares
can be used for future acquisitions or for employee benefit plans.
COMPETITION: The markets for the Company's products are highly competitive and
relatively fragmented, with a large number of competitors. Some of the Company's
competitors are larger than the Company and have greater financial, marketing
and technical resources. The Company has invested significant resources in
computer technology and distribution facilities in an attempt to differentiate
itself from certain of its competitors. There can be no assurance that
competitors will not take actions, including developing new technologies,
products and services, which could adversely affect the Company's sales and
operating results.
DEPENDENCE ON KEY PERSONNEL: The Company's performance depends in large part on
the continued service of its key sales and management personnel and on its
ability to continue to attract, retain and motivate highly qualified personnel.
Competition for such personnel is intense, and the process of locating key
personnel with the combination of skills and attributes required to execute the
Company's strategy is often lengthy. There can be no assurance that the Company
will be able to attract or retain such personnel in the future, and the
inability to do so could have a material adverse effect upon the Company's
business, operating results or financial condition.
EFFECTIVE SUBORDINATION: The Company operates a portion of its business through
subsidiaries, including substantially all of its commercial printing operations.
The Company and its subsidiaries may incur additional indebtedness in the
future, subject to certain limitations contained in the Company's Indenture and
the Credit Agreement and certain of such indebtedness may be secured. Any right
of the Company to participate in any distribution of the assets of its
subsidiaries upon the liquidation, reorganization or insolvency of any such
subsidiary (and the consequent right of the creditors of the Company to
participate in the distribution of those assets) will be subject to the prior
claims of the respective subsidiary's creditors. As a result of the foregoing,
creditors of the Company may recover less ratably than other creditors of the
Company's subsidiaries in the event of any liquidation, reorganization or
insolvency of the Company.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: Certain statements in this filing and elsewhere (such as in other filings
by the 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
24
<PAGE> 25
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations, Continued
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.
QUARTERLY RESULTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
2000
Net sales $ 387,616 $ 384,248 $ 388,718 $ 404,656
Cost of goods sold (excluding depreciation) 265,210 271,915 276,183 287,750
Restructuring costs -- -- 38,896 2,655
Operating income (loss) 37,502 24,887 (16,804) 32,123
Income (loss) before income taxes 30,965 17,113 (22,432) 24,062
Net income (loss) 18,579 10,268 (16,665) 10,435
Net income (loss) per share:
Basic $ .44 $ .25 $ (.41) $ .26
Diluted $ .44 $ .25 $ (.41) $ .26
1999
Net sales $ 384,915 $ 376,306 $ 384,731 $ 384,571
Cost of goods sold (excluding depreciation) 267,136 258,128 262,238 264,415
Operating income 35,655 38,795 42,172 39,326
Income before income taxes 28,382 31,659 34,309 32,431
Net income 17,029 18,995 20,585 19,460
Net income per share:
Basic $ .40 $ .45 $ .49 $ .46
Diluted $ .40 $ .45 $ .49 $ .46
</TABLE>
25
<PAGE> 26
Item 7(A) Quantitative and Qualitative Disclosures About Market Risk
The information required by Item 7(A) is contained in the sections
captioned "Interest Expense" and "Capital Expenditures" in Item 7 of
this report. Also see the section captioned "Financial Instruments"
in Item 14(a) of this report.
Item 8 Financial Statements and Supplementary Data
The financial information required by Item 8 is contained in Item 14
of Part IV of this report.
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
26
<PAGE> 27
Part III
Item 10 Directors and Executive Officers of the Company
Information concerning continuing directors and director nominees of
the Company and their respective terms is contained in the section
captioned "Election of Directors" in the Company's definitive Proxy
Statement dated November 1, 2000, and is incorporated herein by
reference.
Information concerning Section 16(a) Beneficial Ownership Reporting
Compliance is contained in the section captioned "Security Ownership of
Certain Beneficial Owners" in the Company's definitive Proxy Statement
dated November 1, 2000, and is incorporated herein by reference.
Executive Officers of the Company
(a) Names, ages and positions of the executive officers:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Michael A. Anderson 38 Senior Vice President - Integrated Graphics Segment
Thomas G. Brooker 42 Vice President - Corporate Sales
Steven L. Carson 37 Secretary and Vice President - General Counsel
John J. DeCoster 40 Vice President - Corporate Controller
Michael O. Duffield 48 President, Acting Chief Executive Officer and
Chief Operating Officer
Douglas W. Fitzgerald 46 Vice President - Marketing
Craig A. Grant 53 Vice President - Human Resources
Gary K. Haman 42 Assistant Treasurer
Robert J. Kelderhouse 45 Vice President - Treasurer
William J. Montanez 48 Assistant Treasurer
Wayne E. Richter 44 Senior Vice President - Forms and Labels Segment
Thacher R. Smith 42 Tax Officer
</TABLE>
27
<PAGE> 28
Item 10 Executive Officers of the Company, Continued
All officers are elected at the Annual Meeting of the Board of
Directors, which is held immediately after the Annual Meeting of
Stockholders.
(b) Business Experience of the Executive Officers:
Mr. Anderson has been with the Company since 1985. He was elected
Senior Vice President - Integrated Graphics segment in 2000. Mr.
Anderson was previously Vice President - General Manager - Direct
Response Group in 1998, Vice President - General Manager -
Commercial Printing from 1997 to 1998, Vice President - General
Manager - Tops from 1995 to 1997, and Director of Distribution from
1992 to 1995.
Mr. Brooker has been with the Company since 1981. He was elected
Vice President - Corporate Sales in 1998. Mr. Brooker was
previously Vice President - General Manager - Office Products from
1995 to 1998, Vice President - General Manager - Tops Division from
1993 to 1995.
Mr. Carson has been with the Company since 1995 as General Counsel.
He was elected Vice President, General Counsel and Secretary in
1999. Mr. Carson was previously General Counsel and Assistant
Secretary from 1997 to 1999. Mr. Carson was previously an attorney
with Chapman and Cutler, and Katten, Muchin & Zavis.
Mr. DeCoster has been with the Company since 1988. He was elected
Vice President - Corporate Controller in 1999. Mr. DeCoster was
previously Corporate Controller from 1997 to 1999 and Assistant
Corporate Controller from 1993 to 1997.
Mr. Duffield has been with the Company since 1974. He was elected
Acting Chief Executive Officer in 2000. Prior to that he was
elected President and Chief Operating Officer in 1998 and Senior
Vice President - Operations from 1992 to 1998.
Mr. Fitzgerald has been with the Company since 1976. He was elected
Vice President - Marketing in 1996. Mr. Fitzgerald was previously
Director of Marketing from 1989 to 1996.
Mr. Grant joined the Company in 2000 as the Senior Vice President -
Human Resources. Mr. Grant was most recently employed at The
Fleming Companies as the Senior Vice President - Human Resources
from 1998 to 1999. Prior to that he was Vice President - Human
Resources at Interlake, Inc. from 1991 to 1998.
Mr. Haman has been with the Company since 1998 as Assistant
Treasurer. Mr. Haman was previously employed by Eagle Industries,
Inc. as Director of Treasury Operations from 1993 to 1998.
Mr. Kelderhouse joined the Company in 1999 as Vice President -
Treasurer and Assistant Secretary. Mr. Kelderhouse was previously
employed by Heller International Corporation as Senior Vice
President - Finance and Capital Markets, Sales Finance Group from
1997 to 1999, and Senior Vice President - Finance and Capital
Markets, Vendor Finance Division from 1994 to 1997.
28
<PAGE> 29
Item 10 Business Experience of the Executive Officers, Continued
Mr. Montanez has been with the Company since 1992. He was elected
Assistant Treasurer in 1996. Mr. Montanez was previously Director /
Manager of Benefits and Risk Management from 1992 to 1996. Mr.
Montanez resigned from the Company effective September 30, 2000.
Mr. Richter has been with the Company since 1979. He was elected
Senior Vice President - Forms and Labels Segment in 1998. Mr.
Richter was previously Vice President - General Manager - Label
Division from 1992 to 1998.
Mr. Smith joined the Company in 1999 as the Director of Taxation
and is the Tax Officer of the Company. Mr. Smith was previously
employed by BT Office Products, International, Inc. as Director of
Tax from 1995 to 1999. Prior to that Mr. Smith worked for 15 years
at several different public accounting firms.
There are no family relationships between these executives.
Item 11 Executive Compensation
Information concerning management remuneration and transactions,
and compensation of directors for the year ended July 31, 2000 is
contained in the section captioned "Compensation of Executive
Officers" in the Company's definitive Proxy Statement dated
November 1, 2000, and is incorporated herein by reference.
Item 12 Security Ownership of Certain Beneficial Owners and Management
Information concerning the beneficial ownership of the Company's
common stock is contained in the section captioned "Voting
Securities" in the Company's definitive Proxy Statement dated
November 1, 2000, and is incorporated herein by reference.
