SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[x] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended July 31, 2001 Commission File Number 1-6528
Wallace Computer Services, Inc.
-------------------------------
(Exact name of the Company as specified in its charter)
Delaware 36-2515832
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2275 Cabot Drive, Lisle, Illinois 60532
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(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: (630) 588-5000
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, $1.00 par value New York Stock Exchange
Series A Preferred New York Stock Exchange
Stock Purchase Rights
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the Company: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X Yes No
--- ---
State the aggregate market value of the voting stock held by nonaffiliates of
the Company. $679,886,117 (based on the October 23, 2001, closing price of these
shares on the New York Stock Exchange)
Indicate the number of shares outstanding of each of the Company's classes of
common stock, as of the latest practicable date. As of October 23, 2001,
40,956,995 shares of Common Stock were outstanding.
Documents incorporated by reference:
1. Definitive Proxy Statement - Part III of this Form 10-K
Indicate by check mark if the disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
TABLE OF CONTENTS
Form 10-K
Item No. Name of Item Page
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Part I
Item 1 Business 3
Item 2 Properties 9
Item 3 Legal Proceedings 13
Item 4 Submission of Matters to a Vote of
Security Holders 13
Part II
Item 5 Market for the Company's Common Equity and
Related Stockholder Matters 13
Item 6 Selected Financial Data 14
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Item 7(A) Quantitative and Qualitative Disclosures About
Market Risk 25
Item 8 Financial Statements and Supplementary Data 25
Item 9 Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure 25
Part III
Item 10 Directors and Executive Officers of the
Company 26
Item 11 Executive Compensation 28
Item 12 Security Ownership of Certain Beneficial
Owners and Management 28
Item 13 Certain Relationships and Related
Transactions 28
Part IV
Item 14 Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 29
Signatures 30
Exhibit Index 55
2
Part I
Item 1 Business
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(a) General Development of Business
Wallace Computer Services, Inc. (the "Company") was founded in 1908 as an
Illinois corporation under the name "Wallace Press, Inc." It was reorganized in
June 1963 as "Wallace Business Forms, Inc.", a Delaware corporation. The name
was changed in November 1981 to "Wallace Computer Services, Inc." to reflect the
broad array of products sold by the Company to computer users.
Throughout its existence, the Company has shown the ability to grow through both
organic methods and through acquisitions. The Company has grown into an industry
leader and has expanded its capabilities beyond those of a traditional printer.
The Company has made numerous acquisitions over the years with some of the more
recent ones outlined below.
In fiscal year 1998, the Company expanded its commercial printing capabilities
with the acquisition of the 20 Graphic Industries, Inc. ("Graphic") companies in
November 1997. Graphic was the largest network of sheet-fed commercial printing
plants in the United States. It focused on high-quality, short-to-medium run
collateral and high color marketing materials and annual reports. The Graphic
acquisition was made through an all cash purchase of Graphic's shares of common
stock. The acquisition price was $308.3 million for the equity of the Company,
plus $6.1 million of transaction costs, and net debt assumption totalling $123.4
million. In June 1998, the Company also expanded its product line in the fast
growing label market with the acquisition of Good Decal Co., in Englewood,
Colorado. Good Decal makes pressure sensitive labels, decals and screen printed
graphic overlays. This acquisition was made for $12.3 million of cash and a note
payable for $1.0 million.
In December 1998, the Company sold substantially all of the assets of Visible
Computer Supply, its contract stationer business, in a transaction that
approximated book value. In February 1999, the Company sold Mercury Printing,
acquired as part of the Graphic acquisition, for $7.0 million. Both of the
divestitures sold product lines that were not compatible with the Company's
strategic direction.
In May 1999, the Company acquired Commercial Press, Inc., a West Coast
commercial printer. This acquisition was made for $20.1 million of cash, the
assumption of debt totalling $2.2 million, and a note payable of $2.3 million.
The Company also acquired Denver Graphic, Inc., a small prime label company, in
May 1999. The acquisition was made for $3.0 million of cash and a note payable
of $150,000.
On October 31, 1999, the Company sold Quadras, Inc., acquired as a part of the
Graphic acquisition, in a transaction that approximated book value. On January
18, 2000, the Company acquired Metro Printing, Inc. The acquisition price was
$12.2 million of cash and assumption of debt totalling $1.3 million.
In the third quarter of fiscal year 2000, the Company announced a restructuring
plan and undertook initiatives to reduce the overall cost base of the Company.
The fiscal year 2000 results included a pretax charge of $41.6 million related
to the restructuring plan with an additional charge of $0.5 million recorded in
fiscal year 2001. The Company implemented the restructuring program because of
continued softness in the high-quality color marketing and promotional printing
market, along with other issues relating to the integration of the Graphic
acquisition. Management reviewed its operations and developed action plans
relating to both segments that dealt with underperforming facilities,
3
Item 1 Business, Continued
underutilized assets, and rationalization of certain product lines. The
restructuring resulted in the closing of four plants. The charge included the
write off of goodwill, the write off of abandoned software, the write down to
net realizable value of property and equipment to be sold, and severance and
outplacement costs. As of July 31, 2001, the charges related to this
restructuring are complete.
(b) Financial Information About Segments
The Company is reporting its results in two business segments which reflect the
Company's operations and strategies: Integrated Graphics segment, and Forms and
Labels segment. Financial information about the Company's segments is contained
in footnote 13, Notes to Consolidated Financial Statements, in item 14(a) of
Part IV of this report.
(c) Narrative Description of Business
The Company is recognized as a leading provider of printed products and print
management services to Fortune 1000 customers. The Company is evolving to manage
all the printing needs of large organizations. Products include commercial
printing, high color promotional printing, high color marketing printing,
digital printing, direct response printing, business forms, labels and office
products. The Company's e-commerce and enterprise systems and distribution
capabilities have allowed it to increase its emphasis on services as part of its
offering. Services offered include distribution, outsourcing, custom
programming, kitting, fulfillment, e-commerce and Web development. Services such
as inventory control and product distribution are sold both with and without the
printed product the Company provides.
In 1998 the Company developed a new service to help buyers of high-quality,
high-color commercial printing ensure consistent print quality, outsource
materials management, and maximize printing budget efficiency. This service is
Total Print Management ("TPM"), which is provided pursuant to exclusive
contracts. In fiscal year 2001, the volume of contract sales increased 11% over
the prior year.
Providing TPM services would not be possible without an enterprise wide
information system. Proprietary mainframe and midrange enterprise applications
and an extensive communications architecture give the Company the ability to
effectively manage a half million stock keeping units (SKUs) and millions of
customer transactions. These systems allow the Company to tailor relationships
to each customer's unique business needs and processes.
Central to the Company's service capability is the Wallace Information
Network(TM) (W.I.N.(TM)), which connects its manufacturing and distribution
facilities in a unique on-line, real time environment. In 1992, the Company
introduced a proprietary PC-based system that blended Print Management tools
with access to the transaction data housed in W.I.N. The functionality captured
in that PC-based system was transformed into an Internet version in 1996 and has
continued to evolve into @w.i.n. The Company's @w.i.n. system simplifies and
streamlines many customer processes, including: inventory management, end-user
ordering, immediate on-screen proofing, version control, order tracking and
digital asset management. @w.i.n.'s unique value is based on the Company's
ability to link complete and timely transaction information from its enterprise
applications with item-specific data across a number of product categories.
@w.i.n. is also certified to interact with popular e-procurement systems and
print facilitation tools.
Logistics and distribution represent one of the largest cost-saving
opportunities the Company can deliver to its customers, and distribution
capabilities are essential to delivering TPM services. Like its information
4
Item 1 Business, Continued
technology, the Company's distribution system is also proprietary, developed
from the ground-up, specifically for the highly transactional, custom nature of
its business.
The W.I.N. system was originally created to attack the process costs associated
with forms and other printed materials. It has been expanded to manage
commercial printing. Because customers who use the system recognize significant
first-year cost savings, they want to leverage the Company's services into
additional areas. The Company's broad range of products and services provide
customers with opportunities to reduce their vendor base and total costs.
Wallace provides the primary products and services required by its customers for
a Total Print Management relationship.
Integrated Graphics Segment
Product/Service Offering and Markets Served
The Integrated Graphics segment is made up of a nationwide network of commercial
print facilities and the Direct Response division which specializes in variable
imaging and print on demand products used in the promotional printing markets.
The principal products and services supplied by the Integrated Graphics segment
include the design, manufacture, kitting and distribution of high color
marketing and promotional printed materials, variable imaging, digital printing,
and the manufacture of direct response printed materials. Typical products
include annual reports, corporate image materials, promotional literature,
product brochures, product documentation literature, retail point-of-sale
materials, direct mail offers, high-quality brochures, industrial and consumer
catalogs and directories, and price lists. Services offered include kitting,
fulfillment and Web development. The products and services are supplied to the
full spectrum of Fortune 1000 customers.
The Company provides a full-service, quick response, value-added resource to its
customers, and supplies national coverage and state-of-the-art imaging
capabilities and service options, which are designed to increase promotion
response rates and reduce customer costs. The Company continues to emphasize its
TPM program which allows customers to control their high color print sourcing
costs. The objective of TPM is to provide all types of printed material and
services to major contract customers, with the primary focus being Fortune 1000
customers. The TPM approach provides an integrated set of services and
information tools that allow customers to control all of their print-related
costs.
The Company's Direct Response business, which primarily serves corporate
marketing organizations, has been repositioned by reducing its emphasis on the
mass mailer market and focusing on one-to-one marketing opportunities in Fortune
1000 marketing organizations. The predominant distribution channel for
Integrated Graphics is the Company's national direct sales force and the local
commercial print sales force.
The market targeted by the Integrated Graphics segment totals approximately $55
billion. The Company primarily competes with local printers and local direct
mail promotional printers in markets that are highly fragmented.
5
Item 1 Business, Continued
Forms and Labels Segment
Product/Service Offering and Markets Served
The principal products and services supplied by the Forms and Labels segment
include the design, manufacture and sale of both paper based and electronic
business forms, the manufacture of both electronic data processing (EDP) labels
and prime labels, and the manufacture and distribution of a standard line of
office products. Typical products include air freight package forms, monthly
billing statements, healthcare forms, mortgage applications, bar-coded shipping
labels, consumer product labels, airline bag tags, blank stock labels,
electronic article surveillance tags, security labels, legal pads, computer
paper, ribbons, and cash register paper rolls. Services provided by this segment
include distribution, kitting, outsourcing and custom programming.
The Company, through the use of its TPM strategy, is uniquely positioned to
accommodate a wide range of printing and distribution needs of large customers
with multiple locations. The products and services are supplied to businesses,
government agencies, healthcare, not-for-profit and educational institutions.
These customers typically require a forms vendor with the following
characteristics:
a. sufficient forms manufacturing capacity across several regions of the U.S.
to satisfy their needs;
b. distribution capability, across several regions of the U.S., to deliver
multiple types of forms to hundreds of locations on short notice and;
c. the information services capability to provide centralized billing
reporting, forms management, and control for such shipments.
The Company also sells business forms to local small business customers on a
transactional, order by order basis.
The predominant distribution channel for this segment is the national direct
sales force. Sales representatives are located in the Company's sales offices
throughout the United States and are assigned a specific geographic territory.
Within this assigned territory, the Company has identified Target Accounts, and
guides representatives to the best opportunities for both transactional and
contractual business.
EDP labels usually include some computer generated information, such as bar
coding, and are designed to meet the needs of key market segments, including
retail, health care, small package delivery, manufacturing and regulatory
compliance. Prime labels are high quality promotional and product identification
labels used on items such as retail product bottles and containers and food
packages. In fiscal year 2000, the Company entered into a licensing agreement to
produce security labels, a niche label market.
The remainder of the office products include paper-based stock products such as
pads, stock forms, ATM rolls and impact printer ribbons.
The Forms and Labels market targeted by the Company totals approximately $13
billion and is highly competitive. Due to changes in technology, the business
forms market continues to decline. Forms manufacturers are forced to compete for
a share of the shrinking market which has resulted in lower overall selling
prices. Competitive pressures in the forms industry have compelled many forms
manufacturers to move into the growing label market. This shift has brought
price competition into this arena as well.
6
Item 1 Business, Continued
Business in General
Raw Materials
The principal raw material used by the Company is paper which is purchased on
the open market from numerous suppliers in a variety of weights, widths, colors
and sizes. The Company believes that it has adequate sources of supply of raw
materials to meet the requirements of its business. The Company's current
inventory and committed consigned inventory levels are in line with the
inventory levels necessary to satisfy anticipated customer demand.
Working Capital
The Company continues to maintain a strong working capital position, with a
current ratio of 2.2 at July 31, 2001, and 2.3 at July 31, 2000. Total working
capital decreased $21.3 million to $225.4 million as of July 31, 2001 as the
Company has focused on reducing working capital in order to improve asset
utilization. The Company's TPM strategy requires the Company to produce and
store inventories to meet its customers' requirements. Custom and stock finished
goods inventories are stored throughout the United States in both public and
Company-owned warehouses. Finished products represent 68.1% of total inventory
at July 31, 2001.
Substantially all of the Company's sales are made on terms of Net 30 days.
Further information on liquidity and capital resources is contained in
Management's Discussion and Analysis of Financial Condition and Results of
Operations in item 7 of Part II of this report.
Seasonal
The Company does experience some minimal level of seasonality in its Integrated
Graphics' operations in its fiscal third quarter related to the seasonal demand
for printed annual reports of publicly traded companies. Because many customers'
fiscal-year-ends coincide with the calendar year end, the Company experiences
increased sales in the March to April period.
Customer
The Company is not dependent upon any one customer or group of customers under
common control. No single customer or group of customers accounts for more than
10% of consolidated sales.
Research and Development
The Company is continuously involved in research activities relating to
development of new products and technologies and improvement of existing
products and technologies. The amount that the Company spends on research
activities is not significant in relation to the annual sales volume.
Patents and Trademarks
Although certain features of the Company's products and manufacturing processes
are covered by owned or licensed patents, the Company does not consider patents
to be critical to its business.
Environmental Protection
Compliance with federal, state and local provisions governing the discharge of
materials into the environment has not had and is not anticipated to have a
material effect on the Company's capital expenditures, earnings or competitive
position.
7
Item 1 Business, Continued
Employees
The total number of persons employed by the Company was 8,228 as of July 31,
2001.
(d) Financial Information About Geographic Areas
Wallace attributes substantially all of its revenues to customers within the
United States. Long-lived assets are domiciled within the United States.
8
Item 2 Properties
The Company's corporate offices are located in Lisle, Illinois, a
suburb of Chicago.
The Company believes that all of its properties are well
maintained and in good operating condition and adequate for the
purposes for which they are used. All locations are owned by the
Company except as otherwise noted.
