-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UWLHumg1qQRhSyJXhhO3JE02BGXluYFGLortPVVL+TGPMK7PnXEHSV+paoufC7Uf yeMNs1VpEff4Yo1Nxl6gHQ== 0000950137-02-001330.txt : 20020415 0000950137-02-001330.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950137-02-001330 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020131 FILED AS OF DATE: 20020318 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WALLACE COMPUTER SERVICES INC CENTRAL INDEX KEY: 0000104348 STANDARD INDUSTRIAL CLASSIFICATION: MANIFOLD BUSINESS FORMS [2761] IRS NUMBER: 362515832 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06528 FILM NUMBER: 02577226 BUSINESS ADDRESS: STREET 1: 2275 CABOT DR CITY: LISLE STATE: IL ZIP: 60532 BUSINESS PHONE: 6335885000 MAIL ADDRESS: STREET 1: 2275 CABOT DRIVE CITY: LISLE STATE: IL ZIP: 60532 FORMER COMPANY: FORMER CONFORMED NAME: WALLACE BUSINESS FORMS INC DATE OF NAME CHANGE: 19820106 10-Q 1 c68147e10-q.txt QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 January 31, 2002 1-6528 - -------------------------------------- --------------------------------- For the quarterly period ended Commission file number WALLACE COMPUTER SERVICES, INC. --------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) Delaware 36-2515832 - -------------------------------- -------------------------------------- (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 2275 Cabot Drive Lisle, Illinois 60532 - ------------------------------------------------- ---------------- (Address of Principal Executive Offices) (ZIP CODE) (630) 588-5000 41,421,626 - ----------------------------------- ---------------------------------------- (Registrant's Telephone Number, (Number of Common Shares Outstanding Including Area Code) as of March 1, 2002) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No ------- ------- Wallace Computer Services, Inc. Page 2 FORM 10-Q For Quarterly Period Ended January 31, 2002 Part I Financial Information Item 1. Financial Statements The information furnished herein reflects all adjustments which are, in the opinion of the management, necessary to a fair statement of the results of operations and financial position for the six months ended January 31, 2002, subject to year-end audit by independent public accountants. These adjustments are of a normal, recurring nature. Wallace Computer Services, Inc. and Subsidiaries Consolidated Income Statement (Unaudited)
For the Six Months Ended January 31 -------------------------------------------------- % % (In thousands, except per share amounts) 2002 Sales 2001 Sales - ---------------------------------------- ------------------- ------------------- Net Sales $806,264 100.0 $870,967 100.0 Cost and Expenses Cost of goods sold (Note 1) 596,266 74.0 631,447 72.5 Selling and administrative expenses 123,542 15.3 128,413 14.7 Provision for depreciation and amortization (Note 5) 34,751 4.3 39,000 4.5 Restructuring charges (Notes 7 and 8) 32,832 4.1 694 0.1 -------- ----- -------- ----- Total costs and expenses 787,391 97.7 799,554 91.8 -------- ----- -------- ----- Operating Income 18,873 2.3 71,413 8.2 -------- ----- -------- ----- Interest income (535) (0.1) (542) (0.1) Interest expense 12,064 1.5 15,615 1.8 -------- ----- -------- ----- Income before Income Taxes 7,344 0.9 56,340 6.5 Provision for Income Taxes (Note 9) 2,864 0.4 22,930 2.6 -------- ----- -------- ----- Income before the cumulative effect of a change in accounting principle - net of tax 4,480 0.6 33,410 3.8 Cumulative effect of a change in accounting principle - net of tax (Note 5) 144,078 17.9 0 0.0 -------- ----- -------- ----- Net (Loss) / Income (139,598) (17.3) 33,410 3.8 ======== ===== ======== ===== Basic Earnings per Share Before the Cumulative Effect of a Change in Accounting Principle $ 0.11 $ 0.82 ======== ======== Cumulative Effect of a Change in Accounting Principle $ (3.51) $ 0.00 ======== ======== Basic (Loss) / Earnings per Share $ (3.40) $ 0.82 ======== ======== Diluted Earnings per Share Before the Cumulative Effect of a Change in Accounting Principle $ 0.11 $ 0.82 ======== ======== Cumulative Effect of a Change in Accounting Principle $ (3.47) $ 0.00 ======== ======== Diluted (Loss) / Earnings per Share $ (3.36) $ 0.82 ======== ======== Average Common Shares Outstanding 41,103 40,514 ======== ======== Diluted Common Shares Outstanding 41,466 40,724 ======== ======== Dividends Declared Per Share $ 0.330 $ 0.330 ======== ========
The accompanying notes are an integral part of this statement. Wallace Computer Services, Inc. Page 3 FORM 10-Q For Quarterly Period Ended January 31, 2002 Wallace Computer Services, Inc. and Subsidiaries Consolidated Income Statement (Unaudited)
For the Three Months Ended January 31 ------------------------------------------------ % % (In thousands, except per share amounts) 2002 Sales 2001 Sales - ---------------------------------------- --------- ------- --------- ------- Net Sales $ 397,105 100.0 $ 441,688 100.0 Cost and Expenses Cost of goods sold (Note 1) 292,908 73.8 321,105 72.7 Selling and administrative expenses 63,072 15.9 64,763 14.7 Provision for depreciation and amortization (Note 5) 16,976 4.3 19,629 4.4 Restructuring charges (Notes 7 and 8) 30,272 7.6 302 0.1 --------- ------- --------- ------- Total costs and expenses 403,228 101.5 405,799 91.9 --------- ------- --------- ------- Operating (Loss) / Income (6,123) (1.5) 35,889 8.1 --------- ------- --------- ------- Interest income (204) (0.1) (199) (0.0) Interest expense 5,875 1.5 7,549 1.7 --------- ------- --------- ------- (Loss) / Income before income taxes (11,794) (3.0) 28,539 6.5 (Benefit) / Provision for income taxes (Note 9) (4,447) (1.1) 11,615 2.6 --------- ------- --------- ------- Net (Loss) / Income (7,347) (1.9) 16,924 3.8 ========= ======= ========= ======= Basic (Loss) / Earnings per Share $ (0.18) $ 0.42 ========= ========= Diluted (Loss) / Earnings per Share $ (0.18) $ 0.41 ========= ========= Average Common Shares Outstanding 41,098 40,549 ========= ========= Diluted Common Shares Outstanding 41,552 40,920 ========= ========= Dividends Declared Per Share $ 0.165 $ 0.165 ========= =========
The accompanying notes are an integral part of this statement. Wallace Computer Services, Inc. and Subsidiaries Page 4 Consolidated Balance Sheet
(Dollars in thousands) January 31, 2002 July 31, 2001 - ---------------------- (Unaudited) (Audited) ---------------- ------------- Assets - ------ Current Assets: Cash and cash equivalents $ 0 $ 0 Accounts receivable 269,426 291,222 Less-allowance for doubtful accounts 12,869 7,896 ----------- ----------- Net receivables 256,557 283,326 Inventories (Note 1) 97,651 100,922 Assets held for sale (Note 7) 13,771 1,215 Current and deferred income taxes 42,212 27,498 Advances and prepaid expenses 5,969 4,321 ----------- ----------- Total current assets 416,160 417,282 ----------- ----------- Property, plant and equipment, at cost 822,824 893,273 Less-reserves for depreciation and amortization 485,225 502,107 ----------- ----------- Net property, plant and equipment 337,599 391,166 ----------- ----------- Goodwill, net of amortization (Note 5) 137,164 284,664 Cash surrender value of life insurance 15,764 15,201 System development costs, net of amortization 52,152 55,516 Other assets 2,483 2,836 ----------- ----------- Total assets $ 961,322 $ 1,166,665 =========== =========== Liabilities and Stockholders' Equity - ------------------------------------ Current Liabilities: Current maturities of long-term debt $ 35,702 $ 997 Short-term notes payable 2,000 3,003 Accounts payable 101,874 97,384 Accrued salaries, wages, profit sharing and other 73,250 90,461 ----------- ----------- Total current liabilities 212,826 191,845 ----------- ----------- Long-term debt 208,874 284,087 Deferred income taxes 56,970 60,385 Deferred compensation and retirement benefits 41,079 39,128 Other long-term liabilities 10,572 10,603 Stockholders' equity Common stock (Note 2)- issued shares of 45,764,054 at January 31, 2002 and July 31, 2001 45,764 45,764 Additional capital 39,909 39,770 Deferred compensation 3,073 3,301 Retained earnings 416,077 570,507 Treasury stock (at cost)- 4,537,842 shares at January 31, 2002 and 4,785,511 shares at July 31, 2001 (73,822) (78,403) Accumulated other comprehensive loss (Note 4) 0 (322) ----------- ----------- Total stockholders' equity 431,001 580,617 ----------- ----------- Total liabilities and stockholders' equity $ 961,322 $ 1,166,665 =========== ===========
The accompanying notes are an integral part of this statement Wallace Computer Services, Inc. and Subsidiaries Page 5 Consolidated Statement of Cash Flows (Unaudited)