Item 13 Certain Relationships and Related Transactions
Information concerning certain relationships and related
transactions is contained in the Company's definitive Proxy
Statement dated November 1, 2000, and is incorporated herein by
reference.
29
<PAGE> 30
Part IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following consolidated financial statements and schedules of
the Company are set forth on the following pages of this report.
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Consolidated Statements of Income for the years ended July 31,
2000, 1999, and 1998 32
Consolidated Statements of Stockholders' Equity for the years ended
July 31, 2000, 1999, and 1998 33 - 34
Consolidated Balance Sheets as of July 31, 2000 and 1999 35
Consolidated Statements of Cash Flows for the years ended
July 31, 2000, 1999, and 1998 36
Notes to Consolidated Financial Statements 37 - 53
Report of Independent Public Accountants 54
Quarterly Financial Data for the years ended July 31, 2000 and 1999 55
Schedule - II, Valuation and Qualifying Accounts 56
</TABLE>
Schedules Omitted
All other schedules have been omitted because they are not applicable
or not required or because the required information is included in
the financial statements or notes thereto.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the Company during the
quarter ended July 31, 2000.
(c) Exhibit Index
The exhibits as shown in "Index of Exhibits" (pages 57 - 60)
are filed as part of this report.
30
<PAGE> 31
Wallace Computer Services, Inc. Fiscal 2000 10-K
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, on October 20, 2000.
Wallace Computer Services, Inc.
By /s/ John J. DeCoster
--------------------------------
John J. DeCoster
Vice President - Corporate Controller
(principal accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
capacities indicated, on October 20, 2000.
/s/ Neele E. Stearns, Jr. /s/ Andrew J. McKenna, Jr.
------------------------- --------------------------
Neele E. Stearns, Jr. Andrew J. McKenna, Jr.
Chairman of the Board Director
/s/ Michael T. Riordan /s/ John C. Pope
------------------------- --------------------------
Michael T. Riordan John C. Pope
Director Director
/s/ William J. Devers, Jr. /s/ Bettye Martin Musham
------------------------- --------------------------
William J. Devers, Jr. Bettye Martin Musham
Director Director
31
<PAGE> 32
Item 14 (a) Consolidated Financial Statements and Schedules
CONSOLIDATED STATEMENTS OF INCOME
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED JULY 31, 2000, 1999 and 1998 2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net sales $ 1,565,238 $ 1,530,523 $ 1,356,052
----------- ----------- -----------
Cost and expenses:
Cost of goods sold 1,101,058 1,051,917 915,927
Selling and administrative expenses 267,348 247,227 227,898
Provision for depreciation and amortization 77,573 75,431 67,479
Restructuring charge (Note 7) 41,551 -- --
----------- ----------- -----------
Total costs and expenses 1,487,530 1,374,575 1,211,304
----------- ----------- -----------
Operating income 77,708 155,948 144,748
Interest income (2,408) (1,842) (2,108)
Interest expense, net of capitalized interest 33,598 31,009 23,466
Other income (Note 11) (3,190) -- --
----------- ----------- -----------
Income before income taxes 49,708 126,781 123,390
----------- ----------- -----------
Provision for income taxes: (Note 8)
Current:
Federal 20,728 35,383 38,267
State 3,673 7,081 7,826
Deferred 2,690 8,248 3,089
----------- ----------- -----------
Total income taxes 27,091 50,712 49,182
----------- ----------- -----------
Net income $ 22,617 $ 76,069 $ 74,208
----------- ----------- -----------
Net income per share: (Note 12)
Basic $ 0.55 $ 1.80 $ 1.72
Diluted $ 0.55 $ 1.80 $ 1.71
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
32
<PAGE> 33
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK COMMON
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) PREFERRED STOCK ADDITIONAL
FOR THE YEARS ENDED JULY 31, 2000, 1999 and 1998 ISSUED IN TREASURY STOCK PAR VALUE CAPITAL
----------------------------------------------------- -------- ----------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Balance, July 31, 1997 45,764 (2,694) $ -- $ 45,764 $ 34,739
-------- ----------- --------- --------- ----------
Net income -- -- -- -- --
Cash dividends ($.62 per share) -- -- -- -- --
Sale of stock under employee stock
purchase plan (Note 5) -- 457 -- -- (2,185)
Stock options exercised net of shares
exchanged in lieu of cash (Note 5) -- 107 -- -- (247)
Stock transferred to profit sharing and
retirement fund -- 206 -- -- 2,432
Tax benefit from early disposition by employees
of stock issued under stock option plans
and exercise of non-qualified stock options -- -- -- -- 1,219
Amortization of difference between market price
and option price for 1997 option plan (Note 5) -- -- -- -- 432
Treasury stock purchased -- (572) -- -- --
Unrealized security gain (Note 11) -- -- -- -- --
-------- ----------- --------- --------- ----------
Balance, July 31, 1998 45,764 (2,496) -- 45,764 36,390
======== =========== ========= ========= ==========
Net income -- -- -- -- --
Cash dividends ($.64 per share) -- -- -- -- --
Sale of stock under employee stock
purchase plan (Note 5) -- 553 -- -- --
Stock options exercised net of shares
exchanged in lieu of cash (Note 5) -- 53 -- -- --
Deferred compensation liability for change in
shares held in grantor trust (Note 5) -- -- -- -- --
Tax benefit from early disposition by employees
of stock issued under stock option plans
and exercise of non-qualified stock options -- -- -- -- 721
Amortization of difference between market price
and option price for 1997 option plan (Note 5) -- -- -- -- 417
Treasury stock purchased -- (1,656) -- -- --
-------- ----------- --------- --------- ----------
Balance, July 31, 1999 45,764 (3,546) -- 45,764 37,528
======== =========== ========= ========= ==========
Net income -- -- -- -- --
Cash dividends ($.66 per share) -- -- -- -- --
Sale of stock under employee stock
purchase plan (Note 5) -- 869 -- -- --
Stock options exercised net of shares
exchanged in lieu of cash (Note 5) -- 110 -- -- --
Deferred compensation liability for change in
shares held in grantor trust (Note 5) -- -- -- -- --
Tax benefit from early disposition by employees
of stock issued under stock option plans
and exercise of non-qualified stock options -- -- -- -- 541
Amortization of difference between market price
and option price for 1997 option plan (Note 5) -- -- -- -- 417
Treasury stock purchased -- (2,510) -- -- --
-------- ----------- --------- --------- ----------
Balance, July 31, 2000 45,764 (5,077) $ -- $ 45,764 $ 38,486
======== =========== ========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
33
<PAGE> 34
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, Continued
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
UNREALIZED COST OF
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) DEFERRED RETAINED SECURITY TREASURY
FOR THE YEARS ENDED JULY 31, 2000, 1999 and 1998 COMPENSATION EARNINGS GAIN/(LOSS) STOCK
-------------------------------------------------- ------------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
Balance, July 31, 1997 $ -- $ 491,719 $ (95) $ (78,939)
------------ ---------- ----------- ----------
Net income -- 74,208 -- --
Cash dividends ($.62 per share) -- (26,823) -- --
Sale of stock under employee stock
purchase plan (Note 5) -- (326) -- 12,641
Stock options exercised net of shares
exchanged in lieu of cash (Note 5)
-- (1,027) -- 2,891
Stock transferred to profit sharing and
retirement fund -- -- -- 5,567
Tax benefit from early disposition by employees
of stock issued under stock option plans
and exercise of non-qualified stock options -- -- -- --
Amortization of difference between market price
and option price for 1997 option plan (Note 5) -- -- -- --
Treasury stock purchased -- -- -- (14,592)
Unrealized security gain (Note 11) -- -- 95 --
------------ ---------- ----------- ----------
Balance, July 31, 1998 -- 537,751 -- (72,432)
============ ========== =========== ==========
Net income -- 76,069 -- --
Cash dividends ($.64 per share) -- (26,904) -- --
Sale of stock under employee stock
purchase plan (Note 5) -- (4,477) -- 15,910
Stock options exercised net of shares
exchanged in lieu of cash (Note 5) -- (1,047) -- 1,525
Deferred compensation liability for change in
shares held in grantor trust (Note 5) 3,883 -- -- --
Tax benefit from early disposition by employees
of stock issued under stock option plans
and exercise of non-qualified stock options -- -- -- --
Amortization of difference between market price
and option price for 1997 option plan (Note 5) -- -- -- --
Treasury stock purchased -- -- -- (30,003)
------------ ---------- ----------- ----------
Balance, July 31, 1999 3,883 581,392 -- (85,000)
============ ========== =========== ==========
Net income -- 22,617 -- --
Cash dividends ($.66 per share) -- (26,682) -- --
Sale of stock under employee stock
purchase plan (Note 5) -- (16,763) -- 26,166
Stock options exercised net of shares
exchanged in lieu of cash (Note 5) -- (1,631) -- 3,482
Deferred compensation liability for change in
shares held in grantor trust (Note 5) (724) -- -- --
Tax benefit from early disposition by employees
of stock issued under stock option plans
and exercise of non-qualified stock options -- -- -- --