The following principal properties are used by the Integrated Graphics segment:
Approximate
Square
Location Footage Description
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Elk Grove Village, Illinois 276,800 Manufacturing Plants
(One is Leased)
Printing Fulfillment Center
(Leased)
Houston, Texas 273,500 Manufacturing Plant
Printing Fulfillment
Center (Leased)
Hillside, Illinois 231,450 Manufacturing Plant
Engineering and Research
Offices (Both are Leased)
Clinton, Illinois 217,100 Manufacturing Plant
Chamblee, Georgia 193,600 Manufacturing Plant
Pittsburgh, Pennsylvania 135,600 Manufacturing Plant
Atlanta, Georgia 123,600 Manufacturing Plant
Orlando, Florida 114,600 Manufacturing Plant
Distribution Center
(Leased)
Dallas, Texas 110,300 Manufacturing Plant
Manchester, Connecticut 108,000 Manufacturing Plant
Tonawanda, New York 107,800 Manufacturing Plant
Charlotte, North Carolina 95,000 Manufacturing Plant
9
Item 2 Properties, Continued
Approximate
Square
Location Footage Description
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Rochester, New York 84,100 Manufacturing Plant
Warehouses
Silver Spring, Maryland 83,700 Manufacturing Plant
LaPalma, California 81,300 Manufacturing Plant
(Leased)
Bedford, Massachusetts 73,100 Manufacturing Plant
San Diego, California 64,000 Manufacturing Plant
(Leased)
Columbia, South Carolina 60,000 Manufacturing Plant
Philadelphia, Pennsylvania 55,600 Manufacturing Plants
(Includes two facilities)
Eden Prairie, Minnesota 44,600 Manufacturing Plant
New Orleans, Louisiana 44,000 Manufacturing Plant
Austin, Texas 37,000 Manufacturing Plant
West Bend, Wisconsin 26,600 Manufacturing Plant
Las Vegas, Nevada 25,800 Manufacturing Plant
Omaha, Nebraska 11,100 Manufacturing Plant
(Leased)
The following principal properties are used by the Forms and Labels segment:
St. Charles, Illinois 386,800 Manufacturing Plants and
Distribution Center
(Includes two facilities)
Osage, Iowa 256,900 Manufacturing Plants
(Includes two facilities)
10
Item 2 Properties, Continued
Approximate
Square
Location Footage Description
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Covington, Tennessee 242,000 Manufacturing Plant and
Distribution Center
Metter, Georgia 221,000 Manufacturing Plant and
Distribution Center
Manchester, Vermont 162,300 Manufacturing Plant
Luray, Virginia 162,300 Manufacturing Plant
Lodi, California 138,100 Manufacturing Plant and
Distribution Center
Brenham, Texas 127,700 Manufacturing Plant and
Distribution Center
Wilson, North Carolina 127,200 Manufacturing Plant
Gastonia, North Carolina 120,000 Manufacturing Plant
Marlin, Texas 115,700 Manufacturing Plant
San Luis Obispo, California 110,000 Manufacturing Plant
Streetsboro, Ohio 81,400 Manufacturing Plant
Englewood, Colorado 48,500 Manufacturing Plants
(Includes four facilities)
(Leased)
Cincinnati, Ohio 21,800 Manufacturing Plant
11
Item 2 Properties, Continued
Approximate
Square
Location Footage Description
-------- ------- -----------
Additional Distribution Centers and Corporate Offices:
Columbus, Ohio 154,000 Distribution Center (Leased)
Ontario, California 114,500 Distribution Center (Leased)
Lisle, Illinois 105,000 Corporate Headquarters
Allentown, Pennsylvania 100,000 Distribution Center
Lisle, Illinois 72,100 Technology Center (Leased)
Bellwood, Illinois 28,300 Engineering and Research
Facility (Leased)
Remaining public warehouses and sales offices throughout the United States are
leased.
12
Item 3 Legal Proceedings
The Company and its subsidiaries may from time to time be involved
in claims or lawsuits that arise in the ordinary course of
business. Accruals for claims or lawsuits have been provided for
to the extent that losses are deemed probable and estimable.
Although the ultimate outcome of these claims or lawsuits cannot
be ascertained on the basis of present information and advice
received from counsel, it is the opinion of management that the
disposition or ultimate determination of such claims or lawsuits
will not have a material adverse effect on the Company.
Item 4 Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of Security Holders during the
quarter ended July 31, 2001.
Part II
Item 5 Market for the Company's Common Equity and Related Stockholder
Matters
The Company's common shares are traded on the New York Stock Exchange. The total
number of holders of record of the Company's common stock was 2,601 as of
October 23, 2001. Information about quarterly prices of common stock and
dividends paid for the two fiscal years ended July 31 is contained in the table
below:
MARKET PRICE PER SHARE DIVIDENDS PAID PER SHARE
=========================================================================================
FISCAL 2001 FISCAL 2000 FISCAL 2001 FISCAL 2000
=========================================================================================
QUARTER HIGH LOW HIGH LOW
=========================================================================================
First $ 15.44 $ 8.88 $ 25.00 $ 19.63 $ .1650 $ .1600
Second 20.00 13.69 22.88 10.50 .1650 .1650
Third 19.47 15.20 12.75 9.94 .1650 .1650
Fourth 18.75 15.50 11.44 8.56 .1650 .1650
=========================================================================================
13
Item 6 Selected Financial Data
Selected financial data for each of the five years ended July 31 is contained in
the table below:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND AMOUNTS PRESENTED IN "OTHER"
SECTION)
2001 2000 1999 1998 1997
===================================================================================================================================
OPERATIONS
===================================================================================================================================
Net sales * $ 1,692,792 $ 1,645,583 $ 1,610,803 $ 1,425,008 $ 960,806
Net income (Note A) 53,196 22,617 76,069 74,208 81,282
Net income per share (basic) (Note A) 1.31 .55 1.80 1.72 1.88
Net income per share (diluted) (Note A) 1.30 .55 1.80 1.71 1.86
EBITDA (before restructuring) 197,341 196,832 231,379 212,227 184,299
Dividends per share .66 .66 .64 .62 .56
FINANCIAL CONDITION
===================================================================================================================================
Total assets $ 1,166,665 $ 1,249,309 $ 1,297,659 $ 1,257,463 $ 720,442
Long-term debt 284,087 389,413 416,653 428,224 24,500
Capital expenditures 41,310 53,945 50,311 59,632 39,225
Working capital 225,437 246,743 256,509 236,857 149,234
SIGNIFICANT RATIOS
===================================================================================================================================
Net income:
Return on net sales 3.2%** 3.5%** 4.7% 5.2% 8.5%
Return on average assets 4.4%** 4.5%** 6.0% 7.5% 11.5%
Return on average equity 9.5%** 10.1%** 13.5% 14.3% 16.2%
Current ratio 2.2 2.3 2.3 2.2 2.1
Total debt/debt plus equity 33.2% 42.4% 43.0% 46.0% 10.9%
Book value per share $ 14.17 $ 13.45 $ 13.82 $ 12.65 $ 11.45
Sales per employee*** $ 206.5 $ 197.9 $ 193.0 $ 198.4 $ 219.8
OTHER
===================================================================================================================================
Number of employees 8,228 8,167 8,464 8,228 4,610
Number of stockholders of record 2,694 3,138 3,355 3,559 3,680
===================================================================================================================================
* Sales are after restatement of freight expense per EITF Issue 00-10.
** Fiscal year 2001 returns are computed excluding the impact of the
restructuring and fiscal year 2000 excludes restructuring and one-time
charges and uses a historical tax rate (see Note A below).
*** Based on average number of employees during the fiscal year.
NOTES TO FIVE YEAR SUMMARY
A. RESTRUCTURING AND ONE-TIME CHARGES: Net income includes restructuring charges
of $0.5 million in fiscal year 2001. Fiscal year 2000 includes restructuring and
one-time charges of $45.8 million and reflects a tax rate of 54.5%. The tax
rate, which has historically been around 40%, was higher primarily due to the
restructuring charge, a portion of which was not deductible. These charges and
the increased tax rate negatively impacted net income per share by $0.84. See
Management's Discussion and Analysis for further information as to the nature of
the charges and their impact on earnings.
14
Item 6 Selected Financial Data, Continued
B. ACQUISITIONS AND DIVESTITURES: On January 18, 2000, the Company acquired
Metro Printing, Inc. The acquisition price was $12.2 million of cash and the
assumption of debt totalling $1.3 million. On October 31, 1999, the Company sold
Quadras, Inc., acquired as a part of the Graphic Industries acquisition, in a
transaction that approximated book value. On May 21, 1999, the Company acquired
the assets of Denver Graphic, Inc. The acquisition price was $3.0 million of
cash and a note payable of $150,000. Effective May 1, 1999, the Company acquired
Commercial Press, Inc. The acquisition price was $20.1 million of cash, the
assumption of debt totalling $2.2 million, and a note payable of $2.3 million.
On February 28, 1999, the Company sold Mercury Printing, acquired as part of the
Graphic Industries acquisition, for $7.0 million. On December 31, 1998, the
Company sold substantially all of the assets of Visible Computer Supply, its
contract stationer business, in a transaction that approximated book value. On
June 17, 1998, the Company acquired the assets of Good Decal Co. The acquisition
price was $12.3 million of cash and a note payable of $1.0 million. Effective
November 3, 1997, the Company acquired Graphic Industries, Inc. The acquisition
was made through an all cash purchase of Graphic's shares of common stock. The
acquisition price was $308.3 million for the equity of the Company, plus $6.1
million of transaction costs, and net debt assumption totalling $123.4 million.
On July 24, 1997, the Company acquired the assets of Moran Printing Company. The
acquisition price included notes payable of $29.5 million, and the assumption of
net debt totalling $4.9 million. On October 22, 1996, the Company acquired the
assets of Post Printing, Inc. The acquisition price was $6.6 million of cash.
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.
15
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations
SEGMENT INFORMATION
INTEGRATED GRAPHICS SEGMENT: The Integrated Graphics segment is made up of a
national network of commercial print facilities and the Targeted Communications
division which specializes in variable imaging and print on demand products used
in the promotional printing market. The principal products and services supplied
by the Integrated Graphics segment include the design and manufacture of high
color, high quality marketing and promotional materials, and the manufacture of
targeted communications printed materials.
The Company significantly increased its commitment to high color marketing and
promotional printing in the second quarter of fiscal year 1998 with the
acquisition of Graphic Industries ("Graphic"). During fiscal year 2000, the
Company took decisive action to divest non-compatible product lines, expand
geographic coverage and close underperforming facilities. In the third quarter
of fiscal year 2000, the Company announced a restructuring that included closing
three underperforming plants in this segment by the end of the fiscal year. Two
of these plants were acquired as part of the Graphic acquisition. Also in fiscal
year 2000, the Company acquired a small regional commercial printing operation
in the Midwestern United States, and sold Quadras, a design concern that was
part of the Graphic acquisition. In fiscal year 1999, the Company acquired a
commercial printing operation which expanded its commercial printing network to
the West Coast of the United States, and divested Mercury Printing, also part of
the Graphic acquisition.
FORMS AND LABELS SEGMENT: The principal products and services supplied by the
Forms and Labels segment include the design, manufacture and sale of both paper
based and electronic business forms, the manufacture of both electronic data
processing (EDP) labels and prime labels, and the manufacture and distribution
of a standard line of office products.
As a result of the restructuring in fiscal year 2000, one multiple-use plant in
Lebanon, Kentucky was closed in the fourth quarter with its production being
shifted to other Company facilities. In the fourth quarter of fiscal year 1999,
the Company acquired a small prime label company. In the second quarter of
fiscal year 1999, the Company divested the operations of Visible Computer
Supply, a contract stationer business that did not fit with the long-term
strategic direction of the Company.
Results of Operations
Fiscal year 2001 versus Fiscal year 2000
REVENUE: Net sales for fiscal year 2001 increased 2.9% over fiscal year 2000.
The breakdown of sales for fiscal year 2001 within the two business segments was
as follows:
Business Segment % of total revenue % revenue increase
---------------- ------------------ ------------------
Integrated Graphics 50.7% 3.8%
Forms and Labels 49.3% 1.9%
Over the last five years, sales have grown at a compound annual rate of 13.3%,
with most of the growth coming from acquisitions.
16
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations, Continued
The Company's sales strategy can be broken into two components. The primary
driving force for sales growth is the Company's Total Print Management (TPM)
strategy. The objective of TPM is to provide all types of printed material
produced by both segments to major contract customers, with the primary focus
being Fortune 1000 companies. This is accomplished primarily through a national
direct sales force, which sells all of the Company's product offerings. Contract
sales have grown over 10% over the prior year. Contract sales for the Forms and
Labels segment were up approximately 3% whereas contract sales for the
Integrated Graphics segment were up over 30%.
The second key component of the sales strategy is the continued success in
capturing local transactional business. This is especially important in the
Integrated Graphics segment, where a local sales force captures order by order
business in its local market. The national direct sales force also sells
directly on an order by order basis. Non-contract business declined
approximately 1%. Non-contract sales in the Forms and Labels segment were
relatively flat. In the Integrated Graphics segment, the decline in
transactional business was seen in the second half of the fiscal year and can be
mainly attributed to the softening of the economy.
Paper is the basic raw material for approximately 96% of the Company's products.
In the Forms and Labels segment, paper represents approximately 40% of sales. In
the Integrated Graphic segment, paper represents approximately 23% of sales. The
majority of paper used by the Company comes from three paper grades - uncoated
free sheet, tablet and offset. Using 20 pound uncoated free sheet as a proxy for
the paper market, published prices during fiscal year 2000 increased 18%, with
the prices staying relatively constant in fiscal year 2001.
The Company continues to reduce its exposure to volatility in the paper market.
Customer contracts signed as part of the TPM program contain provisions to
increase or decrease sell prices in line with announced paper price changes.
Additionally, the continual shift toward high color marketing and promotional
printing, as well as growth in digital print and market-to-one programs further
mitigates the overall impact of paper on operating margins. Products in the
Integrated Graphics segment have a higher component of value added labor, and
thus rely less on the price of paper.
Despite changes in technology which have led to continuing declines in the
business forms market, the Company continues to grow revenue by exploring new
business lines and growing existing ones. The Company's exceptional systems,
service delivery, and distribution capabilities have allowed the Company to
increase its emphasis on services as part of its product offering. Currently,
services such as inventory control and product distribution are sold with the
printed product the Company provides. The Company believes inventory and
distribution services, along with kitting, custom programming, and sourcing of
non-printed goods can be sold independently of the printed product and offer an
opportunity for revenue growth. Additionally, in fiscal year 2000, the Company
entered into a licensing agreement to produce security labels. The Company used
its extensive printing know-how to develop a proprietary method of manufacturing
a product not normally associated with a printing operation. This type of niche
market represents an opportunity to increase revenue in the label business.
