-----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, La+wO1onphXXiMtGatdx9Sb4wrPmdNIIB0O/pLws2p9gNQi11s9AQzPR2R2ANWpT BQXYcvU8GU0DHwRze0RqRg== 0000950152-99-002427.txt : 19990329 0000950152-99-002427.hdr.sgml : 19990329 ACCESSION NUMBER: 0000950152-99-002427 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990103 FILED AS OF DATE: 19990326 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STANDARD REGISTER CO CENTRAL INDEX KEY: 0000093456 STANDARD INDUSTRIAL CLASSIFICATION: MANIFOLD BUSINESS FORMS [2761] IRS NUMBER: 310455440 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11699 FILM NUMBER: 99573657 BUSINESS ADDRESS: STREET 1: 600 ALBANY ST CITY: DAYTON STATE: OH ZIP: 45401 BUSINESS PHONE: 5134341000 MAIL ADDRESS: STREET 1: 600 ALBANY STREET STREET 2: P O BOX 1167 CITY: DAYTON STATE: OH ZIP: 45401-1167 10-K 1 THE STANDARD REGISTER COMPANY FORM 10-K 1 UNITED STATES 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 For the fiscal year ended January 3, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from ________ to ________ Commission file number 1-1097 THE STANDARD REGISTER COMPANY (Exact name of Registrant as specified in its charter) OHIO 31-0455440 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 600 ALBANY STREET, DAYTON, OHIO 45401 (Address of principal executive offices) (Zip Code) (937) 443-1000 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT Name of each exchange Title of each class on which registered - ---------------------------- ------------------------ Common stock $1.00 par value New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT None 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. Yes X No --- --- Indicate by check mark if 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 registrant' 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. [ ] The aggregate market value of all stock held by non-affiliates of the Registrant at March 16, 1999 was approximately $343,524,000, based on a closing sales price of $29.50 per share on March 16, 1999. At March 16, 1999, the number of shares outstanding of the issuer's classes of common stock are as follows: Common stock, $1.00 par value 23,753,551 shares Class A stock, $1.00 par value 4,725,000 shares Part III incorporates information by reference from the Proxy Statement for Registrant's Annual Meeting of Shareholders to be held on April 21, 1999. -1- 2 THE STANDARD REGISTER COMPANY FORM 10-K PART I ITEM 1. - BUSINESS The Standard Register Company began operations in 1912 in Dayton, Ohio. Throughout its history, the Company's primary business has been the design, manufacture, and sale of business forms. To meet the needs of today's business environment, the business form has evolved to incorporate a wide range of sophisticated features and related services that facilitate the recording, storage and communication of business transactions and information. On December 31, 1997, the Company acquired the stock of Uarco Incorporated (UARCO) for $245 million in cash. The acquisition was in line with the Company's goal to become the leading document management company in the industry. The addition of UARCO enhances the Company's positions in key industry and product growth segments and creates the opportunity for significant economies of scale. With the acquisition, Standard Register believes it is the largest company in the U.S. forms and pressure sensitive label market with an approximate 15 percent share. Moore Corporation is estimated to be a close second in the U.S. market. Effective January 1, 1998, the Company realigned its products and services into two divisions. The Document Management and Systems Division produces and delivers document management solutions to customers, including workflow consulting, document design, custom printed forms and labels, electronic forms, distribution services, and distributed intelligent printing and mailing systems. The Company's Impressions(R) Division provides print on demand, promotional direct mail, document and plastic card fulfillment services, and commercial printing. DOCUMENT MANAGEMENT AND SYSTEMS DIVISION BUSINESS FORMS - Standard Register is known for its high-quality business forms and document management solutions. Traditional forms include custom continuous, secure documents, snap-apart Zipsets(R), as well as laser cut-sheet products. The Company also works with customers to analyze their workflow to improve the design of their forms or to provide electronic documents in order to improve overall business performance. LABELS - Standard Register produces flexographic, screen and offset printed labels, bar code/automatic ID systems, pressure sensitive labels, compliance labels and variable image products that use the latest laser and thermal transfer technology. With the acquisition of Uarco Incorporated, the Company doubled its label revenues and believes that it is now the largest domestic producer of custom pressure sensitive labels in the United States. SMARTWORKS - The Company provides customers with a single desktop solution for document automation and management. SMARTworks(TM) organizes all paper documents, manages their ordering, distribution, and usage, and identifies the best candidates for migration to electronic format. The system is integrated with Standard Register's warehousing and distribution/requisition/order entry systems to provide flexible, up-to-date information, with distributed access and centralized control. SMARTworks on-line, real-time