For the Six Months Ended (Dollars in thousands) January 31 - ---------------------- -------------------------- 2002 2001 --------- --------- Cash Flows from Operating Activities: Net (loss) / income from operations $(139,598) $ 33,410 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of a change in accounting principle (Note 5) 144,078 0 Depreciation and amortization 34,751 39,000 Restructuring charges 21,791 87 Debt cost amortization 855 784 Deferred taxes (3,415) (275) Loss / (Gain) on disposal of property 47 (13) Changes in assets and liabilities Accounts receivable 25,891 (11,012) Inventories 2,873 (18,553) Advances and prepaid expenses (2,395) 859 Prepaid taxes (14,936) 2,106 Other assets 1,563 15,790 Accounts payable and other liabilities (12,157) 21,715 Deferred compensation and retirement benefits 1,952 1,461 --------- --------- Net cash provided by operating activities 61,300 85,359 --------- --------- Cash Flows from Investing Activities: Capital expenditures (11,603) (24,063) Proceeds from disposal of property 3,069 1,170 --------- --------- Net cash used in investing activities (8,534) (22,893) --------- --------- Cash Flows from Financing Activities: Treasury stock transactions (4,481) (4,137) Cash dividends paid (13,567) (13,362) Proceeds from issuance of common stock 7,647 4,557 Net retirements of short-term debt (1,298) (2,399) Retirement of long-term debt (61,067) (111,785) Proceeds from issuance of long-term debt 20,000 65,000 --------- --------- Net cash used in financing activities (52,766) (62,126) --------- --------- Net changes in cash and cash equivalents 0 340 Cash and cash equivalents at beginning of year 0 4,505 --------- --------- Cash and cash equivalents at January 31 $ 0 $ 4,845 ========= ========= Supplemental Disclosure: Interest paid (net of interest capitalized) $ 9,372 $ 14,516 Income taxes paid (net of refunds received) 18,115 21,150
The accompanying notes are an integral part of this statement. Wallace Computer Services, Inc. and Subsidiaries Page 6 Notes to Consolidated Financial Statements January 31, 2002 (Unaudited) Note 1 - Inventories Inventories at January 31, 2002, and July 31, 2001, were as follows: (Dollars in thousands) January 31, 2002 July 31, 2001 ---------------------- ---------------- ------------- Raw materials $ 13,898 $ 15,623 Work in process 17,633 16,531 Finished products 66,120 68,768 ---------------- ------------ $ 97,651 $ 100,922 ================ ============ Certain inventories are stated on the last-in, first-out (LIFO) basis for their labor and material content, and other inventories are stated on the first-in, first-out (FIFO) basis. Because the inventory determination under the LIFO method can only be made at the end of each fiscal year based on the inventory levels and costs at that time, interim period LIFO determinations must necessarily be based upon management's estimates of expected year-end inventory levels and costs. Note 2 - Stock Options As of January 31, 2002, options to purchase 3,478,448 shares of common stock were outstanding and an additional 3,874,859 shares of common stock were available for future grants under the Company's Stock Incentive and Employee Stock Purchase Plans. The Company has authorized 100,000,000 shares of common stock and issued 45,764,054 as of both January 31, 2002 and July 31, 2001. Of these shares, 4,537,842 and 4,785,511 were held in treasury as of January 31, 2002 and July 31, 2001, respectively. Note 3 - Segment Reporting The Company operates in two business segments. Each segment offers distinctive products and services and is managed separately because of its 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. Wallace Computer Services, Inc. and Subsidiaries Page 7 Notes to Consolidated Financial Statements January 31, 2002 (Unaudited) Note 3 - Segment Reporting (continued) The Company's accounting policies for the segments are the same as those described in the "Summary of Significant Accounting Policies" in the Company's 2001 Annual Report. Management evaluates segment performance based on segment profit or loss before interest and income taxes. Net interest expense and income taxes are not allocated to segments. Transfers between segments, which are not significant, are accounted for at standard cost. Segment data excludes one-time charges related to the cumulative effect of a change in accounting principle per Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets." Summarized segment data and a reconciliation to the consolidated totals for the quarters ended January 31, 2002 and 2001 are as follows:
Quarter Ended January 31, 2002 External Restructuring Income before (Amounts in Thousands) Sales Charge Income Taxes - --------------------------------------------------------------------------------------------- Forms and Labels Segment $200,083 $ 4,558 $ 20,005 Integrated Graphics Segment 197,022 24,121 4,144 - --------------------------------------------------------------------------------------------- Segment Total 397,105 28,679 24,149 - --------------------------------------------------------------------------------------------- Corporate / (Net Interest Expense) 0 0 (5,671) Restructuring Charge - Corporate 0 1,593 (30,272) - --------------------------------------------------------------------------------------------- Consolidated $397,105 $30,272 $(11,794) ============================================================================================= Quarter Ended January 31, 2001 External Restructuring Income before (Amounts in Thousands) Sales Charge Income Taxes - --------------------------------------------------------------------------------------------- Forms and Labels Segment $213,825 $ 0 $ 24,078 Integrated Graphics Segment 227,863 199 12,113 - --------------------------------------------------------------------------------------------- Segment Total 441,688 199 36,191 - --------------------------------------------------------------------------------------------- Corporate / (Net Interest Expense) 0 0 (7,350) Restructuring Charge - Corporate 0 103 (302) - --------------------------------------------------------------------------------------------- Consolidated $441,688 $ 302 $ 28,539 =============================================================================================
Wallace Computer Services, Inc. and Subsidiaries Page 8 Notes to Consolidated Financial Statements January 31, 2002 (Unaudited) Note 3 - Segment Reporting (continued) Summarized segment data and a reconciliation to the consolidated totals for the six months ended January 31, 2002 and 2001 are as follows:
Six Months Ended January 31, 2002 External Restructuring Income before (Amounts in Thousands) Sales Charge Income Taxes - --------------------------------------------------------------------------------------------- Forms and Labels Segment $404,255 $ 4,558 $ 39,919 Integrated Graphics Segment 402,009 24,804 11,786 - --------------------------------------------------------------------------------------------- Segment Total 806,264 29,362 51,705 - --------------------------------------------------------------------------------------------- Corporate / (Net Interest Expense) 0 0 (11,529) Restructuring Charge - Corporate 0 3,470 (32,832) - --------------------------------------------------------------------------------------------- Consolidated $806,264 $32,832 $ 7,344 ============================================================================================= Six Months Ended January 31, 2001 External Restructuring Income before (Amounts in Thousands) Sales Charge Income Taxes - --------------------------------------------------------------------------------------------- Forms and Labels Segment $430,270 $ 0 $ 47,816 Integrated Graphics Segment 440,697 291 24,291 - --------------------------------------------------------------------------------------------- Segment Total 870,967 291 72,107 - --------------------------------------------------------------------------------------------- Corporate / (Net Interest Expense) 0 0 (15,073) Restructuring Charge - Corporate 0 403 (694) - --------------------------------------------------------------------------------------------- Consolidated $870,967 $ 694 $ 56,340 =============================================================================================
Segment assets, particularly the Integrated Graphics segment, have been impacted by restructuring and SFAS No. 142. The adoption of SFAS No. 142 and the related goodwill impairment charge reduced Integrated Graphics goodwill by $147.5 million. Segment assets as of January 31, 2002 were $485,521 for Integrated Graphics, $341,742 for Forms and Labels, and $134,059 for Corporate versus $627,377 for Integrated Graphics, $424,814 for Forms and Labels, and $114,474 for Corporate at July 31, 2001. Note 4 - 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 two 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 was to better match the Company's assets and liabilities and reduce its exposure to interest rate risk. As required by the Company's hedging and derivative use policy such Swaps were entered into with high quality, independent counterparties at market pricing. These parties are rated A1 and/or A+ or higher by Moody's and Standard & Poors. The Swaps had a term that was Wallace Computer Services, Inc. and Subsidiaries Page 9 Notes to Consolidated Financial Statements January 31, 2002 (Unaudited) Note 4 - Accounting for Derivative Instruments and Hedging Activities, (continued) one year or less from the date of inception. These Swaps were considered cash flow hedges and, accordingly, the fair market value of the Swaps were 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. Any