COST OF GOODS SOLD: Cost of goods sold as a percent of sales for fiscal year
2001 was 73.1% versus 71.8% in fiscal year 2000. The increased cost of goods
sold percentage is primarily attributed to competitive pricing pressures and
decreased utilization rates over the second half of fiscal year 2001, both of
which have been exacerbated by the economic slowdown. In light of economic
conditions, the Company has increased some judgmental reserves, such as
inventory reserves. The increase in cost of goods sold as a percent of sales was
seen in both segments of the business.
In the Integrated Graphics segment, cost of goods sold as a percent of sales
increased by approximately 150 basis points. This increase is largely
attributable to competitive market conditions and the economic slowdown. This
17
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations, Continued
segment was impacted by a slowing economy as many companies reduced their
spending on marketing and promotional materials when conditions worsened. The
economic slowdown in the second half of the year has significantly impacted this
segment. Through the first six months of the fiscal year, cost of goods sold as
a percent of sales increased by approximately 30 basis points over the same
period of the prior year. The Company believes that this increase reflected
competitive market conditions up to that point. In the second half of the year,
sales declined in this segment, with cost of goods sold as a percent of sales
increasing, on a fiscal year basis, by 150 basis points. While the economy will
continue to affect this segment, the Company believes that margins can be
expanded in the Integrated Graphics segment through cost reductions and by
continuing to increase contract sales which will increase equipment utilization.
In the Forms and Labels segment, cost of goods sold as a percent of sales
increased by approximately 100 basis points. Excluding LIFO income of $0.9
million in the current fiscal year and LIFO expense of $4.8 million in the prior
fiscal year, cost of goods sold as a percent of sales would have increased by
170 basis points. The LIFO credit was the result of decreasing inventory
quantities and stabilizing prices this year, while prices increased
significantly in the prior year on grades of paper primarily used in this
segment. This segment is also experiencing gross margin compression as a result
of economic softness and ongoing competition. Due to changes in technology, the
business forms market has continued to decline. Forms manufacturers are
continuing to compete for a share of the shrinking market which has resulted in
lower overall selling prices. Competitive pressures in the forms industry have
compelled many forms manufacturers to move into the growing label market. This
shift has brought price competition into this arena as well. The Company
continually looks for niche markets to continue to expand revenue and margins in
the label market.
SELLING AND ADMINISTRATIVE EXPENSES: Selling and administrative expenses as a
percent of sales were 15.3% in fiscal year 2001 versus 16.2% in fiscal year
2000. Several one-time charges have significantly impacted this category. In the
current fiscal year, a charge of $3.0 million was recorded due to a change in an
accounting estimate for workers compensation. In fiscal year 2000, charges
related to executive retirement benefits and other costs related to management
changes totalled $3.3 million. Additional charges of $4.1 million included an
adjustment to the reserve for postretirement medical costs of $3.0 million that
arose from a change in actuarial assumptions utilized to estimate the benefit,
and $1.1 million related to an adverse judgment in an arbitration proceeding
arising from a contractual obligation of Graphic Industries. Without these
one-time charges, selling and administrative expenses would have been 15.1% of
sales in the current year versus 15.8% in the prior year. Overall selling and
administrative expense has benefited significantly from the restructuring and
other cost saving initiatives initiated in the third quarter of fiscal year
2000. Offsetting some of this benefit, the Company has experienced deterioration
of its accounts receivable portfolio, primarily as a result of the weakening
economy. The resultant increase in accounts receivable reserves has increased
selling and administrative expense in the second half of fiscal year 2001.
DEPRECIATION AND AMORTIZATION: The provision for depreciation and amortization
remained consistent from year to year at 4.7% of sales. Goodwill amortization
declined slightly as reductions were made to purchase accounting reserves for
the Graphic Industries acquisition which reduced total goodwill. These
adjustments were the result of a decrease in the amount of pre-acquisition
contingencies existing as of the date of acquisition. Software amortization
increased to $9.6 million in fiscal year 2001 from $6.4 million in fiscal year
2000. Most of the increase is related to amortization of a $46 million system
enhancement project which began in fiscal year 1999 and whose final phase was
fully implemented in the current fiscal year.
18
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations, Continued
RESTRUCTURING CHARGE: In the third quarter of fiscal year 2000, the Company
announced a restructuring plan and undertook initiatives to reduce the overall
cost base of the Company. Residual charges of that restructuring plan amounted
to $0.5 million in the current fiscal year. Fiscal year 2000 results include a
pretax charge of $41.6 million related to the restructuring plan. The Company
implemented the restructuring program because of continued softness in the
high-quality color marketing and promotional printing market, along with other
issues relating to the integration of the Graphic Industries acquisition.
Management reviewed its operations and developed action plans relating to both
segments that dealt with underperforming facilities, underutilized assets, and
rationalization of certain product lines. To improve prospective financial and
operational performance, the Company is evaluating additional cost reduction
actions including further reductions in workforce, plant consolidations and
production process improvements.
INTEREST EXPENSE: Net interest expense for fiscal year 2001 decreased $4.5
million from fiscal year 2000. Approximately $1.0 million of the decrease is
related to lower interest rates in fiscal year 2001. The remainder relates to
the significant decrease in debt during the year. The impact of a 10% increase
or decrease in interest rates during fiscal year 2001 would not have had a
significant impact on net earnings of the Company.
OTHER INCOME: Other income in fiscal year 2000 of $3.2 million represented the
proceeds received from the sale of stock that the Company received in John
Hancock's conversion from a policyholder owned company to a stockholder based
company. The Company received shares in relation to the amount of corporate
owned life insurance policies held with John Hancock. This item was considered a
one-time event in fiscal year 2000.
INCOME TAXES: The effective income tax rate in fiscal year 2001 was 40.7%. In
fiscal year 2000, due primarily to the restructuring charges, a portion of which
were not deductible, the effective tax rate was 54.5%.
NET INCOME AND NET INCOME PER DILUTED SHARE: Net income for the year increased
by $30.6 million or 135.2%, to $53.2 million or $1.30 per diluted share.
Fiscal year 2000 versus Fiscal year 1999
REVENUE: Net sales for fiscal year 2000 increased 2.2% over fiscal year 1999.
Pro forma sales growth after adjusting for acquisitions, divestitures and
closures was 4.1%.
The breakdown of net sales for fiscal year 2000 within the two business segments
was as follows:
Business Segment % of total revenue % revenue increase
---------------- ------------------ ------------------
Integrated Graphics 50.2% 3.1%
Forms and Labels 49.8% 1.2%
After adjusting for acquisitions and divestitures, the Integrated Graphics
segment grew 4.4% and the Forms and Labels segment grew 3.9%. Over the last five
years, sales have grown at a compound annual rate of 16.9%, with most of the
growth coming from acquisitions.
Contract sales to major customers under the TPM strategy increased 7.8% from
fiscal year 1999 to fiscal year 2000 (before divestitures). Contract sales for
the Integrated Graphics segment (again before divestitures) were up 18.5%
19
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations, Continued
whereas contract sales for the Forms and Labels segment were up 4.3%. Adjusted
for acquisitions and divestitures, non-contract business grew 2.4% in fiscal
year 2000, with growth coming from both segments.
Paper price changes have a material effect on the Company's reported sales
dollars and operating results. Prices on 20 pound white uncoated free sheet
increased 16% from January 1, 1999 to July 31, 1999. Prices continued to
increase in fiscal year 2000, being up an additional 18% by the end of fiscal
year 2000. The Company has continued to reduce its exposure to this volatility
by including provisions in contracts that adjust sell prices in light of
announced paper price changes. Additionally, the product mix shift to high color
and promotional printing helps to mitigate the overall impact of paper on
operating margins. New business opportunities such as the production of security
labels and the increased offering of inventory and distribution services also
reduce reliance on paper.
In the second quarter of fiscal year 1999 the Company divested its contract
stationer business, which had annual revenues of approximately $40 million,
because it did not fit with the long-term strategic objectives of the Company.
In conjunction with the sale of this business to Boise Cascade Office Products
("BCOP"), the Company expanded its alliance with BCOP in order to better serve
the needs of its customers.
COST OF GOODS SOLD: Cost of goods sold as a percent of sales for fiscal year
2000 was 71.8% versus 70.3% in fiscal year 1999. The increase in cost of goods
sold as a percent of sales was seen in both segments of the business. This
trend, however, was more pronounced in the Forms and Labels segment where cost
of goods sold as a percent of sales increased by approximately 250 basis points.
Fifty basis points of the increase was related to an unfavorable change in LIFO
expense, which was the result of higher prices in paper grades used by the
segment. The Company was also experiencing gross margin compression as a result
of ongoing competition. Technology changes have continued to cause the business
forms market to decline. In the Integrated Graphics segment, cost of goods sold
as a percent of sales increased by approximately 80 basis points. The increase
was largely attributable to competitive market conditions predominantly in the
eastern and southeastern United States. The increase in cost of goods sold in
those regions were partially offset by decreases in the Targeted Communications
division's cost of goods sold, which benefited from increased sales in
market-to-one product, which has a lower cost of sales due to lower paper
content.
SELLING AND ADMINISTRATIVE EXPENSES: Selling and administrative expenses as a
percent of sales were 16.2% in fiscal year 2000 and 15.3% in fiscal year 1999.
Several one-time charges related to executive retirement benefits, reserves for
postretirement medical costs and an adverse judgement in an arbitration
proceeding were included in fiscal year 2000 and totalled $7.4 million. Without
these one-time charges, selling and administrative expenses would have been
15.8% of sales in fiscal year 2000. While the fiscal year 2000 expense ratio
exceeded fiscal year 1999, the fourth quarter benefited significantly from the
third quarter restructuring and other cost savings initiatives. There were no
Y2K related software expenses in fiscal year 2000, as compared to $2.0 million
in fiscal year 1999.
DEPRECIATION AND AMORTIZATION: The provision for depreciation and amortization
was 4.7% of sales in both fiscal year 2000 and fiscal year 1999. Software
amortization increased to $6.4 million in fiscal year 2000 from $5.4 million in
fiscal year 1999. Most of the increase was related to a $46 million system
enhancement project which began in fiscal year 1999 and was being implemented in
phases.
RESTRUCTURING CHARGE: In the third quarter of fiscal year 2000, the Company
announced a restructuring plan and undertook initiatives to reduce the overall
cost base of the Company. The fiscal year 2000 results include a pretax charge
of $41.6 million related to the restructuring plan. The charge included the
write-off of goodwill associated with plants that were closed, the write-off of
abandoned software, the write-down to net realizable value of property and
equipment to be sold, and severance and outplacement costs. The amount of
allocated goodwill written off related to plants acquired in the Graphic
20
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations, Continued
acquisition. The majority of the restructuring activity, and related charges,
occurred in the third quarter.
INTEREST EXPENSE: Net interest expense for fiscal year 2000 increased $2.0
million over fiscal year 1999. The increase is mostly from higher interest rates
on variable rate debt, along with incremental interest expense resulting from
the issuance of $200.0 million of fixed rate bonds in the second quarter of
fiscal year 1999 in which the proceeds were used to pay down variable rate debt.
OTHER INCOME: Other income included a one-time credit of $3.2 million which was
recorded in the third quarter of fiscal year 2000 and represented the proceeds
received from the sale of stock that the Company received in John Hancock's
conversion from a policyholder owned company to a stockholder based company. The
Company received shares in relation to the amount of corporate owned life
insurance policies held with John Hancock.
INCOME TAXES: Due primarily to the restructuring charges, a portion of which
were not deductible, the current year effective tax rate was 54.5%. The tax rate
in fiscal year 1999 was 40%.
YEAR 2000: The Company's effort to address Year 2000 compliance issues included
(i) evaluating internal computing infrastructure, business applications and
production systems for Year 2000 compliance, and (ii) replacing or remediating
systems and applications as necessary to assure such compliance. The Company's
effort in these respects was completed as of December 31, 1999.
Substantially all of the Company's software, firmware, hardware (including
embedded chips) and equipment used in its printing operations, including its
pre-press and press equipment and its equipment used to finish and deliver its
products, were not materially affected by a Year 2000 related failure. Also, the
Company did not experience any Year 2000 related problems caused by key
suppliers or customers whose systems interact with those of the Company. In
addition, the Company did not experience any Year 2000 related failure caused by
utility companies, telecommunication services providers, delivery services, the
financial services industry and other suppliers outside of its control. The
passing of December 31, 1999 and other high-risk dates (i.e. February 29, 2000)
with no major negative impact from a national standpoint mitigates the risk of
any future major Year 2000 related disruptions.
NET INCOME AND NET INCOME PER SHARE: Net income for fiscal year 2000 decreased
by $53.5 million or 70.3%, to $22.6 million or $0.55 per share. Before the
restructuring charge of $41.6 million, other one-time charges (net of credits)
of $4.2 million, and using a tax rate consistent with fiscal year 1999 of 40%,
net income would have been $34.7 million higher and earnings per share would
have been $0.84 higher.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 141, "Business Combinations", which
addresses the financial accounting and reporting for business combinations. SFAS
No. 141 requires that all business combinations be accounted for by a single
method, the purchase method, modifies the criteria for recognizing intangible
assets, and expands disclosure requirements. The provisions of SFAS No. 141
apply to all business combinations initiated after June 30, 2001. It is
anticipated that SFAS No. 141 will have no effect on the financial position or
results of operations of the Company.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets", which addresses financial accounting and
reporting for acquired goodwill and other intangible assets. SFAS No. 142
21
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations, Continued
addresses how intangible assets that are acquired in an acquisition should be
recognized and, if necessary, amortized. It also requires that goodwill and
intangible assets that have indefinite useful lives not be amortized, but rather
tested at least annually for impairment using a fair-value-based test, and
intangible assets that have finite useful lives be amortized over their useful
lives. In addition, SFAS No. 142 expands the disclosure requirements about
goodwill and other intangible assets in the years subsequent to their
acquisition. The Company must adopt SFAS No. 142 in fiscal year 2003 with early
adoption permitted in fiscal year 2002. Impairment losses for goodwill and
indefinite-life intangible assets that arise due to the initial application of
SFAS No. 142, if any, are to be reported as a change in accounting principle.
Goodwill and intangible assets acquired after June 30, 2001 are subject
immediately to the provisions of SFAS No. 142. The Company is in the process of
determining the full impact that adoption will have on the consolidated
financial statements as well as determining when to adopt. Goodwill amortization
of $7.6 million and $8.1 million was recorded in fiscal years 2001 and 2000,
respectively, and, under the provision of SFAS No. 142, will no longer be
recorded in the Company's results of operations upon adoption of the new
standard.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL: Working capital decreased $21.3 million to $225.4 million as of
July 31, 2001. The Company has continued its increased focus on the balance
sheet, specifically working capital, in order to generate cash to reduce debt.
