1
WALLACE 1997 ANNUAL REPORT
WALLACE MAKES IT
SIMPLE
2
[BACKGROUND PICTURE]
COPIER PAPER
INVOICES
ENVELOPES
INDUSTRIAL CATALOGS
LABELING SOFTWARE
ATM ROLLS
DISKETTES
STOCK LABELS
TELECOM SERVICE NOTICES
MARKERS
PRINTER CARTRIDGES
NOTEPADS
PENS
PHONE MESSAGE PADS
PAPER CLIPS
STATEMENTS
ELECTRONIC ARTICLE SURVEILLANCE LABELS
AIRLINE BAG TAGS
BOTTLE LABELS
STOCK FORMS
TAPE
PACKAGE DELIVERY FORMS
LEGAL PADS
HMO DIRECTORIES
STAPLERS
COMPUTER PAPER
FILE FOLDERS
INTERCOMPANY FORMS
MARKETING BROCHURES
DIRECT MAIL OFFERS
BAR-CODED SHIPPING LABELS
INTRACOMPANY FORMS
P.O.S. DISPLAYS
CREDIT CARD OFFERS
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WALLACE AT A GLANCE
- ------------------------------------------------------------------------------------------------------------------------------------
PERCENTAGE PRODUCT
PRODUCT SEGMENT EXAMPLES OF CORPORATE SALES REVENUE GROWTH
- ------------------------------------------------------------------------------------------------------------------------------------
FORMS - Air freight package forms --------------------- ---------------------
- Monthly billing $305.6 MILLION 1997 2 Year
statements --------------------- GROWTH CAGR
- Mortgage applications 34% ---------------------
- Healthcare forms --------------------- -5.7% 4.5%
- Credit card statements PIE GRAPH ---------------------
- Point-of-sale transaction forms --------------------- $323.9
$305.6
$280.0
---------------------
BAR GRAPH
---------------------
1995 1996 1997
---------------------
(IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------------------
PRINT - Sweepstakes mailings --------------------- ---------------------
- Credit card offers $242.0 MILLION 1997 2 YEAR
- Retail point-of-sale materials --------------------- GROWTH CAGR
- Product brochures 27% ---------------------
- Healthcare plan directories --------------------- 11.4% 23.1%
- On-demand, individual mailings PIE CHART ---------------------
$242.0
$217.2
$159.6
---------------------
1995 1996 1997
---------------------
(IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------------------
OFFICE PRODUCTS - Legal pads --------------------- ---------------------
- Computer paper $221.3 MILLION 1997 2 YEAR
- Printer ribbons and --------------------- GROWTH CAGR
cartridges 24% ---------------------
- ATM and cash register paper rolls --------------------- 9.9% 14.5%
- Brand-name office supplies PIE CHART ---------------------
- Standardized business forms --------------------- $221.3
$201.4
$168.8
---------------------
1995 1996 1997
---------------------
(IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------------------
LABELS - Bar-coded shipping labels --------------------- ---------------------
- Consumer product labels $137.4 MILLION 1997 2 YEAR
- Airline bag tags --------------------- GROWTH CAGR
- Blank stock labels 15% ---------------------
- Label software, printers and --------------------- 14.7% 14.7%
applicators PIE CHART ---------------------
- Electronic article surveillance --------------------- $137.4
(EAS) tags $119.8
$104.4
----------------------
1995 1996 1997
----------------------
(IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------------------
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[GRAPH]
WALLACE AT A GLANCE
- ------------------------------------------------------------------------------------------------------------------
PRODUCT SEGMENT FISCAL 1997 HIGHLIGHTS GROWTH STRATEGY
- ------------------------------------------------------------------------------------------------------------------
FORMS - Unit sales of forms grew %5, - The outsourcing trend will continue
but in dollars were 5.7% below to produce new opportunities
last year due to paper prices that to penetrate the Fortune 1000.
were as much as 40% below
fiscal 1996 levels.
- Communicate the proven results
- Wallace became the recognized we have achieved for 314 W.I.N.
leader in forms management and Select Services customers
services, and the strong market to continue market share gains.
appeal of W.I.N. (TM) and Select
Services(TM) drove the number - Further expand and enhance forms
of new forms contracts up 29.2% management services to maintain a
superior customer value offering.
- Began rolling-out the third phase
of MIPS establishing digital order - Focus special attention on key
entry and pricing to speed vertical markets.
customer price estimating, and
a new automated planning and - Introduce Priorities(TM), a
scheduling system in the plants. structured program that provides
a potential new customer with a
- Launched QUEST, a quality and comprehensive audit of all forms
productivity enhancement program and departments to identify cost
in all forms plants. reduction opportunities.
- Developed @W.I.N. Direct(TM), - Continue to leverage Wallace's
an internet ordering system information systems' strengths
that makes it faster and easier to develop and implement programs
for end-users to order their that increase customer service
forms and supplies. and savings, as well as
manufacturing efficiency and
quality.
- -----------------------------------------------------------------------------------------------------------------------------------
PRINT - Direct response and commercial - The way most large organizations
printing sales grew 11.4% to currently purchase and manage
$242.0 million over fiscal 1996. materials such as marketing
brochures represents a sizable
opportunity to apply Wallace's
- Launched a new commercial services and expertise, resulting
printing strategy aimed at in reduced overall costs for
becoming the supplier of the customer and new sales
printed promotional items, opportunities for Wallace.
such as brochures and marketing
materials, to large - Roll-out W.I.N. 3.0 to leverage
organizations. existing account relationships to
generate commercial print and
- Developed W.I.N. 3.0 which adds direct response sales
the capabilities needed to manage . opportunities.
all commercial printing supplies
and generate cost and work savings - Make further acquisitions to
increase geographic availability
- Acquired Post Printing and Moran of high-end commercial printing
Printing to add to Wallace's capability.
high-end commercial printing
capabilities. - Continue developing additional
customer applications for The
- The Daily Mail(TM) service Daily Mail's unique benefits.
doubled in size. This exclusive
product offers new on-demand - Emphasize and strengthen direct
solutions to customer response capabilities for smaller
notification and marketing quantity, more targeted direct
programs. mail campaigns for which demand is
rebounding.
- ------------------------------------------------------------------------------------------------------------------------------------
OFFICE PRODUCTS - Aggregate office product sales - Based on superior supplies
grew 9.9% over fiscal 1996. management services and the trend
forcustomers to consolidate vendors,
- The number of contract stationer continue to acquire contract
customers tripled and finished stationery accounts.
the year with 143 agreements
to supply brand-name office - Together(TM), Wallace's integrated
products. supply management service, will
increase the number of stock
- TOPS expanded its lines of products that customers buy from
designed pad products which Wallace.
are attractive to mass
merchandise retailers, and - Maintain Wallace's position as the
obtained product placement industry's low-cost producer and
in the nation's largest mass continue its cost advantage in the
merchandiser. marketplace.
- Became exclusive supplier of - TOPS will introduce additional
pads to one of the largest special design pad products to
contract stationers and also increase appeal and penetration
to the nation's largest office in the mass market retail channel.
products wholesaler.
- Focus marketing efforts for
- TOPS did an outstanding job contract stationery on existing
of increasing unit sales W.I.N. accounts.
to mostly offset the effects
of dramatically lower paper
prices from the prior year.
- Introduced W.I.N. Office(TM),
a software tool that allows
end-users to order office
supplies directly from Wallace.
- ------------------------------------------------------------------------------------------------------------------------------------
LABELS - Label product sales increased - Leverage established W.I.N. and
14.7% over 1996. Select Services account relationships
to increase label sales.
- Joined the Digital Label
Alliance to develop digital - Further expand product lines, such
label printing technologies as linerless labels, to become our
for shorter run applications customers' one-stop shop for all
and lower pre-press costs. labeling needs.
- Established Wallace's Label - Continue developing the Sensormatic
Design Center to do custom relationship to increase retail
programming and design bar security tag sales and integrate
coded labels for customers. EAS technology into other types of
labels forsource-tagging.
- Formed an alliance with
Sensormatic Electronics Corp. - Introduce new airline bag tag
for the production of EAS materials which will provide
tags and joint development enhanced performance and better
of new technologies. values.
- Leverage material supplier
- Implemented a re-engineering relationships for new product
process, the Press Ready development, just-in-time delivery
Organization (PRO) System, and lower costs.
to reduce make-ready time
in the manufacturing plants. - Fully implement PRO in all plants.
- Wallace was selected as the
American OEM of the Year
by Zebra Technologies
Corporation, whose bar-code
label printers we resell and
integrate.
- ------------------------------------------------------------------------------------------------------------------------------------
5
6
WALLACE MAKES
SAVING MONEY
ON INFORMATION
MANAGEMENT SUPPLIES
SIMPLE
1
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FINANCIAL HIGHLIGHTS
(in thousands except per share amounts)
=======================================================================
FISCAL YEARS ENDED JULY 31 1997 1996 CHANGE
=======================================================================
Net sales $906,290 $862,287 5%
- -----------------------------------------------------------------------
Net income $ 81,282 $ 72,999 11%
- -----------------------------------------------------------------------
Net income per share $ 1.88 $ 1.60 17%
- -----------------------------------------------------------------------
Dividends per share $ 0.56 $ 0.43 30%
- -----------------------------------------------------------------------
Working capital $149,234 $206,238 (28%)
- -----------------------------------------------------------------------
Stockholders' equity $493,188 $510,443 (3%)
- -----------------------------------------------------------------------
Stockholders' equity per share $ 11.45 $ 11.20 2%
- -----------------------------------------------------------------------
Average common shares outstanding 43,322 45,582 (5%)
=======================================================================
[LINE GRAPH]
===================================================
SALES (IN THOUSANDS)
---------------------------------------------------
2 year CAGR 12.8%
5 year CAGR 12.1%
===================================================
93 94 95 96 97
---------------------------------------------------
$ 545,315 $ 588,173 $ 712,838 $ 862,287 $ 906,290
[LINE GRAPH]
==================================================
EARNINGS PER SHARE
--------------------------------------------------
2 year CAGR 23.6%
5 year CAGR 16.4%
==================================================
93 94 95 96 97
--------------------------------------------------
$ .92 $ 1.08 $ 1.23 $ 1.60 $ 1.88
[LINE GRAPH]
==================================================
DIVIDENDS PER SHARE
--------------------------------------------------
2 year CAGR 23.0%
5 year CAGR 15.7%
==================================================
93 94 95 96 97
--------------------------------------------------
$ .29 $ .32 $ .37 $ .43 $ .56
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LETTER TO OUR SHAREHOLDERS
FOR ORGANIZATIONS THAT WANT TO
CUT COSTS AND INCREASE PRODUCTIVITY,
WALLACE IS THE BUSINESS SUPPLIES SOURCE THAT
PROVIDES THE SIMPLEST SOLUTIONS
WITH THE MAXIMUM ADMINISTRATIVE CONTROL
AND COST SAVINGS. OUR ABILITY TO DO
THIS BETTER THAN ANYONE ELSE IS GENERATING GROWTH
AND SHAREHOLDER VALUE.
TED DIMITRIOU BOB CRONIN
Chairman President and
Chief Executive Officer
[PICTURE]
Nineteen ninety-seven was a year of continued growth. We fortified our core
competitive advantages, made good progress on near-term growth opportunities
and initiated a new strategy for longer-term growth. We are confident that
Wallace will continue to be the best opportunity for large organizations to cut
costs by outsourcing the work of purchasing and managing forms and other
supplies. More than any other vendor, we can take on more of the day-to-day
work; give the customer the greatest control; and deliver the greatest cost
savings. As a result, the company posted its 36th consecutive record year in
sales, and our market position and the opportunities we see ahead have never
been stronger.