net gain or loss on the Swaps, which is not significant in fiscal year 2002, is reflected in interest expense in the income statement. As of January 31, 2002, the Company has settled the Swaps and has no other derivative financial instruments outstanding. Note 5 - Change in Accounting Principle In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets," which addresses financial accounting and reporting for acquired goodwill and other intangible assets. The Company is required to adopt the provisions of SFAS No. 142 on August 1, 2002, but has the option of adopting early, as of August 1, 2001. Under SFAS No. 142, goodwill is no longer amortized, and the rules for measuring goodwill impairment use a fair-value-based test. Under the new rules, a fair value of each of the Company's reporting units with assigned goodwill must be calculated using either market comparables or a discounted cash flow approach, or a combination thereof. Once the fair value of the reporting unit has been determined, the fair value of net assets, including intangibles, of that reporting unit must be compared to the total market value derived in the first step to determine impairment. The Company has elected early adoption of SFAS No. 142. Accordingly, the Company has stopped amortization of goodwill effective August 1, 2001. However, goodwill amortization continues to be recorded in historical periods. In completing the transitional impairment test required under SFAS No. 142, the Company determined the carrying amount of its various reporting units and compared that amount to its fair value. Fair value was determined with the assistance of an outside professional services firm using a combination of market comparables and discounted cash flow approaches. The carrying amount of the Company's Commercial Print division was below its fair value and, as a result, impairment existed. The amount of impairment was determined using the "implied fair value" of the Commercial Print division reporting unit as required by SFAS No. 142. As a result of the impairment test, the Company recognized an impairment charge to write-off goodwill in the amount of $147.5 million ($144.1 million net of tax) relating to the Commercial Print division in the Integrated Graphics segment. The impairment loss is recognized in the statement of operations under the caption "cumulative effect of a change in accounting principle." In accordance with SFAS No. 142, this charge was recorded as of the beginning of the fiscal year. Had the provisions of SFAS No. 142 been applied for the three months and six months ended January 31, 2001, the Company's net income, before the cumulative effect of a change in accounting principle, and net income / (loss) per share would have been as follows:
(In thousands, except For the Three Months Ended January 31 per share amounts) 2002 2001 --------- ---------- Net (Loss) / Income , as reported $ (7,347) $ 16,924 Add: Goodwill amortization 0 2,004 Tax effect 0 39 --------- ---------- Adjusted Net (Loss) / Income $ (7,347) $ 18,967 ========= ========== Basic (Loss) / Earnings per Share, as reported $ (0.18) $ 0.42 Effect of SFAS No. 142 $ 0.00 $ 0.05 --------- ---------- Adjusted Basic (Loss) / Earnings per Share $ (0.18) $ 0.47 ========= ========== Diluted (Loss) / Earnings per Share, as reported $ (0.18) $ 0.41 Effect of SFAS No. 142 $ 0.00 $ 0.05 --------- ---------- Adjusted Diluted (Loss) / Earnings per Share $ (0.18) $ 0.46 ========= ==========
Wallace Computer Services, Inc. and Subsidiaries Page 10 Notes to Consolidated Financial Statements January 31, 2002 (Unaudited) Note 5 - Change in Accounting Principle, (continued)
(In thousands, except For the Six Months Ended January 31 per share amounts) 2002 2001 ------ ------- Net Income Before the Cumulative Effect of a Change in Accounting Principle $4,480 $33,410 Add: Goodwill amortization 0 3,995 Tax effect 0 63 ------ ------- Adjusted Net Income Before the Cumulative Effect of a Change in Accounting Principle $4,480 $37,468 ====== ======= Basic Earnings per Share, as reported $ 0.11 $ 0.82 Effect of SFAS No. 142 $ 0.00 $ 0.10 ------ ------- Adjusted Basic Earnings per Share $ 0.11 $ 0.92 ==== ==== Diluted Earnings per Share, as reported $ 0.11 $ 0.82 Effect of SFAS No. 142 $ 0.00 $ 0.10 ------ ------- Adjusted Diluted Earnings per Share $ 0.11 $ 0.92 ====== =======
The Company has no separately identified intangible assets resulting from acquisitions recorded on the balance sheet. Changes in the carrying amount of goodwill (net), by segment, for the six months ended January 31, 2002, are as follows:
Forms and Labels Integrated Graphics (Dollars in thousands) Segment Segment Total ---------------------- ---------------- ------------------- --------- Balance as of July 31, 2001 $23,360 $ 261,304 $ 284,664 Pretax Impairment adjustment - adoption of SFAS No. 142 0 (147,500) (147,500) ------- --------- --------- Balance as of January 31, 2002 $23,360 $ 113,804 $ 137,164 ======= ========= =========
Wallace Computer Services, Inc. and Subsidiaries Page 11 Notes to Consolidated Financial Statements January 31, 2002 (Unaudited) Note 6 - Recently Issued Accounting Pronouncements In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which is effective for financial statements issued for fiscal years beginning after June 15, 2002. Early application is encouraged. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. It is anticipated that the adoption of SFAS No. 143 will have no impact on the financial position or results of operations of the Company. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which is effective in fiscal year 2003. SFAS No. 144 supersedes SFAS No. 121,"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and Accounting Principles Board Opinion No. 30 which addresses the accounting and reporting relating to the disposal of a segment of a business. It is anticipated that the adoption of SFAS No. 144 will not have a significant impact on the financial position or results of operations of the Company. Note 7 - Fiscal 2002 Restructuring In the first quarter of fiscal year 2002 the Company implemented a restructuring program of which $30.3 million was recognized in the current quarter and $32.8 million year to date. The restructuring charge is presented separately as a component of income from operations in the statement of operations. The restructuring initiatives are aimed at improving the overall level of organizational efficiency and effectiveness, consolidating and rationalizing existing facilities and processes, and reducing the overall cost base of the Company. The restructuring charges recognized include employee severance costs, asset write-downs, equipment moving costs, consulting charges directly related to the restructuring and other miscellaneous costs. The costs related to equipment moving and consulting were expensed as incurred. The Company anticipates that the restructuring program will be completed by the end of the fiscal year with the majority of the costs having been recognized in the current quarter. It is anticipated that the aggregate charges associated with the restructuring will be less than $40 million with a majority of those charges related to the Integrated Graphics segment. The following table summarizes the activity in the restructuring reserve during the first six months of fiscal year 2002:
(Amounts in Thousands) - ------------------------------------------------------------------------------------------------------------- Employee Asset Write-downs Other Charges Total Restructuring Termination (non-cash) Benefits - ------------------------------------------------------------------------------------------------------------- Restructuring Provision $6,598 $ 21,791 $ 4,443 $ 32,832 - ------------------------------------------------------------------------------------------------------------- Adjustments to Reserves 0 0 0 0 Cash Payments (3,731) 0 (3,282) (7,013) Non-cash items 0 (21,791) 0 (21,791) - ------------------------------------------------------------------------------------------------------------- Reserve balance January 31, $2,867 $ 0 $ 1,161 $ 4,028 2002 - -------------------------------------------------------------------------------------------------------------