access provides customers value through single-source document management, printing, fulfillment, requisition, and warehousing solutions. DISTRIBUTION SERVICES - Standard Register operates a nationwide network of over 80 distribution centers to provide our customers with the cost advantages of high-volume printing, coupled with just-in-time delivery service to dock or desktop. -2- 3 INTELLIGENT PRINTING SYSTEMS AND SUPPLIES - The Company's Document System Group enhances the quality, efficiency, and security of printed documents by providing turnkey printing solutions. Document management equipment, application software, service, and supplies come together with traditional business forms and labels to provide customers with a single source supplier for all their printing and processing needs. IMPRESSIONS DIVISION PRINT ON DEMAND - Stanfast(R) was established in 1983 based on the concept of providing short-run documents to the Company's forms management accounts. The trend towards outsourcing is driving rapid growth in the print on demand market and Stanfast's nationwide network of distributive print centers allows the Company to provide value and service to our customers. The Company now has 35 Stanfast print centers across the nation specializing in just-in-time production of business documents using traditional offset printing and newer digital print and image technology. PROMOTIONAL DIRECT MAIL - Communicolor(R) is a leading designer and printer of innovative direct-mail campaigns providing personalization services for many of the nation's largest direct-mail marketers. A pioneer in the direct-mail industry, they offer a full range of state-of-the-art technology to enhance the targeted direct mail message. On February 11, 1999, the Company announced that it has reached an agreement to sell the Communicolor operation to R.R. Donnelley and Sons Company. The Company believes shareholders will be better served by redirecting its investment to the Company's core products and services. The sale is expected to close by March 31, 1999. DOCUMENT AND PLASTIC CARD FULFILLMENT SERVICES - The Company's Imaging Services Group(SM) provides customers with complete fulfillment services, including programming, design, printing, imaging, and distribution of these types of documents. In addition, the Imaging Services Group takes advantage of the trend to outsource plastic card services by offering packages for ATMs, prepaid phone cards, membership cards, smart cards, and numerous other card programs. COMMERCIAL PRINTING - On January 26, 1999, the Company announced the formation of a Commercial Print Group which will include the Company's Secaucus, New Jersey facility and the newly purchased DuPont printing and publishing operation in Boothwyn, Pennsylvania. Recognizing the trend of business customers to use high-quality, commercial printing pieces to augment their traditional products, Standard Register is poised to be a single-source supplier and take advantage of this expanding marketplace. The Company's products and services are marketed by direct selling and service organizations operating from offices located in principal cities throughout the United States. Documents are printed at 62 geographically disbursed locations in the U.S. Documents are shipped directly to customers or are stored by the Company in warehouses for subsequent on-demand delivery. The management of document inventories to provide just-in-time delivery is a major element of customer service. The Company purchases raw paper in a wide variety of weights, grades, and colors from various paper mills in the United States and Canada. Carbonless paper, inks, and printing supplies are available nationally and are purchased from leading vendors. Continuing efforts are made to assure adequate supplies to meet present and future sales objectives. The Company fills its needs by ordering from suppliers of long-standing relationship. The Company had engineering and research expense during 1998 of $9.4 million compared to $9.1 and $7.8 million for 1997 and 1996, respectively. These costs relate to the development of new products and to the improvement of existing products and services. These efforts are entirely company sponsored and involve 98 professional employees. -3- 4 Expenditures for property, plant and equipment totaled $65.7 million in 1998, compared to $61.3 million and $57.8 million in 1997 and 1996, respectively. No significant changes occurred in the types of products, manufacture, or method of distribution during the past fiscal year nor does the Company intend to change its method of doing business in the near future. Other items of information which may be pertinent to an understanding of the Company and its business are as follows: 1.) The Company has several patents which provide a competitive advantage or which generate license income. None of these, individually, have a material effect upon the business. 2.) No material portion of the Company's business could be considered seasonal. 3.) The Company believes its working capital is sufficient for its current operations. The current ratio is 3.6 to 1 at January 3, 1999 as compared to 3.5 to 1 at December 28, 1997 and 4.0 to 1 at December 29, 1996. Total debt, including long-term and current maturities, was 31.0% of total capital at year-end 1998, compared to 0.9% and 1.0% for years-end 1997 and 1996, respectively. 4.) The business of the Company taken as a whole is not dependent upon any single customer or a few customers. No single customer accounts for 10% or more of total revenue. 