MET CORPORATE OBJECTIVES
Results for fiscal 1997 continue to reflect the best performance in the
industry and met our operating and financial objectives excluding the impact of
paper price changes. For the fiscal year ended July 31, 1997, unit sales
increased 12 percent which generated a 5.1 percent increase in dollar sales to
$906.3 million. Falling paper prices had the effect of understating our real
sales growth. Compounded over the last three years, which averages the swings
in paper prices, the company's annual growth rates were 15.5 percent in sales
and 20.3 percent in earnings per share.
Reported fiscal 1997 net income increased 11.3 percent to $81.3 million,
or $1.88 per share, compared to $73.0 million, or $1.60 per share in fiscal
1996.
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9
LETTER TO OUR SHAREHOLDERS
Excluding takeover expenses from the prior year, fiscal 1997 net income
increased 2.6 percent. Ratios of financial performance remained strong,
although affected by paper prices and acquisitions. Return on Net Sales reached
9.0 percent, Return on Average Assets was 11.5 percent and Return on Average
Equity was 16.2 percent.
FORTIFIED COMPETITIVE ADVANTAGES AND
MAPPED FUTURE GROWTH STRATEGY
In fiscal 1997, we strengthened our fundamental competitive position as the
leader in forms management. We added 71 new forms management customers, and at
year-end had an installed base of more than 300. The savings we have documented
for these organizations have become persuasive selling tools and we continue to
increase market share.
This year we also developed additional services that further reduce
customer workload and add savings opportunities. These include W.I.N.
Direct(TM), @W.I.N. Direct(TM), W.I.N. Office(TM), and StatusNow!(TM).
Enhancements to our information systems and manufacturing infrastructure
increased customer service and production efficiency. These internal systems
allow us to be flexible, molding our organization to each customer's unique
systems and business processes. Additionally, we began making all systems Year
2000 compliant and project completion by the end of fiscal 1999.
In fiscal 1997, we took our expertise in new directions and began applying
our forms management services to other product areas, helping companies
generate additional cost savings and consolidation. Office products sales
through our contract stationer program continued to grow. We also
recognized that printed promotional materials, such as brochures and
point-of-sale pieces, can benefit dramatically from our supplies management
services. As a result, we launched a new high-end commercial print strategy to
become the market's only added-value services supplier of these promotional
materials. We made two acquisitions to
[LINE GRAPH]
=================== ========================
SALES PER EMPLOYEE RATE OF
------------------- REINVESTMENT
LATEST FISCAL YEAR ------------------------
SALES PER EMPLOYEE FIVE YEAR AVERAGE
=================== CAPITAL EXPENDITURES AS
(IN THOUSANDS) A PERCENT OF SALES
------------------- ========================
WALLACE INDUSTRY WALLACE INDUSTRY
$ 207.4 $ 140.2 6.0% 3.9%
=================== ========================
=================== =====================
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LETTER TO OUR SHAREHOLDERS
launch this capability; more geographic acquisitions are anticipated to provide
nationwide coverage.
For the future, we are looking at additional custom and stock product
categories where our supplies management services could provide value to large
organizations. Also this year, we mapped out what we believe will develop into
a major growth initiative: integrated supply management. Our unique approach,
which we call Together, is the ultimate execution of our expanding product
offering. We will become a large organization's single source for all the
business supplies used in its office areas. Market conditions are favorable for
this type of comprehensive service and we have strong competitive advantages
that will facilitate evolving and expanding our role with customers. In
conjunction with the launch of our integrated supply strategy in early fiscal
1998, we will roll-out W.I.N. 3.0. This new version is the single tool
customers need to control this broad relationship, and expands Wallace's
leadership in supplies management services.
We are accomplishing all this ahead of our competitors because of the
company's long-standing commitment to reinvesting in the business. Over the
last 10 years, these investments have created the company's primary competitive
assets in information systems, manufacturing, distribution, the salesforce, and
workforce skills, which allow us to offer these advanced services.
OTHER EVENTS
In the first few days of fiscal 1997, the Moore Corporation formally abandoned
its efforts to buy Wallace. Within a day, one of the remaining takeover
speculators launched a proxy fight. At the November annual meeting,
shareholders voted down his slate of dissident board candidates as well as his
two proposals. The few remaining speculators sold their positions within a few
weeks following the annual meeting and the company's shareholder base returned
to normal. With those issues aside, Wallace looks forward to fiscal 1998 and
beyond.
At a special meeting held in February, stockholders increased the number
of authorized common shares from 50 million to 100 million. The additional
shares authorized for future issuance may be used for general corporate
purposes such as any future stock splits, stock dividends, issuance under the
company's employee benefit plans, raising additional capital or in connection
with acquisitions, and other appropriate uses. Stockholders also approved a
stock incentive plan, which will further align the interests of certain
employees, officers and directors with the company's stockholders.
In April of this year, we completed a $100 million share buyback program
under which 3,444,200 shares were repurchased. Subsequently in May, the Board
authorized an additional $100 million program. At fiscal 1997 year-end, 177,400
shares had been repurchased and Wallace had 43.1 million shares outstanding. We
anticipate that the remainder of this authorization could be utilized by the
end of fiscal 1998.
WALLACE MAKES IT SIMPLE FOR CUSTOMERS
Making supplies management easier and less costly for our customers is hard
work. It takes motivated, creative people to take on additional tasks and help
customers change business processes. The talent and motivation of Wallace's
people are clearly illustrated by sales per employee that is almost 50 percent
above the industry average.
As much as Wallace and its customers changed in 1997, it was only the
beginning. Wallace will continue to be the industry's leading agent of change
in how customers manage their business supplies, and further growth and
shareholder value will result. Thank you for your support.
TED DIMITRIOU BOB CRONIN
TED DIMITRIOU BOB CRONIN
Chairman President and
Chief Executive Officer
5
11
SIMPLE TO
ORDER
SIMPLE TO
DISTRIBUTE
SIMPLE TO
STREAMLINE
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12
FINDING QUALIFIED VENDORS
DETERMINING VENDOR REQUIREMENTS
WRITING RFPS
EVALUATING PROPOSALS
NEGOTIATING CONTRACTS
CONSOLIDATING VENDORS
OUTSOURCING OPPORTUNITIES
PLACING ORDER
ESTABLISHING QUANTITIES
MANAGING ITEM SPECIFICATIONS
MONITORING LOCATION ORDERS
RESOLVING PROBLEMS
LOST SHIPMENTS
STREAMLINING WORK FLOW
ITEM OBSOLESCENCE
ELIMINATING DUPLICATIONS
DISTRIBUTING
MONITORING USAGE
IMPLEMENTING SPEC CHANGES
PURCHASING COMPLIANCE
POLICY COMPLIANCE
REPORTING
DESIGN CHANGES
WALLACE MAKES SAVING MONEY
SIMPLE BY LETTING CUSTOMERS
OFF-LOAD THE DAY-TO-DAY ADMINISTRATION OF
INFORMATION MANAGEMENT SUPPLIES.
There's a lot of work in managing supplies. One customer's research found that
while accounting for only 15% of their total purchase costs, supplies took up
78% of their transactions. Wallace provides supplies management services that
make the purchasing manager's job easier and generate significant cost savings
for the company.
The following pages describe how Wallace can assume tasks such as ordering,
distributing and streamlining, and provide examples of how companies
of varying sizes are benefitting.
MANAGING INVENTORIES
OUT-OF-STOCKS
OVERSTOCKS
SHRINKAGE
PLACING ORDERS
ESTABLISHING QUANTITIES
MANAGING ITEM SPECIFICATIONS
MONITORING LOCATION ORDERS
RESOLVING PROBLEMS
LOST SHIPMENTS
ITEM OBSOLESCENCE
DISTRIBUTING
MONITORING USAGE
PURCHASING COMPLIANCE
QUALITY ASSURANCE
LOGISTICS
BUDGETING
REVIEWING COSTS
SORTING BILLING DETAILS
FINDING COST REDUCTION OPPORTUNITIES
PAYING INVOICES
MAINTAINING VENDOR RELATIONSHIPS
EVALUATING VENDOR PERFORMANCE
EXPEDITING ORDERS
UNDERSTANDING USER NEEDS
INVESTIGATING NEW TECHNOLOGIES
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[PICTURE]
A wide range of products helps corporations consolidate vendors and reduce
their workload.
[PICTURE]
[PICTURE]
We help purchasing managers control usage and ordering throughout their
organization to reduce costs and increase compliance.
[PICTURE]
[PICTURE]
End-users can order supplies directly by phone, fax, e-mail and the internet.
[PICTURE]
W.I.N., the tool for Purchasing,
provides comprehensive current
information for better cost control.
14
[PICTURE]
SIMPLE TO ORDER
FLEXIBLE ORDERING SYSTEMS
MAKE IT EASY TO
PLACE AND MANAGE ORDERS
FROM THOUSANDS OF LOCATIONS.
15
[PICTURE]
SIMPLE TO DISTRIBUTE
CUSTOMERS CUT THEIR COSTS
AND WORKLOAD BY OUTSOURCING
THEIR SUPPLIES
DISTRIBUTION TO WALLACE
16
[PICTURE]
[PICTURE]
Wallace's distribution system is highly automated to reduce costs and increase
fulfillment speed and accuracy.
[PICTURE]
Wallace's distribution system ships more than 22,000 order line items per day.
[PICTURE]
We ship directly to end-users throughout our customers' organizations.
[PICTURE]
By consolidating many different supply items into one shipment, we can
dramatically reduce shipping costs.
[PICTURE]
[PICTURE]
[PICTURE]
17
[PICTURE]
[PICTURE]
Leveraging our experience and superior tools, we have generated first-year
savings of 15-20%.
[PICTURE]
Wallace teams conduct department-by-department reviews of forms and other
supplies to identify consolidation, combination, redesign and streamlining
opportunities.
[PICTURE]
[PICTURE]
People in all Wallace departments work with customers to streamline the
supplies management process.
[PICTURE]
Implementation teams input all the data about every form and supply item into
the W.I.N. system to make it easy to track items and changes.
18
[PICTURE]
SIMPLE TO STREAMLINE
WALLACE DOES THE LEGWORK
TO IDENTIFY STREAMLINING AND
COST REDUCTION OPPORTUNITIES
19
SIMPLE
TO SAVE
MONEY
By outsourcing these activities to Wallace, customers dramatically reduce their
workload and costs. At year-end, more than 300 companies were leveraging
Wallace's services and saving tens of millions of dollars. The following three
cases illustrate how companies of various sizes have benefitted.
14
20
SELECT SERVICES(TM) CUSTOMERS
Central to all the customer services we provide is the Wallace Information
Network (TM) (W.I.N.), a software tool that ties customers into Wallace's
corporate information system and centrally organizes and manages all the
customer's data about supplies. Select Services is Wallace's program for
customers who buy more than $400,000 annually. These customers use the W.I.N.
system through their local sales office. There, a Wallace representative
utilizes the W.I.N. system's analysis tools to uncover and recommend cost
saving opportunities. In this way, customers outsource the work of managing
forms and other supplies to Wallace, while retaining decision-making control.
Regional Healthcare Provider
Annual information management supplies purchases:
$500,000
CASE 1
[PICTURE]
REVENUES: $415 MILLION
LOCATIONS: 8
EMPLOYEES: 4,400
DOCUMENTED FIRST YEAR
SAVINGS
19%
SERVICE LEVEL SELECT SERVICES
A regional medical center with one main hospital and seven satellite facilities
wanted to minimize its forms costs. To begin, Wallace conducted its
Consultative Assessment Program(TM), analyzing 19 departments and 870 form and
label items. This review identified key items and processes where costs could
be reduced. Significant findings included: service department personnel were
diverting time to create and maintain these items; consistent design and
workflow standards were not being followed; and the previous vendor had not
enforced compliance with purchasing control measures.