Wallace Computer Services, Inc. and Subsidiaries Page 12 Notes to Consolidated Financial Statements January 31, 2002 (Unaudited) Note 7 - Fiscal 2002 Restructuring, (continued) The restructuring plan, implemented in the first quarter of fiscal year 2002, includes the closing of six manufacturing facilities, one distribution and fulfillment center, one multi-use facility and workforce reductions of 10% of the total workforce. It is anticipated that cash proceeds will be derived in the restructuring through the anticipated sale of three manufacturing facilities and sales of disposed equipment. Anticipated proceeds from the sale of assets are categorized separately as "assets held for sale" in the current asset portion of the balance sheet. Through the end of the second quarter, 705 employees were terminated or notified of termination, 662 of which were from plant locations and 43 from the corporate headquarters. Note 8 - Fiscal 2000 Restructuring In February 2000, the Company announced a plan to restructure its operations, which resulted in non-recurring pre-tax expense totalling $41.6 million for fiscal year 2000. In fiscal year 2001, additional restructuring costs of $0.7 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. Note 9 - Income Taxes The annual effective tax rate for fiscal year 2002 has been adjusted to 39.0% in the current quarter. The reduction in tax rate from the prior year is the result of no longer amortizing non-deductible goodwill after the adoption of SFAS No. 142. The tax rate increased from 38.2% in the first quarter primarily due to the impact of the restructuring charge on pretax income. The annual effective tax rate for fiscal year 2001 was 40.7%. Wallace Computer Services, Inc. and Subsidiaries Page 13 Notes to Consolidated Financial Statements January 31, 2002 (Unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations For the three-month period ended January 31, 2002, net sales decreased 10.1% to $397.1 million from the quarter ended January 31, 2001. For the six-month period ended January 31, 2002, net sales decreased 7.4% to $806.3 million from the same period in the prior year. Both segments were impacted by the current weak economic conditions. The Forms and Labels segment was also impacted by decreased sales of low margin stock paper as the Company discontinued all stock and computer paper production and will be sourcing this product going forward. The Integrated Graphics segment's sales also decreased in the current quarter due to restructuring activities taking place within the segment. Contractual sales continued to increase in both segments, with faster growth coming off of a smaller base in the Integrated Graphics segment. Continued growth in contractual sales is important in providing stability to the Company's profitability and utilization rates. Transactional sales (i.e. non-contract sales) volume was off in both segments. The decline in transactional sales, specifically in the Integrated Graphics segment, is indicative of the competitive marketplace. The double-digit decline in total transactional sales volume was a significant factor in the decline in profitability in the current quarter versus the second quarter of last year. In the first quarter of fiscal year 2002 the Company implemented a new restructuring program of which $30.3 million was recognized in the current quarter and $2.5 million was recognized in the first quarter of this fiscal year. The restructuring plan includes the closing of six manufacturing facilities, one distribution and fulfillment center, one multi-use facility and workforce reductions of approximately 10% of the total workforce. The restructuring initiatives were aimed at improving the overall level of organizational efficiency and effectiveness, consolidating and rationalizing existing facilities and processes, and reducing the overall cost base of the Company. It is currently estimated that an additional $4 million to $6 million of charges could still be incurred relating to this restructuring initiative. The majority of the remaining charges will occur in the third quarter of the current fiscal year. The majority of the restructuring charge relates to the Integrated Graphics segment. It is anticipated that cash proceeds derived in the restructuring through the sale of disposed equipment, working capital improvements and improved operations will more than offset cash charges from the restructuring in fiscal year 2002. The restructuring is also expected to have a positive impact on cash flow in fiscal year 2003 and beyond, and should result in annual earnings improvement of approximately $13.0 million. For further information regarding the fiscal year 2002 restructuring charge, see footnote 6. In the six months ended January 31, 2001 the Company recognized $0.7 million of residual restructuring charges related to an earlier restructuring initiative ("2000 restructuring") announced in the third quarter of fiscal year 2000. The 2000 restructuring was undertaken as the Company was experiencing continued softness in the high-quality color marketing and promotional printing markets as well as issues related to the integration of the Graphic Industries acquisition. The Company's 2000 restructuring plan was approved, committed to, and for the most part, executed in the third quarter of fiscal year 2000 with only minor charges incurred in fiscal year 2001. The Company has not incurred any charges related to the 2000 restructuring in fiscal year 2002 and does not anticipate any future charges related to the 2000 restructuring. Wallace Computer Services, Inc. and Subsidiaries Page 14 Notes to Consolidated Financial Statements January 31, 2002 (Unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Cost of sales for the quarter was 73.8% of sales as compared to 72.7% in the second quarter of last year. LIFO income was $0.2 million in the current quarter versus a charge of $0.3 million in the second quarter of last year. Cost of sales for the six-month period ended January 31, 2002 was 74.0% of sales compared to 72.5% in the same period a year ago. Total LIFO charges in the first half of fiscal year 2002 were not significant, while in the first half of fiscal year 2001 total charges were $1.0 million. Year over year, the Forms and Labels segment's quarterly sales decreased 6.4% to $200.1 million, with operating income of $20.0 million and operating margin of 10.0% versus operating income of $24.1 million and an operating margin of 11.3% in the second quarter of last year. For the six-month period ended January 31, 2002, segment sales decreased 6.0% to $404.3 million, with operating income of $39.9 million and an operating margin of 9.9%, versus operating income of $47.8 million and an operating margin of 11.1% in the prior year to date period. Competitive market and current economic conditions have continued to put pressure on operating margins in this segment. While operating income is down from the prior year's second quarter, operating margins have improved sequentially since the third quarter of fiscal year 2001, as the effects of cost cutting and other restructuring measures have taken effect. The Integrated Graphics segment's quarterly sales decreased 13.5% to $197.0 million, with operating income of $4.1 million and operating margin of 2.1% versus operating income of $12.1 million and an operating margin of 5.3% in the second quarter of last year. For the six-month period ended January 31, 2002, segment sales decreased 8.8% to $402.0 million, with operating income of $11.8 million and an operating margin of 2.9% versus operating income of $24.3 million and an operating margin of 5.5% in the prior year to date period. Competitive and economic pressures have been significant in this segment. The majority of the restructuring activity is occurring in this segment as the Company is in the process of standardizing its production processes and bringing costs in line with sales demand. The Company will also be strengthening capabilities in strategic local markets while continuing to focus on contract business. As part of the restructuring plan, the Company has closed two plants and disposed of one in this segment, with two more still in the process of being disposed of. The plant closures are responsible for approximately $5 million of the segment's quarterly sales decline. Additionally, the plants that were closed, or will be closed, recorded an operating loss of $1.9 million in the current quarter. Although the Company will be losing approximately $55 million annually in transactional sales from the closed and sold facilities, margins for the entire Commercial Print division are expected to improve. Selling and administration expenses for the second quarter were 15.9% versus 14.7% last year. Included in the current quarter are additional reserves for bad debt in the amount of $3.3 million, the majority of which relate to a charge taken as a result of the bankruptcy of a major customer. The remainder of the incremental reserve continues to be necessary in light of current economic conditions, and their impact on the collectability of the Company's trade receivables. Depreciation and amortization for the quarter was $17.0 million or 4.3% of sales versus $19.6 million or 4.4% of sales in the second quarter a year ago. Software amortization expense is up over 37% over the prior year's second quarter due to enhancements made to the Company's order entry, customer service, and inventory management system in the past year. Goodwill amortization declined $2.0 million due to the adoption of SFAS No. 142. Depreciation expense declined almost 10% in the current quarter as a result of assets disposed of in the restructuring, and will decline further in the third quarter. Interest expense for the quarter was $5.9 million, down from $7.5 million last year. The majority of the decrease in interest expense can be attributed to debt reduction. Declining interest rates, however, account for a portion of the reduction. Interest income for the quarter was consistent