Amortization of difference between market price
and option price for 1997 option plan (Note 5) -- -- -- --
Treasury stock purchased -- -- -- (41,453)
------------ ---------- ----------- ----------
Balance, July 31, 2000 $ 3,159 $ 558,933 $ -- $ (96,805)
============ ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
34
<PAGE> 35
CONSOLIDATED BALANCE SHEETS
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
JULY 31, 2000 and 1999 2000 1999
------------------------------------------------ ----------- -----------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 4,505 $ 8,033
Accounts receivable, less allowance for doubtful accounts
of $5,906 in 2000 and $5,582 in 1999 294,353 292,095
Inventories (Note 3) 108,133 107,540
Current and deferred income taxes 27,732 37,422
Advances and prepaid expenses 8,110 3,284
----------- -----------
Total current assets 442,833 448,374
----------- -----------
Property, plant and equipment, at cost:
Land and buildings 177,869 177,983
Machinery, equipment, furniture and fixtures 673,346 663,507
Leasehold improvements 5,612 5,408
----------- -----------
Total property, plant and equipment 856,827 846,898
Less: reserves for depreciation and amortization (443,981) (409,891)
----------- -----------
Net property, plant and equipment 412,846 437,007
Intangible assets arising from acquisitions 296,745 306,117
Cash surrender value of life insurance 36,400 58,796
System development costs 55,727 43,337
Other assets 4,758 4,028
----------- -----------
Total Assets $ 1,249,309 $ 1,297,659
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term debt $ 2,454 $ 2,290
Short-term notes payable 12,991 21,222
Accounts payable 99,368 85,577
Dividends payable 6,648 6,808
Accrued compensation and related expenses 45,660 42,675
Other accrued expenses 22,618 17,720
Contribution to profit sharing and retirement fund (Note 10) 6,351 15,573
----------- -----------
Total current liabilities 196,090 191,865
----------- -----------
Deferred compensation and retirement benefits (Note 9) 36,265 31,992
Deferred income taxes (Note 8) 69,912 64,438
Long-term debt (Note 4) 389,413 416,653
Other long-term liabilities 8,092 9,144
Stockholders' equity:
Preferred stock, $50 par value, authorized 500,000 shares -- --
Common stock, $1.00 par value, authorized 100,000,000 shares 45,764 45,764
Additional capital 38,486 37,528
Deferred Compensation (Note 5) 3,159 3,883
Retained earnings 558,933 581,392
Treasury stock (96,805) (85,000)
----------- -----------
Total stockholders' equity 549,537 583,567
----------- -----------
Total Liabilities and Stockholders' Equity $ 1,249,309 $ 1,297,659
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements
35
<PAGE> 36
CONSOLIDATED STATEMENTS OF CASH FLOW
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED JULY 31, 2000, 1999 AND 1998 2000 1999 1998
------------------------------------------------ --------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 22,617 $ 76,069 $ 74,208
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 77,573 75,431 67,479
Restructuring charge 31,828 -- --
Deferred taxes 4,908 12,467 1,053
(Gain) loss on disposal of property (344) (770) 676
(Gain) on sale of investments (3,190) -- --
Changes in assets and liabilities, net of effect
of acquisitions and divestitures:
Accounts receivable (345) (34,720) 1,808
Inventories (387) 11,808 (3,996)
Prepaid taxes 8,940 (2,222) (18,084)
Advances and prepaid expenses (1,158) 3,501 11,841
Other assets (6,475) (34,169) (22,220)
Accounts payable and other liabilities 10,368 19,913 (10,085)
Deferred compensation and retirement benefits 4,273 1,440 1,723
--------- --------- ---------
Net cash provided by operating activities 148,608 128,748 104,403
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (53,945) (50,311) (59,632)
Proceeds from sales of short-term investments 3,190 -- 1,866
Proceeds from disposal of property 6,086 10,254 7,400
Net construction funds held by trustee -- 1,280 --
Other capital investments, including acquisitions/divestitures (10,067) (14,803) (451,139)
--------- --------- ---------
Net cash used in investing activities (54,736) (53,580) (501,505)
--------- --------- ---------
Cash flows from financing activities:
Cash dividends paid (27,016) (26,802) (26,146)
Amounts paid on long-term debt (128,698) (76,461) (18,326)
Net (retirements of)/proceeds from issuance of short-term debt (8,067) (14,496) 7,218
Proceeds from issuance of long-term debt 96,487 64,075 416,884
Proceeds from issuance of common stock 11,347 13,051 21,397
Purchase of treasury stock (41,453) (30,003) (14,592)
--------- --------- ---------
Net cash (used in)/provided by financing activities (97,400) (70,636) 386,435
--------- --------- ---------
Net changes in cash and cash equivalents (3,528) 4,532 (10,667)
Cash and cash equivalents at beginning of year 8,033 3,501 14,168
--------- --------- ---------
Cash and cash equivalents at end of year $ 4,505 $ 8,033 $ 3,501
========= ========= =========
Supplemental disclosure:
Interest paid (net of interest capitalized) $ 28,155 $ 21,177 $ 21,887
Income taxes paid 14,680 36,342 60,782
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
36
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION: The accompanying financial statements include the
accounts of the Company and its subsidiaries, which are wholly-owned. All
significant intercompany transactions have been eliminated.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities and reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those
estimates.
RECLASSIFICATIONS: Certain prior year amounts have been reclassified to conform
to the current year presentation.
REVENUE RECOGNITION: Revenues from product sales are recorded when the product
is shipped to the customer. Revenue from services or software is not recognized
until service or software installation is complete or customer acceptance is
acknowledged.
CASH AND CASH EQUIVALENTS: The Company invests excess cash balances in
short-term securities, including commercial paper, money market funds, and
municipal bonds whose original maturities are less than three months.
CAPITALIZED INTEREST COSTS: Interest costs are capitalized based upon the cost
of capital projects in progress during the year. Interest expense, before
interest capitalization, and the amount of interest capitalized as of the last
three year ends are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) INTEREST EXPENSE INTEREST CAPITALIZED
-------------- ---------------- --------------------
<S> <C> <C>
2000 $ 36,272 $ 2,674
1999 32,245 1,236
1998 24,821 1,355
</TABLE>
Amortization expense for interest capitalized was $1,106,000 in 2000; $1,035,000
in 1999; and $903,000 in 1998.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is recorded at
historical cost. Depreciation for financial statement purposes is computed using
the straight-line method over the estimated useful lives of the various classes
of property, plant and equipment.
<TABLE>
<S> <C>
Buildings 40 years
Building equipment 10-15 years
Machinery and equipment, Furniture and Fixtures 3-10 years
Leasehold improvements Lease period
</TABLE>
37
<PAGE> 38
INTANGIBLE ASSETS: The excess of cost over the assigned value of the net
tangible assets in connection with all acquisitions is being amortized on a
straight-line basis primarily over 40 years. Amortization expense amounted to
$8,116,000 in 2000, $7,927,000 in 1999 and $5,857,000 in 1998. The unamortized
balance relating to Graphic was $206,207,000 at July 31, 2000 and $220,360,000
at July 31, 1999. The balance relating to all other acquisitions was $90,538,000
at July 31,2000 and $85,757,000 at July 31, 1999.
SYSTEM DEVELOPMENT COSTS: Computer software that is either purchased or
developed internally for use by the Company is amortized over a useful life of
three to seven years. Amortization of internal use software was $6,395,000 in
fiscal 2000; $5,410,000 in fiscal 1999; and $4,238,000 in fiscal 1998. Certain
computer software costs are capitalized in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed", and are reported
at the lower of unamortized cost or net realizable value. This software,
marketed under the name Platforms(R), has been developed to provide customers
with electronic forms and was amortized over two to five years. All costs
incurred to customize the specific application for a customer are included in
cost of goods sold in the period in which revenue is recognized. Revenues and
expenses for the Platforms' product are included in the statements of
operations. All Platforms' software was completely amortized as of July 31,
1998. Amortization of Platforms' software was $0 in fiscal 2000; $0 in fiscal
1999; and $1,210,000 in fiscal 1998. The unamortized balance of all capitalized
computer software was $55,727,000 in 2000 and $43,337,000 in 1999.
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 operation.
LONG-LIVED ASSETS: In accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
the Company reviews its long-lived assets for impairments when events or changes
in circumstances indicate the carrying amount may not be recoverable. As a
result of this review, the Company did write down certain long-lived assets in
connection with the restructuring announced in fiscal 2000. See Note 7 for
information concerning the write offs.