The decrease in the accounts receivable balance was mostly attributable to the
decrease in fourth quarter sales, as days sales outstanding increased slightly
from the prior year. The increase in the allowance for doubtful accounts is a
reflection of the current economic conditions. The Company is in the process of
implementing a new accounts receivable system, which will be an important tool
in improving the management of accounts receivable. The $7.2 million decrease in
inventory reflects the efforts in the current fiscal year to reduce working
capital. The Company will continue to focus on working capital management. The
current ratio at July 31, 2001 was 2.2.
CAPITAL EXPENDITURES: Capital expenditures for fiscal year 2001 were $41.3
million. There were no major construction projects in process at fiscal
year-end. In addition to capital expenditures, the Company continues to invest
in its information technology infrastructure. Information systems expenditures
of $8.2 million have been capitalized in fiscal year 2001. In fiscal year 2001,
the Company completed its most aggressive systems initiative to date.
Over the last five years, capital expenditures have totalled $244.4 million.
These expenditures were funded through internally generated funds. Over the past
five years, the Company also spent $73.2 million for software development. For
fiscal year 2002, it is estimated that capital expenditures will be between
$30.0 million and $40.0 million. Capital expenditures are expected to be lower
than historical rates in fiscal year 2002 as the Company continues to maximize
output on its current asset base.
DEBT: In fiscal year 2001, total debt decreased $116.8 million to $288.1
million. Strong cash flows from operations have made it possible to reduce the
ratio of debt to total capitalization from 42.4% at July 31, 2000 to 33.2% at
July 31, 2001. During fiscal year 2001, the Company purchased $7.1 million of
its common stock in open market transactions at an average price of $11.30.
Company-owned life insurance policies totalling $22.2 million were surrendered
in the first half of the year, with proceeds being used to reduce debt.
22
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations, Continued
Of the outstanding debt as of July 31, 2001, $75 million has been borrowed under
a five-year credit agreement ("Credit Facility"), which as of September 28,
2001, provides for a maximum aggregate principal amount available to be borrowed
of $250 million. On January 15, 1999, the Company offered $200 million of Senior
Notes, and at that time, incurred an $18.3 million settlement on the treasury
rate lock agreement related to the issuance of the Senior Notes. The proceeds of
the note issue were used to pay down borrowings under the Credit Facility. The
borrowings under the Credit Facility are classified as long-term debt since the
Company has the intent and ability to carry that debt long-term.
In addition to the Credit Facility, the Company has unsecured money market lines
of $75 million, under which $3.0 million was borrowed at July 31, 2001. The $3.0
million from the unsecured money market lines is classified as short-term debt.
The maximum amount as authorized by the Board of Directors for total borrowings
is currently $600 million.
In fiscal year 1998, the Company filed a shelf registration to issue up to
$300.0 million of unsecured debt and equity securities. The $200.0 million in
Senior Notes issued in fiscal year 1999 reduced the amount available under the
shelf registration to $100.0 million. The Company has a BBB rating from Standard
& Poor's and a Baa2 rating from Moody's for both the $300.0 million universal
shelf registration and the $400.0 million revolving credit facility. Both
agencies have placed the Company on Stable Outlook.
The Company is exposed to market risk from changes in interest rates. As of July
31, 2001, 94% of total debt is fixed rate debt. Excluding interest rate swaps
which will come due by the end of the calendar year, 69% of total debt is fixed
rate debt.
The Company believes that it has adequate financing and cash flows to make
acquisitions, repurchase stock, pay dividends, make capital expenditures or pay
down debt during fiscal year 2002 while maintaining its investment grade
ratings. The Company is currently at its target level for debt to total
capitalization.
COMMON STOCK
Annual dividends were last raised in September, 1999 to $0.66 per share, which
was an increase of 3.1%.
During fiscal year 2001, 920,000 shares of common stock were issued in
connection with the Company's Employee Stock Purchase Plan and the 1989 and 1997
Stock Option Plans. The balance of $3.3 million of deferred compensation in the
equity section of the balance sheet reflects the total fixed liability of
183,000 shares of stock that have been placed into a grantor trust for the
benefit of certain executives.
The Company also repurchased 628,869 shares during the year under the $100.0
million share repurchase program approved by the Board of Directors in May 1997.
Those repurchases bring the total purchases made under this program to $98.5
million. In January 2000 the Board of Directors authorized the purchase of an
additional $100.0 million of stock. The treasury shares can be used for future
acquisitions or for employee benefit plans.
23
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations, Continued
COMPETITION: The markets for the Company's products are highly competitive and
relatively fragmented, with a large number of competitors. Some of the Company's
competitors are larger than the Company and have greater financial, marketing
and technical resources. The Company has invested significant resources in
computer technology and distribution facilities in an attempt to differentiate
itself from certain of its competitors. There can be no assurance that
competitors will not take actions, including developing new technologies,
products and services, which could adversely affect the Company's sales and
operating results.
DEPENDENCE ON KEY PERSONNEL: The Company's performance depends in large part on
the continued service of its key sales and management personnel and on its
ability to continue to attract, retain and motivate highly qualified personnel.
Competition for such personnel is intense, and the process of locating key
personnel with the combination of skills and attributes required to execute the
Company's strategy is often lengthy. There can be no assurance that the Company
will be able to attract or retain such personnel in the future, and the
inability to do so could have a material adverse effect upon the Company's
business, operating results or financial condition.
EFFECTIVE SUBORDINATION: The Company operates a portion of its business through
subsidiaries, including substantially all of its commercial printing operations.
The Company and its subsidiaries may incur additional indebtedness in the
future, subject to certain limitations contained in the Company's Indenture and
the Credit Agreement and certain of such indebtedness may be secured. Any right
of the Company to participate in any distribution of the assets of its
subsidiaries upon the liquidation, reorganization or insolvency of any such
subsidiary (and the consequent right of the creditors of the Company to
participate in the distribution of those assets) will be subject to the prior
claims of the respective subsidiary's creditors. As a result of the foregoing,
creditors of the Company may recover less ratably than other creditors of the
Company's subsidiaries in the event of any liquidation, reorganization or
insolvency of the Company.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: Certain statements in this filing and elsewhere (such as in other filings
by the Company with the Securities and Exchange Commission, press releases,
presentations by the Company or its management, and oral statements) may
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. All statements, other than statements
of historical facts, that address activities, events, or developments that the
Company expects or anticipates may occur in the future, including such things as
future capital expenditures (including the amount and nature thereof), business
strategy and measures to implement strategy, competitive strengths, goals,
expansion and growth of the Company's and its subsidiaries' business and
operations, plans, references to future success and other such matters are
forward-looking statements. These forward-looking statements involve known and
unknown risks, uncertainties, and other factors which may cause the actual
results, performance or achievements of the Company to materially differ from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among other things, general
economic, market or business conditions, changes in laws or regulations; the
opportunities (or lack thereof) that may be presented to and pursued by the
Company and its subsidiaries; successful integration of acquisitions; labor
market conditions; changes in postal rates and paper prices; the ability of the
Company to retain its customers who generally do not operate under long-term
contracts with the Company; the potential unpredictability of the Company's net
sales due to seasonal and other factors which can lead to fluctuations in
quarterly and annual operating results; the ability of the Company to keep pace
with technological advancements in the industry; the effect of technical
advancements on the demand for the Company's goods and services; and the risk of
damage to the Company's data centers and manufacturing facilities or
interruptions in the Company's telecommunications links.
24
Item 7(A) Quantitative and Qualitative Disclosures About Market Risk
The information required by Item 7(A) is contained in the section
captioned "Interest Expense" and "Capital Expenditures" in Item 7
of this report. Also see the section captioned "Accounting For
Derivative Instruments and Hedging Activities" in Item 14(a) of
this report.
Item 8 Financial Statements and Supplementary Data
The financial information required by Item 8 is contained in Item
14 of Part IV of this report.
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
25
Part III
Item 10 Directors and Executive Officers of the Company
Information concerning continuing directors and director nominees
of the Company and their respective terms is contained in the
section captioned "Election of Directors" in the Company's
definitive Proxy Statement dated November 1, 2001, and is
incorporated herein by reference.
Information concerning Section 16 (a) Beneficial Ownership
Reporting Compliance is contained in the section captioned
"Security Ownership of Certain Beneficial Owners" in the Company's
definitive Proxy Statement dated November 1, 2001, and is
incorporated herein by reference.
Executive Officers of the Company
(a) Names, ages and positions of the executive officers:
Name Age Position
---- --- --------
Michael A. Anderson 39 Senior Vice President -
Integrated Graphics Segment
Vicki L. Avril 46 Senior Vice President and
Chief Financial Officer
Thomas G. Brooker 43 Vice President - Corporate
Sales
Michael O. Duffield 49 President and Chief
Operating Officer
Douglas W. Fitzgerald 47 Vice President - Marketing
Gary K. Haman 43 Assistant Treasurer
M. David Jones 54 Chairman of the Board and
Chief Executive Officer
Robert J. Kelderhouse 46 Vice President - Treasurer
and Assistant Secretary
Charles H. Kwon 40 Vice President - Strategy
and New Ventures
Wayne E. Richter 45 Senior Vice President -
Forms and Labels Segment
Lori G. Roberts 40 Vice President - Human
Resources
Thacher R. Smith 43 Tax Officer
26
Item 10 Executive Officers of the Company, Continued
All officers are elected at the Annual Meeting of the Board of
Directors, which is held immediately after the Annual Meeting of
Stockholders.
(b) Business Experience of the Executive Officers:
Mr. Anderson has been with the Company since 1985. He was elected
Senior Vice President - Integrated Graphics segment in 2000. Mr.
Anderson was previously Vice President - General Manager - Direct
Response Group in 1998, Vice President - General Manager -
Commercial Printing from 1997 to 1998, Vice President - General
Manager - Tops from 1995 to 1997, and Director of Distribution
from 1992 to 1995.
Ms. Avril joined the Company in 2001 as the Senior Vice President
and Chief Financial Officer. Ms. Avril was most recently employed
at Inland Steel Industries Inc. as the Vice President Finance and
Chief Financial Officer. Prior to that she was Treasurer and
Director of Planning for four years.
Mr. Brooker has been with the Company since 1981. He was elected
Vice President - Corporate Sales in 1998. Mr. Brooker was
previously Vice President - General Manager - Office Products
from 1995 to 1998, Vice President - General Manager - Tops
Division from 1993 to 1995.
Mr. Duffield has been with the Company since 1974. He is
currently the President and Chief Operating Officer and was
elected to this role in 1998. From January through November 2000,
Mr. Duffield was the Acting Chief Executive Officer during the
time the Company was conducting its search for a permanent Chief
Executive Officer. Mr. Duffield was previously the Senior Vice
President - Operations from 1992 to 1998.
Mr. Fitzgerald has been with the Company since 1976. He was
elected Vice President - Marketing in 1996. Mr. Fitzgerald was
previously Director of Marketing from 1989 to 1996.
Mr. Haman has been with the Company since 1998 as Assistant
Treasurer. Mr. Haman was previously employed by Eagle Industries,
Inc. as Director of Treasury Operations from 1993 to 1998.
Mr. Jones joined the Company in November 2000 as the Chairman of
the Board and Chief Executive Officer. Mr. Jones was most
recently employed as the Vice President - Filtration Group and
President of Fleetguard/Nelson, Inc., the filtration division of
Cummins Engine Company, from 1996 to 2000. Prior to that he held
various positions at Cummins Engine Company where he began his
career in 1970.
Mr. Kelderhouse joined the Company in 1999 as Vice President -
Treasurer and Assistant Secretary. Mr. Kelderhouse was previously
employed by Heller International Corporation as Senior Vice
President - Finance and Capital Markets, Sales Finance Group from
1997 to 1999, and Senior Vice President - Finance and Capital
Markets, Vendor Finance Division from 1994 to 1997.
Mr. Kwon joined the Company in 2001 as Vice President - Strategy
and New Ventures. Mr. Kwon was previously employed by Neodesic
Corporation as Chief Executive Officer and President from 1997 to
2001. From 1993 to 1997, Mr. Kwon was a Strategy Consultant with
Booz, Allen & Hamilton, a management consulting firm.
27
Item 10 Business Experience of the Executive Officers, Continued
Mr. Richter has been with the Company since 1979. He was elected
Senior Vice President - Forms and Labels Segment in 1998. Mr.
Richter was previously Vice President - General Manager - Label
Division from 1992 to 1998.
Ms. Roberts joined the Company in 2001 as Vice-President - Human
Resources. Ms. Roberts was previously employed by Cummins Engine
Company, Inc. as Director - Human Resources, Southern Region from
1998 to 1999, as Director - Compensation & Benefits from 1997 to
1998, and as Director - Human Resources for the Fuel Systems
Division from 1993 to 1997. Ms. Roberts was voluntarily
unemployed between the period of time she left Cummins Engine
Company, Inc. and the time she began working at Wallace Computer
Services, Inc.
Mr. Smith joined the Company in 1999 as the Director of Taxation
and is the Tax Officer of the Company. Mr. Smith was previously
employed by BT Office Products, International, Inc. as Director
of Tax from 1995 to 1999. Prior to that Mr. Smith worked for 15
years at several different public accounting firms.
There are no family relationships between these executives.
Item 11 Executive Compensation
Information concerning management remuneration and transactions, and
compensation of directors for the year ended July 31, 2001 is
contained in the section captioned "Compensation of Executive
Officers" in the Company's definitive Proxy Statement dated November
1, 2001, and is incorporated herein by reference.
Item 12 Security Ownership of Certain Beneficial Owners and Management
Information concerning the beneficial ownership of the Company's
common stock is contained in the section captioned "Voting Securities"
in the Company's definitive Proxy Statement dated November 1, 2001,
and is incorporated herein by reference.
Item 13 Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions
is contained in the Company's definitive Proxy Statement dated
November 1, 2001, and is incorporated herein by reference.
28
Part IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following consolidated financial statements and schedules of
the Company are set forth on the following pages of this report.
Page
Number
------
Consolidated Statements of Income for the years
ended July 31, 2001, 2000, and 1999 31
Consolidated Statements of Stockholders' Equity for the
years ended July 31, 2001, 2000, and 1999 32 - 33
Consolidated Balance Sheets as of July 31, 2001 and 2000 34
Consolidated Statements of Cash Flows for the years ended
July 31, 2001, 2000, and 1999 35
Notes to Consolidated Financial Statements 36 - 51
Report of Independent Public Accountants 52
Quarterly Financial Data for the years ended
July 31, 2001 and 2000 53
Schedule - II, Valuation and Qualifying Accounts 54
Schedules Omitted
All other schedules have been omitted because they are not
applicable or not required or because the required information is
included in the financial statements or notes thereto.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the Company during
the quarter ended July 31, 2001.
(c) Exhibit Index
The exhibits as shown in "Index of Exhibits" (pages 55 - 58)
are filed as part of this report.
29
Wallace Computer Services, Inc. Fiscal 2001 10-K
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, on October 10, 2001.
Wallace Computer Services, Inc.