Wallace then took on the production and management of all custom forms and
labels as well as stock forms - more than 500 items. The customer realized
a 19% cost savings the first year through redesigning and consolidating
forms, combining production runs and the re-assignment of its in-house
forms design function. Additional savings have been generated through
more effective use of the hospital's print center, and purchasing compliance
has also increased with a large number of "bootleg" forms being brought under
management.
Based on the forms management program's success, the customer is expanding
the number of product lines it is purchasing and managing through Wallace to
also include stock labels, envelopes, letterhead, business cards, custom
charts, manuals and brochures. Purchasing is also analyzing its current
ordering procedure, with an eye towards upgrading to Wallace's internet
ordering system, @W.I.N. Direct, to allow end-users to order
individual-use quantities directly from Wallace.
15
21
W.I.N.(TM) CUSTOMERS
Customers that sign multi-year contracts to purchase $1 million or more
annually can choose to have a W.I.N. system placed on-site as well as a Wallace
employee (W.I.N. Administrator) to run it. The additional services are valuable
because these customers have many more supply items, end-users and locations to
manage.
International Manufacturer of Durable Consumer Goods
Annual information management supplies purchases:
$1,600,000
CASE 2
[PICTURE]
SERVICE LEVEL W.I.N.
REVENUES: $ 2.4 BILLION
LOCATIONS: 200
EMPLOYEES: 14,000
DOCUMENTED FIRST YEAR
SAVINGS
26%
In 1995, a large manufacturer embarked on a new program to centralize
purchasing control, reduce supplies costs and eliminate vendors. At the time,
it had more than 8,000 vendors, including 60 forms suppliers. The company's $60
cost to process every invoice was a significant factor behind this drive to
consolidate. Each division was ordering and managing their supplies separately.
Company-wide, tremendous amounts of warehouse space were devoted to supplies
storage and the company experienced high obsolescence costs because there was
no effective system for tracking supplies.
The manufacturer conducted an extensive vendor review based on quality,
technology, price and service. Wallace received the highest score and was
awarded a long-term contract to supply all forms and labels. We then took over
the distribution of these products, freeing up all the previously committed
warehouse space. The sales team, with reps in all major facilities, uses our
W.I.N. system to manage inventories and plan more efficient production runs. As
part of this process, we have standardized forms specs across the organization
to create more opportunities for group production runs. End users now order
directly from Wallace, eliminating all the daily order handling work that
previously bogged down the various Purchasing groups.
Wallace has changed the entire company's process for ordering, producing,
storing and distributing supplies. In the first year we exceeded promised
savings targets, reducing costs by 26%. Subsequently, the customer broadened
the categories it buys from Wallace to 6,000 items, successfully reducing its
vendor base by 200.
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22
TOGETHER(TM) CUSTOMERS
Together represents the future of many of our customer relationships. Together
is Wallace's just-introduced service level for customers that want
to outsource and fully integrate the management of all their supplies. To make
this service a reality, a new version of W.I.N. (3.0) was introduced in July
that manages all types of supply items, both stock and custom, in one
easy-to-use system.
National Specialty Retailer
CASE 3
SERVICE LEVEL
TOGETHER
REVENUES: $4.6 BILLION
LOCATIONS: 133 STORES
EMPLOYEES: 8,400
[PICTURE]
Annual information management
supplies purchases: projected
$2,000,000
DOCUMENTED FIRST YEAR
SAVINGS
PROJECTED
19%
In late 1996, a new purchasing philosophy was initiated to go beyond
traditional purchasing models to generate greater cost savings and business
process streamlining for the corporation and its stores. Purchasing executives
began talking with Wallace, which at the time was developing a new, fully
integrated supply management service. In the spring of 1997 a contract was
signed. The retailer's objectives for this newly-formed relationship include:
reduce the unit costs of supply items; improve service levels; reduce the costs
of distributing supplies throughout the organization; and consolidate all
supply items under one vendor.
We have become the retailer's single source and even at this early stage,
nearly every order goes through Wallace. We produce forms, labels, office
products, direct mail and commercial printing. Other third-party items (such as
shirts, bags and signage) are inventoried and distributed by Wallace. Some
orders, for unusual, low-volume items, Wallace hands off to separate vendors
for fulfillment. Whatever the product, however, Wallace provides the central,
coordinated ordering and management for all these supplies. Under Purchasing's
guidance and control, Wallace is doing the day-to-day work that is necessary to
streamline supplies usage across the organization. Wallace is also working as
an extension of Purchasing to drive compliance with this new purchasing model.
Stores are embracing it because it lowers their costs, provides greater
assurance of correct quantities on-hand, and provides billing flexibility to
optimize each store's budget. During the first months' start-up, 12% cost
reductions were generated. For the first full year, aggregate savings of 18-20%
are anticipated.
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23
SIMPLER
EVERY DAY
Customers see that the ultimate future of this simplification is for Wallace to
become their integrated supply manager, furnishing and managing all the
supplies used in their offices throughout the organization.
This is a continuous process. To help customers further consolidate
vendors, we are broadening our range of products and are rapidly approaching a
million SKUs under management. At the same time, we continue to add new
services and enhance existing ones to help customers off-load even more work
and drive additional costs out of their supply processes. Our work never stops
to make supplies purchasing and management simple for our customers.
18
24
FINANCIALS
11 Year Financial Summary................................................ 20
Management's Discussion and Analysis..................................... 22
Consolidated Financial Statements........................................ 28
Notes to Consolidated Financial Statements............................... 32
Corporate and Investor Information...................... INSIDE BACK COVER
19
25
11 YEAR SUMMARY OF SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1996 1995 1994
==================================================================================================================================
OPERATIONS
==================================================================================================================================
Net sales $ 906,290 $ 862,287 $ 712,838 $ 588,173
- ----------------------------------------------------------------------------------------------------------------------------------
Net income 81,282 72,999 55,297 47,931
- ----------------------------------------------------------------------------------------------------------------------------------
Net income per share 1.88 1.60 1.23 1.08
- ----------------------------------------------------------------------------------------------------------------------------------
Dividends per share .56 .43 .37 .32
- ----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL CONDITION
==================================================================================================================================
Total assets $ 720,442 $ 695,850 $ 592,702 $ 538,592
- ----------------------------------------------------------------------------------------------------------------------------------
Long-term debt 24,500 30,600 25,600 23,500
- ----------------------------------------------------------------------------------------------------------------------------------
Capital expenditures 39,225 59,506 51,487 34,228
- ----------------------------------------------------------------------------------------------------------------------------------
Working capital 149,234 206,238 193,150 183,432
- ----------------------------------------------------------------------------------------------------------------------------------
SIGNIFICANT RATIOS
==================================================================================================================================
Net income:
- ----------------------------------------------------------------------------------------------------------------------------------
Return on net sales 9.0% 8.5% 7.8% 8.1%
- ----------------------------------------------------------------------------------------------------------------------------------
Return on average assets 11.5% 11.3% 9.8% 9.4%
- ----------------------------------------------------------------------------------------------------------------------------------
Return on average equity 16.2% 15.1% 12.8% 12.3%
- ----------------------------------------------------------------------------------------------------------------------------------
Current ratio 2.1 3.1 3.9 3.8
- ----------------------------------------------------------------------------------------------------------------------------------
Long-term debt/debt plus equity 4.7% 5.7% 5.3% 5.4%
- ----------------------------------------------------------------------------------------------------------------------------------
Book value per share $ 11.45 $ 11.20 $ 10.05 $ 9.16
- ----------------------------------------------------------------------------------------------------------------------------------
Sales per employee* $ 207.4 $ 218.4 $ 195.4 $ 171.0
- ----------------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment per employee* $ 69.0 $ 73.2 $ 70.3 $ 67.7
- ----------------------------------------------------------------------------------------------------------------------------------
OTHER
==================================================================================================================================
Number of employees 4,610 4,131 3,765 3,530
- ----------------------------------------------------------------------------------------------------------------------------------
Number of stockholders of record 3,680 3,863 4,383 4,531
==================================================================================================================================
*Based on average number of employees during the fiscal year
NOTES TO 11 YEAR SUMMARY
A. ACQUISITIONS: On July 24, 1997, the company acquired 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 Post Printing, Inc. The acquisition price was $6.6 million of cash. On
February 1, 1996, the company sold the LaserMax division to 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
20
26
1993 1992 1991 1990 1989 1988 1987
=============================================================================================================
=============================================================================================================
$ 545,315 $ 511,572 $ 458,840 $ 448,700 $ 429,008 $ 383,045 $ 340,504
- -------------------------------------------------------------------------------------------------------------
41,170 39,455 35,009 39,555 36,867 31,610 26,027
- -------------------------------------------------------------------------------------------------------------
.92 .88 .81 .93 .88 .76 .64
- -------------------------------------------------------------------------------------------------------------
.29 .27 .25 .23 .20 .17 .15
- -------------------------------------------------------------------------------------------------------------
=============================================================================================================
$ 480,722 $ 467,142 $ 399,093 $ 375,203 $ 331,830 $ 291,764 $ 260,004
- -------------------------------------------------------------------------------------------------------------
25,210 25,959 19,790 20,155 20,465 20,830 21,180
- -------------------------------------------------------------------------------------------------------------
31,818 33,517 40,540 49,835 30,677 24,948 30,039
- -------------------------------------------------------------------------------------------------------------
157,937 152,246 141,390 137,598 138,218 117,139 100,128
- -------------------------------------------------------------------------------------------------------------
=============================================================================================================
- -------------------------------------------------------------------------------------------------------------
7.5% 7.7% 7.6% 8.8% 8.6% 8.3% 7.6%
- -------------------------------------------------------------------------------------------------------------
8.7% 9.1% 9.0% 11.2% 11.8% 11.5% 10.7%
- -------------------------------------------------------------------------------------------------------------
11.4% 11.9% 11.9% 15.1% 16.2% 16.1% 15.3%
- -------------------------------------------------------------------------------------------------------------
3.9 3.9 4.3 3.8 4.4 4.2 3.9
- -------------------------------------------------------------------------------------------------------------
6.4% 6.8% 6.0% 6.7% 7.7% 9.0% 10.4%
- -------------------------------------------------------------------------------------------------------------
$ 8.34 $ 7.86 $ 7.11 $ 6.52 $ 5.77 $ 5.05 $ 4.41
- -------------------------------------------------------------------------------------------------------------
$ 161.9 $ 160.4 $ 154.2 $ 154.4 $ 154.4 $ 145.8 $ 136.3
- -------------------------------------------------------------------------------------------------------------
$ 67.7 $ 70.7 $ 64.7 $ 59.3 $ 50.3 $ 48.4 $ 46.3
- -------------------------------------------------------------------------------------------------------------
=============================================================================================================
3,350 3,386 2,993 2,957 2,857 2,700 2,554
- -------------------------------------------------------------------------------------------------------------
4,260 4,435 4,347 4,396 4,350 4,038 4,104
=============================================================================================================
payable of $.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 608,034 shares of
common stock, $13 million of cash and the assumption of debt totalling $17.5
million. On December 15, 1988, the company acquired Apollo Labeling Systems for
$900,000.
All acquisitions were accounted for as purchases, and, accordingly, their
results of operations are included in the consolidated financial statements
from their respective dates of acquisition.
B. STOCK SPLITS: All share and per share amounts have been adjusted for the 2
for 1 stock splits effective August, 1989 and July, 1996.
21
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL 1997 VERSUS FISCAL 1996
Net sales for fiscal 1997 increased by 5.1% to $906.3 million. A breakdown by
the four major product groups is as follows:
% TO TOTAL % REVENUE
PRODUCT GROUP REVENUE INCREASE
========================================
Forms 34 (6)
- ----------------------------------------
Print 27 11
- ----------------------------------------
Office Products 24 10
- ----------------------------------------
Labels 15 15
========================================
Over the last five years, sales have grown at an annual compounded growth
rate of 12.1%.