INCOME TAXES: The Company accounts for income taxes under SFAS No. 109,
"Accounting for Income Taxes". Under that standard, deferred income taxes are
recognized for the tax consequences of "temporary differences" by applying
statutory tax rates applicable to future years to differences between the
financial statement carrying amount and the tax basis of existing assets and
liabilities. Investment tax credits are amortized to income over the lives of
the applicable assets. The unamortized investment tax credit amounted to
$142,001 in 2000 and $167,000 in 1999.
FINANCIAL INSTRUMENTS: The Company had used a treasury rate lock agreement in
fiscal 1999, to modify interest rate exposure with the intent to reduce risk.
The Company had only limited involvement with derivative financial instruments
and does not use them for trading purposes.
The Company accounts for financial instruments under SFAS No. 80,
"Accounting for Futures Contracts". Under this standard, for instruments that
properly qualify for hedge accounting, the gain or loss realized on an interest
rate hedge is deferred and amortized as a yield adjustment over the life of the
related debt issuance. Amortization begins at the time of the debt issuance.
38
<PAGE> 39
NET INCOME PER SHARE: The Company computes earnings per share in accordance with
SFAS No. 128, "Earnings per Share". Accordingly, basic earnings per share
amounts are computed based on the weighted-average number of common shares
outstanding. Diluted earnings per share amounts are based on the increased
number of common shares that would be outstanding assuming the exercise of
certain outstanding stock options, when such conversion would have the effect of
reducing earnings per share. See Note 12 for the computation of earnings per
share.
RECENTLY IMPLEMENTED ACCOUNTING PRONOUNCEMENTS: In June 1997, the Financial
Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive
Income". The provisions of SFAS No. 130 were adopted in the first quarter of
fiscal 1999. This statement establishes standards for the reporting and display
of comprehensive income and its components in a full set of financial
statements. This statement is intended to report a measure of all changes in
shareholders' equity that result from either recognized transactions and other
economic events from non-owner sources, excluding capital stock transactions,
that impact shareholders' equity. Implementation of this disclosure standard has
not affected the Company's financial position, results of operations or the
manner in which financial information is currently presented.
In 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.
NEW ACCOUNTING PRONOUNCEMENTS: In June 1998, the Financial Accounting Standards
Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". This standard requires that an entity recognize derivatives as
either assets or liabilities on its balance sheet and measure those instruments
at fair value. As a result of SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No.
133", the Company will adopt this standard in the first quarter of fiscal 2001.
Based on current circumstances, the Company does not believe that application of
SFAS No. 133 will have a material effect on the Company's financial condition or
results of operations.
In July 2000 the Emerging Issue Task Force of the Financial Accounting
Standards Board ("Task Force") issued EITF Issue 00-10, "Accounting for Shipping
and Handling Revenues and Costs". This pronouncement provides new requirements
on how to account for revenues collected from customers to reimburse the seller
for shipping and handling costs. However, no guidance has been given on how to
account for the corresponding freight costs paid by the seller. The Company will
be required to report amounts billed to a customer in a sale transaction related
to shipping and handling, if any, as revenue in the income statement. Although
we believe this pronouncement will have no impact on the Company's financial
condition or results of operations, this pronouncement may have a significant
impact on individual lines within the income statement including sales and
possibly cost of sales. The Company currently aggregates shipping and handling
costs and revenues in the revenue line on the income statement. This statement
requires retroactive restatement and will be adopted by the Company in the
fourth quarter of fiscal 2001.
In May 2000 the Task Force issued EITF Issue 00-14, "Accounting for Certain
Sales Incentives", which addresses the recognition, measurement and income
statement classification of sales incentives that a company offers to its
customers for use in a single exchange transaction. Based upon current
circumstances, the Company does not believe that application of EITF Issue 00-14
will have a material effect on the Company's financial condition or results of
operations.
39
<PAGE> 40
2. ACQUISITION OF GRAPHIC INDUSTRIES:
On November 3, 1997, a wholly-owned subsidiary of the Company completed a tender
offer for all of the shares of common stock of Graphic Industries, Inc.
("Graphic"), a commercial printing company. On December 22, 1997, the
wholly-owned subsidiary was merged with and into Graphic, with Graphic becoming
a wholly-owned subsidiary of the Company as a result of the merger. The
transaction has been accounted for as a purchase. The Company acquired
13,405,828 shares of common stock at a purchase price of $21.75 per share. The
purchase price of $437.8 million is comprised of the following:
(IN THOUSANDS)
<TABLE>
<S> <C>
Market value of shares, including options exercised
and convertible debt $ 308,306
Assumed debt, net of acquired cash 123,449
Transaction costs 6,075
----------
Total purchase price $ 437,830
==========
</TABLE>
The results of operations for Graphic are included in the income statement of
the Company since the second quarter of fiscal 1998. Goodwill in the amount of
$230.5 million, based on the final allocation of the purchase price, is being
amortized on a straight-line basis over 40 years.
The pro forma financial results of operations below assume the transaction
was completed at the beginning of fiscal 1998 and include adjustments for
increased interest costs associated with the transaction, as well as increased
depreciation, amortization, and effective income tax rates to reflect the
effects of the purchase price allocation:
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998
-----------
<S> <C>
Net sales $ 1,473,494
Net income 72,718
Net income per share (basic) 1.68
Net income per share (diluted) 1.68
</TABLE>
3. INVENTORIES:
Inventories are stated at cost which does not exceed market and include
material, labor and overhead. Cost is determined on the last-in, first-out
(LIFO) basis for certain inventories, and on the first-in, first-out (FIFO)
basis for other inventories.
Inventories at July 31, were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 2000 1999
--------- ---------
<S> <C> <C>
Raw materials $ 15,913 $ 18,043
Work in process 22,148 16,948
Finished products 70,072 72,549
--------- ---------
$ 108,133 $ 107,540
========= =========
</TABLE>
40
<PAGE> 41
At July 31, 2000 and 1999, the cost of inventories aggregating $56,752,000
and $54,451,000, respectively, was determined on the LIFO method.
Inventories would have been $16,591,000 higher in fiscal 2000 and
$11,800,000 higher in fiscal 1999, if the FIFO method had been used for all
inventories.
4. FINANCING ARRANGEMENTS:
SHORT-TERM DEBT: Unsecured money market lines of $125 million were available as
of July 31, 2000. Total borrowings outstanding as of that date were $13.0
million, with a weighted average interest rate of 6.90%.
LONG-TERM DEBT: Long-term debt consisted of the following at July 31:
<TABLE>
<CAPTION>
(IN THOUSANDS) 2000 1999
--------- ---------
<S> <C> <C>
Average 6.95% in fiscal 2000 and 5.49%
in fiscal 1999 revolving credit
agreement due 2003 $ 180,000 $ 200,000
8.93% senior term notes due 2009 122,703 121,762
8.31% senior term notes due 2006 61,180 60,648
Floating rate industrial revenue bonds average
rate 4.00% in fiscal 2000 and 3.32% in fiscal
1999 due 2007 7,000 7,000
Floating rate industrial revenue bonds average
rate 4.00% in fiscal 2000 and 3.22% in fiscal
1999 due 2010 8,000 8,000
Floating rate industrial revenue bonds average
rate 3.90% in fiscal 2000 and 3.30% in fiscal
1999 due 2019 - 8,500
8.63% lease agreement due 2004 1,499 1,736
5.10% promissory note due 2004 1,415 2,300
6.00% promissory note due 2001 333 667
6.00% promissory note due 2003 1,350 --
Average 7.04% property mortgages
due 2003 - 2013 8,360 7,911
Other 27 419
--------- ---------
$ 391,867 $ 418,943
Less-current portion 2,454 2,290
--------- ---------
Total Long Term Debt $ 389,413 $ 416,653
========= =========
</TABLE>
Based upon the interest rates currently available to the Company for
borrowings with similar terms and maturities, the fair value of the Company's
debt and other financial instruments, after adjusting for the deferred expense
related to the treasury lock, are either carried at fair value or do not
materially differ from fair value. The balance of the deferred expense related
to the treasury lock on the Senior Notes was $16.1 million as of July 31, 2000
and $17.6 million as of July 31, 1999.
41
<PAGE> 42
The industrial revenue bonds due 2007 and 2010 may be tendered at the option
of the holders on dates specified in the agreements. The Company maintains
arrangements with agents to remarket any bonds tendered before the final
maturity dates. The bonds are also supported by letters of credit.
Principal payments due on long-term debt, exclusive of the treasury lock of
$16.1 million, are as follows: $2,454,000 in 2001, $1,384,000 in 2002,
$181,439,000 in 2003, $1,841,000 in 2004, $664,000 in 2005 and $220,185,000 in
2006 and beyond.
In fiscal 1999, the Company offered $200 million of Senior Notes to
institutional investors in a private placement. The transaction closed and was
funded on January 15, 1999. The proceeds of the note were used to pay down
borrowings under the revolving credit agreement ("Credit Facility"). The Company
settled the treasury rate lock agreement related to the issuance of the $200
million Senior Notes. A settlement of $18.3 million relating to the treasury
lock expense plus fees related to the transaction are being amortized using the
effective interest method over the term of the 7 and 10 year Notes and have been
included in the rates noted above. The Company has several debt covenants
related to the Senior Notes; however, the most restrictive covenant requires the
Company to maintain a debt to capitalization ratio not greater than 65%.