5.) The Company's backlog of custom printing orders at February 28, 1999 was $81.4 million compared to $85.7 million and $53.8 million at February 28, 1998 and February 28, 1997, respectively. The February 28, 1998 backlog included $17.6 million of business acquired in the UARCO acquisition. All orders are expected to be filled within the ensuing fiscal year. 6.) The Company has no significant exposure with regard to the renegotiation or termination of government contracts. 7.) Expenditures made by the Company in order to comply with federal, state, or local provisions of environmental protection have not had a material effect upon the Company's capital expenditures, earnings, or competitive position. 8.) At February 28, 1999, the Company had 8,682 employees compared to 9,743 and 6,488 at February 28, 1998 and February 28, 1997, respectively. 9.) Substantially all of the Company's products and services facilitate the recording, storage and communication of business transactions and information. 10.) No material portion of the Company's sales or net income is derived from sales to foreign customers. The Company does offer technical assistance to foreign business forms manufacturers and receives royalties for these services. Royalties from these foreign associates are approximately .2% of total revenue. -4- 5 ITEM 2 - PROPERTIES The Document Management and Systems Division operates major production facilities located in the following cities: - Cincinnati, Ohio - Dayton, Ohio - Fayetteville, Arkansas - Kirksville, Missouri - Middlebury, Vermont - Murfreesboro, Tennessee - Porterville, California - Radcliff, Kentucky - Rocky Mount, Virginia - Salisbury, Maryland - Shelbyville, Indiana - Spring Grove, Illinois - Tampa, Florida - Terre Haute, Indiana - Toccoa, Georgia - Watseka, Illinois - York, Pennsylvania With the exceptions of Tampa, Florida and Toccoa, Georgia, these facilities are owned by the Company. The Impressions Division operates major production facilities located in the following cities: - Boothwyn, Pennsylvania - Charlotte, North Carolina - Eudora, Kansas - Newark, Ohio - Phoenix, Arizona - Rochester, New York - Sacramento, California - Tolland, Connecticut Of these facilities, Phoenix, Arizona, Rochester, New York, Sacramento, California, and Tolland, Connecticut are leased. In addition, the Impressions Division operates 35 smaller Stanfast Print Centers. In most cases these facilities are located in major metropolitan locations in the U.S. and are leased. The Company currently owns Eudora, Kansas and Newark, Ohio, both of which are slated for sale to R.R. Donnelley and Sons. The Company's current capacity, augmented by modest capital additions, is expected to be sufficient to meet production requirements for the foreseeable future. Capacity utilization varies significantly by press size and feature capability. Most presses are in the 50 - 95 percent utilization range, averaging an estimated 70 percent overall. The Company believes its production facilities are suitable to meet future production needs. -5- 6 ITEM 3 - LEGAL PROCEEDINGS (a) No material claims or litigation are pending against the Company. (b) The Company has been named as a potentially responsible party by the U.S. Environmental Protection Agency or has received a similar designation by state environmental authorities in several situations. None of these matters have reached the stage where a significant liability has been assessed against the Company. The Company has evaluated each of these matters and believes that none of them individually, nor all of them in the aggregate, would give rise to a material charge to earnings or a material amount of capital expenditures. This assessment is notwithstanding the ability of the Company to recover on existing insurance policies or from other parties which the Company believes would be held as joint and several obligors under any such liabilities. However, since these matters are in various stages of process by the relevant environmental authorities, future developments could alter these conclusions. However, management does not now believe that there is a likelihood of a material adverse effect on the financial condition of the Company in these circumstances. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to shareholders during the fourth quarter of the fiscal year. EXECUTIVE OFFICERS OF THE REGISTRANT
Officer Name Age Office and Experience Since ---- --- --------------------- ----- Craig J. Brown 49 Senior Vice President, Administration, 1987 Treasurer and Chief Financial Officer. Mr. Brown has served in his current position since March 1995, having previously served as Vice President, Finance and Treasurer from April 1987 to March 1995. Brian W. Calabro 42 Corporate Vice President, Sales. Mr. 1997 Calabro has served in his current position since April 1997. He previously served as General Sales Manager, National Accounts since July 1994 and Manager, National Account Sales since November 1990. H. Franklin Coffman 60 Corporate Vice President, Corporate 1995 Marketing and Communications. Mr. Coffman has served in this position since March 1995. Previously he held positions as Assistant Vice President, Customer Service and Communications from January 1995 to March 1995, Director, Field Automation and Customer Support from October 1993 to January 1995, and National Sales Manager from January 1992 to October 1993.