The company estimates that actual unit growth for the year was 12%, the
same growth rate as fiscal 1996 when sales dollars were up 21.0%. This dramatic
change in sales dollars between years with comparative unit growth is
attributed to paper price changes. Paper is the basic raw material for 75% of
the company's products. Paper price changes, therefore, have a material effect
on reported sales dollars.
The majority of paper used by the company is uncoated free sheet, with
additional large purchases of both tablet and offset grades. Using 20 pound
white uncoated free sheet as a proxy for the paper market, published prices
during the last two fiscal years decreased by 42%.
The effects of paper price changes are felt immediately by the Print
product lines (commercial and promotional printing) and by the stock tab
product lines sold under Forms and Office Products. These products collectively
represent 30% of consolidated net sales.
For the 61% of the Forms product line which is sold under contract, there
is usually a 60 to 90 day lag between the time of a paper price change and its
effect on reported sales. When paper prices first increase, the 60 to 90 day
lag can put pressure on margins. Conversely, when paper prices decrease, the
lag can produce some margin expansion.
Overall, our best estimate for fiscal 1997 is that the impact of lower
paper prices reduced reported sales by 7%.
The number of new W.I.N. and Select Services customers continued to grow
throughout fiscal 1997. The number of customers for these programs increased by
29%. Most are new customers and most sign five year agreements for their forms,
office products, labels and other information management requirements. The 314
W.I.N. and Select Services customers at year-end represented 44% of
consolidated sales for the year.
The Forms product group continues to grow in a product category that is
declining on an industrywide basis. For fiscal 1997, we estimate that Forms'
unit growth was 5%, with lower paper prices reducing sales by 9%. Fiscal 1996
sales had included $7.4 million of sales for a business that was sold in
February, 1996. Stock computer paper represented 8% of Forms sales for 1997,
down from 10% last year.
The Print product category includes commercial and promotional printing.
The commercial printing products include both long-run catalogs and quick
turnaround documents such as medical provider directories. In fiscal 1997, the
company expanded the commercial printing product line with the acquisitions of
Post Printing and Moran Printing. These companies produce collateral marketing
pieces such as brochures and point of sale displays. These two acquisitions
added $8.7 million of sales for fiscal 1997.
The promotional printing products sold through the Colorforms division
include high quality printing and personalization services. The Daily Mail
program for regulated industries and weekly signage services for major retail
customers continued to grow during fiscal 1997. A full year of sales in fiscal
1997 for Forms Engineering Company (FEC) acquired in February, 1996, added $19
million of sales. Without the additive sales from FEC, Colorforms sales results
would have decreased 4% due to lower selling prices related to lower paper
costs and increasing competition. As the forms market declines, more forms
manufacturers have entered the promotional printing market, which is expected
to grow 8-9% per year.
The Office Products group includes commodity items that are produced by
the company such as legal pads, ribbons,
[PIE CHART]
==================================
REVENUE
CONTRIBUTION
==================================
Forms 34%
Print 27%
Office Products 24%
Labels 15%
==================================
22
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
standardized business forms, add rolls, and stock computer paper. Manufactured
products represent 70% of office product sales. The balance of 30% represents
products purchased from other vendors for resale. The office products alliance,
which gives the company a presence in the contract stationery
business, grew to an annualized rate of $14 million.
The TOPS division, which manufactures paper based products for the resale
market, performed well despite the paper price decrease. Total sales for the
year were down $2.3 million, including a decrease of $6.0 million in stock
computer paper. Unit growth for TOPS was in line with the company average.
The Label Group had a good year with estimated unit growth of 17% and a
sales dollar increase of 15%. Label raw material costs do not fluctuate as much
as paper costs so the Label Group's results are more consistent year over year.
The Group manufactures both data processing and packaging labels, and sells
proprietary labeling software along with hardware items such as label
applicators. The sale of packaging labels and labeling equipment was up 10%
during fiscal 1997.
Net income for the year increased $8.3 million or 11.3%. Before takeover
expenses of $10.1 million in fiscal 1996, net income would have been up $2.0
million or 2.6%. The after-tax ratio for fiscal 1997 was 9.0%, the highest net
income ratio since the company went public in 1961.
For the last five years, net income has grown at an average annual
compound rate of 15.6%.
Cost of goods sold as a percent to sales for fiscal 1997 was 61.4% versus
62.4% in 1996. Fiscal 1996 had included a LIFO credit of $6.6 million due to
the drop in paper costs in the second half of that year. We recorded another
LIFO credit of $2.1 million in fiscal 1997 because paper prices declined again.
On a per share basis, the LIFO credits added 3 cents to fiscal 1997 and 9 cents
to fiscal 1996. Before the effects of LIFO accounting, cost of goods sold was
61.6% in 1997 and 63.2% in 1996. The margin improvement in fiscal 1997 came
from the replacement of lower margin stock tab product sales with increased
sales to and improved margins from the W.I.N. and Select Services customers.
Selling and administrative expenses increased 9.3% for the year. As a
percent to sales, they were 18.3% in fiscal 1997 and 17.6% in fiscal 1996. One
unusual expense in fiscal 1997 was $800,000 of legal and other fees in
connection with an unsuccessful attempt to place three dissident directors on
the Board at the November, 1996 annual meeting. The biggest expense increase in
the administrative area was an incremental $3.5 million for Information
Systems. We expect increasing IS expenditures in future years to keep the
selling and administrative percentage in the 18-19% range.
Depreciation and amortization expense was 5.4% of sales in fiscal 1997 and
5.2% in fiscal 1996. The increase in 1997 came from higher amortization of
capitalized software development costs.
One additional expense in fiscal 1997 was $264,000 for costs related to
Year 2000 programming. The total cost to make the company's 10,000 programs
Year 2000 compliant is estimated at $7.3 million. $1 million of this total will
go toward new financial software packages which will add additional
functionality and will, therefore, be capitalized. The balance of $6.3 million
will be expensed as incurred. Estimated expense for fiscal years 1998 and 1999
is $3.0 million each year.
Operating income for fiscal 1997 was up 15.5% after takeover expenses and
6.3% before takeover expenses.
Due to the share repurchase program, interest expense for fiscal 1997
exceeded interest income. The company recorded net interest expense of $743,000
in 1997 and net interest income of $1,556,000 in 1996. Interest income from tax
exempt investments was $.5 million in fiscal 1997 and $1.5 million in 1996.
Capitalized interest for the year was $1.3 million in 1997 and $1.4 million in
1996.
The effective income tax rate for fiscal 1997 was 39.5% versus 38.4% in
fiscal 1996. The rate was higher in 1997 due to
[LINE GRAPH]
==================================================
NET INCOME
(IN THOUSANDS)
- --------------------------------------------------
2 year CAGR 21.2%
5 year GAGR 15.6%
==================================================
93 94 95 96 97
- --------------------------------------------------
41,170 47,931 55,297 72,999 81,282
23
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
lower tax-exempt investment income and lower tax credits. We expect the
effective rate for fiscal 1998 to remain at 39.5%.
New modules have been developed for the W.I.N. and Select Services
programs, which will further distinguish these services. Early success with
Integrated Supply Management has reinforced the viability of this concept. To
offer ISM on a national basis, the company will create a network of
high-quality regional commercial printers. Our goal will be to make
acquisitions that are accretive to earnings per share in the first year of
operations.
As the company approaches $1 billion in sales, we will be nearing the
volume limitations of our base computer system (known as WCSS) that was
designed in 1984 and has been continually upgraded since then. The company will
spend over $30 million in the next several years to expand WCSS to handle
several billion dollars of sales and to further support the ISM strategy.
A new distribution center in the Ohio Valley has been approved by the
Board of Directors, as have six new presses for the Label division.
The drivers for the company's future growth will be continued reinvestment
in computer systems, distribution facilities, and new manufacturing equipment,
coupled with accretive acquisitions and expansion of the company's 700 person
salesforce, which we believe to be the best in our industry.
FISCAL 1996 VERSUS FISCAL 1995
Net sales for fiscal 1996 increased by 21% to $862.3 million. The breakdown by
major product group is as follows: Forms products, which represented 38% of
total sales, increased by 16%; Print, which represented 25% of sales, increased
36%; Office Products, representing 23% of sales, increased 19%; and Labels,
which represented 14% of sales, increased 15%.
Paper prices, which affect 75% of sales, remained stable through the first
half of fiscal 1996. In the second half of the year, however, paper prices
declined by as much as 40%. For the 59% of the Forms product line which is sold
under contract, there is usually a 60 to 90 day lag between the time of a paper
price change and its effect on our reported sales. For those parts of the
business that are not under contract, the impact of lower paper prices is felt
almost immediately.
The company believes that sales growth in fiscal 1996 was hampered by the
hostile takeover attempt announced by the Moore Corporation on July 31, 1995.
The uncertainty surrounding the Moore tender offer affected our ability to
recruit new employees, especially new salespeople. Several
customers declined to give the company new business due to this uncertainty.
Despite the takeover related issues, sales for the year increased by
$149.4 million through a combination of internal growth and acquisitions.
Approximately $85.5 million of the increase is attributed to 12% unit growth.
Another $18.7 million of sales came from the acquisition of Forms Engineering
Company (FEC) in February, 1996. The remaining $45.2 million of sales increase
came from higher selling prices.
During fiscal 1996, the company added 86 new customers to the W.I.N. and
Select Services programs, bringing the total to 243 customers at year-end.
Collectively, they represented 40% of consolidated net sales for the year.
Net income for fiscal 1996 increased 32% or $17.7 million. The after-tax
ratio to sales was 8.5% in fiscal 1996 and 7.8% in fiscal 1995. Fiscal 1996
results include $10.1 million of one time pre-tax expenses in connection with
the Moore tender offer. On a per share basis, we reported $1.60, which would
have been $1.74 without takeover related expenses, versus $1.23 in fiscal 1995.
Cost of goods sold for fiscal 1996 includes a LIFO credit of $6.6 million
due to the decrease in raw material costs. During fiscal 1995, we had recorded
a LIFO charge of $13.8 million due to dramatically higher paper costs. Before
the effects of LIFO accounting, costs of goods sold as a percent to sales was
63.2% in fiscal 1996 and 62.1% for fiscal 1995.
Selling and administrative expenses increased 13.6% for the
24
[LINE GRAPH]
- --------------------------------------------------------------------------------
BOOK VALUE
PER SHARE
- --------------------------------------------------------------------------------
2 year CAGR 6.7%
5 year CAGR 7.8%
================================================================================
93 94 95 96 97
- --------------------------------------------------------------------------------
$ 8.34 $ 9.16 $ 10.05 $ 11.20 $ 11.45
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
year. As a percent to sales, they were 17.6% in fiscal 1996 and 18.8% in fiscal
1995. In absolute terms, selling and administration expenses increased by $18.1
million. The lower percentage to sales in fiscal 1996 is due primarily to
higher selling prices.
Depreciation and amortization expense increased 20.7% to $45.0 million,
including $4.2 million for the amortization of internally developed software
programs. Major software initiatives added $10.4 million of capitalized
development costs in fiscal 1996. Capital expenditures of $51.5 million in
fiscal 1995 contributed to the depreciation expense increase in 1996, as did
the $59.5 million of capital expenditures in fiscal 1996.
Investment income decreased between years by $772,000 due to lower
interest rates and lower investable balances following the FEC acquisition. The
company acquired FEC for a combination of cash, notes and the assumption of
debt for a total of $34.8 million.