/s/ Vicki L. Avril
By________________________
Vicki L. Avril
Senior Vice President and Chief
Financial Officer
(principal accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
capacities indicated, on October 10, 2001.
/s/ M. David Jones /s/ Andrew J. McKenna, Jr.
------------------------- --------------------------
M. David Jones Andrew J. McKenna, Jr.
Chairman of the Board and Director
Chief Executive Officer
/s/ Michael T. Riordan /s/ John C. Pope
------------------------- -------------------------
Michael T. Riordan John C. Pope
Director Director
/s/ William J. Devers, Jr. /s/ Bettye Martin Musham
------------------------- -------------------------
William J. Devers, Jr. Bettye Martin Musham
Director Director
/s/ Neele E. Stearns, Jr.
------------------------
Neele E. Stearns, Jr.
Director
30
Item 14 (a) Consolidated Financial Statements and Schedules
CONSOLIDATED STATEMENTS OF INCOME
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED JULY 31, 2001, 2000 and 1999 2001 2000 1999
==============================================================================================
Net sales $ 1,692,792 $ 1,645,583 $ 1,610,803
----------------------------------------------------------------------------------------------
Cost and expenses:
Cost of goods sold 1,236,589 1,181,403 1,132,197
Selling and administrative expenses 258,862 267,348 247,227
Provision for depreciation and amortization 78,848 77,573 75,431
Restructuring charge (Note 7) 513 41,551 --
----------------------------------------------------------------------------------------------
Total costs and expenses 1,574,812 1,567,875 1,454,855
----------------------------------------------------------------------------------------------
Operating income 117,980 77,708 155,948
Interest income (829) (2,408) (1,842)
Interest expense, net of capitalized interest 29,102 33,598 31,009
Other income (Note 11) -- (3,190) --
----------------------------------------------------------------------------------------------
Income before income taxes 89,707 49,708 126,781
----------------------------------------------------------------------------------------------
Provision for income taxes: (Note 8)
Current:
Federal 37,363 20,728 35,383
State 5,199 3,673 7,081
Deferred (6,051) 2,690 8,248
----------------------------------------------------------------------------------------------
Total income taxes 36,511 27,091 50,712
----------------------------------------------------------------------------------------------
Net income $ 53,196 $ 22,617 $ 76,069
----------------------------------------------------------------------------------------------
Net income per share: (Note 12)
Basic $ 1.31 $ 0.55 $ 1.80
Diluted $ 1.30 $ 0.55 $ 1.80
==============================================================================================
The accompanying notes are an integral part of these statements.
31
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
SHARES OF COMMON STOCK COMMON
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ---------------------- PREFERRED STOCK ADDITIONAL
FOR THE YEARS ENDED JULY 31, 2001, 2000 and 1999 ISSUED IN TREASURY STOCK PAR VALUE CAPITAL
====================================================================================================================================
Balance, July 31, 1998 45,764 (2,496) $ -- $ 45,764 $36,390
====================================================================================================================================
Net income -- -- -- -- --
Cash dividends ($.64 per share) -- -- -- -- --
Sale of stock under employee stock
purchase plan (Note 5) -- 553 -- -- --
Stock options exercised net of shares
exchanged in lieu of cash (Note 5) -- 53 -- -- --
Deferred compensation liability for change in
shares held in grantor trust (Note 5) -- -- -- -- --
Tax benefit from early disposition by employees
of stock issued under stock option plans and
exercise of non-qualified stock options -- -- -- -- 721
Amortization of difference between market price
and option price for 1997 option plan (Note 5) -- -- -- -- 417
Treasury stock purchased -- (1,656) -- -- --
====================================================================================================================================
Balance, July 31, 1999 45,764 (3,546) -- 45,764 37,528
====================================================================================================================================
Net income -- -- -- -- --
Cash dividends ($.66 per share) -- -- -- -- --
Sale of stock under employee stock
purchase plan (Note 5) -- 869 -- -- --
Stock options exercised net of shares
exchanged in lieu of cash (Note 5) -- 110 -- -- --
Deferred compensation liability for change in
shares held in grantor trust (Note 5) -- -- -- -- --
Tax benefit from early disposition by employees
of stock issued under stock option plans and
exercise of non-qualified stock options -- -- -- -- 541
Amortization of difference between market price
and option price for 1997 option plan (Note 5) -- -- -- -- 417
Treasury stock purchased -- (2,510) -- -- --
====================================================================================================================================
Balance, July 31, 2000 45,764 (5,077) -- 45,764 38,486
====================================================================================================================================
Net income -- -- -- -- --
Cash dividends ($.66 per share) -- -- -- -- --
Sale of stock under employee stock
purchase plan (Note 5) -- 643 -- -- --
Stock options exercised net of shares
exchanged in lieu of cash (Note 5) -- 277 -- -- --
Deferred compensation liability for change in
shares held in grantor trust (Note 5) -- -- -- -- --
Tax benefit from early disposition by employees
of stock issued under stock option plans
and exercise of non-qualified stock options -- -- -- -- 1,151
Amortization of difference between market price
and option price for 1997 option plan (Note 5) -- -- -- -- 133
Cash Flow Hedge (Note 2) -- -- -- -- --
Treasury stock purchased -- (629) -- -- --
====================================================================================================================================
Balance, July 31, 2001 45,764 (4,786) $ -- $ 45,764 $39,770
====================================================================================================================================
The accompanying notes are an integral part of these statements.
32
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, Continued
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
ACCUMULATED
OTHER COST OF
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) DEFERRED RETAINED COMPREHENSIVE TREASURY COMPREHENSIVE
FOR THE YEARS ENDED JULY 31, 2001, 2000 and 1999 COMPENSATION EARNINGS LOSS STOCK INCOME/(LOSS)
====================================================================================================================================
Balance, July 31, 1998 $ -- $ 537,751 $ -- $(72,432) $ 74,303
====================================================================================================================================
Net income -- 76,069 -- -- 76,069
Cash dividends ($.64 per share) -- (26,904) -- -- --
Sale of stock under employee stock
purchase plan (Note 5) -- (4,477) -- 15,910 --
Stock options exercised net of shares
exchanged in lieu of cash (Note 5) -- (1,047) -- 1,525 --
Deferred compensation liability for change in
shares held in grantor trust (Note 5) 3,883 -- -- -- --
Tax benefit from early disposition by employees
of stock issued under stock option plans and
exercise of non-qualified stock options -- -- -- -- --
Amortization of difference between market price
and option price for 1997 option plan (Note 5) -- -- -- -- --
Treasury stock purchased -- -- -- (30,003) --
====================================================================================================================================
Balance, July 31, 1999 3,883 581,392 -- (85,000) 76,069
====================================================================================================================================
Net income -- 22,617 -- -- 22,617
Cash dividends ($.66 per share) -- (26,682) -- -- --
Sale of stock under employee stock
purchase plan (Note 5) -- (16,763) -- 26,166 --
Stock options exercised net of shares
exchanged in lieu of cash (Note 5) -- (1,631) -- 3,482 --
Deferred compensation liability for change in
shares held in grantor trust (Note 5) (724) -- -- -- --
Tax benefit from early disposition by employees
of stock issued under stock option plans
and exercise of non-qualified stock options -- -- -- -- --
Amortization of difference between market price
and option price for 1997 option plan (Note 5) -- -- -- -- --
Treasury stock purchased -- -- -- (41,453) --
====================================================================================================================================
Balance, July 31, 2000 3,159 558,933 -- (96,805) 22,617
====================================================================================================================================
Net income -- 53,196 -- -- 53,196
Cash dividends ($.66 per share) -- (26,831) -- -- --
Sale of stock under employee stock
purchase plan (Note 5) -- (11,271) -- 18,230 --
Stock options exercised net of shares
exchanged in lieu of cash (Note 5) -- (3,520) -- 7,278 --
Deferred compensation liability for change in
shares held in grantor trust (Note 5) 142 -- -- -- --
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) -- -- -- -- --
Cash flow hedge (Note 2) -- -- (322) -- (322)
Treasury stock purchased -- -- -- (7,106) --
====================================================================================================================================
Balance, July 31, 2001 $ 3,301 $ 570,507 $ (322) $(78,403) $ 52,874
====================================================================================================================================
The accompanying notes are an integral part of these statements.
33
CONSOLIDATED BALANCE SHEETS
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS) JULY 31, 2001 and 2000 2001 2000
============================================================================================================
Assets
Current Assets:
Cash and cash equivalents $ -- $ 4,505
Accounts receivable, less allowance for doubtful accounts
of $7,896 in 2001 and $5,906 in 2000 283,326 294,353
Inventories (Note 3) 100,922 108,133
Current and deferred income taxes 27,498 27,732
Advances and prepaid expenses 5,536 8,110
------------------------------------------------------------------------------------------------------------
Total current assets 417,282 442,833
------------------------------------------------------------------------------------------------------------
Property, plant and equipment, at cost:
Land and buildings 180,724 177,869
Machinery, equipment, furniture and fixtures 706,641 673,346
Leasehold improvements 5,908 5,612
------------------------------------------------------------------------------------------------------------
Total property, plant and equipment 893,273 856,827
Less: reserves for depreciation and amortization (502,107) (443,981)
------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 391,166 412,846
Goodwill, net of amortization 284,664 296,745
Cash surrender value of life insurance 15,201 36,400
System development costs, net of amortization 55,516 55,727
Other assets 2,836 4,758
------------------------------------------------------------------------------------------------------------
Total Assets $ 1,166,665 $ 1,249,309
============================================================================================================
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term debt $ 997 $ 2,454
Short-term notes payable 3,003 12,991
Accounts payable 97,384 99,368
Dividends payable 6,765 6,648
Accrued compensation and related expenses 46,964 45,660
Other accrued expenses 23,266 22,618
Contribution to profit sharing and retirement fund (Note 10) 13,466 6,351
------------------------------------------------------------------------------------------------------------
Total current liabilities 191,845 196,090
------------------------------------------------------------------------------------------------------------
Deferred compensation and retirement benefits 39,128 36,265
Deferred income taxes (Note 8) 60,385 69,912
Long-term debt (Note 4) 284,087 389,413
Other long-term liabilities 10,603 8,092
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 39,770 38,486
Deferred compensation (Note 5) 3,301 3,159
Retained earnings 570,507 558,933
Treasury stock (78,403) (96,805)
Accumulated other comprehensive loss (322) --
------------------------------------------------------------------------------------------------------------
Total stockholders' equity 580,617 549,537
------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 1,166,665 $ 1,249,309
============================================================================================================
The accompanying notes are an integral part of these statements.
34
CONSOLIDATED STATEMENTS OF CASH FLOW
WALLACE COMPUTER SERVICES, INC. AND SUBSIDIARIES
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED JULY 31, 2001, 2000 AND 1999 2001 2000 1999
============================================================================================================
Cash flows from operating activities:
Net income $ 53,196 $ 22,617 $ 76,069
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 78,848 77,573 75,431
Restructuring charge 87 31,828 --
Deferred taxes (9,527) 4,908 12,467
(Gain) loss on disposal of property 48 (344) (770)
(Gain) on sale of investments -- (3,190) --
Changes in assets and liabilities, net
of effect of acquisitions and divestitures:
Accounts receivable 11,027 (345) (34,720)
Inventories 7,211 (387) 11,808
Prepaid taxes 453 8,940 (2,222)
Advances and prepaid expenses 2,574 (1,158) 3,501
Other assets 13,481 (6,475) (34,169)
Accounts payable and other liabilities 13,839 10,368 19,913
Deferred compensation and retirement benefits 2,863 4,273 1,440
-----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 174,100 148,608 128,748
-----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (41,310) (53,945) (50,311)
Proceeds from sales of short-term investments -- 3,190 --
Proceeds from disposal of property 1,671 6,086 10,254
Net construction funds held by trustee -- -- 1,280
Other capital investments, including acquisitions/divestitures -- (10,067) (14,803)
-----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (39,639) (54,736) (53,580)
-----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Cash dividends paid (26,844) (27,016) (26,802)
Amounts paid on long-term debt (210,284) (128,698) (76,461)
Net retirements of short-term debt (11,582) (8,067) (14,496)
Proceeds from issuance of long-term debt 105,000 96,487 64,075
Proceeds from issuance of common stock 11,850 11,347 13,051
Purchase of treasury stock (7,106) (41,453) (30,003)
-----------------------------------------------------------------------------------------------------------
Net cash used in financing activities (138,966) (97,400) (70,636)
-----------------------------------------------------------------------------------------------------------
Net changes in cash and cash equivalents (4,505) (3,528) 4,532
Cash and cash equivalents at beginning of year 4,505 8,033 3,501
-----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ -- $ 4,505 $ 8,033
===========================================================================================================
Supplemental disclosure:
Interest paid (net of interest capitalized) $ 25,494 $ 28,155 $ 21,177
Income taxes paid 38,028 14,680 36,342
===========================================================================================================
The accompanying notes are an integral part of these statements
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION: The accompanying financial statements include the
accounts of the Company and its subsidiaries, which are wholly-owned. All
significant intercompany transactions have been eliminated.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities and reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those
estimates.
During fiscal year 2001 the Company changed its method of estimating
workers' compensation reserves from the case reserve method to a fully developed
loss method, a more conservative method. This change in accounting estimate
resulted in a one-time, pre-tax charge of $3.0 million or $0.04 per fully
diluted share.
RECLASSIFICATIONS: Certain prior year amounts have been reclassified to conform
to the current year presentation.
REVENUE RECOGNITION: Revenues from product sales are recorded when title to the
product transfers to the customer. Revenue from services or software is not
recognized until services are performed or software installation is complete or
customer acceptance is acknowledged.
CASH AND CASH EQUIVALENTS: The Company invests excess cash balances in
short-term securities, including commercial paper, money market funds, and
municipal bonds whose original maturities are less than three months.
CAPITALIZED INTEREST COSTS: Interest costs are capitalized based upon the cost
of capital projects in progress during the year. Interest expense, before
interest capitalization, and the amount of interest capitalized as of the last
three year ends is as follows:
(IN THOUSANDS) INTEREST EXPENSE INTEREST CAPITALIZED
================================================================================
2001 $ 31,102 $ 2,000
2000 36,272 2,674
1999 32,245 1,236
================================================================================
Amortization expense for interest capitalized was $1,223,000 in 2001;
$1,106,000 in 2000; and $1,035,000 in 1999.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is recorded at
historical cost. Depreciation for financial statement purposes is computed using
the straight-line method over the estimated useful lives of the various classes
of property, plant and equipment.
========================================================================
Buildings 40 years
Building equipment 10-15 years
Machinery, equipment, furniture and fixtures 3-10 years
Leasehold improvements Lease period
========================================================================
36
GOODWILL: 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 $7,582,000 in 2001,
$8,116,000 in 2000 and $7,927,000 in 1999. The unamortized balance relating to
the Graphic Industries acquisition was $196,593,000 at July 31, 2001 and
$206,207,000 at July 31, 2000. The balance relating to all other acquisitions
was $88,071,000 at July 31, 2001 and $90,538,000 at July 31, 2000.