The Company has a $400 million revolving Credit Facility. The borrowings
under the Credit Facility were $180 million and $200 million as of July 31, 2000
and 1999, respectively. The borrowings under the Credit Facility are classified
as long-term debt since the Company has the intent and ability to carry that
debt long-term. The Company has several debt covenants related to this Credit
Facility; however, under the most restrictive of the covenants, the Company must
maintain a minimum interest coverage of at least 2.5 to 1, and a funded debt to
EBITDA ratio not greater than 3 to 1.
The Company was in compliance with all debt covenants at July 31, 2000 and
1999. The impact of a 10% increase or decrease in interest rates during fiscal
2000 does not have a significant impact on total interest expense for the
Company.
The maximum amount as authorized by the Board of Directors for total
borrowings is limited to $600 million. The Company has no compensating balance
requirements.
5. STOCK OPTIONS:
The Company has two stock option plans, the 1997 Stock Incentive Plan (the "1997
Plan") and the 1989 Stock Option Plan (the "1989 Plan"), and an employee stock
purchase plan adopted in 1974 (the "1974 Plan"). The 1989 Plan expired on
September 12, 1999.
Under the terms of the 1997 Plan, which expires September 4, 2006, options
may be granted to employees, as well as to non-employee Directors. Two types of
options to purchase common stock may be granted to officers and others, except
for non-employee Directors: Incentive Options and Non-Qualified Options. In the
case of Incentive Options, the option price may not be less than 100% of the
market value of the stock at the date of grant. For Non-Qualified Options, the
grant price may not be less than 85% of the market value; however, to date no
options have been granted at less than 100% of market value. The option price
may be paid in cash or by exchanging previously acquired Company common stock
with a market value equal to the purchase price. Options generally become
exercisable as to 40% of the shares granted one year after grant and the
remaining 60% of the shares granted become exercisable two years after grant.
Options expire 10 years after grant. The exercisability of options may be
subject to one or more of the following performance measures: Common Stock
value, earnings per share, return to shareholders (including dividends), return
on assets, return on equity, earnings of the Company, revenues, market share,
cash flow, cost reduction goals, or any combination of the above.
42
<PAGE> 43
The 1997 plan additionally provides for options for non-employee Directors.
Immediately following the Company's annual meeting, each non-employee Director
will be granted an option to purchase 2,000 shares at a purchase price per share
equal to the fair market value of a share of common stock on the date of grant
of such option. The options will vest at 25% every three months, such that they
will be fully vested within one year, or by the next annual meeting, whichever
occurs first.
The Company accounts for employee stock options under Accounting Principles
Board Opinion No. 25. The Company has adopted the disclosure-only provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation." Accordingly, no
compensation cost has been recognized for the stock option plans. Had
compensation cost for the plans been determined consistent with SFAS No. 123,
the Company's net income and earnings per share would have been reduced to the
following pro forma amounts:
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT EPS) 2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Net income:
As reported $ 22,617 $ 76,069 $ 74,208
Pro forma 19,951 71,857 69,426
Earnings per share (basic):
As reported .55 1.80 1.72
Pro forma .49 1.71 1.60
Earnings per share (diluted):
As reported .55 1.80 1.71
Pro forma .49 1.70 1.60
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to August 1, 1995, the resulting pro forma compensation cost may
not be representative of expected compensation cost in future years.
43
<PAGE> 44
The following table summarizes the activity under the stock option plans for
the last two years:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
----------- ----------------
<S> <C> <C>
Outstanding at July 31, 1998 1,731,045 $ 26.49
----------- ---------
Granted 581,750 17.39
Forfeited (98,800) 27.96
Exercised (75,132) 13.48
----------- ---------
Outstanding at July 31, 1999 2,138,863 $ 24.41
=========== =========
Granted 1,183,204 15.98
Forfeited (328,723) 24.15
Exercised (41,400) 14.59
----------- ---------
Outstanding at July 31, 2000 2,951,944 $ 21.13
=========== =========
</TABLE>
<TABLE>
<CAPTION>
JULY 31 JULY 31
2000 1999
---------- ---------
<S> <C> <C>
Options available for future grants 1,803,832 647,646
Options exercisable 1,358,406 840,913
</TABLE>
Of the 845,715 options granted in fiscal 1997, 567,000 were granted with
performance measure vesting provisions as outlined in the 1997 Plan. The
performance measures for the options are based on revenues, pretax income,
return on equity, and return on assets. Based on performance, 37.5% of the
options vested on September 4, 1999 and the remaining options will vest March 4,
2006. These options were issued with shareholder approval on February 28, 1997,
with a grant date of September 4, 1996. The difference between market price on
February 28, 1997 and the grant date is being reflected as expense in the
Company's income statement over the vesting period. This expense of $417,000 is
included in fiscal 2000 and fiscal 1999. The remaining options granted in 1997
did not have performance vesting provisions.
The Employee Stock Purchase Plan, adopted in 1974, expires on December 31,
2004. A total of 6,600,000 shares of common stock have been reserved for
purchase by employees through semi-annual offerings. The option price is the
lower of 85% of the market price of the shares on the commencement date or the
termination date of each offering period. Employees participate in the plan
through payroll deductions and the plan qualifies for certain tax advantages
under section 423 of the Internal Revenue Code of 1986, as amended. Options were
exercised to purchase 869,136 shares at $11.18 in fiscal 2000, 552,552 shares at
$20.69 in fiscal 1999 and 456,880 shares at $22.17 in fiscal 1998. There were
674,928 shares available at July 31, 2000 and 1,544,064 shares available at July
31, 1999 for future issuance under this plan.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants: risk-free interest rates of 4.6% to 6.7% depending
on the expected life of the option; expected dividend yield of 2.9% to 7.4%;
expected lives of 5.3 years for options granted through the stock option plan
and 0.5 years for options granted through the Employee Stock Purchase Plan;
44
<PAGE> 45
and expected volatility of 30.6% to 39.1% for options granted through the stock
option plan, and 43.4% to 71.4% for options granted through the employee stock
purchase plan.
During fiscal 1999, the Company established a grantor trust, a "Rabbi
Trust", for the benefit of certain employees in which previously earned and
accrued deferred bonus amounts are held on behalf of the employee. There were
155,962 and 198,241 shares held by the Rabbi Trust at July 31, 2000 and 1999,
respectively. The value of these shares is included as treasury stock within the
equity section of the financial statements, however, the shares are considered
outstanding and incorporated into the computation of both basic and diluted
earnings per share. The weighted-average number of these shares included in the
earnings per share calculation is 211,000 at July 31, 2000 and 50,000 at July
31, 1999. The deferred compensation liability is included in the equity section
of the balance sheet for both fiscal 2000 and 1999. Dividends accrued on these
"Rabbi Trust" shares are recognized as compensation expense in the income
statement. These shares will be remitted to the executives upon retirement or
termination, or their beneficiaries upon death.
6. LEASE COMMITMENTS:
Total rent expense for manufacturing facilities, sales offices and equipment
amounted to $17,799,000 in 2000, $15,175,000 in 1999 and $11,797,000 in 1998.
The minimum future rental commitments under non-cancelable lease arrangements
are $13,384,000 in 2001; $10,573,000 in 2002; $7,456,000 in 2003; $5,349,000 in
2004; $3,826,000 in 2005; and $ 10,329,000 in 2006 and beyond.
7. RESTRUCTURING:
In February 2000, the Company announced a plan to restructure its operations,
which resulted in one-time pre-tax expense totaling $41.6 million for fiscal
2000. This is presented separately as a component of income from operations in
the Statement of Operations. The anticipated additional charges related to this
restructuring should be minimal.
The Company experienced continued softness in the high-quality color marketing
and promotional printing market as well as issues relating to the integration of
the Graphic acquisition. Management reviewed its operations and developed action
plans relating to both segments that dealt with under-performing facilities,
underutilized assets, rationalization of certain product lines and a reduction
in management positions at the corporate office. The Company's plan was
approved, committed to, and for the most part, executed in the third quarter of
fiscal 2000.