During fiscal 1996, the company incurred a net expense of $4.2 million for
the continuing development of electronic forms software. The net loss is made
up of several components: sales less cost of goods sold was $0.7 million,
amortization and depreciation of purchased and developed software was $2.3
million, and selling and administrative expenses were $1.2 million. The
comparable pre-tax expense for fiscal 1995 was $3.8 million. Its components
were: sales less cost of goods sold was $1.3 million, amortization and
depreciation of purchased and developed software was $1.1 million, and selling
and administrative expenses were $1.4 million.
The effective income tax rate for fiscal 1996 was 38.4% versus 36.8% in
1995. The rate increased due to lower tax-exempt investment income during
fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1997, the company purchased $95.3 million of its common stock in
open market transactions. Borrowings under our revolving credit agreement to
support the share repurchase program reached a high of $30 million in January,
1997. By fiscal year-end, all borrowings under the revolving credit agreement
had been repaid.
Working capital at July 31, 1997 was $149.2 million, a decrease of $57.0
million from the prior year-end. This year's total includes $15.9 million of
cash and short-term investments, a decrease of $46.8 million from July 31,
1996. The beginning of the year cash and short-term investment balances were
used to purchase stock.
Capital expenditures for the year were $39.2 million, down from $59.5
million in fiscal 1996. Last year's total included $21.4 million for new
buildings and related equipment. Building expenditures during fiscal 1997
totaled $5.0 million. There were no major construction projects in-process at
fiscal year-end.
Over the last five years, capital expenditures have totaled $216.3
million. $7.2 million of these expenditures were financed by industrial revenue
bonds, with the balance being financed through internally generated funds. Over
the last five years, the company has also spent $36.4 million for the
development of proprietary software programs.
Total capital expenditures for fiscal 1998 are estimated at $40.0 million.
Expenditures for software development are estimated at $16.0 million including
$4.0 million for Year 2000 related activities.
The company acquired Post Printing in October, 1996 and acquired Moran
Printing in July, 1997. Post Printing was an all cash purchase for $6.6
million. Moran Printing was purchased for $34.4 million through a combination
of notes payable and the retirement of debt. $28.5 million of short-term
borrowing at July 31, 1997 represents payments due to the Moran principals.
$15.0 million was paid in August, 1997. The balance will be paid early in
calendar 1998.
Long-term debt at July 31, 1997 was $24.5 million. $23.5 million
represents industrial revenue bonds issued in prior years for the construction
of three manufacturing facilities. The remaining balance of $1 million
represents deferred payments in connection with the Moran acquisition. $7.1
million of deferred
===================================================================================================
TOTAL CAPITALIZATION
(IN THOUSANDS)
93 94 95 96 97
- ---------------------------------------------------------------------------------------------------
Long-term debt $ 25,210 $ 23,500 $ 25,600 $ 30,600 $ 24,500
Stockholders' equity $ 368,146 $ 410,139 $ 456,118 $ 510,443 $ 493,188
===================================================================================================
25
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
payments from acquisitions in fiscals 1995 and 1996 will be paid during fiscal
1998 and are shown as the current portion of long-term debt on the balance
sheet.
The company has a $50 million revolving credit facility with two major
national banks. During fiscal 1997, unsecured money market lines of $50 million
each were added with three national banks, two of which participate in the
revolving credit agreement. The maximum amount of short-term debt outstanding
under the revolver and the money market lines is limited to $50 million. There
are no compensating balance requirements under these agreements.
Stockholders' equity decreased by $17.3 million to $493.2 million. Return
on average stockholders' equity was 16.2% versus 15.1% last year after takeover
expenses. Book value per share was $11.45 at July 31, 1997 and $11.20 at July
31, 1996.
During fiscal 1997, the company completed the $100 million share
repurchase which had been authorized in June, 1996 by the Board of Directors.
Shares were repurchased at an average price of $28.98. Total repurchases during
fiscal 1997 under this authorization were $89.9 million.
In May, 1997, the Board of Directors approved a second $100 million share
repurchase program. Through July 31, 1997, $5.3 million of stock had been
repurchased at an average price of $30.09.
The company anticipates that it will complete the second repurchase
authorization by the end of fiscal 1998. The company also expects to complete
one or more acquisitions for cash during fiscal 1998. The company will have to
increase its credit lines to finance both the share repurchase and
acquisitions.
COMMON STOCK
Dividends were raised for the 25th consecutive year to $.56 per share in
September, 1996, a 30.2 % increase.
During fiscal 1997, 771,000 shares of common stock were issued in
connection with the company's 1989 Stock Option Plan, the Employee Stock
Purchase Plan, and the Profit Sharing and Retirement Plan. In February, 1997,
the stockholders approved an additional 2 million shares for the 1997 Stock
Incentive Plan.
Shares of stock repurchased during fiscal 1997 total 3,111,000 shares
under the fiscal 1996 authorization and 177,000 shares under the fiscal 1997
authorization. These treasury shares will be used for future acquisitions or
for stock purchases under employee benefit programs.
The company's common stock is traded on the New York Stock Exchange under
the symbol WCS.
FORWARD LOOKING STATEMENTS
The written statements made in this annual report by the company may contain
forward-looking statements covered by the Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995. These statements involve
uncertainties and risks and there can be no assurance that actual results will
not differ from the company's expectations. Factors which could cause
materially different results include, among others, customer acceptance of new
product categories and service offerings, the frequency and magnitude of paper
price changes, the pace of new customer sales ramp-ups, changes in software and
communications technologies, general economic and business conditions,
competitive actions, and other risks described in the company's other filings
with the Securities and Exchange Commission.
======================================================================
CAPITAL EXPENDITURES
AND DEPRECIATION
======================================================================
93 94 95 96 97
Depreciation 28,543 30,934 33,708 39,473 42,256
Capital Expenditures 31,818 34,228 51,487 59,506 39,225
26
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
QUARTERLY RESULTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
====================================================================================================================================
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
====================================================================================================================================
1997
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $220,793 $225,439 $225,807 $234,251
- ------------------------------------------------------------------------------------------------------------------------------------
Cost of goods sold (excluding depreciation) 132,787 135,569 141,613 146,104
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income 34,858 35,800 32,100 32,336
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 35,009 35,630 31,843 31,869
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 21,180 21,556 19,265 19,281
- ------------------------------------------------------------------------------------------------------------------------------------
Net income per share $ .48 $ .50 $ .45 $ .45
- ------------------------------------------------------------------------------------------------------------------------------------
1996
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $214,438 $219,545 $213,762 $214,542
- ------------------------------------------------------------------------------------------------------------------------------------
Cost of goods sold (excluding depreciation) 136,331 136,535 133,781 131,726
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income 26,543 31,481 28,195 30,703
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 27,061 31,823 28,375 31,219
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 16,778 19,571 17,451 19,199
- ------------------------------------------------------------------------------------------------------------------------------------
Net income per share $ .37 $ .43 $ .38 $ .42
- ------------------------------------------------------------------------------------------------------------------------------------
MARKET PRICE PER SHARE DIVIDENDS PAID PER SHARE
====================================================================================================================================
FISCAL 1997 FISCAL 1996 FISCAL 1997 FISCAL 1996
====================================================================================================================================
QUARTER HIGH LOW HIGH LOW
- ------------------------------------------------------------------------------------------------------------------------------------
First $30.38 $26.63 $29.75 $27.88 $.1075 $.0925
- ------------------------------------------------------------------------------------------------------------------------------------
Second 35.50 29.63 29.69 26.44 .14 .1075
- ------------------------------------------------------------------------------------------------------------------------------------
Third 34.38 26.13 30.00 27.31 .14 .1075
- ------------------------------------------------------------------------------------------------------------------------------------
Fourth 33.50 26.88 30.56 27.13 .14 .1075
====================================================================================================================================
[27]
33
CONSOLIDATED STATEMENTS OF INCOME
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
(in thousands, except per share amounts) For the years ended July 31, 1997, 1996 and 1995 1997 1996 1995
====================================================================================================================================
Net sales $906,290 $862,287 $712,838
- ------------------------------------------------------------------------------------------------------------------------------------
Cost and expenses:
- ------------------------------------------------------------------------------------------------------------------------------------
Cost of goods sold 556,073 538,373 456,799
- ------------------------------------------------------------------------------------------------------------------------------------
Selling and administrative expenses 165,918 151,846 133,713
- ------------------------------------------------------------------------------------------------------------------------------------
Provision for depreciation and amortization 49,205 45,029 37,296
- ------------------------------------------------------------------------------------------------------------------------------------
Hostile takeover expenses - 10,117 -
- ------------------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 771,196 745,365 627,808
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income 135,094 116,922 85,030
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income (1,876) (2,867) (3,639)
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense, net of capitalized interest 2,619 1,311 1,209
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 134,351 118,478 87,460
- ------------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes: (Note 7)
- ------------------------------------------------------------------------------------------------------------------------------------
Current:
- ------------------------------------------------------------------------------------------------------------------------------------
Federal 42,825 35,385 24,309
- ------------------------------------------------------------------------------------------------------------------------------------
State 8,210 7,390 5,942
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred 2,034 2,704 1,912
- ------------------------------------------------------------------------------------------------------------------------------------
Total income taxes 53,069 45,479 32,163
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $81,282 $72,999 $55,297
- ------------------------------------------------------------------------------------------------------------------------------------
Net income per share $ 1.88 $ 1.60 $ 1.23
====================================================================================================================================
The accompanying notes are an integral part of these statements.