SYSTEM DEVELOPMENT COSTS: Computer software that is either purchased or
developed internally for use by the Company is amortized over a useful life of
three to seven years. Amortization of internal use software was $9,625,000 in
fiscal year 2001; $6,395,000 in fiscal year 2000; and $5,410,000 in fiscal year
1999. The unamortized balance of all capitalized computer software was
$55,516,000 at July 31, 2001 and $55,727,000 at July 31, 2000.
In fiscal year 2000, the Company adopted Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". The statement requires that certain costs, such as preliminary
project costs and training, related to internally developed software must be
expensed as incurred. Implementation of this standard has not affected the
Company's financial condition or results of operations.
LONG-LIVED ASSETS: In accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
the Company reviews its long-lived assets for impairments when events or changes
in circumstances indicate the carrying amount may not be recoverable. In fiscal
year 2000 the Company did write down certain long-lived assets in connection
with a restructuring. See Note 7 for information concerning the write-offs.
INCOME TAXES: The Company accounts for income taxes under SFAS No. 109,
"Accounting for Income Taxes". Under that standard, deferred income taxes are
recognized for the tax consequences of "temporary differences" by applying
statutory tax rates applicable to future years to differences between the
financial statement carrying amount and the tax basis of existing assets and
liabilities. Investment tax credits are amortized to income over the lives of
the applicable assets. The unamortized investment tax credit amounted to
$124,750 in 2001 and $142,001 in 2000.
NET INCOME PER SHARE: The Company computes earnings per share in accordance with
SFAS No. 128, "Earnings per Share". Accordingly, basic earnings per share
amounts are computed based on the weighted-average number of common shares
outstanding. Diluted earnings per share amounts are based on the increased
number of common shares that would be outstanding assuming the exercise of
certain outstanding stock options, when such conversion would have the effect of
reducing earnings per share. See Note 12 for the computation of earnings per
share.
COMPREHENSIVE INCOME: Comprehensive income, disclosed in the Consolidated
Statements of Stockholders Equity, includes net income and all other nonowner
charges in equity that are not reported in net income. For fiscal year 2001,
comprehensive income includes net income and losses on interest rate swaps as
recognized in accordance with SFAS No. 133.
RECENTLY IMPLEMENTED ACCOUNTING PRONOUNCEMENTS: Effective August 1, 2000, the
Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended by SFAS No. 137 and SFAS No. 138. This standard requires
that an entity recognize derivatives as either assets or liabilities on its
balance sheet and measure those instruments at fair value. As of the date of
adoption, the Company had no outstanding derivatives and, as a result, the
adoption did not have a material impact on the Company's financial position or
results of operations. See Note 2 for additional information.
37
In July 2000 the Emerging Issue Task Force of the Financial Accounting
Standards Board (i.e. Task Force) issued EITF Issue 00-10, "Accounting for
Shipping and Handling Revenues and Costs". The provisions of EITF 00-10 were
adopted in the fourth quarter of fiscal year 2001. This pronouncement provides
new requirements on how to account for revenues collected from customers to
reimburse the seller for shipping and handling costs. The Company is required to
report amounts billed to a customer in a sale transaction related to shipping
and handling, if any, as revenue in the income statement with the corresponding
freight expense recorded in cost of sales. The Company previously aggregated
shipping and handling costs and revenues in the revenue line on the income
statement. Implementation of this pronouncement has had no impact on the
Company's financial condition or results of operations. However, it has had a
significant impact on individual lines within the income statement including
sales and cost of sales. The adoption of EITF 00-10 has increased sales and cost
of sales by $83.2 million in fiscal year 2001 and $80.3 million in fiscal years
2000 and 1999.
NEW ACCOUNTING PRONOUNCEMENTS: In June 2001, the Financial Accounting Standards
Board issued SFAS No. 141, "Business Combinations," which addresses the
financial accounting and reporting for business combinations. SFAS No. 141
requires that all business combinations be accounted for by a single method, the
purchase method, modifies the criteria for recognizing intangible assets, and
expands disclosure requirements. The provisions of SFAS No. 141 apply to all
business combinations initiated after June 30, 2001. It is anticipated that SFAS
No. 141 will have no effect on the financial position or results of operations
of the Company.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets", which addresses financial accounting and
reporting for acquired goodwill and other intangible assets. SFAS No. 142
addresses how intangible assets that are acquired in an acquisition should be
recognized and, if necessary, amortized. It also requires that goodwill and
intangible assets that have indefinite useful lives not be amortized, but rather
tested at least annually for impairment using a fair-value-based test, and
intangible assets that have finite useful lives be amortized over their useful
lives. In addition, SFAS No. 142 expands the disclosure requirements about
goodwill and other intangible assets in the years subsequent to their
acquisition. The Company must adopt SFAS No. 142 in fiscal year 2003 with early
adoption permitted in fiscal year 2002. Impairment losses for goodwill and
indefinite-life intangible assets that arise due to the initial application of
SFAS No. 142, if any, are to be reported as a change in accounting principle.
Goodwill and intangible assets acquired after June 30, 2001 are subject
immediately to the provisions of SFAS No. 142. The Company is in the process of
determining the full impact that adoption will have on the consolidated
financial statements as well as determining when to adopt. Goodwill amortization
of $7.6 million and $8.1 million was recorded in fiscal years 2001 and 2000,
respectively, and, under the provision of SFAS No. 142, will no longer be
recorded in the Company's results of operations upon adoption of the new
standard.
2. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:
Effective August 1, 2000, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended by SFAS No. 137 and
SFAS No. 138. This standard requires that an entity recognize derivatives as
either assets or liabilities on its balance sheet and measure those instruments
at fair value.
In the second quarter of fiscal year 2001, the Company entered into interest
rate swap agreements ("Swaps") which effectively converted $75 million of
floating rate debt under the revolving Credit Facility ("Credit Facility") to
fixed rate debt. The purpose for entering into the Swaps is to better match the
Company's assets and liabilities and reduce its exposure to interest rate risk.
The Swaps have a term that is one year or less from the date of inception. These
Swaps are considered cash flow hedges and, accordingly, the fair market value of
the Swaps as of July 31, 2001 are recorded as liabilities in "accrued salaries,
wages, profit sharing and other" in the current liabilities section of the
balance sheet. "Accumulated other comprehensive loss" in the equity section of
the balance sheet reflects the after-tax charge to equity corresponding to the
fair market value of the Swaps. The accumulated other comprehensive loss related
to the Swaps is included in comprehensive income in the consolidated statements
of stockholders' equity.
38
Any net gain or loss on the Swaps, which is not significant in fiscal year 2001,
is reflected in interest expense in the income statement.
3. INVENTORIES:
Inventories are stated at cost which does not exceed market and include
material, labor and overhead. Cost is determined on the last-in, first-out
(LIFO) basis for certain inventories, and on the first-in, first-out (FIFO)
basis for other inventories.
Inventories at July 31, were as follows:
(IN THOUSANDS) 2001 2000
==========================================================
Raw materials $ 15,623 $ 15,913
Work in process 16,531 22,148
Finished products 68,768 70,072
----------------------------------------------------------
$ 100,922 $ 108,133
==========================================================
At July 31, 2001 and 2000, the cost of inventories aggregating $55,572,000
and $56,752,000, respectively, was determined on the LIFO method.
Inventories would have been $14,825,000 higher in fiscal year 2001 and
$16,591,000 higher in fiscal year 2000, if the FIFO method had been used for all
inventories.
39
4. FINANCING ARRANGEMENTS: SHORT-TERM DEBT: Unsecured money market lines of $75
million were available as of July 31, 2001. Total borrowings outstanding as of
that date were $3.0 million, with a weighted average interest rate of 4.46%.
LONG-TERM DEBT: Long-term debt consisted of the following at July 31:
(IN THOUSANDS) 2001 2000
================================================================================
Average 6.21% in fiscal year 2001 and 6.95%
in fiscal year 2000 revolving credit
agreement due 2003 $ 75,000 $180,000
8.93% senior term notes due 2009 123,727 122,703
8.31% senior term notes due 2006 61,758 61,180
Average 3.80% in fiscal year 2001 and 4.00%
in fiscal year 2000 floating rate industrial
revenue bonds due 2007 7,000 7,000
Average 3.70% in fiscal year 2001 and 4.00%
in fiscal year 2000 floating rate industrial
revenue bonds due 2010 8,000 8,000
9.18% lease agreement due 2004 -- 1,499
5.10% promissory note due 2004 870 1,415
6.00% promissory note due 2001 -- 333
6.00% promissory note due 2003 900 1,350
Average 7.05% property mortgages
due 2003 - 2013 7,824 8,360
Other 5 27
--------------------------------------------------------------------------------
$285,084 $391,867
Less-current portion 997 2,454
--------------------------------------------------------------------------------
Total Long Term Debt $284,087 $389,413
================================================================================
Based upon the interest rates currently available to the Company for
borrowings with similar terms and maturities, the fair value of the Company's
debt and other financial instruments, after adjusting for the deferred expense
related to the treasury lock, are either carried at fair value or do not
materially differ from fair value. The balance of the deferred expense related
to the treasury lock on the Senior Notes was $14.5 million as of July 31, 2001
and $16.1 million as of July 31, 2000.
The industrial revenue bonds due 2007 and 2010 may be tendered at the option
of the holders on dates specified in the agreements. The Company maintains
arrangements with agents to remarket any bonds tendered before the final
maturity dates. The bonds are also supported by letters of credit.
Principal payments due on long-term debt, exclusive of the treasury lock of
$14.5 million, are as follows: $997,000 in 2002, $76,013,000 in 2003, $1,711,000
in 2004, $665,000 in 2005, $65,678,000 in 2006 and $154,536,000 in 2007 and
beyond.
In fiscal year 1999, the Company offered $200.0 million of Senior Notes to
institutional investors in a private placement. The transaction closed and was
funded on January 15, 1999. The proceeds of the note were used to pay down
borrowings under the revolving credit agreement ("Credit Facility"). The Company
settled a treasury rate lock agreement related to the issuance of the $200.0
million Senior Notes for $18.3 million plus related fees which are being
amortized using the effective interest method over the terms of the seven and
ten year Senior Notes. The impact of the amortization has been included in the
40
interest rates above. The Company has several debt covenants related to the
Senior Notes. Under the most restrictive of the covenants, the Company must
maintain a debt to capitalization ratio not greater than 65% and must maintain
minimum net worth levels.
As of July 31, 2001, the Company has a $400.0 million revolving Credit
Facility. The borrowings under the Credit Facility were $75.0 million and $180.0
million as of July 31, 2001 and 2000, respectively. The borrowings under the
Credit Facility are classified as long-term debt since the Company has the
intent and ability to carry that debt long-term. The Company has several debt
covenants related to the Credit Facility. Under the most restrictive of the
covenants, the Company must maintain a minimum interest coverage of at least 2.5
to 1, and a funded debt to EBITDA ratio not greater than 3 to 1.
As of September 28, 2001, subsequent to the Company's year-end, the
revolving Credit Facility has been reduced to $250.0 million.
The Credit Facility and Senior Notes maintain cross default provisions in
which a violation of debt covenants in either debt instrument automatically
triggers a default in the other. The Company was in compliance with all debt
covenants at July 31, 2001 and 2000.
The maximum amount as authorized by the Board of Directors for total
borrowings is $600.0 million. The Company has no compensating balance
requirements.
5. STOCK OPTIONS:
The Company has two stock option plans, the 1997 Stock Incentive Plan (the "1997
Plan") and the 1989 Stock Option Plan (the "1989 Plan"), and an employee stock
purchase plan adopted in 1974 (the "1974 Plan"). The 1989 Plan expired on
September 12, 1999.
Under the terms of the 1997 Plan, which expires September 4, 2006, options
may be granted to employees, as well as to non-employee Directors. Two types of
options to purchase common stock may be granted to officers and other employees:
Incentive Options and Non-Qualified Options. In the case of Incentive Options,
the option price may not be less than 100% of the market value of the stock at
the date of grant. For Non-Qualified Options, the grant price may not be less
than 85% of the market value. 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 33% of the shares one
year after grant, 33% of the shares two years after grant and the remaining 34%
of the shares three years after grant. Options expire 10 years after grant. The
exercisability of options may be further restricted by 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
is to 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
such grant. The non-employee director options vest at 25% every three months,
such that they will be fully vested within one year, or by the next annual
meeting, whichever occurs first.
The Company accounts for employee stock options under Accounting Principles
Board Opinion No. 25. The Company has adopted the disclosure-only provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation." Accordingly, no
compensation cost has been recognized for the stock option plans.
41
Pro forma net income and earnings per share calculated in conformance with the
provisions of SFAS No. 123, which includes stock option expense, would be
reduced as follows:
(IN THOUSANDS, EXCEPT EPS) 2001 2000 1999
================================================================================
Net income:
As reported $53,196 $22,617 $76,069
Pro forma 48,369 19,951 71,857
--------------------------------------------------------------------------------
Earnings per share (Basic):
As reported 1.31 .55 1.80
Pro forma 1.20 .49 1.71
Earnings per share (Diluted):
As reported 1.30 .55 1.80
Pro forma 1.19 .49 1.70
================================================================================
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
OPTIONS EXERCISE PRICE
================================================================================
Outstanding at July 31, 1999 2,138,863 $ 24.41
--------------------------------------------------------------------------------
Granted 1,183,204 15.98
Forfeited (328,723) 24.15
Exercised (41,400) 14.59
================================================================================
Outstanding at July 31, 2000 2,951,944 $ 21.13
--------------------------------------------------------------------------------
Granted 771,500 14.02
Forfeited (311,525) 24.15
Exercised (241,613) 12.93
--------------------------------------------------------------------------------
Outstanding at July 31, 2001 3,170,306 $ 19.72
================================================================================
JULY 31 JULY 31
2001 2000
--------------------------------------------------------------------------------
Options available for future grants 1,343,857 1,803,832
Options exercisable 1,729,552 1,358,406
================================================================================
42
In fiscal year 1997, 567,000 options were granted with performance measure
vesting provisions as outlined in the 1997 Plan. The performance measures for
the options are based on revenues, pretax income, return on equity, and return
on assets. Based on performance, 37.5% of the options vested on September 4,
1999 and the remaining options will vest March 4, 2006. These options were
granted with shareholder approval on February 28, 1997, with a grant date of
September 4, 1996. The difference between market price on February 28, 1997 and
the grant date is being reflected as expense in the Company's operations
statement over the vesting period. This expense of $133,000 in 2001 and $417,000
in fiscal year 2000 and fiscal year 1999 is included in the results of
operations.