The following table summarizes the activity in the restructuring reserve during
fiscal 2000:
<TABLE>
<CAPTION>
(Amounts in Thousands)
Employee Asset Write downs Other Cash Total
Termination Benefits (non-cash) Charges Restructuring
-------------------- ------------------ ---------- -------------
<S> <C> <C> <C> <C>
Restructuring Provision $ 6,350 $ 30,896 $ 1,650 $ 38,896
-------- -------- -------- --------
Adjustments to Reserves 0 0 0 0
Cash Payments (2,827) 0 (865) (3,692)
Non-cash items 0 (30,896) 0 (30,896)
-------- -------- -------- --------
Reserve balance April 30, 2000 $ 3,523 $ 0 $ 785 $ 4,308
-------- -------- -------- --------
Additional restructuring charges 291 639 1,725 2,655
Adjustments to Reserves 0 0 0 0
Cash Payments (1,735) 0 (1,380) (3,115)
Non-cash items 0 (639) 0 (639)
-------- -------- -------- --------
Reserve balance July 31, 2000 $ 2,079 $ 0 $ 1,130 $ 3,209
-------- -------- -------- --------
</TABLE>
45
<PAGE> 46
The plan resulted in four plant closings, and resizing and consolidation of
other facilities. Exit costs are primarily comprised of tangible and intangible
asset write downs related to assets to be disposed of and the sale of certain
facilities, and severance and severance-related costs. Under the plan, during
fiscal 2000, the Company terminated 435 employees, 380 of which are from plant
locations and 55 from the corporate headquarters.
Due to the changes described above, management performed a review of its
existing property and equipment, to determine impairment as described in
Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." Based on its evaluation, management determined that significant impairment
in goodwill and long-lived assets associated with plants that were closed
occurred related to both segments. Certain assets that had no long-term
strategic value were considered held for disposal and either written off or
written down to estimated fair market value if the asset was able to be sold.
The amount of non-cash write offs related to impaired assets is $20.5 million.
The amount of allocated goodwill written off related to plants acquired in the
Graphics acquisition was $11.1 million.
46
<PAGE> 47
8. INCOME TAXES:
The significant deferred tax assets and liabilities at July 31 were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 2000 1999
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Accelerated depreciation $ 51,404 $ 52,390
Software development 22,101 16,328
Capitalized interest 2,631 1,833
Other 10,411 8,577
Total Deferred Tax Liabilities 86,547 79,128
-------- --------
Deferred tax assets:
Deferred compensation 11,150 8,992
Restructuring reserves 4,597 --
Postretirement benefits 3,224 1,432
Inventory capitalization 2,647 6,248
Accrued vacation 3,216 4,901
Supplemental profit sharing 1,854 2,116
Bad debt reserve 2,351 2,211
Other 5,259 4,219
-------- --------
Total Deferred Tax Assets 34,298 30,119
-------- --------
Net Deferred Tax Liabilities $ 52,249 $ 49,009
======== ========
</TABLE>
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
State and local income taxes 3.5 4.2 4.6
Goodwill amortization 5.9 2.2 1.7
Goodwill written off in restructuring 6.8 -- --
Tax credits and other 3.3 (1.4) (1.4)
------ ------ ------
Effective tax rate 54.5% 40.0% 39.9%
====== ====== ======
</TABLE>
47
<PAGE> 48
9. POSTRETIREMENT BENEFITS:
Effective July 31, 1999, the Company adopted SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits". The information
for 2000, 1999 and 1998 has been presented in conformity with the requirements
of SFAS No. 132.
All current retirees; employees at least 55 with 20 or more years of service
as of December 31, 1993; and employees between the ages of 50 and 54 who have at
least 20 years of service as of December 31, 1993, and retired as of December
31, 1998, are entitled to postretirement health care coverage. These benefits
are subject to the same deductibles and co-payment provisions which apply to
active employees. All other employees who retire after December 31, 1993 will
pay 100% of their retirement medical coverage. The Company may amend or change
the plan periodically.
The net accrual basis expense for postretirement benefits as of July 31 was as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Components of net periodic
postretirement benefit costs:
Service cost $ -- $ 6 $ 11
Interest cost 500 266 253
Loss due to change in actuarial assumptions 5,322 985 229
------ ------ ------
Net periodic postretirement benefit cost $5,822 $1,257 $ 493
====== ====== ======
</TABLE>
The increase in the actuarial loss in fiscal 2000 and fiscal 1999 is primarily
related to the impact of employees between the ages of 50 and 54 who have 20
years of service as of December 31, 1993 and who elected to retire as of
December 31, 1998. The number of employees that elected to retire was greater
than the estimate used to calculate the accumulated postretirement benefit.
Additionally, actual claims cost information was used for the fiscal 2000
valuation which was higher than the estimated claims cost information used in
fiscal 1999. Fiscal 2000 experienced the first full year impact of actual claims
costs incurred by the group of employees that elected to retire on December 31,
1998. Of the $5.8 million in net periodic pension cost recognized in fiscal
2000, the Company has recognized $3.0 million as a one-time charge within
selling and administrative costs.
48
<PAGE> 49
The liability at July 31 (included in Deferred Compensation and Retirement
Benefits on the accompanying Consolidated Balance Sheet) for postretirement
benefits is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 2000 1999
------- -------
<S> <C> <C>
Change in benefit obligation:
Projected benefit obligation, beginning of year $ 3,561 $ 3,144
Service cost -- 6
Interest cost 500 266
Actuarial loss 5,322 985
Benefits paid (1,210) (840)
------- -------
Projected benefit obligation, end of year $ 8,173 $ 3,561
------- -------
Change in plan assets:
Plan assets at fair value, beginning of year $ -- $ --
Employer contribution 1,210 840
Benefits paid (1,210) (840)
------- -------
Plan assets at fair value, end of year $ -- $ --
------- -------
Funded status of plan:
Funded status $ 8,173 $ 3,561
------- -------
Net amount recognized on balance sheet $ 8,173 $ 3,561
------- -------
</TABLE>
For financial reporting purposes, the actuarial computations assumed a
discount rate of 7.75% in 2000, 7.5% in 1999 and 7.0% in 1998. The assumed
health care cost trend rate used in measuring the benefit obligations for
pre-age 65 employees is 6.0% in 2000 declining to 5% by the year 2002 and
thereafter. For post-age 65 employees the health care cost trend rate is 5.5% in
2000 declining to 5% in 2002 and thereafter. However, a one percentage point
increase in the assumed health care cost trend would increase the aggregate of
the service cost and interest cost components of the annual postretirement
expense by $39,000 and the postretirement benefit obligation as of July 31, 2000
by $574,000. A one percentage point decrease in the assumed health care cost
trend would decrease the aggregate of the service cost and interest cost
components of the annual postretirement expense by $34,000 and the
postretirement benefit obligation as of July 31, 2000 by $504,000.
10. PROFIT SHARING AND RETIREMENT PLAN:
The Company has a contributory profit sharing and retirement plan ("PSRP")
covering most employees, excluding the employees that were part of Graphic and
subsequent commercial print acquisitions. The plan provides for Company
contributions based on an amount determined by the Board of Directors. In recent
years the Company contribution has been based on 19% of earnings excluding
Graphics' results before profit sharing contributions. Those employees not
covered by the PSRP are covered under separate profit sharing and retirement
plan agreements.
49
<PAGE> 50
Substantially all of the Graphic employees are covered under a plan which
provides for Company contributions based on 50% of the first 4% of the covered
employees contribution.
Company contributions to all plans charged to operations were $8,554,000 in
fiscal 2000, $17,118,000 in fiscal 1999 and $17,018,000 in fiscal 1998.
11. INVESTMENTS IN DEBT AND EQUITY SECURITIES:
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", requires securities that are available-for-sale to be carried at
fair value, with changes in net unrealized gains and losses recorded as a
separate component of shareholders' equity. This statement has had no impact on
shareholders' equity at July 31, 2000 or July 31, 1999.
The long-term investment of $1.4 million at July 31, 2000 and July 31, 1999
is included in the `Other Assets' section of the balance sheet. There is no
unrealized holding gain or loss on this investment.
Proceeds on the sale of securities were $3.2 million for fiscal 2000 and $0
for fiscal 1999. The $3.2 million was recorded in other income on the income
statement and represents the proceeds received from the sale of stock that the
Company received in John Hancock's conversion from a policyholder owned company
to a stockholder based company. The Company received shares in relation to the
amount of corporate owned life insurance policies held with John Hancock.
The amortized cost of these securities was based on specific identification.
No securities during the period were classified as trading securities. There
have been no sales of held-to-maturity securities other than at their maturity
date.
12. EARNINGS PER SHARE:
Below is the computation of basic and diluted earnings per share for the fiscal
years ended July 31, 2000, 1999, and 1998.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
COMPUTATION OF BASIC EARNINGS PER SHARE
Net income $ 22,617 $ 76,069 $ 74,208
Weighted-average number of shares outstanding 40,940 42,118 43,213
Weighted-average number of shares held in grantor trust (Note 5) 211 50 --
-------- -------- --------
Shares applicable to basic earnings 41,151 42,168 43,213
Basic earnings per share .55 1.80 1.72
-------- -------- --------
COMPUTATION OF DILUTED EARNINGS PER SHARE
Net income $ 22,617 $ 76,069 $ 74,208
Shares applicable to basic earnings 41,151 42,168 43,213
Add net shares from assumed exercise of options 187 207 184
-------- -------- --------
Shares applicable to diluted earnings 41,338 42,375 43,397
Diluted earnings per share .55 1.80 1.71
</TABLE>
50
<PAGE> 51
13. SEGMENT REPORTING:
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 sale 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.