[28]
34
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
(in thousands) SHARES OF COMMON STOCK COMMON
------------------------ PREFERRED STOCK
For the years ended July 31, 1997, 1996 and 1995 ISSUED IN TREASURY STOCK PAR VALUE
====================================================================================================================================
Balance, July 31, 1994 22,796 (403) $- $22,796
====================================================================================================================================
Net income - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Cash dividends ($.37 per share) - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Sale of stock under employee
stock purchase plan (Note 5) - 266 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Stock options exercised net of shares
exchanged in lieu of cash (Note 5) - 30 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Tax benefit from early disposition by
employees of stock issued under stock
option plans and exercise of
non-qualified stock options - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Unrealized security gain (loss) (Note 9) - - - -
====================================================================================================================================
Balance, July 31, 1995 22,796 (107) - 22,796
====================================================================================================================================
Net income - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Cash dividends ($.43 per share) - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Sale of stock under employee
stock purchase plan (Note 5) 35 153 - 35
- ------------------------------------------------------------------------------------------------------------------------------------
Stock options exercised net of shares
exchanged in lieu of cash (Note 5) 51 32 - 51
- ------------------------------------------------------------------------------------------------------------------------------------
Tax benefit from early disposition by
employees of stock issued under stock
option plans and exercise of
non-qualified stock options - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Treasury stock purchased - (167) - -
- ------------------------------------------------------------------------------------------------------------------------------------
Two-for-one stock split effective July, 1996 22,882 (88) - 22,882
- ------------------------------------------------------------------------------------------------------------------------------------
Unrealized security gain (loss) (Note 9) - - - -
====================================================================================================================================
Balance, July 31, 1996 45,764 (177) - 45,764
====================================================================================================================================
Net income - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Cash dividends ($.56 per share) - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Sale of stock under employee
stock purchase plan (Note 5) - 324 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Stock options exercised net of shares
exchanged in lieu of cash (Note 5) - 230 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Stock transferred to profit sharing and
retirement fund - 217 - -
- ------------------------------------------------------------------------------------------------------------------------------------
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 - (3,288) - -
- ------------------------------------------------------------------------------------------------------------------------------------
Unrealized security gain (loss) (Note 9) - - - -
====================================================================================================================================
Balance, July 31, 1997 45,764 (2,694) $- $45,764
====================================================================================================================================
UNREALIZED COST OF
(in thousands) ADDITIONAL RETAINED SECURITY TREASURY
For the years ended July 31, 1997, 1996 and 1995 CAPITAL EARNINGS GAIN/LOSS STOCK
====================================================================================================================================
Balance, July 31, 1994 $51,028 $346,626 $- $ (10,311)
====================================================================================================================================
Net income - 55,297 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Cash dividends ($.37 per share) - (16,680) - -
- ------------------------------------------------------------------------------------------------------------------------------------
Sale of stock under employee
stock purchase plan (Note 5) (42) (358) - 6,834
- ------------------------------------------------------------------------------------------------------------------------------------
Stock options exercised net of shares
exchanged in lieu of cash (Note 5) (107) (91) - 789
- ------------------------------------------------------------------------------------------------------------------------------------
Tax benefit from early disposition by
employees of stock issued under stock
option plans and exercise of
non-qualified stock options 518 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Unrealized security gain (loss) (Note 9) - - (181) -
====================================================================================================================================
Balance, July 31, 1995 51,397 $384,794 (181) (2,688)
====================================================================================================================================
Net income - 72,999 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Cash dividends ($.43 per share) - (19,622) - -
- ------------------------------------------------------------------------------------------------------------------------------------
Sale of stock under employee
stock purchase plan (Note 5) 1,100 (414) - 6,465
- ------------------------------------------------------------------------------------------------------------------------------------
Stock options exercised net of shares
exchanged in lieu of cash (Note 5) 1,230 (298) - 925
- ------------------------------------------------------------------------------------------------------------------------------------
Tax benefit from early disposition by
employees of stock issued under stock
option plans and exercise of
non-qualified stock options 1,771 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Treasury stock purchased - - - (9,878)
- ------------------------------------------------------------------------------------------------------------------------------------
Two-for-one stock split effective July, 1996 (22,882) - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Unrealized security gain (loss) (Note 9) - - (39) -
====================================================================================================================================
Balance, July 31, 1996 32,616 437,459 (220) (5,176)
====================================================================================================================================
Net income - 81,282 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Cash dividends ($.56 per share) - (23,993) - -
- ------------------------------------------------------------------------------------------------------------------------------------
Sale of stock under employee
stock purchase plan (Note 5) (337) (291) - 8,939
- ------------------------------------------------------------------------------------------------------------------------------------
Stock options exercised net of shares
exchanged in lieu of cash (Note 5) (1,165) (2,738) - 6,572
- ------------------------------------------------------------------------------------------------------------------------------------
Stock transferred to profit sharing and
retirement fund 1,502 - - 5,998
- ------------------------------------------------------------------------------------------------------------------------------------
Tax benefit from early disposition by
employees of stock issued under stock
option plans and exercise of
non-qualified stock options 1,869 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Amortization of difference between market price
and option price for 1997 option plan (Note 5) 254 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Treasury stock purchased - - - (95,272)
- ------------------------------------------------------------------------------------------------------------------------------------
Unrealized security gain (loss) (Note 9) - - 125 -
====================================================================================================================================
Balance, July 31, 1997 $34,739 $491,719 $ (95) $(78,939)
====================================================================================================================================
The accompanying notes are an integral part of these statements. Prior years have been reclassified to conform with current
year presentation.
[29]
35
CONSOLIDATED BALANCE SHEETS
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
(dollars in thousands) July 31, 1997 and 1996 1997 1996
===============================================================================================
Assets
Current Assets:
Cash and cash equivalents $ 14,168 $ 23,618
- -----------------------------------------------------------------------------------------------
Short-term investments (Note 9) 1,706 39,025
- -----------------------------------------------------------------------------------------------
Accounts receivable, less allowance for doubtful accounts
of $3,481 in 1997 and $3,215 in 1996 167,578 148,918
- -----------------------------------------------------------------------------------------------
Inventories (Note 2) 85,150 71,332
- -----------------------------------------------------------------------------------------------
Prepaid taxes 16,748 15,138
- -----------------------------------------------------------------------------------------------
Advances and prepaid expenses 5,140 6,077
- -----------------------------------------------------------------------------------------------
Total current assets 290,490 304,108
- -----------------------------------------------------------------------------------------------
Property, plant and equipment, at cost:
- -----------------------------------------------------------------------------------------------
Land and buildings 140,930 123,993
- -----------------------------------------------------------------------------------------------
Machinery, equipment, furniture and fixtures 465,878 431,648
- -----------------------------------------------------------------------------------------------
Leasehold improvements 1,678 1,428
- -----------------------------------------------------------------------------------------------
Total property, plant and equipment 608,486 557,069
- -----------------------------------------------------------------------------------------------
Less-reserves for depreciation and amortization (306,994) (268,197)
- -----------------------------------------------------------------------------------------------
Net property, plant and equipment 301,492 288,872
- -----------------------------------------------------------------------------------------------
Intangible assets arising from acquisitions 59,913 43,180
- -----------------------------------------------------------------------------------------------
Cash surrender value of life insurance 39,845 32,244
- -----------------------------------------------------------------------------------------------
System development costs 24,404 21,499
- -----------------------------------------------------------------------------------------------
Other assets 4,298 5,947
- -----------------------------------------------------------------------------------------------
Total Assets $ 720,442 $ 695,850
===============================================================================================
Liabilities and Stockholders' Equity
- -----------------------------------------------------------------------------------------------
Current Liabilities:
- -----------------------------------------------------------------------------------------------
Current maturities of long-term debt $ 7,100 $ -
- -----------------------------------------------------------------------------------------------
Short-term notes payable 28,500 -
- -----------------------------------------------------------------------------------------------
Accounts payable 49,348 46,044
- -----------------------------------------------------------------------------------------------
Dividends payable 6,030 4,900
- -----------------------------------------------------------------------------------------------
Accrued compensation and related expenses 24,458 22,281
- -----------------------------------------------------------------------------------------------
Other accrued expenses 8,200 8,821
- -----------------------------------------------------------------------------------------------
Contribution to profit sharing and retirement fund (Note 4) 17,620 15,824
- -----------------------------------------------------------------------------------------------
Total current liabilities 141,256 97,870
- -----------------------------------------------------------------------------------------------
Deferred compensation and retirement benefits (Note 8) 28,829 24,750
- -----------------------------------------------------------------------------------------------
Deferred income taxes (Note 7) 32,669 32,187
- -----------------------------------------------------------------------------------------------
Long-term debt (Note 3) 24,500 30,600
- -----------------------------------------------------------------------------------------------
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* 34,739 32,616
- -----------------------------------------------------------------------------------------------
Retained earnings* 491,719 437,459
- -----------------------------------------------------------------------------------------------
Unrealized security loss (Note 9) (95) (220)
- -----------------------------------------------------------------------------------------------
Treasury stock* (78,939) (5,176)
- -----------------------------------------------------------------------------------------------
Total stockholders' equity 493,188 510,443
- -----------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 720,442 $ 695,850
===============================================================================================
The accompanying notes are an integral part of these statements.
*Prior year has been reclassified to conform with current year presentation.
30
36
CONSOLIDATED STATEMENTS OF CASH FLOW
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
(dollars in thousands) For the years ended July 31, 1997, 1996 and 1995 1997 1996 1995
====================================================================================================================================
Cash flows from operating activities:
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 81,282 $ 72,999 $ 55,297
- ------------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to
net cash provided by operating activities:
- ------------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization 49,205 45,029 37,296
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred taxes* 409 5,398 1,481
- ------------------------------------------------------------------------------------------------------------------------------------
(Gain) loss on disposal of property (21) 3 (399)
- ------------------------------------------------------------------------------------------------------------------------------------
Changes in assets and liabilities, net of effects from the purchase of
Lampro Graphics, Retterbush and Sauer, Forms Engineering Company,
Post Printing, and Moran Printing, and the sale of the LaserMax Division:
- ------------------------------------------------------------------------------------------------------------------------------------
Accounts receivable (11,433) (13,863) (30,538)
- ------------------------------------------------------------------------------------------------------------------------------------
Inventories (9,276) 4,820 (9,213)
- ------------------------------------------------------------------------------------------------------------------------------------
Prepaid taxes* (1,218) (6,344) (3,574)
- ------------------------------------------------------------------------------------------------------------------------------------
Advances and prepaid expenses 1,459 (145) 778
- ------------------------------------------------------------------------------------------------------------------------------------
Other assets (15,588) (16,032) (14,145)
- ------------------------------------------------------------------------------------------------------------------------------------
Accounts payable and other liabilities 1,009 26,523 6,328
- ------------------------------------------------------------------------------------------------------------------------------------
Federal and state income taxes - (2,055) (1,886)
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred compensation and retirement benefits 4,079 3,583 3,191
- ------------------------------------------------------------------------------------------------------------------------------------
Realized security (gain) loss* 106 107 (144)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 100,013 120,023 44,472
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
- ------------------------------------------------------------------------------------------------------------------------------------
Capital expenditures (39,225) (59,506) (51,487)
- ------------------------------------------------------------------------------------------------------------------------------------
Purchases of short-term investments* (14,000) (116,378) (56,245)
- ------------------------------------------------------------------------------------------------------------------------------------
Proceeds from sales of short-term investments* 51,420 107,423 85,256
- ------------------------------------------------------------------------------------------------------------------------------------
Proceeds from disposal of property 313 407 455
- ------------------------------------------------------------------------------------------------------------------------------------
Net construction funds held by trustee 1,044 3,137 1,970
- ------------------------------------------------------------------------------------------------------------------------------------
Other capital investments, including acquisitions/divestitures (40,981) (29,165) (17,017)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (41,429) (94,082) (37,068)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
- ------------------------------------------------------------------------------------------------------------------------------------
Cash dividends paid (22,864) (18,919) (16,065)
- ------------------------------------------------------------------------------------------------------------------------------------
Amounts paid on long-term debt - (205) (6,110)
- ------------------------------------------------------------------------------------------------------------------------------------
Proceeds from issuance of short-term debt 58,500 4,216 4,829
- ------------------------------------------------------------------------------------------------------------------------------------
Proceeds from issuance of long-term debt 1,000 5,000 2,100
- ------------------------------------------------------------------------------------------------------------------------------------
Proceeds from issuance of common stock 20,602 10,864 7,544
- ------------------------------------------------------------------------------------------------------------------------------------
Retirement of short-term and acquired debt (30,000) (4,216) (6,474)
- ------------------------------------------------------------------------------------------------------------------------------------
Purchase of treasury stock (95,272) (9,878) -
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (68,034) (13,138) (14,176)
- ------------------------------------------------------------------------------------------------------------------------------------
Net changes in cash and cash equivalents (9,450) 12,803 (6,772)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 23,618 10,815 17,587
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 14,168 $ 23,618 $ 10,815
====================================================================================================================================
Supplemental disclosure:
- ------------------------------------------------------------------------------------------------------------------------------------
Interest paid (net of interest capitalized) $ 917 $ (297) $ (220)
- ------------------------------------------------------------------------------------------------------------------------------------
Income taxes paid 51,712 46,910 35,520
====================================================================================================================================
The accompanying notes are an integral part of these statements. *Prior year has been reclassified to conform with current year
presentation.
31
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1997
1. SUMMARY OF MAJOR 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.
REVENUE RECOGNITION: Revenues from product sales and software licenses are
recorded when the product is shipped to the customer. In some instances,
revenue is not recognized until installation is complete or customer acceptance
is acknowledged.
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.
DEPRECIATION: 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.
===================================================
Buildings 40 years
- ---------------------------------------------------
Building equipment 10-15 years
- ---------------------------------------------------
Machinery and equipment 3-10 years
- ---------------------------------------------------
Leasehold improvements Lease period
===================================================
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
$1,205,000 in 1997, $965,000 in 1996 and $491,000 in 1995. The unamortized
balance relating to Moran Printing Company was $17,035,000 at July 31, 1997;
the balance relating to all other acquisitions was $42,878,000 at July 31,
1997, and $43,180,000 at July 31, 1996.