year-to-year. Wallace Computer Services, Inc. and Subsidiaries Page 15 Notes to Consolidated Financial Statements January 31, 2002 (Unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) The annual effective tax rate for fiscal year 2002 has been adjusted to 39.0% in the current quarter. The reduction in tax rate from the prior year is the result of the adoption of Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets." The majority of the goodwill that had previously been amortized was not tax deductible. The tax rate increased from 38.2% in the first quarter primarily due to the impact of the restructuring charge on pretax income. The annual effective tax rate for fiscal year 2001 was 40.7%. Income before the cumulative effect of a change in accounting principle for the second quarter was a loss of $7.3 million or 18 cents per share, down from a profit of $16.9 million or 41 cents per share in the same quarter a year ago. Income before the cumulative effect of a change in accounting principle for the six-month period ended January 31, 2002 decreased 86.6% to $4.5 million or 11 cents per share, from $33.4 million or 82 cents per share in the prior year to date period. In June 2001, the Financial Accounting Standards Board issued SFAS No. 142, which addresses financial accounting and reporting for acquired goodwill and other intangible assets. The Company is required to adopt the provisions of SFAS No. 142 on August 1, 2002, but has the option of adopting early, as of August 1, 2001. Under SFAS No. 142, goodwill is no longer amortized, and the rules for measuring goodwill impairment use a fair-value-based test. Under the new rules, a fair value of each of the Company's reporting units with assigned goodwill must be calculated using either market comparables or a discounted cash flow approach, or a combination thereof. Once the fair value of the reporting unit has been determined, the fair value of net assets, including intangibles, of that reporting unit must be compared to the total market value derived in the first step to determine impairment. The Company has elected early adoption of SFAS No. 142. Accordingly, the Company has stopped amortization of goodwill effective August 1, 2001. As a result of adopting SFAS No. 142, the Company has, retroactive to the beginning of the fiscal year, recorded an impairment charge of $144.1 million, net of tax. This impairment is recorded as a cumulative effect of a change in accounting principle. The impairment was measured as of the date of adoption, and relates to the Company's Commercial Print division in the Integrated Graphics segment. Goodwill related to the other divisions is not impaired. The gross impairment of goodwill was $147.5 million, which reduces total goodwill in the Integrated Graphics segment to $113.8 million. A professional services firm was engaged to assist in the valuation process. The restructuring activities that took place in the second quarter did not cause any additional impairment. Liquidity and Capital Resources Working capital decreased by $22.1 million from July 31, 2001. Since the first quarter of the current fiscal year, borrowings under the revolving credit agreement have been classified as current as this agreement expires on October 31, 2002. In previous quarters borrowings under this agreement were classified as long-term debt. At January 31, 2002, $35.0 million was classified as current under this agreement, compared to $75.0 million classified as long-term at July 31, 2001. Additionally, in the current quarter, the Company's profit sharing plan was funded, decreasing current liabilities by $13.3 million. The current ratio at January 31, 2002 was 2.0 to 1. Current inventory levels are believed to be in-line with the inventory levels necessary to satisfy customer demand. The Company anticipates having adequate sources of supply of raw materials to meet future business requirements. Wallace Computer Services, Inc. and Subsidiaries Page 16 Notes to Consolidated Financial Statements January 31, 2002 (Unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Liquidity and Capital Resources, (continued) Of the outstanding debt as of January 31, 2002, $35.0 million has been borrowed under a five-year revolving Credit Agreement ("Credit Facility"), which provides for a maximum aggregate principal amount available to be borrowed of $200.0 million. The Company has $200.0 million of Senior Term Notes with institutional investors with a book value of $186.3 million classified as long-term debt with the earliest maturity in 2006. In addition to the Credit Facility and the senior notes, the Company has unsecured money market lines of $50.0 million under which $2.0 million was borrowed at January 31, 2002. The $2.0 million from the unsecured money market lines is classified as short-term debt. Of the remaining long-term debt, $15.0 million is made up of industrial revenue bonds at rates ranging from 1.35% to 1.45%. The balance of $7.5 million relates to acquisitions. Total debt currently represents 36.4% of total capitalization. Had the impairment of goodwill under SFAS No. 142 not been recorded this quarter, total debt to capitalization would have been 30.0%. The maximum amount as authorized by the Board of Directors for total borrowings is limited to $600 million. The Credit Facility and the Senior Notes maintain cross default provisions in which a violation of debt covenants in either debt instrument automatically triggers a default in the other. Under the most restrictive covenants, the Company must maintain a minimum interest coverage of 2.5 to 1, a funded debt to EBITDA ratio not greater than 3 to 1, consolidated indebtedness to consolidated total capitalization of less than 65% and maintain a minimum consolidated net worth of $421 million at quarter-end. The company has received an amendment to the Credit Facility to exclude up to $58 million in non-cash restructuring charges in the second quarter of fiscal year 2002 when computing the minimum interest coverage and funded debt to EBITDA tests. The Company is currently in compliance with all debt covenants and believes it would remain in compliance going forward. As a result of adopting SFAS No. 142 and subsequently recording the $144.1 million charge, net of tax, for goodwill impairment, the Company has sought an amendment to the Senior Note agreement that would reduce the net worth requirement by $75 million. At the time of this filing, a majority of the noteholders have agreed in concept with the proposed amendment and it is expected that the amended agreement will be executed in the third quarter of fiscal year 2002. Capital expenditures for the quarter totaled $5.4 million. For the full fiscal year, capital expenditures are expected to be between $20 and $30 million, which are expected to be financed through internally generated funds and by borrowing against the Credit Facility. Stockholders' equity decreased 25.8% to $431.0 million at January 31, 2002. Almost the entire decrease can be attributed to the impairment charge taken as a result of adopting SFAS No. 142. Wallace Computer Services, Inc. and Subsidiaries Page 17 Notes to Consolidated Financial Statements January 31, 2002 (Unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Recently Issued Accounting Pronouncements In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which is effective in fiscal year 2003. SFAS No. 144 supersedes SFAS No. 121,"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and Accounting Principles Board Opinion No. 30 which addresses the accounting and reporting relating to the disposal of a segment of a business. It is anticipated that the adoption of SFAS No. 144 will not have a significant impact on the financial position or results of operations of the Company. Common Stock On September 8, 1999, the Board of Directors increased the annualized dividend rate to $0.66 per share, a 3.1% increase from fiscal year 1999. Since that time, the Board of Directors maintained the quarterly dividend rate of $0.165 per share. During the first quarter of fiscal year 2002, the Company purchased 300,200 shares of Wallace common stock. No shares were repurchased during the second quarter of fiscal year 2002. Total repurchases through January 31, 2002, against the $100 million authorized by the Board in June 1997, have been $98.5 million. On January 25, 2000 the Board of Directors approved an additional $100 million share repurchase authorization. Wallace Computer Services, Inc. and Subsidiaries Page 18 Notes to Consolidated Financial Statements January 31, 2002 (Unaudited) Part II Other Information Items 1 through 3 None Item 4 Submission of Matters to a Vote of Security Holders The Company held its annual meeting of stockholders on December 5, 2001. The results of the three proposals put to a shareholder vote are as follows: 1) Election of directors for the class of directors For Withheld ---------- ----------- Bettye Martin Musham 36,944,200 774,331 Andrew J. McKenna, Jr. 37,015,253 703,278 2) Approval of the 2001 Stock Incentive Plan For Against Abstain ---------- --------- --------- 29,606,037 7,613,843 498,651 3) Ratification of the appointment