The Employee Stock Purchase Plan, adopted in 1974, expires on December 31,
2004. A total of 6,600,000 shares of common stock have been reserved for
purchase by employees through semi-annual offerings. The option price is the
lower of 85% of the market price of the shares on the commencement date or the
termination date of each offering period. Employees participate in the plan
through payroll deductions and the plan qualifies for certain tax advantages
under section 423 of the Internal Revenue Code of 1986, as amended. Options were
exercised to purchase 643,066 shares at $11.45 in fiscal year 2001, 869,136
shares at $11.18 in fiscal year 2000 and 552,552 shares at $20.69 in fiscal year
1999. There were 2,031,862 shares available at July 31, 2001 and 674,928 shares
available at July 31, 2000 for future issuance under this plan.
For SFAS No. 123 disclosure purposes, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted-average assumptions used for grants: risk-free interest
rates of 4.8% to 6.0% depending on the expected life of the option; expected
dividend yield of 3.6% to 5.3%; expected lives of 4.8 years for options granted
through the stock option plan and 0.5 years for options granted through the
Employee Stock Purchase Plan; and expected volatility of 39.7% to 43.0% for
options granted through the stock option plan, and 40.2% to 50.3% for options
granted through the employee stock purchase plan.
The Company maintains a grantor trust, a "Rabbi Trust", for the benefit of
certain employees in which previously earned and accrued deferred bonus amounts
are held on behalf of the employee. There were 182,977 and 155,962 shares held
by the Rabbi Trust at July 31, 2001 and 2000, respectively. The value of these
shares is included as treasury stock within the equity section of the financial
statements, however, the shares are considered outstanding and incorporated into
the computation of both basic and diluted earnings per share. The
weighted-average number of these shares included in the earnings per share
calculation is 172,052 at July 31, 2001 and 211,000 at July 31, 2000. The
deferred compensation liability is included in the equity section of the balance
sheet for both fiscal years 2001 and 2000. Dividends accrued on these "Rabbi
Trust" shares are recognized as compensation expense in the income statement.
These shares will be remitted to the executives upon retirement or termination,
or their beneficiaries upon death.
6. LEASE COMMITMENTS:
Total rent expense for manufacturing facilities, sales offices and equipment
amounted to $19,410,000 in 2001, $17,799,000 in 2000 and $15,175,000 in 1999.
The minimum future rental commitments under non-cancelable lease arrangements
are $12,871,000 in 2002; $9,686,000 in 2003; $7,705,000 in 2004; $5,313,000 in
2005; $3,727,000 in 2006 and $8,153,000 in 2007 and beyond.
43
7. RESTRUCTURING:
In February 2000, the Company announced a plan to restructure its operations,
which resulted in non-recurring pre-tax expense totaling $41.6 million for
fiscal year 2000. In fiscal year 2001, additional restructuring costs of $0.5
million were incurred primarily related to ongoing cash charges related to plant
closing activities and restructuring administrative costs that could previously
not be accrued in accordance with EITF 94-3. The restructuring costs are
presented separately as a component of income from operations in the
Consolidated Statements of Income. The Company does not anticipate any future
charges related to this restructuring initiative.
The restructuring was undertaken in fiscal year 2000 as the Company was
experiencing continued softness in the high-quality color marketing and
promotional printing market as well as issues relating to the integration of the
Graphic Industries acquisition. Management reviewed its operations and developed
action plans relating to both segments that dealt with under-performing
facilities, underutilized assets, rationalization of certain product lines and a
reduction in management positions at the corporate office. The Company's plan
was approved, committed to, and for the most part, executed in the third quarter
of fiscal year 2000 with only minor charges incurred subsequent to that time.
The following table summarizes the activity in the restructuring reserve during
fiscal years 2000 and 2001:
(Amounts in Thousands)
-------------------------------------------------------------------------------------------------------------------------------
Employee Termination Asset Write downs Other Cash Total
Benefits (non-cash) Charges Restructuring
-------------------------------------------------------------------------------------------------------------------------------
Restructuring provision $ 6,350 $ 30,896 $ 1,650 $ 38,896
-------------------------------------------------------------------------------------------------------------------------------
Additional restructuring charges 291 639 1,725 2,655
Cash payments (4,562) -- (2,245) (6,807)
Non-cash items -- (31,535) -- (31,535)
-------------------------------------------------------------------------------------------------------------------------------
Reserve balance July 31, 2000 $ 2,079 $ -- $ 1,130 $ 3,209
-------------------------------------------------------------------------------------------------------------------------------
Additional restr. charges/(credits) (220) 87 646 513
Cash payments (1,859) -- (1,776) (3,635)
Non-cash items -- (87) -- (87)
-------------------------------------------------------------------------------------------------------------------------------
Reserve balance July 31, 2001 $ -- $ -- $ -- $ --
-------------------------------------------------------------------------------------------------------------------------------
The plan resulted in four plant closings, and resizing and consolidation of
other facilities. Exit costs are primarily comprised of tangible and intangible
asset write-downs related to assets to be disposed of and severance and
severance-related costs. Under the plan, during fiscal year 2000, the Company
terminated 446 employees, 388 of which were from plant locations and 58 from the
corporate headquarters.
Due to the changes described above, management performed a review of its
existing property and equipment to determine impairment as described in SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." Based on its evaluation, management determined that
significant impairment of goodwill and long-lived assets associated with plants
that were closed had occurred and related to both segments. Certain assets that
had no long-term strategic value were considered held for disposal and either
written off or written down to estimated fair market value if the asset was to
be sold. The amount of non-cash write-offs related to impaired assets was $20.5
million. The amount of associated goodwill written off was $11.1 million.
44
8. INCOME TAXES:
The significant deferred tax assets and liabilities at July 31 were as follows:
(IN THOUSANDS) 2001 2000
================================================================================
Deferred tax liabilities:
Accelerated depreciation $53,744 $55,908
Software development 20,664 22,101
Other 7,431 9,181
Total Deferred Tax Liabilities 81,839 87,190
--------------------------------------------------------------------------------
Deferred tax assets:
Deferred compensation, postretirement
and employee benefits 21,682 19,444
Accrued liabilities 9,092 4,035
Restructuring reserves 256 4,597
Inventory capitalization and reserves 4,515 3,077
Bad debt reserve 2,991 2,351
Other 911 794
--------------------------------------------------------------------------------
Total Deferred Tax Assets 39,447 34,298
--------------------------------------------------------------------------------
Net Deferred Tax Liabilities $42,392 $52,892
================================================================================
The provision for income taxes is comprised of the following:
2001 2000 1999
================================================================================
Statutory federal income tax rate 35.0% 35.0% 35.0%
State and local income taxes 2.6 3.5 4.2
Goodwill amortization 2.9 5.9 2.2
Goodwill written off in restructuring -- 6.8 --
Tax credits and other 0.2 3.3 (1.4)
--------------------------------------------------------------------------------
Effective tax rate 40.7% 54.5% 40.0%
================================================================================
45
9. POSTRETIREMENT BENEFITS:
All employees at least 55 years old with 20 or more years of service as of
December 31, 1993 and certain grandfathered employees who retired as of December
31, 1998 were 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, 1998 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) 2001 2000 1999
===============================================================================
Components of net periodic
postretirement benefit costs:
-------------------------------------------------------------------------------
Service cost $ -- $ -- $ 6
Interest cost 591 500 266
Loss due to change in actuarial assumptions 2,727 5,322 985
-------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 3,318 $ 5,822 $1,257
===============================================================================
In fiscal year 2001, the Company adopted the 1983 group annuity mortality
table for calculating the net periodic postretirement benefit cost. Because the
1983 group annuity mortality table uses more conservative mortality assumptions
than the previously used 1984 unisex pension mortality table, the actuarial loss
for fiscal year 2001 is higher than it would have been historically.
The increase in the actuarial loss in fiscal year 2000 is primarily related
to the impact of employees between the ages of 50 and 54 who had 20 years of
service as of December 31, 1993 and who elected to retire as of December 31,
1998. The number of employees that elected to retire was greater than the
estimate used to calculate the accumulated postretirement benefit. Additionally,
actual claims cost information was used for the fiscal year 2000 valuation which
was higher than the estimated claims cost information used in fiscal year 1999.
Fiscal year 2000 experienced the first full year impact of actual claims costs
incurred by the group of employees that elected to retire on December 31, 1998.
As a result, of the $5.8 million in net periodic pension cost recognized in
fiscal year 2000, the Company recognized $3.0 million as a one-time charge
within selling and administrative costs.
46
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) 2001 2000
------------------------------------------------------------------------------
Change in benefit obligation:
------------------------------------------------------------------------------
Projected benefit obligation, beginning of year $ 8,173 $ 3,561
Service cost -- --
Interest cost 591 500
Actuarial loss 2,727 5,322
Benefits paid (1,111) (1,210)
------------------------------------------------------------------------------
Projected benefit obligation, end of year $ 10,380 $ 8,173
------------------------------------------------------------------------------
Change in plan assets:
------------------------------------------------------------------------------
Plan assets at fair value, beginning of year $ -- $ --
Employer contribution 1,111 1,210
Benefits paid (1,111) (1,210)
------------------------------------------------------------------------------
Plan assets at fair value, end of year $ -- $ --
------------------------------------------------------------------------------
Funded status of plan:
------------------------------------------------------------------------------
Unfunded status $ 10,380 $ 8,173
------------------------------------------------------------------------------
Net amount recognized on balance sheet $ 10,380 $ 8,173
------------------------------------------------------------------------------
For financial reporting purposes, the actuarial computations assumed a
discount rate of 7.50% in 2001, 7.75% in 2000 and 7.50% in 1999. The assumed
health care cost trend rate used in measuring the benefit obligations for
pre-age 65 employees is 5.5% in 2001 and thereafter. For post-age 65 employees
the health care cost trend rate is 5.0% in 2001 and thereafter. 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 $44,000 and the postretirement benefit obligation as
of July 31, 2001 by $871,000. A one percentage point decrease in the assumed
health care cost trend would decrease the aggregate of the service cost and
interest cost components of the annual postretirement expense by $39,000 and the
postretirement benefit obligation as of July 31, 2001 by $755,000.
10. PROFIT SHARING AND RETIREMENT PLAN:
The Company has a contributory profit sharing and retirement plan ("PSRP")
covering most employees, excluding the employees that were part of the Graphic
and subsequent commercial print acquisitions. The plan provides for Company
contributions based on an amount determined by the Board of Directors. In recent
years the Company contribution has been based on 19% of earnings excluding
Graphics' results before profit sharing contributions. Those employees not
covered by the PSRP are covered under separate profit sharing and retirement
plan agreements. Substantially all of the employees not covered by the PSRP are
covered under a plan that provides for Company contributions based on 50% of the
first 4% of the covered employees contribution.
47
Company contributions to all plans charged to operations were $15,479,000 in
fiscal year 2001, $8,554,000 in fiscal year 2000 and $17,118,000 in fiscal year
1999.
11. INVESTMENTS IN DEBT AND EQUITY SECURITIES:
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", requires securities that are available-for-sale to be carried at
fair value, with changes in net unrealized gains and losses recorded as a
separate component of shareholders' equity. This statement has had no impact on
shareholders' equity at July 31, 2001 or July 31, 2000.
Proceeds on the sale of securities were $0 for fiscal year 2001, $3.2
million for fiscal year 2000 and $0 for fiscal year 1999. The $3.2 million was
recorded in other income on the income statement and represents the proceeds
received from the sale of stock that the Company received in John Hancock's
conversion from a policyholder owned company to a stockholder based company. The
Company received shares in relation to the amount of corporate owned life
insurance policies held with John Hancock.
12. EARNINGS PER SHARE:
Below is the computation of basic and diluted earnings per share for the fiscal
years ended July 31, 2001, 2000, and 1999.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2001 2000 1999
========================================================================================================
COMPUTATION OF BASIC EARNINGS PER SHARE
Net income $53,196 $22,617 $76,069
Weighted-average number of shares outstanding 40,527 40,940 42,118
Weighted-average number of shares held in grantor trust (Note 5) 172 211 50
----------------------------------------------------------------------------------------------------------
Shares applicable to basic earnings 40,699 41,151 42,168
Basic earnings per share 1.31 .55 1.80
----------------------------------------------------------------------------------------------------------
COMPUTATION OF DILUTED EARNINGS PER SHARE
Net income $53,196 $22,617 $76,069
Shares applicable to basic earnings 40,699 41,151 42,168
Add net shares from assumed exercise of options 252 187 207
----------------------------------------------------------------------------------------------------------
Shares applicable to diluted earnings 40,951 41,338 42,375
Diluted earnings per share 1.30 .55 1.80
==========================================================================================================
48
13. SEGMENT REPORTING:
The Company operates in two business segments. Each segment offers distinctive
products and services and are managed separately because of their unique
production, distribution, and marketing requirements. The Company's two
reportable segments are Forms and Labels, and Integrated Graphics.
The principal products and services supplied by the Forms and Labels Segment
include the design, manufacture and sales of paper based forms, the manufacture
of both electronic data processing (EDP) labels and prime labels, and the
manufacture and distribution of a standard line of office products. The
principal products and services supplied by the Integrated Graphics Segment
include the design and manufacture of high-color, high quality marketing and
promotional materials, and the manufacture of direct response printing
materials.
The Company's accounting policies for the segments are the same as those
described in the "Summary of Significant Accounting Policies". Management
evaluates segment performance based on segment profit or loss before interest
and income taxes. Net interest expense and income taxes are not allocated to
segments. Transfers between segments, which are not significant, are accounted
for at standard cost. The Company has no significant non-cash items other than
depreciation and amortization.