SYSTEM DEVELOPMENT COSTS: Computer software that is either purchased or
developed internally for use by the company is amortized over a useful life of
one to seven years. Amortization of internal use software was $3,029,000 in
fiscal 1997; $2,127,000 in fiscal 1996; and $1,907,000 in fiscal 1995. Certain
computer software costs are capitalized in accordance with Statement of
Financial Accounting Standards (SFAS) No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed," and are reported
at the lower of unamortized cost or net realizable value. This software,
marketed under the name Platforms(TM), has been developed to provide customers
with electronic forms. The software is customized to meet the customer's
requirements. The originally purchased software, which is the base technology
for our Platforms product, is being amortized over five years. Subsequent
software developments are being amortized over two 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.
Amortization of Platforms' software was $2,229,000 in fiscal 1997; $2,042,000
in fiscal 1996; and $959,000 in fiscal 1995. The unamortized balance of all
capitalized computer software was $24,404,000 in 1997 and $21,499,000 in 1996.
OTHER ASSETS: $1,280,000 in 1997 and $2,325,000 in 1996 represent the unused
balance of construction funds held for the Lebanon, Kentucky plant.
ACCOUNTING CHANGES: In fiscal 1997, the company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of." The statement requires that long-lived assets, including
related goodwill, be reviewed for impairment and written down to fair value
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. The effect of the accounting change had no impact on
the company's financial statements.
INCOME TAXES: The company accounts for income taxes under SFAS No. 109,
"Accounting for Income Taxes." Under that standard, deferred income taxes are
recognized for the tax consequences of "temporary differences" by applying
statutory tax rates applicable to future years to differences between the
financial statement carrying amount and the tax bases of existing assets and
liabilities. Investment tax credits are amortized to income over the lives of
the applicable assets. The unamortized investment tax credit amounted to
$243,000 in 1997 and $300,000 in 1996.
INDUSTRY SEGMENT: The company is engaged primarily in the computer services and
supply industry.
NET INCOME PER SHARE: Net income per share is based on the weighted average
number of shares outstanding during each year.
In 1997, the Financial Accounting Standards Board issued a new standard,
SFAS No. 128 on Earnings Per Share disclosure which is effective for financial
statements for periods ending after December 15, 1997. The company will adopt
this statement and reflect its disclosures in the company's fiscal 1998
financial statements. SFAS No. 128 requires dual presentation of basic and
diluted earnings per share, as defined, for current and prior periods. Earnings
per share were as follows:
1997 1996 1995
======================================================
Basic $1.88 $1.60 $1.23
- ------------------------------------------------------
Diluted 1.86 1.59 1.23
======================================================
CASH AND CASH EQUIVALENTS: The company invests excess cash balances in
short-term securities, including commercial paper, money market funds, and
municipal bonds whose original maturities are less than three months.
CAPITALIZED INTEREST COSTS: Interest costs are capitalized based upon the cost
of capital projects in progress during the year. Interest costs capitalized for
the last three years were:
(IN THOUSANDS) INTEREST EXPENSE INTEREST CAPITALIZED
======================================================
1997 $3,940 $1,321
- ------------------------------------------------------
1996 2,717 1,406
- ------------------------------------------------------
1995 2,717 1,508
======================================================
Amortization expense for interest capitalized was $912,000 in 1997; $794,000 in
1996; and $681,000 in 1995.
USE OF ESTIMATES: In preparing financial statements in conformity with
generally accepted accounting principles, management makes estimates and
assumptions that affect reported and disclosed assets and liabilities at the
date of the financial statements and reported revenues and expenses during the
reporting period. Actual results could differ from those estimates.
32
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVENTORIES:
Inventories at July 31, were as follows:
(IN THOUSANDS) 1997 1996
===========================================================
Raw materials $21,440 $20,470
- -----------------------------------------------------------
Work in process 1,426 1,771
- -----------------------------------------------------------
Finished products 62,284 49,091
- -----------------------------------------------------------
$85,150 $71,332
===========================================================
At July 31, 1997 and 1996 the cost of inventories aggregating $55,484,000 and
$49,623,000, respectively, was determined on the LIFO method.
Inventories would have been $17,649,000 higher in Fiscal 1997 and
$19,790,000 higher in Fiscal 1996, if the FIFO method had been used for all
inventories.
3. FINANCING ARRANGEMENTS:
Long-term debt consisted of the following at July 31:
(IN THOUSANDS) 1997 1996
===========================================================
Average 3.73% adjustable industrial
revenue bonds due 2007 $ 7,000 $ 7,000
- -----------------------------------------------------------
Average 3.64% adjustable industrial
revenue bonds due 2009 8,000 8,000
- -----------------------------------------------------------
Average 3.73% adjustable industrial
revenue bonds due 2019 8,500 8,500
- -----------------------------------------------------------
Average 5.43% adjustable promissory
note due 1998 2,000 2,000
- -----------------------------------------------------------
Average 4.95% adjustable promissory note
maturing not earlier than 1998 100 100
- -----------------------------------------------------------
Average 5.27% adjustable promissory
note due 1998 5,000 5,000
- -----------------------------------------------------------
Average 5.80% adjustable promissory
note due 1999 1,000 -
- -----------------------------------------------------------
$31,600 $30,600
- -----------------------------------------------------------
Less-current portion 7,100 -
- -----------------------------------------------------------
$24,500 $30,600
===========================================================
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 are either carried at fair value or do not
materially differ from fair value.
The industrial revenue bonds due 2007, 2009 and 2019 may be tendered at
the option of the holders on dates specified in the agreements.
The company maintains arrangements with agents to remarket any bonds
tendered before the final maturity dates. The bonds are also
supported by letters of credit.
The company's financing arrangements contain certain restrictive financial
covenants. Under the most restrictive of the covenants, the company must
maintain a current ratio of at least 2 to 1, net worth of not less than $403
million and funded debt not greater than 40% of net tangible assets plus funded
debt. The company was in compliance with all debt covenants at July 31, 1997
and 1996.
Principal payments due on long-term debt during the next five years are as
follows: $7,100,000 in 1998; $1,000,000 in 1999; and $0 in each of 2000 through
2002.
Short-term notes payable of $28.5 million represents payments due to Moran
Printing principals. The notes carry an interest rate of 5.8%. $15 million was
paid in August, 1997, with the balance due in January, 1998.
The company has a $50 million revolving credit facility with The First
National Bank of Chicago as the agent and Bank of America Illinois as co-agent.
Additionally, unsecured money market lines of $50 million each were added in
fiscal 1997. The maximum amount as authorized by the Board of Directors for
short-term borrowings under the revolver and the money market lines is limited
to $50 million. There are no compensating balance requirements under these
agreements. There were no borrowings under these agreements at July 31, 1997
and 1996.
4. PROFIT SHARING AND RETIREMENT PLAN:
The company has a contributory profit sharing and retirement plan covering most
employees. Company contributions to the Plan charged to operations were
$17,620,000 in Fiscal 1997, $15,824,000 in Fiscal 1996, and $11,906,000 in
Fiscal 1995.
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").
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 that 100% of the
market value of the stock at the date of grant. For Non-Qualified Options, the
grant price may not be less than 85% of the market value; however, to date no
options have been granted at less than 100% of market value. The option price
may be paid in cash or by exchanging previously acquired company common stock
with a market value equal to the purchase price. Options generally become
exercisable as to 40% of the shares granted one year after grant and the
remaining 60% of the shares granted become exercisable two years after grant.
Options expire 10 years after grant. The exercisability of options may be
subject to one or more of the following performance measures: Common Stock
value, earnings per share, return to shareholders (including dividends), return
on assets, return on equity, earnings of the company, revenues, market share,
cash flow, cost reduction goals, or any combination of the above.
The 1997 plan additionally provides for options for non-employee
Directors. Immediately following the company's annual meeting, each
non-employee Director will be granted an option to purchase 2,000 shares at a
purchase price per share equal to the fair market value of a share of common
stock on the date of grant of such option. The options will vest at 25% every
three months, such that they will be fully vested within one year, or by the
next annual meeting, whichever occurs first.
Under the terms of the 1989 Plan, which will expire on September 12, 1999,
options may be granted to officers and others. This plan is similar to the 1997
plan except it does not permit grants to non-employee Directors and it does not
provide for performance measures to determine vesting. Currently there are
70,952 options still available under this plan. The company does not intend to
seek authorization for additional shares under this plan.
33
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
(IN THOUSANDS, EXCEPT EPS) 1997 1996
===========================================================
Net Income as reported $81,282 $72,999
- -----------------------------------------------------------
Net Income pro forma 78,333 71,743
- -----------------------------------------------------------
Earnings per Share as reported 1.88 1.60
- -----------------------------------------------------------
Earnings per Share pro forma 1.81 1.57
===========================================================
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to August 1, 1995, the resulting pro forma compensation
cost may not be representative of expected compensation cost in future years.
The following table summarizes the activity under the stock option plans
for the last two years:
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
=================================================================
Outstanding at July 31, 1995 819,784 $ 13.18
- -----------------------------------------------------------------
Granted 267,400 28.94
- -----------------------------------------------------------------
Forfeited (5,800) 18.76
- -----------------------------------------------------------------
Exercised (174,212) 12.38
- -----------------------------------------------------------------
Outstanding at July 31, 1996 907,172 $ 17.94
- -----------------------------------------------------------------
Granted 845,715 27.18
- -----------------------------------------------------------------
Forfeited (6,300) 28.15
- -----------------------------------------------------------------
Exercised (249,744) 13.04
- -----------------------------------------------------------------
Outstanding at July 31, 1997 1,496,843 $ 23.94
=================================================================
July 31 July 31
- -----------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------
Shares available for future grants 1,489,337 328,752
- -----------------------------------------------------------------
Shares exercisable 757,468 536,657
=================================================================
Of the 845,715 options granted in fiscal 1997, 567,000 were granted with
performance measure vesting provisions as outlined in the 1997 Plan. The
performance measures for the options are based on revenues, pretax income,
return on equity, and return on assets. Vesting will occur in 3 years to the
extent that the company meets specified performance measures. To the extent
that the measures are not met, the options will vest in 9.5 years. 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 will be reflected as expense in the
company's operations statement over the vesting period. Fiscal 1997 includes
additional expense of $254,000. The remaining options granted in 1997 did not
have performance vesting provisions.
The Employee Stock Purchase Plan, adopted in 1974, was to end on December
31, 1997. During 1997, the 1974 Plan was amended to add 14 additional 6-month
offering periods, subject to shareholder approval. A total of 6,600,000 shares
of common stock have been reserved for purchase by employees through
semi-annual offerings, of which 1,900,000 shares are subject to shareholder
approval. 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. Options were exercised to purchase 324,002 shares at $25.65 in
Fiscal 1997, 375,754 shares at $19.12 in Fiscal 1996, and 531,254 shares at
$12.11 in Fiscal 1995. There were 2,553,496 shares available at July 31, 1997
and 977,498 shares available at July 31, 1996 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 5.2% to 6.8%
depending on expected life of the option; expected dividend yield of 1.3% to
1.7%; expected lives of 5.4 years for options issued without performance
measures, 7.4 years for options with performance measures, and 0.5 years for
options granted through the Employee Stock Purchase Plan; and expected
volatility of 25.2% to 25.8% for options granted through the stock option plan,
and 9.5% to 43.6% for options granted through the Employee Stock Purchase Plan.
6. LEASE COMMITMENTS:
Total rent expense for manufacturing facilities, sales offices and equipment
amounted to $6,225,000 in 1997, $5,906,000 in 1996 and $5,508,000 in 1995. The
minimum future rental commitments under non-cancellable lease arrangements are
$3,821,000 in 1998; $3,030,000 in 1999; $1,982,000 in 2000; $1,618,000 in 2001;
and $6,368,000 for 2002 and beyond.