of Arthur Andersen LLP as the Company's independent public accountants for the fiscal year 2002 For Against Abstain ---------- --------- --------- 37,253,083 432,562 32,886 Wallace Computer Services, Inc. and Subsidiaries Page 19 Notes to Consolidated Financial Statements January 31, 2002 (Unaudited) Item 5 Other Information SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: Certain statements in this filing and elsewhere (such as in other filings by the Company with the Securities and Exchange Commission, press releases, presentations by the Company or its management, and oral statements) may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, that address activities, events, or developments that the Company expects or anticipates may occur in the future, including such things as future capital expenditures (including the amount and nature thereof), business strategy and measures to implement strategy, competitive strengths, goals, expansion and growth of the Company's and its subsidiaries' business and operations, plans, references to future success and other such matters are forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance or achievements of the Company to materially differ from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, general economic, market or business conditions, changes in laws or regulations; the opportunities (or lack thereof) that may be presented to and pursued by the Company and its subsidiaries; successful integration of acquisitions; labor market conditions; changes in postal rates and paper prices; the ability of the Company to retain its customers who generally do not operate under long-term contracts with the Company; the potential unpredictability of the Company's net sales due to seasonal and other factors which can lead to fluctuations in quarterly and annual operating results; the ability of the Company to keep pace with technological advancements in the industry; the effect of technical advancements on the demand for the Company's goods and services; and the risk of damage to the Company's data centers and manufacturing facilities or interruptions in the Company's telecommunications links. Item 6 Exhibits and Reports on Form 8-K (a) Exhibits 10.1 Wallace Computer Services, Inc. 2001 Stock Incentive Plan dated December 5, 2001, previously filed as Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended October 31, 2001. 10.2 Separation Agreement effective as of October 17, 2001 between the Company and Michael A. Anderson, filed herewith. (b) Reports on Form 8-K None Page 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WALLACE COMPUTER SERVICES, INC. March 15, 2002 /s/ M. David Jones ------------------------ ----------------------------------- Date M. David Jones Chairman of the Board and Chief Executive Officer March 15, 2002 /s/ Vicki L. Avril ------------------------ ----------------------------------- Date Vicki L. Avril Senior Vice President and Chief Financial Officer (Principal Accounting Officer) EX-10.2 3 c68147ex10-2.txt SEPARATION AGREEMENT EXHIBIT 10.2 CONFIDENTIAL SEPARATION AGREEMENT AND GENERAL RELEASE This Confidential Separation Agreement and General Release (this "Agreement") is entered into as of October 26, 2001 between Wallace Computer Services, Inc. (including its affiliates and subsidiaries), a Delaware corporation (the "Company"), and Michael A. Anderson (the "Executive"). WHEREAS, the Executive currently serves as a Senior Vice President of the Company; and WHEREAS, the Company and the Executive desire to set forth herein their mutual agreement with respect to all matters relating to (i) the Executive's cessation of employment with the Company, and (ii) the Executive's release of claims, all upon the terms set forth herein. NOW, THEREFORE, in consideration of the mutual promises and agreements contained herein, the adequacy and sufficiency of which are hereby acknowledged, the Company and the Executive hereby agree as follows: 1. Resignation; Termination of Employment. The Executive hereby resigns as a Senior Vice President of the Company, and from all other positions (if any) with the Company, effective as of the date hereof (the "Employment Termination Date"). On the Employment Termination Date, the Executive shall cease to be an employee and officer of, or have any other position with, the Company or its subsidiaries or any affiliate of the Company or its subsidiaries. 2. Payment of Accrued Obligations. (a) Unless otherwise indicated herein, the Company shall pay all Accrued Obligations (as defined in Section 2(b) hereof) to the Executive as soon as reasonably practicable following the Employment Termination Date; provided, however, that any portion of the Accrued Obligations subject to plans or policies of the Company shall be determined and paid in accordance with the terms of the relevant plan or policy as applicable to the Executive. (b) For purposes of this Agreement, "Accrued Obligations" shall mean, the following: (i) in lieu of earned and/or accrued vacation pay and outstanding expense reimbursements, the Executive's current base salary through December 31, 2001 (to the extent not theretofore paid), payable in equal monthly installments in accordance with the Company's retirement payroll practices; (ii) the cash balance accrued for the benefit of the Executive under the Company's Capital Accumulation Plans, compounded at a 6% annual rate in accordance with the plan documents, shall be paid in a lump sum; (iii) amounts deferred by the Executive pursuant to the Company's 2001 Capital Accumulation Plan following January 1, 2001, which amounts shall be returned to the Executive pursuant to the terms of such plan; 1 (iv) the shares of common stock of the Company accrued for the benefit of the Executive under the Company's Deferred Executive Incentive Plan; and (v) all benefits which have accrued as of the Employment Termination Date under the Company's Profit Sharing Plan and Supplemental Profit Sharing Plan in accordance with the terms of each such plan; 3. Additional Payments and Benefits. Provided that the Executive has not revoked the release contained in Section 9 hereof, and provided that the Executive complies with Sections 6 and 7 hereof and complies in all material respects with Section 13 hereof, the Company shall make the payments and provide the benefits set forth in this Section 3, it being understood that if the Executive fails to comply with Section 6 or 7 hereof or fails to comply with Section 13 hereof in any material respect and if such failure is not intentional, the Executive shall have 30 days to cure such failure, to the extent that such failure is subject to cure, and if the Executive effects such cure within such 30-day period, the Company's obligations pursuant to this Section 3 shall not be affected by such failure: (a) As soon as reasonably practicable following the Employment Termination Date, the Company shall pay to the Executive the amount determined by subtracting the amount payable pursuant to Section 2(b)(ii) hereof from the amount the Executive would have received under the Company's Capital Accumulation Plans if the balance were compounded at 12% per annum; (b) During the period commencing on January 1, 2002 and ending December 31, 2002, Company shall pay to the Executive the aggregate amount of $235,000, payable in twelve equal monthly installments in accordance with the Company's retirement payroll practices; (c) Company shall pay to the Executive, in October, 2002, a pro-rata share of his target bonus for fiscal year 2002 in a lump sum equal to $26,438. (d) All stock options granted to the Executive prior to January 1, 2001, which shall be outstanding on the Employment Termination Date and shall not have become exercisable, shall become exercisable in full, effective as of the Employment Termination Date, and the agreement relating to each stock option granted to the Executive and outstanding on the date hereof shall be amended to provide that the period during which such stock option may be exercised shall end on the date which is 90 days following the Employment Termination Date or on the date of expiration of such stock option, whichever occurs first, and each such stock option shall expire if not exercised prior to such date; and (e) The Company shall, for a period of one year from the date of the Employment Termination Date and at its sole expense, not to exceed 15% of base salary, provide the Executive with outplacement services, the scope and provider of which shall be selected by the Executive. 4. COBRA Coverage. Pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"), the Executive may elect to continue coverage for the Executive and his dependents under the Company's medical, dental and vision insurance policies 2 for a period of up to 18 months following the Employment Termination Date. From the Employment Termination Date through December 31, 2002, the Company shall pay the difference between COBRA premiums and premiums that would have been payable by the Executive had he remained in the employ of the Company. Premiums shall be deducted from separation payments. 