The Company's accounting policies for the segments are the same as those
described in the Summary of Significant Accounting Policies. Management
evaluates segment performance based on segment profit or loss before interest
and income taxes. Net interest expense and income taxes are not allocated to
segments. Transfers between segments, which are not significant, are accounted
for at standard cost. The Company has no significant non-cash items other than
depreciation and amortization.
51
<PAGE> 52
Summarized segment data and a reconciliation to the consolidated totals for
fiscal years 2000, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR 2000
EXTERNAL DEPRECIATION INCOME BEFORE SEGMENT CAPITAL
(AMOUNTS IN THOUSANDS) SALES & AMORTIZATION INCOME TAXES ASSETS(A) RESTRUCTURING EXPENDITURES
---------- -------------- ------------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Forms and Labels Segment $ 774,394 $ 35,928 $ 78,965 $ 461,986 $ 5,251 $ 14,689
Integrated Graphics Segment 790,844 41,645 40,294 638,336 23,010 39,256
---------- --------- --------- ---------- -------- --------
Segment Total 1,565,238 77,573 119,259 1,100,322 28,261 53,945
---------- --------- --------- ---------- -------- --------
Corporate -- -- -- 148,987 13,290 --
Restructuring -- -- (41,551) -- -- --
Net Interest Expense -- -- (31,190) -- -- --
Other Income -- -- 3,190 -- -- --
---------- --------- --------- ---------- -------- --------
Consolidated $1,565,238 $ 77,573 $ 49,708 $1,249,309 $ 41,551 $ 53,945
========== ========= ========= ========== ======== ========
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR 1999
EXTERNAL DEPRECIATION & INCOME BEFORE SEGMENT CAPITAL
(AMOUNTS IN THOUSANDS) SALES AMORTIZATION INCOME TAXES ASSETS(A) EXPENDITURES
---------- -------------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Forms and Labels Segment $ 763,791 $ 32,712 $ 108,648 $ 471,884 $ 33,755
Integrated Graphics Segment 766,732 42,719 47,300 721,510 16,556
---------- --------- ---------- ----------- ---------
Segment Total 1,530,523 75,431 155,948 1,193,394 50,311
---------- --------- ---------- ----------- ---------
Corporate -- -- -- 104,265 --
Net Interest Expense -- -- (29,167) -- --
---------- --------- ---------- ----------- ---------
Consolidated $1,530,523 $ 75,431 $ 126,781 $ 1,297,659 $ 50,311
========== ========= ========== =========== =========
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR 1998
EXTERNAL DEPRECIATION & INCOME BEFORE SEGMENT CAPITAL
(AMOUNTS IN THOUSANDS) SALES AMORTIZATION INCOME TAXES ASSETS(A) EXPENDITURES
---------- -------------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Forms and Labels Segment $ 754,167 $ 33,243 $ 99,182 $ 457,871 $ 25,875
Integrated Graphics Segment 601,885 34,236 45,566 708,859 33,757
---------- --------- ---------- ----------- ---------
Segment Total 1,356,052 67,479 144,748 1,166,730 59,632
---------- --------- ---------- ----------- ---------
Corporate -- -- -- 90,733 --
Net Interest Expense -- -- (21,358) -- --
---------- --------- ---------- ----------- ---------
Consolidated $1,356,052 $ 67,479 $ 123,390 $ 1,257,463 $ 59,632
========== ========= ========== =========== =========
</TABLE>
52
<PAGE> 53
(A) Corporate represents general corporate assets that are not allocated to the
segments. This amount includes items such as cash, prepaid taxes and cash
surrender value of life insurance.
Fiscal Year 1998 includes the acquisition of Graphic Industries, which was
effective November 1997.
GEOGRAPHIC INFORMATION:
Wallace attributes substantially all of its revenues to customers within the
United States. Long-lived assets are domiciled within the United States.
MAJOR CUSTOMER INFORMATION:
Wallace is not dependent upon any customer or a group of customers under common
control. No single customer or group of customers accounts for more than 10% of
consolidated net sales.
53
<PAGE> 54
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Wallace Computer Services, Inc.
We have audited the accompanying consolidated balance sheets of Wallace Computer
Services, Inc., (a Delaware corporation) and Subsidiaries as of July 31, 2000
and 1999, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three Fiscal years in the period ended
July 31, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Wallace Computer Services, Inc.
and Subsidiaries as of July 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three Fiscal years in the period
ended July 31, 2000 in conformity with accounting principles generally accepted
in the United States.
Arthur Andersen LLP
Chicago, Illinois
September 11, 2000
54
<PAGE> 55
QUARTERLY RESULTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
2000
Net sales $ 387,616 $ 384,248 $ 388,718 $ 404,656
Cost of goods sold (excluding depreciation) 265,210 271,915 276,183 287,750
Restructuring costs -- -- 38,896 2,655
Operating income (loss) 37,502 24,887 (16,804) 32,123
Income (loss) before income taxes 30,965 17,113 (22,432) 24,062
Net income (loss) 18,579 10,268 (16,665) 10,435
Net income (loss) per share:
Basic $ .44 $ .25 $ (.41) $ .26
Diluted $ .44 $ .25 $ (.41) $ .26
1999
Net sales $ 384,915 $ 376,306 $ 384,731 $ 384,571
Cost of goods sold (excluding depreciation) 267,136 258,128 262,238 264,415
Operating income 35,655 38,795 42,172 39,326
Income before income taxes 28,382 31,659 34,309 32,431
Net income 17,029 18,995 20,585 19,460
Net income per share:
Basic $ .40 $ .45 $ .49 $ .46
Diluted $ .40 $ .45 $ .49 $ .46
</TABLE>
<TABLE>
<CAPTION>
MARKET PRICE PER SHARE DIVIDENDS PAID PER SHARE
----------------------------------------- ----------------------------
FISCAL 2000 FISCAL 1999 FISCAL 2000 FISCAL 1999
------------------ ---------------- ------------ -------------
QUARTER HIGH LOW HIGH LOW
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
First $ 25.00 $ 19.63 $ 22.75 $ 15.44 $ .1600 $ .1550
Second 22.88 10.50 27.25 19.75 .1650 .1600
Third 12.75 9.94 24.63 17.75 .1650 .1600
Fourth 11.44 8.56 26.44 22.00 .1650 .1600
</TABLE>
55
<PAGE> 56
Wallace Computer Services, Inc. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
For the years ended July 31
<TABLE>
<CAPTION>
(Amounts in Thousands)
Total Reserve for Bad Debts 2000 1999 1998
--------------------------- --------- --------- --------
<S> <C> <C> <C>
Balance at Beginning of Year $ 5,582 $ 5,195 $ 3,481
Provision for Doubtful Accounts 3,654 2,341 700
Accounts Written Off Against Allowance (3,867) (2,709) (863)
Recoveries Credited to Allowance 537 755 182
Other Credits(1) - - 1,695
--------- --------- --------
Balance at End of Year $ 5,906 $ 5,582 $ 5,195
========= ========= ========
</TABLE>
(1) Credits from the acquisition of Graphic Industries, Inc. as of November 3,
1997.
56
<PAGE> 57
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1A Restated Certificate of Incorporation of the Company as filed with
the Secretary of State of the State of Delaware on January 7, 1987
(previously filed as part of Exhibit 3 to the Company's Annual
Report on Form 10-K for the fiscal year ended July 31, 1987, and
incorporated herein by reference to such Report).
3.1B Certificate of Amendment amending Section 1 of Article FOURTH of
the Certificate of Incorporation of the Company as filed with the
Secretary of State of the State of Delaware on November 28, 1989
(previously filed as part of Exhibit 3 to the Company's Annual
Report on Form 10-K for the fiscal year ended July 31, 1987, and
incorporated herein by reference to such Report).
3.1C Certificate of Amendment amending Section 1 of Article FOURTH of
the Certificate of Incorporation of the Company as filed with the
Secretary of State of the State of Delaware on March 14, 1997
(previously filed as part of Exhibit 3 to the Company's Annual
Report on Form 10-K for the fiscal year ended July 31, 1997, and
incorporated herein by reference to such Report).
3.1D Certificate of Designation of Series B Preferred Stock of the
Company as filed with the Secretary of State of the State of
Delaware on March 16, 2000 (previously filed as part of Exhibit 4
to the Company's Current Report on Form 8-K filed on March 16,
2000, and incorporated herein by reference to such Report).
3.2 Amended and Restated By-Laws of the Company as adopted on July 1,
1998 (previously filed as part of Exhibit 10 to the Company's
Annual Report on Form 10-K for the fiscal year ended July 31,
1998, and incorporated herein by reference to such Report).