-6- 7
Officer Name Age Office and Experience Since ---- --- --------------------- ----- James H. DeYoung 60 Corporate Vice President, International 1995 Operations. Mr. DeYoung has served in this position since March 1995. He previously served as Assistant Vice President, International Operations from January 1994 to March 1995 and Director, World Trade from October 1990 to January 1994. Peter A. Dorsman 43 Senior Vice President and General 1996 Manager, Document Management and Systems Division. Mr. Dorsman has served in this position since January 1998. He served as Senior Vice President and General Manager, Equipment Division from January 1996 to January 1998. Prior to joining Standard Register in January 1996, he held a number of senior marketing, strategic planning, and sales management positions with NCR Corporation. Paul H. Granzow 71 Chairman, Board of Directors. Mr. 1984 Granzow has served as Chairman of the Board of Directors since January 1984. He is co-trustee of the John Q. Sherman Trust and also serves as Senior Vice President and Director of the Weston Paper and Manufacturing Company. Kathryn A. Lamme 52 Corporate Vice President, Secretary and 1998 Deputy General Counsel. Ms. Lamme has served in this position since joining Standard Register in March 1998. Previously she was a partner with the law firm of Turner, Granzow & Hollenkamp. J. Doug Patterson 44 Corporate Vice President, Chief 1998 Information Officer. Prior to joining Standard Register in January 1998, Mr. Patterson served as Vice President, Information Systems for Uarco Incorporated since November 1993. Peter S. Redding 60 President and Chief Executive Officer. 1981 Mr. Redding has served in his current position since December 1994. He previously served as Executive Vice President and Chief Operating Officer from January 1994 to December 1994 and Executive Vice President, Forms Division from January 1992 to January 1994. John E. Scarpelli 55 Corporate Vice President, Human 1995 Resources. Mr. Scarpelli was elected to this position in March 1995. He previously served as Assistant Vice President, Human Resources from January 1993 to March 1995. Joseph V. Schwan 62 Executive Vice President and Chief 1991 Operating Officer. Mr. Schwan has served in this position since April 1997. Previously he served as Senior Vice President and General Manager, Document Management Division from March 1995 to April 1997 and Vice President, Forms Sales and Marketing from August 1991 to March 1995.
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Officer Name Age Office and Experience Since ---- --- --------------------- ----- Allan F. Scott 51 Corporate Vice President, Operational 1998 Excellence. Prior to joining Standard Register in January 1998, Mr. Scott served as Vice President, Operations for Uarco Incorporated since November 1996. Previous to his Uarco experience, Mr. Scott had been with Wilson Sporting Goods as Vice President of Golf Operations from 1995 to 1996 and plant manager from 1993 to 1995. Harry A. Seifert, Jr. 61 Corporate Vice President and General 1987 Manager, Rotary Group. Mr. Seifert has served in this position since March 1998. Previously he had been Vice President, Manufacturing - Document Management Division from January 1997 to March 1998 and Vice President, Forms Manufacturing - Document Management Division from August 1992 to January 1997. Michael Spaul 51 Corporate Vice President. Mr. Spaul has 1991 served as General Manager of Communicolor since January 1990. Timothy J. Webb 49 Senior Vice President and General 1998 Manager, Impressions Division. Prior to joining Standard Register in January 1998, Mr. Webb served Uarco Incorporated for 26 years, most recently as President and CEO since August 1994. He also served as Executive Vice President from April 1994 to August 1994 and Senior Vice President prior to April 1994.