7. INCOME TAXES:
The significant deferred tax assets and liabilities at July 31 were as follows:
(IN THOUSANDS) 1997 1996
=============================================================================================
Deferred tax liabilities:
- ---------------------------------------------------------------------------------------------
Accelerated depreciation $30,576 $30,053
- ---------------------------------------------------------------------------------------------
Software development 8,661 7,545
- ---------------------------------------------------------------------------------------------
Other 7,871 7,544
- ---------------------------------------------------------------------------------------------
Total Deferred Liabilities 47,108 45,142
- ---------------------------------------------------------------------------------------------
Deferred tax assets:
- ---------------------------------------------------------------------------------------------
Deferred compensation 8,471 7,126
- ---------------------------------------------------------------------------------------------
Postretirement benefits 1,376 1,516
- ---------------------------------------------------------------------------------------------
Inventory capitalization 3,207 2,514
- ---------------------------------------------------------------------------------------------
Accrued vacation 1,548 1,468
- ---------------------------------------------------------------------------------------------
Supplemental profit sharing 1,525 1,121
- ---------------------------------------------------------------------------------------------
Other 5,673 5,702
- ---------------------------------------------------------------------------------------------
Total Deferred Assets 21,800 19,447
- ---------------------------------------------------------------------------------------------
Net Deferred Tax Liabilities $25,308 $25,695
=============================================================================================
The provision for income taxes is comprised of the following:
1997 1996 1995
=============================================================================================
Statutory federal income tax rate 35.0% 35.0% 35.0%
- ---------------------------------------------------------------------------------------------
State and local income taxes 4.4 4.4 4.4
- ---------------------------------------------------------------------------------------------
Tax exempt interest income (0.1) (0.4) (1.0)
- ---------------------------------------------------------------------------------------------
Tax credits and other 0.2 (0.6) (1.6)
- ---------------------------------------------------------------------------------------------
Effective tax rate 39.5% 38.4% 36.8%
=============================================================================================
34
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. POSTRETIREMENT BENEFITS:
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 retire before 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:
(IN THOUSANDS) 1997 1996 1995
=========================================================================================
Components of net periodic postretirement benefit costs:
- -----------------------------------------------------------------------------------------
Service cost $ 10 $ 22 $ 22
- -----------------------------------------------------------------------------------------
Interest cost 278 298 308
- -----------------------------------------------------------------------------------------
Amortization of (gain) loss - 134 (985)
- -----------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 288 $ 454 $(655)
=========================================================================================
The liability at July 31 (included in Deferred Compensation and
Retirement Benefits on the accompanying Consolidated Balance Sheet) for
postretirement benefits is as follows:
(IN THOUSANDS) 1997 1996
===========================================================================
Actuarial present value of benefit obligations:
- ---------------------------------------------------------------------------
Retirees $2,175 $2,386
- ---------------------------------------------------------------------------
Fully eligible active plan participants 863 947
- ---------------------------------------------------------------------------
Other active plan participants 245 269
- ---------------------------------------------------------------------------
Life insurance 200 219
- ---------------------------------------------------------------------------
Actuarial present value of benefit obligations $3,483 $3,821
===========================================================================
For financial reporting purposes, the actuarial computations assumed a discount
rate of 8.0% to determine the accumulated postretirement benefit obligation,
and an assumed health care cost trend rate of 7.5% and 7.0% for pre-65 and
post-65 medical coverage, respectively, for 1997, declining gradually to 5.0%
in 2002, to measure the accumulated postretirement benefit obligation. 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 $21,000 and the postretirement benefit
obligation as of July 31, 1997 by $228,000.
9. 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 decreased
shareholders' equity by $95,000 at July 31, 1997 and $220,000 at July 31, 1996
(net of tax).
The amortized cost and market value of investments as of July 31, 1996, and
July 31, 1997 were as follows:
(IN THOUSANDS)
=====================================================================================================
July 31, 1996 AMORTIZED UNREALIZED HOLDING MARKET
COST GAINS LOSSES VALUE
=====================================================================================================
Available-for-sale
- -----------------------------------------------------------------------------------------------------
State, municipal & other gov't debt $ 60 $ - $ 23 $ 37
- -----------------------------------------------------------------------------------------------------
Equity 39,332 - 344 38,988
- -----------------------------------------------------------------------------------------------------
Held-to-maturity
- -----------------------------------------------------------------------------------------------------
State, municipal & other gov't debt - - - -
- -----------------------------------------------------------------------------------------------------
Total short-term investments $ 39,392 $ - $ 367 $39,025
- -----------------------------------------------------------------------------------------------------
Long-term available-for-sale
- -----------------------------------------------------------------------------------------------------
Equity $ 1,880 $ - $ - $ 1,880
=====================================================================================================
July 31, 1997 AMORTIZED UNREALIZED HOLDING MARKET
COST GAINS LOSSES VALUE
=====================================================================================================
Available-for-sale
- -----------------------------------------------------------------------------------------------------
State, municipal & other gov't debt $ - $ - $ - $ -
- -----------------------------------------------------------------------------------------------------
Equity 1,866 - 160 1,706
- -----------------------------------------------------------------------------------------------------
Held-to-maturity
- -----------------------------------------------------------------------------------------------------
State, municipal & other gov't debt - - - -
- -----------------------------------------------------------------------------------------------------
Total short-term investments $ 1,866 $ - $ 160 $ 1,706
- -----------------------------------------------------------------------------------------------------
Long-term available-for-sale
- -----------------------------------------------------------------------------------------------------
Equity $ 1,730 $ - $ - $ 1,730
=====================================================================================================
Maturities for all debt securities classified as short-term are less than one
year. The long-term investment is included in the 'Other Assets' section of the
balance sheet.
Proceeds on the sale of securities were $51,420,000 for Fiscal 1997, and
$107,423,000 for Fiscal 1996, with gross realized losses of $106,000 in Fiscal
1997, and $107,000 in Fiscal 1996.
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.
The reduction in net unrealized loss on available-for-sale securities from July
31, 1996 to July 31, 1997 was $125,000 (net of tax).
35
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1997 and 1996 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, 1997. These financial statements are the responsibility
of the company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Wallace Computer Services,
Inc. and Subsidiaries as of July 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three Fiscal years in the
period ended July 31, 1997 in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Chicago, Illinois
September 3, 1997
36
42
CORPORATE AND INVESTOR INFORMATION
BOARD OF DIRECTORS
THEODORE DIMITRIOU (E) (P)
Chairman
ROBERT J. CRONIN (E) (P)
President and Chief
Executive Officer
RICHARD F. DOYLE (A) (E)
Former Senior Vice President
Finance and Administration
Texas Oil & Gas Corp.
ALBERT W. ISENMAN III (C)
Professor of Management
Kellogg Graduate School
of Management
Northwestern University
WILLIAM N. LANE, III (C) (E)
Chairman, President and
Chief Executive Officer
Lane Industries, Inc.
JOHN C. POPE (A) (C)
Chairman of the Board
MotivePower Industries, Inc.
ROBERT P. RITTEREISER (P)
Chairman and
Chief Executive Officer
Gruntal Financial L.L.C.
Gruntal & Co. L.L.C.
NEELE E. STEARNS, JR. (A)
Former President and
Chief Executive Officer
CC Industries., Inc.
(A) Member of the Audit Committee
(C) Member of the Compensation Committee
(E) Member of the Executive Committee
(P) Member of the Profit Sharing Committee
OFFICERS
THEODORE DIMITRIOU
Chairman of the Board
ROBERT J. CRONIN
President and Chief
Executive Officer
MICHAEL O. DUFFIELD
Senior Vice President
Operations
MICHAEL T. LEATHERMAN
Senior Vice President
Business Services
Chief Information Officer
THOMAS G. BROOKER
Vice President, General Manager
Office Products Group
BRUCE D'ANGELO
Vice President Corporate Sales
MICHAEL J. HALLORAN
Vice President, Chief Financial
Officer and Assistant Secretary
DONALD J. HOFFMANN
Vice President Engineering
and Research
MICHAEL M. MULCAHY
Vice President, General Manager
Direct Response Group
WAYNE E. RICHTER
Vice President, General Manager
Label Group
SANDRA K. BRANDT
Treasurer, Division Vice President
MICHAEL T. LAUDIZIO
Secretary, Division Vice
President Taxes
WILLIAM J. MONTANEZ
Assistant Treasurer
DIVISION MANAGERS
MICHAEL A. ANDERSON
Vice President Commercial Printing
STEVEN F. ARPAIA
Vice President Colorforms Sales
DAVID W. BERTRAM
Vice President Contract Services
DOUGLAS W. FITZGERALD
Vice President Marketing
JOSEPH J. JUSZAK
Vice President Quality
and Technical Services
MICHAEL D. KEIM
Vice President Manufacturing
Systems
JAMES E. KERSTEN
Vice President Direct Sales - West
MARK J. KOVACH
Vice President Sales, TOPS
MARC A. LOOMER
Vice President Business Forms
Manufacturing
MARK D. MINDRUM
Vice President Direct Sales -
Midwest
MICHAEL A. REPP
Vice President, General Manager
TOPS Division
EDWARD A. RIGUARDI
Vice President Direct Sales - East
DAVID M. ROUSSEAU
Vice President Information
Services
RONALD D. SEAVEY
Vice President Direct Sales -
Southeast
DIANE E. SCHREINER
Vice President Distribution
Services
BARRY L. WHITE
Vice President Human Resources
FACILITIES
Headquarters - Lisle, IL
La Palma, CA
Lodi, CA
Ontario, CA
San Luis Obispo, CA
Orlando, FL (2)
Tampa, FL
Metter, GA
Bellwood, IL
Clinton, IL
Elk Grove Village, IL
Hillside, IL
St. Charles, IL (2)
Osage, IA (2)
Lebanon, KY
Gastonia, NC
Wilson, NC
Tonawanda, NY
Cincinnati, OH
Streetsboro, OH
Allentown, PA
Covington, TN
Brenham, TX
Marlin, TX
Luray, VA
Manchester, VT
West Bend, WI
Sales Offices - Nationwide
CORPORATE INFORMATION
GENERAL COUNSEL
Steven L. Carson
AUDITORS
Arthur Andersen LLP, Chicago, IL
PRODUCT INFORMATION
Information about Wallace's information
management products, services and
solutions is available on our
web site at www.wallace.com.
You may also contact the Marketing
Department at corporate headquarters
in Lisle.
800/323-8447
E-mail: corpmarketing@wallace.com
STOCKHOLDER INFORMATION
COMMON STOCK
The company's common shares
are traded on the New York Stock
Exchange, ticker symbol WCS.
TRANSFER AGENT AND REGISTRAR
Questions regarding stock transfer
requirements, lost stock certificates,
dividends or address changes
should be directed to:
Boston EquiServe, L.P.
Investor Relations
MS 45-02-64
P.O. Box 644
Boston, MA 02102-0644
800/733-5001
REPORTS TO THE S.E.C.
Reports to the S.E.C. on forms
10-K and 10-Q are available at
no charge upon written request
to the Corporate Secretary.
COMPANY NEWS
Wallace press releases and
additional company information
are available on Wallace's web
site at www.wallace.com
INVESTOR CONTACT
Brad Samson, Director of
Investor Relations
630/588-5395
E-mail: bsamson@wallace.com
Printed by Moran Printing
43
WALLACE LOGO
INFORMATION MANAGEMENT PRODUCTS, SERVICES, SOLUTIONS.
WALLACE COMPUTER SERVICES, INC.
CORPORATE OFFICES
2275 CABOT DRIVE LISLE, IL 60532-3630
630-588-5000
4650-AR-97 Q/R