5. Federal and State Withholding. The Company shall deduct from the amounts payable to the Executive pursuant to this Agreement the amount of all required federal and state withholding taxes in accordance with the Executive's Form W-4 on file with the Company and all applicable social security taxes. 6. Confidentiality. The Executive shall not, at any time, make use of or disclose, directly or indirectly, any (i) trade secret or other confidential or secret information of the Company or of any of its subsidiaries, or (ii) other proprietary information (including but not limited to technical, business, or financial) of the Company or of any of its subsidiaries, not available to the public, to any individual or entity ("Confidential Information"), except to the extent that such Confidential Information (a) becomes a matter of public record or is published in a newspaper, magazine or other periodical, or on electronic or other media, available to the general public, other than as a result of any act or omission of the Executive or (b) is required to be disclosed by any law, regulation or order of any court or regulatory commission, department or agency, provided that the Executive gives prompt notice of such requirement to the Company to enable the Company to seek an appropriate protective order. Within five days following the Employment Termination Date, the Executive shall surrender to the Company all records, memoranda, notes, plans, reports, computer tapes and software and other documents and data which constitute Confidential Information that he may then possess or have under his control (together with all copies thereof). 7. Noncompetition; Nonsolicitation. (a) During the period commencing on the Employment Termination Date and ending on December 31, 2002, the Executive shall not, without the prior express written consent of the President, Chief Executive Officer, or Chief Operating Officer of the Company, in any direct mail/targeted communication or commercial print capacity, directly or indirectly, through any person, firm or corporation, alone or as a member of a partnership or as an officer, director, stockholder, investor or employee of or consultant to any other corporation or enterprise or otherwise, engage or be engaged, or assist any other person, firm, corporation or enterprise in engaging or being engaged, in any business in which the Executive was involved or had knowledge, being conducted by, or contemplated by, the Company or any of its subsidiaries as of the Employment Termination Date in any geographic area in which Executive performed substantial services for the Company or any of its subsidiaries ("Competitive Business"); provided, however, and subject to subsection 7(b), that the Executive may accept employment with (1) a Competitive Business with annual sales revenue under $100,000,000 for each of the five fiscal years preceding the Employment Termination Date; and (2) any diversified corporation or enterprise having a business unit which competes with the Company and a business unit which does not compete with the Company if, prior to the acceptance of such employment, the Executive delivers to the Company a written assurance from such corporation or enterprise addressed to the Company and satisfactory to the Company that the Executive will render services exclusively for the business unit which does not compete with the Company and 3 will not render services, directly or indirectly, for the business unit which competes with the Company. (b) During the period commencing on the Employment Termination Date and ending two years thereafter, the Executive shall not in any manner, directly or indirectly: (i) induce or solicit, or attempt to induce or solicit, any employee of the Company or any of its subsidiaries to leave the employment thereof or in any way interfere with the relationship of such employee with the Company or its subsidiaries; or (ii) induce or solicit, or attempt to induce or solicit, any customer, supplier, licensee or other individual, corporation or other business organization having a business relation with the Company or its subsidiaries to cease doing business with the Company or its subsidiaries or in any way interfere with the relationship between any such customer, supplier, licensee or other person and the Company or its subsidiaries. (c) Nothing in this Section 7 shall prohibit the Executive from being (i) a stockholder in a mutual fund or a diversified investment company or (ii) a passive owner of not more than two percent of the outstanding stock of any class of a corporation, any securities of which are publicly traded, so long as the Executive has no active participation in the business of such corporation. 8. Scope of Covenants; Remedies. The following provisions shall apply to the covenants of the Executive contained in Sections 6 and 7 hereof: (a) the covenants contained in Section 6 shall apply on a nationwide basis, which is the basis on which the Company is actively engaged in the conduct of its businesses and in which customers are being solicited; (b) without limiting the right of the Company to pursue all other legal and equitable remedies available for violation by the Executive of the covenants contained in Section 6 and 7 hereof, it is expressly agreed by the Executive and the Company that such other remedies cannot fully compensate the Company for any such violation and that the Company shall be entitled, in addition to other rights and remedies existing in its favor, to a restraining order or orders and other injunctive relief to prevent any such violation or any continuing violation thereof; and (c) the Company and the Executive each intends and agrees that the covenants contained in Sections 6 and 7 hereof are reasonably designed to protect the Company's legitimate business interests without unnecessarily or unreasonably restricting the Executive's business opportunities, but that if in any action before any court or agency legally empowered to enforce the covenants contained in Sections 6 and 7 hereof any term, restriction, covenant or promise contained therein is found to be unreasonable and accordingly unenforceable, then such term, restriction, covenant or promise shall be deemed modified to the extent necessary to make it enforceable by such court or agency. 4 (d) the Executive agrees that he will submit himself to the personal jurisdiction of the courts of the State of Illinois in any action by the Company to obtain injunctive or other relief. (e) the Executive agrees that, should he be found by a court of competent jurisdiction to be in violation of either Section 6 or 7 herein, or should either Section 6 or 7 herein be adjudged unenforceable by a court of competent jurisdiction, he shall immediately forfeit and re-pay any amounts paid to him hereunder, and due and owing to him if not yet paid, in additional to all other remedies herein and available to the Company. 9. General Release. The Executive, on behalf of himself and anyone claiming through him, hereby agrees not to sue the Company or any of its divisions, subsidiaries, affiliates or other related entities (whether or not such entities are wholly owned) or any of the past, present or future directors, officers, administrators, trustees, fiduciaries, employees, agents or attorneys of the Company or any of such other entities, or the predecessors, successors or assigns of any of them (hereinafter referred to as the "Released Parties"), and agrees to release and discharge, fully, finally and forever, the Released Parties from any and all claims, causes of action, lawsuits, liabilities, debts, accounts, covenants, contracts, controversies, agreements, promises, sums of money, damages, judgments and demands of any nature whatsoever, in law or in equity, both known and unknown, asserted or not asserted, foreseen or unforeseen, which the Executive ever had or may presently have against any of the Released Parties arising from the beginning of time up to and including the effective date of this Agreement, including, without limitation, all matters in any way related to the Executive's employment by the Company or any of its affiliates, the terms and conditions thereof, any failure to promote the Executive and the termination or cessation of the Executive's employment with the Company or any of its affiliates, and including, without limitation, any and all claims arising under the Civil Rights Act of 1964, as amended, the Civil Rights Act of 1991, the Civil Rights Act of 1866, the Age Discrimination in Employment Act, the Older Workers' Benefit Protection Act, the Family and Medical Leave Act, the Americans With Disabilities Act, the Employee Retirement Income Security Act of 1974, the Illinois Human Rights Act, or any other federal, state, local or foreign statute, regulation, ordinance or order, or pursuant to any common law doctrine; provided, however, that nothing contained in this Section 9 shall apply to, or release the Company from, any obligation of the Company (i) contained in this Agreement or in any benefit plan of the Company in which the Executive participates (excluding any plan providing severance benefits upon termination of employment) or (ii) to indemnify the Executive pursuant to any prior, written indemnification agreement with the Executive, or the Company's certificate of incorporation or by-laws. The consideration offered herein is accepted by the Executive as being in full accord, satisfaction, compromise and settlement of any and all claims or potential claims, and the Executive expressly agrees that he is not entitled to, and shall not receive, any further recovery of any kind from the Company or any of the other Released Parties, and that in the event of any further proceedings whatsoever based upon any matter released herein, neither the Company nor any of the other Released Parties shall have any further monetary or other obligation of any kind to the Executive, including any obligation for any costs, expenses or attorneys' fees incurred by or on behalf of the Executive. The Executive agrees that he has no present or future right to employment with the Company or any of the other Released Parties and that he will not apply for or otherwise seek employment with any of them. 5 10. Authority. The Executive expressly represents and warrants that he is the sole owner of the actual and alleged claims, demands, rights, causes of action and other matters that are released herein; that the same have not been transferred or assigned or caused to be transferred or assigned to any other person, firm, corporation or other legal entity; and that he has the full right and power to grant, execute and deliver the general release, undertakings and agreements contained herein. 11. Nondisparagement. Both the Executive and the Company shall refrain from all conduct and statements, verbal or otherwise, that disparage or damage or could disparage or damage the reputation, goodwill or standing in the community of the other, including any of the Released Parties in the case of the Company. 12. Nondisclosure. The Executive agrees that unless and until the Company discloses the terms of this Agreement to the public, the Executive will not disclose the existence or terms of this Agreement to any third party, except his accountants, attorneys and spouse, each of whom shall be bound by this nondisclosure provision, or as may be required to comply with legal process; provided, however, that the Executive shall be entitled to disclose fully the terms of Sections 6, 7 and 8 hereof to any employer or prospective employer of the Executive. If a person not a party to this Agreement requests or demands, by subpoena or otherwise, that the Executive disclose or produce this Agreement or any terms or conditions hereof prior to the public disclosure thereof by the Company, the Executive shall immediately notify the Company and shall give the Company an opportunity to respond to such notice before taking any action or making any decision in connection with such request or subpoena. The Executive understands and agrees that this nondisclosure requirement is a material inducement to the Company to enter into this Agreement. 13. Cooperation. For the period commencing on the Employment Termination Date and ending one year following the Employment Termination Date, the Executive shall be reasonably available to the Company to respond to requests by the Company for information pertaining to or relating to the Company and its affiliates which may be within the knowledge of the Executive. The Executive will cooperate fully with the Company in connection with any and all existing or future litigation brought by or against the Company or any of its affiliates, to the extent the Company reasonably deems the Executive's cooperation necessary. The Executive understands that he may be required to devote up to three days (with a "day" defined for purposes of this Section as any day when Executive devotes more than 30 minutes to such requests) during each month of such one-year period to the fulfillment of his obligations under this Section 13, provided that the devotion of such time does not unreasonably interfere with the Executive's subsequent employment. The Company shall reimburse the Executive for any reasonable out-of-pocket expenses incurred as a result of such cooperation. 14. Company Property. Executive acknowledges and confirms he has returned to the Company any and all property, keys, records, documents that have come into his possession by virtue of his employment with the Company or its affiliates. He further acknowledges and confirms that he has not retained copies of any documents or computer media containing Confidential Information. Within 30 days of the Termination Date, Executive shall execute all appropriate documents to effectuate the termination of the Split Dollar Life Insurance policy taken out by the Company in the name of the Executive. Executive agrees that all cash surrender value up to the aggregate premiums paid, shall be retained by the Company. 6 15. Successors; Binding Agreement. This Agreement shall inure to the benefit of and be enforceable by the Executive and by his personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. In the event of the death of the Executive while any amounts are payable to the Executive hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to such person or persons designated in writing by the Executive to receive such amounts or, if no person is so designated, to the Executive's estate. 16. Notices. All notices and other communications required or permitted under this Agreement shall be in writing and shall be deemed to have been duly given by a party hereto when delivered personally or by overnight courier or five days after deposit in the United States mail, postage prepaid to the following address of the other party hereto (or to such other address of such other party as shall be furnished in accordance herewith): If to the Company, to: Wallace Computer Services, Inc. 2275 Cabot Drive Lisle, Illinois 60532-3630 Attention: Chief Executive Officer with a copy to: Wallace Computer Services, Inc. 2275 Cabot Drive Lisle, Illinois 60532-3630 Attention: General Counsel If to the Executive, to: Mr. Michael A. Anderson At his last known address on the records of the Company 17. Governing Law; Validity. The interpretation, construction and performance of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Illinois without regard to the principle of conflicts of laws. 18. Counterparts. This Agreement may be executed in two counterparts, each of which shall be deemed to be an original and both of which together shall constitute one and the same instrument. 19. Miscellaneous. No provision of this Agreement may be modified or waived unless such modification or waiver is agreed to in writing and executed by the Executive and by a duly authorized officer of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. Failure by the Executive or the Company to insist upon strict compliance with any provision of this Agreement or to 7 assert any right which the Executive or the Company may have hereunder shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. Any other understanding(s) and agreement(s), oral or written, respecting the Executive's employment status or relationship with the Company, or any subject matter hereof, are hereby superseded and canceled, except to the extent they are general plans or policies of the Company. 20. No Admission. Nothing in this Agreement is intended to, or shall be construed as, an admission by the Company or any of the other Released Parties that it violated any law, interfered with any right, breached any obligation or otherwise engaged in any improper or illegal conduct with respect to the Executive or otherwise. The Company, for itself and the other Released Parties, hereby expressly denies any such illegal or wrongful conduct. 21. ACKNOWLEDGMENT BY EXECUTIVE. BY EXECUTING THIS AGREEMENT, THE EXECUTIVE EXPRESSLY ACKNOWLEDGES THAT HE IS MAKING CERTAIN WAIVERS UNDER THE AGE DISCRIMINATION IN EMPLOYMENT ACT. THE EXECUTIVE FURTHER ACKNOWLEDGES HE HAS READ THIS AGREEMENT CAREFULLY, THAT HE FULLY UNDERSTANDS ITS TERMS AND CONDITIONS, THAT HE HAS BEEN ADVISED TO CONSULT WITH AN ATTORNEY PRIOR TO EXECUTING THIS AGREEMENT, THAT HE HAS BEEN ADVISED THAT HE HAS 30 DAYS FROM THE DATE OF RECEIPT WITHIN WHICH TO DECIDE WHETHER OR NOT TO EXECUTE THIS AGREEMENT AND THAT HE INTENDS TO BE LEGALLY BOUND BY IT. DURING A PERIOD OF SEVEN DAYS FOLLOWING THE DATE OF HIS EXECUTION OF THIS AGREEMENT, THE EXECUTIVE SHALL HAVE THE RIGHT TO REVOKE THE RELEASE CONTAINED IN SECTION 9 OF THIS AGREEMENT OF CLAIMS UNDER THE AGE DISCRIMINATION IN EMPLOYMENT ACT BY SERVING WITHIN SUCH PERIOD WRITTEN NOTICE OF REVOCATION. IF THE EXECUTIVE EXERCISES HIS RIGHTS UNDER THE PRECEDING SENTENCE, HE SHALL FORFEIT ALL AMOUNTS PAYABLE TO HIM PURSUANT TO SECTION 3 OF THIS AGREEMENT. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by a duly authorized officer of the Company and the Executive has executed this Agreement as of the day and year first above written. WALLACE COMPUTER SERVICES, INC. By --------------------------------- EXECUTIVE: ----------------------------------- Michael A. Anderson DATE: -------------------------- 8 -----END PRIVACY-ENHANCED MESSAGE-----