49
Summarized segment data and a reconciliation to the consolidated totals for
fiscal years 2001, 2000 and 1999 are as follows:
FISCAL YEAR 2001 EXTERNAL DEPRECIATION INCOME BEFORE SEGMENT CAPITAL
SALES & AMORTIZATION INCOME TAXES ASSETS(A) RESTRUCTURING EXPENDITURES
(AMOUNTS IN THOUSANDS)
-----------------------------------------------------------------------------------------------------------------------------
Forms and Labels Segment $ 835,320 $ 37,681 $ 85,377 $ 424,814 $ 42 $ 18,293
Integrated Graphics Segment 857,472 41,167 33,116 627,377 340 23,017
-----------------------------------------------------------------------------------------------------------------------------
Segment total 1,692,792 78,848 118,493 1,052,191 382 41,310
-----------------------------------------------------------------------------------------------------------------------------
Corporate -- -- -- 114,474 131 --
Restructuring -- -- (513) -- -- --
Net interest expense -- -- (28,273) -- -- --
Other income -- -- -- -- -- --
-----------------------------------------------------------------------------------------------------------------------------
Consolidated $1,692,792 $ 78,848 $ 89,707 $1,166,665 $ 513 $ 41,310
=============================================================================================================================
FISCAL YEAR 2000 EXTERNAL DEPRECIATION INCOME BEFORE SEGMENT CAPITAL
SALES & AMORTIZATION INCOME TAXES ASSETS(A) RESTRUCTURING EXPENDITURES
(AMOUNTS IN THOUSANDS)
-----------------------------------------------------------------------------------------------------------------------------
Forms and Labels Segment $ 819,759 $ 35,928 $ 78,965 $ 461,986 $ 5,251 $ 14,689
Integrated Graphics Segment 825,824 41,645 40,294 638,336 23,010 39,256
-----------------------------------------------------------------------------------------------------------------------------
Segment total 1,645,583 77,573 119,259 1,100,322 28,261 53,945
-----------------------------------------------------------------------------------------------------------------------------
Corporate -- -- -- 148,987 13,290 --
Restructuring -- -- (41,551) -- -- --
Net interest expense -- -- (31,190) -- -- --
Other income -- -- 3,190 -- -- --
-----------------------------------------------------------------------------------------------------------------------------
Consolidated $1,645,583 $ 77,573 $ 49,708 $1,249,309 $ 41,551 $ 53,945
=============================================================================================================================
FISCAL YEAR 1999 EXTERNAL DEPRECIATION INCOME BEFORE SEGMENT CAPITAL
SALES & AMORTIZATION INCOME TAXES ASSETS(A) EXPENDITURES
(AMOUNTS IN THOUSANDS)
-----------------------------------------------------------------------------------------------------------
Forms and Labels Segment $ 809,722 $ 32,712 $ 108,648 $ 471,884 $ 33,755
Integrated Graphics Segment 801,081 42,719 47,300 721,510 16,556
-----------------------------------------------------------------------------------------------------------
Segment total 1,610,803 75,431 155,948 1,193,394 50,311
-----------------------------------------------------------------------------------------------------------
Corporate -- -- -- 104,265 --
Net interest expense -- -- (29,167) -- --
-----------------------------------------------------------------------------------------------------------
Consolidated $1,610,803 $ 75,431 $ 126,781 $1,297,659 $ 50,311
===========================================================================================================
(A) Corporate represents general corporate assets that are not allocated
to the segments. This amount includes items such as cash, prepaid taxes and
cash surrender value of life insurance.
50
GEOGRAPHIC INFORMATION:
Wallace attributes substantially all of its revenues to customers within the
United States. Long-lived assets are domiciled within the United States.
MAJOR CUSTOMER INFORMATION:
Wallace is not dependent upon any customer or a group of customers under common
control. No single customer or group of customers accounts for more than 10% of
consolidated net sales.
51
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, 2001
and 2000, 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, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Wallace Computer Services, Inc.
and Subsidiaries as of July 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended July 31, 2001 in conformity with accounting principles generally accepted
in the United States.
Arthur Andersen LLP
Chicago, Illinois
September 11, 2001
52
QUARTERLY RESULTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
=================================================================================================================
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
=================================================================================================================
2001
-----------------------------------------------------------------------------------------------------------------
Net sales $ 429,280 $ 441,688 $ 416,198 $ 405,626
Cost of goods sold (excluding depreciation) 310,344 321,104 303,144 301,997
Restructuring costs 392 302 30 (211)
Operating income 35,523 35,889 30,423 16,145
Income before income taxes 27,800 28,539 23,463 9,905
Net income 16,485 16,923 13,914 5,874
Net income per share:
Basic $ .41 $ .42 $ .34 $ .14
Diluted $ .41 $ .41 $ .34 $ .14
-----------------------------------------------------------------------------------------------------------------
2000
-----------------------------------------------------------------------------------------------------------------
Net sales $ 407,295 $ 403,955 $ 408,857 $ 425,476
Cost of goods sold (excluding depreciation) 284,889 291,622 296,323 308,569
Restructuring costs -- -- 38,896 2,655
Operating income (loss) 37,502 24,887 (16,804) 32,123
Income (loss) before income taxes 30,965 17,113 (22,432) 24,062
Net income (loss) 18,579 10,268 (16,665) 10,435
Net income (loss) per share:
Basic $ .44 $ .25 $ (.41) $ .27
Diluted $ .44 $ .25 $ (.41) $ .27
=================================================================================================================
53
Wallace Computer Services, Inc. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
For the years ended July 31
(Amounts in Thousands)
Total Reserve for Bad Debts 2001 2000 1999
------- ------- --------
Balance at Beginning of Year $ 5,906 $ 5,582 $ 5,195
Provision for Doubtful Accounts 5,693 3,654 2,341
Accounts Written Off Against Allowance (4,123) (3,867) (2,709)
Recoveries Credited to Allowance 420 537 755
------- ------- --------
Balance at End of Year $ 7,896 $ 5,906 $ 5,582
======= ======= ========
54
Exhibit Index
Exhibit
Number Description
---------- -----------
3.1A Restated Certificate of Incorporation of the Company as filed with
the Secretary of State of the State of Delaware on January 7, 1987
(previously filed as part of Exhibit 3 to the Company's Annual
Report on Form 10-K for the fiscal year ended July 31, 1987, and
incorporated herein by reference to such Report).
3.1B Certificate of Amendment amending Section 1 of Article FOURTH of
the Certificate of Incorporation of the Company as filed with the
Secretary of State of the State of Delaware on November 28, 1989
(previously filed as part of Exhibit 3 to the Company's Annual
Report on Form 10-K for the fiscal year ended July 31, 1987, and
incorporated herein by reference to such Report).
3.1C Certificate of Amendment amending Section 1 of Article FOURTH of
the Certificate of Incorporation of the Company as filed with the
Secretary of State of the State of Delaware on March 14, 1997
(previously filed as part of Exhibit 3 to the Company's Annual
Report on Form 10-K for the fiscal year ended July 31, 1997, and
incorporated herein by reference to such Report).
3.1D Certificate of Designation of Series B Preferred Stock of the
Company as filed with the Secretary of State of the State of
Delaware on March 16, 2000 (previously filed as part of Exhibit 4
to the Company's Current Report on Form 8-K filed on March 16,
2000, and incorporated herein by reference to such Report).
3.2 Amended and Restated By-Laws of the Company as adopted on July 1,
1998 (previously filed as part of Exhibit 10 to the Company's
Annual Report on Form 10-K for the fiscal year ended July 31,
1998, and incorporated herein by reference to such Report).
4.1A Indenture between Wallace Computer Services, Inc. and Bank of New
York as Indenture Trustee (previously filed as Exhibit 4.7 to
Amendment No. 1 to Form S-3 Registration Statement, Registration
No. 333-46807, dated April 10, 1998 and incorporated herein by
reference to such Report).
4.1B First Supplemental Indenture between Wallace Computer Services,
Inc. and Bank of New York as Indenture Trustee, dated January 15,
1999 (previously filed as part of Exhibit 4.1B to the Registrant's
Annual Report on Form 10-K for the fiscal year ended July 31,
1999, and incorporated herein by reference to such Report).
10.1 Form of Rights Agreement, dated as of March 14, 2000, between the
Company and Harris Trust and Savings Bank, as Rights Agent, which
includes as Exhibit A the Certificate of Designation of Series B
Preferred Stock, as Exhibit B the form of Rights Certificate, and
as Exhibit C the form of Summary of Rights (previously filed as
Exhibit 4 to the Company's Current Report on Form 8-K dated March
16, 2000, and incorporated herein by reference to such Report).
55
10.2 The Wallace Computer Services, Inc. 1997 Stock Incentive Plan
(previously filed as Exhibit 10.3 to the Company's Quarterly
Report on Form 10-Q for the quarter ended January 31, 1997, and
incorporated herein by reference to such Report).
10.3 The Wallace Computer Services, Inc. Amended and Restated Executive
Incentive Plan, dated as of August 1, 1997 (previously filed as
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q dated
January 31, 1998, and incorporated herein by reference to such
Report).
10.4 Form of Deferred Compensation/Capital Accumulation Plan of the
Company for each of the years 1988, 1989, 1990, 1991, 1993, 1994,
1995, 1996, 1997, 1998, 1999 and 2000 (previously filed as part of
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q dated
October 31, 1995, and incorporated herein by reference to such
Report).
10.5 Supplemental Profit Sharing Plan of the Company (previously filed
as part of Exhibit 10 to the Company's Annual Report on Form 10-K
for the fiscal year ended July 31, 1988, and incorporated herein
by reference to such Report).
10.6A Executive Severance Pay Plan of the Company (previously filed as
part of Exhibit 10 to the Company's Annual Report on Form 10-K for
the fiscal year ended July 31, 1990, and incorporated herein by
reference to such Report).
10.6B First Amendment to the Executive Severance Pay Plan of the Company
(previously filed as part of Exhibit 10 to the Company's Annual
Report on Form 10-K for the fiscal year ended July 31, 1995, and
incorporated herein by reference to such Report).
10.7 The Wallace Computer Services, Inc. Annual Bonus Plan (previously
filed as Appendix A to the Proxy Statement of the Company for
Annual Meeting of Stockholders filed on October 6, 1997, and
incorporated herein by reference to such Statement).
10.8 Form of Deferred Compensation/Capital Accumulation Plan for
Directors of the Company for each of the years 1988, 1989, 1993,
1994, 1995, 1996, 1997, 1998, 1999 and 2000 (previously filed as
Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for
the quarter ended October 31, 1995, and incorporated herein by
reference to such Report).
10.9 Retirement Plan for Outside Directors of the Company (previously
filed as part of Exhibit 10 to the Company's Annual Report on Form
10-K for the fiscal year ended July 31, 1990, and incorporated
herein by reference to such Report).
10.10A Employee Severance Pay Plan of the Company (previously filed as
part of Exhibit 10 to the Company's Annual Report on Form 10-K for
the fiscal year ended July 31, 1992, and incorporated herein by
reference to such Report).
10.10B First Amendment of the Employee Severance Pay Plan of the Company
(previously filed as part of Exhibit 10 to the Company's Annual
Report on Form 10-K for the fiscal year ended July 31, 1995, and
incorporated herein by reference to such Report).
10.11A Form of Indemnification Agreement with Director between the
Company and each of the following: William J. Devers, Jr., Bettye
Martin Musham, Andrew J. McKenna, Jr., John C. Pope, Michael T.
56
Riordan, and Neele E. Stearns, Jr. (previously filed as part of
Exhibit 10 to the Company's Annual Report on Form 10-K for the
fiscal year ended July 31, 1990, and incorporated herein by
reference to such Report).
10.11B Form of Addendum to Indemnification Agreement with Director
(Member of Profit Sharing Committee) between the Company and
Andrew J. McKenna, Jr. (previously filed as part of Exhibit 10 to
the Company's Annual Report on Form 10-K for the fiscal year ended
July 31, 1990, and incorporated herein by reference to such
Report).
10.12A Form of Indemnification Agreement with Officer between the Company
and each of the following: Michael A. Anderson, Thomas G. Brooker,
Michael O. Duffield, Douglas W. Fitzgerald, Gary K. Haman, Robert
J. Kelderhouse, and Wayne E. Richter (previously filed as part of
Exhibit 10 to the Company's Annual Report on Form 10-K for the
fiscal year ended July 31, 1990, and incorporated herein by
reference to such Report).
10.12B Form of Addendum to Indemnification Agreement with Officer
(Trustee of Profit Sharing and Retirement Trust and Member of
Profit Sharing Committee) between the Company and each of the
following: Michael O. Duffield and Robert J. Kelderhouse
(previously filed as part of Exhibit 10 to the Company's Annual
Report on Form 10-K for the fiscal year ended July 31, 1990, and
incorporated herein by reference to such Report).
10.12C Form of Addendum to Indemnification Agreement with Officer (Member
of Profit Sharing Committee) between the Company and Michael O.
Duffield, and Robert J. Kelderhouse (previously filed as part of
Exhibit 10 to the Company's Annual Report on Form 10-K for the
fiscal year ended July 31, 1995, and incorporated herein by
reference to such Report).
10.13A Separation Agreement and General Release effective as of January
18, 2000 between the Company and Robert J. Cronin (previously
filed as Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q dated March 16, 2000, and incorporated herein by reference to
such Report).
10.13B Consulting Agreement effective as of January 18, 2000 between the
Company and Robert J. Cronin (previously filed as Exhibit 10.4 to
the Company's Quarterly Report on Form 10-Q dated March 16, 2000,
and incorporated herein by reference to such Report).
10.13C Separation Agreement and General Release effective as of June 30,
2001 between the Company and Craig Grant, filed herewith.
10.14A Employment Agreement effective as of September 9, 1998 between the
Company and Michael O. Duffield (previously filed as part of
Exhibit 10 to the Company's Annual Report on Form 10-K for the
fiscal year ended July 31, 1998, and incorporated herein by
reference to such Report).
10.14B Change of Control Agreement effective as of September 9, 1998
between the Company and Michael O. Duffield (previously filed as
part of Exhibit 10 to the Company's Annual Report on Form 10-K for
the fiscal year ended July 31, 1998, and incorporated herein by
reference to such Report).
10.15A $500,000,000 Credit Agreement dated as of October 31, 1997, among
Wallace Computer Services, Inc., Bank of America National Trust
and Savings Association, as Administrative Agent and the other
financial institutions party thereto, (previously filed as Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q dated October
31, 1997, and incorporated herein by reference to such Report).
10.15B First Amendment Credit Agreement dated June 5, 1998 among Wallace
Computer Services, Inc., Bank of America National Trust and
Savings Association, as Administrative Agent and the other
financial institutions party thereto amending the $500,000,000
57
Credit Agreement dated as of October 31, 1997, (previously filed
as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
dated April 30, 1998, and incorporated herein by reference to such
Report).
10.16 $200,000,000 Purchase Agreement dated as of January 15, 1999 among
Wallace Computer Services, Inc. and various institutional
investors (previously filed on Company's current report) on Form
8-K dated January 20, 1999, and incorporated herein by reference
to such Report).
10.17 Benefit Trust Agreement between Wallace Computer Services, Inc.
and the Northern Trust Company dated December 8, 1995, (previously
filed as part of Exhibit 10 to the Company's Annual Report on Form
10-K for the fiscal year ended July 31, 1998, and incorporated
herein by reference to such Report) and the First Amendment to The
Wallace Computer Services, Inc. Benefit Trust, effective as of
October 31, 1997, (First Amendment was previously filed as Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q dated January
31, 1998, and incorporated herein by reference to such Report).
10.18 The Wallace Computer Services, Inc. Performance Share Plan
(previously filed as Appendix B of the Proxy Statement for Annual
Meeting of Stockholders filed on October 6, 1997, and incorporated
herein by reference to such Statement).
10.19 Director Retainer Fee Plan, dated June 2, 1999, (previously filed
as part of Exhibit 10 to the Company's Quarterly Report on Form
10-Q for the quarter ended April 30, 1999, and incorporated herein
by reference to such Report).
21 Subsidiaries of the Company
23 Consent of Arthur Andersen LLP
58