4.1A Indenture between Wallace Computer Services, Inc. and Bank of New
York as Indenture Trustee (previously filed as Exhibit 4.7 to
Amendment No. 1 to Form S-3 Registration Statement, Registration
No. 333-46807, dated April 10, 1998 and incorporated herein by
reference to such Report).
4.1B First Supplemental Indenture between Wallace Computer Services,
Inc. and Bank of New York as Indenture Trustee, dated January 15,
1999 (previously filed as part of Exhibit 4.1B to the Registrant's
Annual Report on Form 10K for the fiscal year ended July 31, 1999,
and incorporated herein by reference to such Report).
10.1 Form of Rights Agreement, dated as of March 14, 2000, between the
Company and Harris Trust and Savings Bank, as Rights Agent, which
includes as Exhibit A the Certificate of Designation of Series B
Preferred Stock, as Exhibit B the form of Rights Certificate, and
as Exhibit C the form of Summary of Rights (previously filed as
Exhibit 4 to the Company's Current Report on Form 8-K dated March
16, 2000, and incorporated herein by reference to such Report).
10.2 The Wallace Computer Services, Inc. 1997 Stock Incentive Plan
(previously filed as Exhibit 10.3 to the Company's Quarterly
Report on Form 10-Q for the quarter ended January 31, 1997, and
incorporated herein by reference to such Report).
</TABLE>
57
<PAGE> 58
<TABLE>
<S> <C>
10.3 The Wallace Computer Services, Inc. Amended and Restated Executive
Incentive Plan, dated as of August 1, 1997 (previously filed as
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q dated
January 31, 1998, and incorporated herein by reference to such
Report).
10.4 Form of Deferred Compensation/Capital Accumulation Plan of the
Company for each of the years 1988, 1989, 1990, 1991, 1993, 1994,
1995, 1996, 1997, 1998, 1999 and 2000 (previously filed as part of
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q dated
October 31, 1995, and incorporated herein by reference to such
Report).
10.5 Supplemental Profit Sharing Plan of the Company (previously filed
as part of Exhibit 10 to the Company's Annual Report on Form 10-K
for the fiscal year ended July 31, 1988, and incorporated herein
by reference to such Report).
10.6A Executive Severance Pay Plan of the Company (previously filed as
part of Exhibit 10 to the Company's Annual Report on Form 10-K for
the fiscal year ended July 31, 1990, and incorporated herein by
reference to such Report).
10.6B First Amendment to the Executive Severance Pay Plan of the Company
(previously filed as part of Exhibit 10 to the Company's Annual
Report on Form 10-K for the fiscal year ended July 31, 1995, and
incorporated herein by reference to such Report).
10.7 The Wallace Computer Services, Inc. Annual Bonus Plan (previously
filed as Appendix A to the Proxy Statement of the Company for
Annual Meeting of Stockholders filed on October 6, 1997, and
incorporated herein by reference to such Statement).
10.8 Form of Deferred Compensation/Capital Accumulation Plan for
Directors of the Company for each of the years 1988, 1989, 1993,
1994, 1995, 1996, 1997, 1998, 1999 and 2000 (previously filed as
Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for
the quarter ended October 31, 1995, and incorporated herein by
reference to such Report).
10.9 Retirement Plan for Outside Directors of the Company (previously
filed as part of Exhibit 10 to the Company's Annual Report on Form
10-K for the fiscal year ended July 31, 1990, and incorporated
herein by reference to such Report).
10.10A Employee Severance Pay Plan of the Company (previously filed as
part of Exhibit 10 to the Company's Annual Report on Form 10-K for
the fiscal year ended July 31, 1992, and incorporated herein by
reference to such Report).
10.10B First Amendment of the Employee Severance Pay Plan of the Company
(previously filed as part of Exhibit 10 to the Company's Annual
Report on Form 10-K for the fiscal year ended July 31, 1995, and
incorporated herein by reference to such Report).
10.11A Form of Indemnification Agreement with Director between the
Company and each of the following: William J. Devers, Jr., Bettye
Martin Musham, Andrew J. McKenna, Jr., John C. Pope, Michael T.
Riordan, and Neele E. Stearns, (previously filed as part of
Exhibit 10 to the Company's Annual Report on Form 10-K for the
fiscal year ended July 31, 1990, and incorporated herein by
reference to such Report).
</TABLE>
58
<PAGE> 59
<TABLE>
<S> <C>
10.11B Form of Addendum to Indemnification Agreement with Director
(Member of Profit Sharing Committee) between the Company and
Andrew J. McKenna, Jr. (previously filed as part of Exhibit 10 to
the Company's Annual Report on Form 10-K for the fiscal year ended
July 31, 1990, and incorporated herein by reference to such
Report).
10.12A Form of Indemnification Agreement with Officer between the Company
and each of the following: Michael A. Anderson, Thomas G. Brooker,
Steven L. Carson, John J. DeCoster, Michael O. Duffield, Douglas
W. Fitzgerald, Craig A. Grant, Gary K. Haman, Robert J.
Kelderhouse, Marc A. Loomer, and Wayne E. Richter (previously
filed as part of Exhibit 10 to the Company's Annual Report on Form
10-K for the fiscal year ended July 31, 1990, and incorporated
herein by reference to such Report).
10.12B Form of Addendum to Indemnification Agreement with Officer
(Trustee of Profit Sharing and Retirement Trust and Member of
Profit Sharing Committee) between the Company and each of the
following: Michael O. Duffield and Robert J. Kelderhouse
(previously filed as part of Exhibit 10 to the Company's Annual
Report on Form 10-K for the fiscal year ended July 31, 1990, and
incorporated herein by reference to such Report).
10.12C Form of Addendum to Indemnification Agreement with Officer (Member
of Profit Sharing Committee) between the Company and Michael O.
Duffield, and Robert J. Kelderhouse (previously filed as part of
Exhibit 10 to the Company's Annual Report on Form 10-K for the
fiscal year ended July 31, 1995, and incorporated herein by
reference to such Report).
10.13C Separation Agreement and General Release effective as of January
18, 2000 between the Company and Robert J. Cronin (previously
filed as Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q dated March 16, 2000, and incorporated herein by reference to
such Report).
10.13B Consulting Agreement effective as of January 18, 2000 between the
Company and Robert J. Cronin (previously filed as Exhibit 10.4 to
the Company's Quarterly Report on Form 10-Q dated March 16, 2000,
and incorporated herein by reference to such Report).
10.14A Employment Agreement effective as of September 9, 1998 between the
Company and Michael O. Duffield (previously filed as part of
Exhibit 10 to the Company's Annual Report on Form 10-K for the
fiscal year ended July 31, 1998, and incorporated herein by
reference to such Report).
10.14B Change of Control Agreement effective as of September 9, 1998
between the Company and Michael O. Duffield (previously filed as
part of Exhibit 10 to the Company's Annual Report on Form 10-K for
the fiscal year ended July 31, 1998, and incorporated herein by
reference to such Report).
10.15A $500,000,000 Credit Agreement dated as of October 31, 1997, among
Wallace Computer Services, Inc., Bank of America National Trust
and Savings Association, as Administrative Agent and the other
financial institutions party thereto, (previously filed as Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q dated October
31, 1997, and incorporated herein by reference to such Report).
10.15B First Amendment Credit Agreement dated June 5, 1998 among Wallace
Computer Services, Inc., Bank of America National Trust and
Savings Association, as Administrative Agent and the other
financial institutions party thereto amending the $500,000,000
Credit Agreement dated as of October 31, 1997, (previously filed
as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
dated April 30, 1998, and incorporated herein by reference to such
Report).
</TABLE>
59
<PAGE> 60
<TABLE>
<S> <C>
10.16 $200,000,000 Purchase Agreement dated as of January 15, 1999 among
Wallace Computer Services, Inc. and various institutional
investors (previously filed on Company's current report) on Form
8-K dated January 20, 1999, and incorporated herein by reference
to such Report).
10.17 Benefit Trust Agreement between Wallace Computer Services, Inc.
and the Northern Trust Company dated December 8, 1995, (previously
filed as part of Exhibit 10 to the Company's Annual Report on Form
10-K for the fiscal year ended July 31, 1998, and incorporated
herein by reference to such Report) and the First Amendment to The
Wallace Computer Services, Inc. Benefit Trust, effective as of
October 31, 1997, (First Amendment was previously filed as Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q dated January
31, 1998, and incorporated herein by reference to such Report).
10.18 The Wallace Computer Services, Inc. Performance Share Plan
(previously filed as Appendix B of the Proxy Statement for Annual
Meeting of Stockholders filed on October 6, 1997, and incorporated
herein by reference to such Statement).
10.19 Director Retainer Fee Plan, dated June 2, 1999, (previously filed
as part of Exhibit 10 to the Company's Quarterly Report on Form
10-Q for the quarter ended April 30, 1999, and incorporated herein
by reference to such Report).
21 Subsidiaries of the Company
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
</TABLE>
60