There are no family relationships among any of the officers. Officers are elected at the annual meeting of the Board of Directors, which is held immediately after the annual meeting of shareholders, for a term of office covering one year. - 8 - 9 PART II ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS (a) The common stock of the Registrant is traded on the New York Stock Exchange National Market under the symbol SR. The range of high and low market prices and dividends paid per share for each quarterly period during the two most recent fiscal years are presented below.
1998 ------------------------------------------------------------------------------------------------ Cash Quarter Dividend High Low Last ------- -------- ---- --- ---- 1st $0.21 $36.31 $31.00 $33.87 2nd $0.21 $40.00 $33.87 $35.69 3rd $0.21 $36.75 $28.31 $28.69 4th $0.21 $30.94 $24.50 $30.94
1997 ------------------------------------------------------------------------------------------------ Cash Quarter Dividend High Low Last ------- -------- ---- --- ---- 1st $0.20 $35.50 $31.75 $33.12 2nd $0.20 $35.75 $30.50 $30.50 3rd $0.20 $35.25 $30.50 $32.75 4th $0.20 $35.50 $32.00 $35.37
(b) The number of shareholders of record of the Company's common stock as of March 16, 1999 was 3,264, excluding individual holders whose shares are held by nominees. There are also 16 holders of Class A stock. (c) Dividend policy - The Company expects to continue paying quarterly cash dividends in the future, however, the amounts paid will be dependent upon earnings and the future financial condition of the Company. No events have occurred which would indicate a curtailment of the payment of dividends. -9- 10 ITEM 6 - SELECTED FINANCIAL DATA
Selected Income Statement Data 1998 1997 1996 1995 1994 - ------------------------------ ---- ---- ---- ---- ---- Thousands except for per share data --------------------------------------------------------------------- Revenue $1,396,869 $965,674 $943,979 $903,240 $767,415 Net income 59,583 66,894 63,157 47,759 43,876 Earnings per share: Basic 2.10 2.35 2.20 1.67 1.53 Diluted 2.08 2.33 2.19 1.67 1.53 Selected Balance Sheet Data - --------------------------- Total assets $985,077 $647,018 $588,113 $555,503 $525,659 Long-term debt 234,075 4,600 4,600 4,600 11,071 Other - ----- Cash dividends paid per share .84 .80 .76 .72 .68
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations: 1998 Compared to 1997 - --------------------------------------------- Net Income for 1998 was $59.6 million or $2.10 per basic share, 11% below the $66.9 million or $2.35 per basic share result for 1997. Revenue totaled $1.397 billion, 45% above the $966 million reported for 1997. The acquisition of Uarco, Inc., which became effective December 31, 1997 - during the first week of the Company's 1998 fiscal year, figured prominently in the results of operations for 1998. In the year prior to the acquisition, Uarco incurred a $39 million pretax operating loss on revenue of $474 million, closing its fiscal year 1997 with approximately $423 million in financial debt. Standard Register acquired the stock of Uarco, Inc. for $245 million in cash and assumed no financial debt. The table below summarizes the valuation after final purchase accounting adjustments:
(Dollars in thousands) Net Operating Assets Acquired $159.6 Prepaid Pension Asset 67.0 Restructuring Liability ( 41.7) Goodwill 60.1 ------ Purchase Price $245.0 ======
The Company's business plan for 1998 incorporated the following objectives: - - Achieve a rapid consolidation of the two companies in order to capitalize on the respective companies' personnel and market strengths and to present a single identity to the customer. - - Target profit improvements, including both improved pricing in unprofitable accounts and structural cost reductions. - - Achieve successive quarterly increases in earnings during 1998, exiting the year with a strong financial position. -10- 11 With regard to consolidations and profit improvements, the Company completed the following actions during 1998: - - The marketing and manufacturing operations of Standard Register and Uarco were immediately reorganized along product lines into two divisions. 1. Document Management & Systems Division - Provides business forms and forms management, distribution services, pressure sensitive labels, and document management systems. 2. Impressions Division - Provides promotional direct mail, imaging services, and on-demand printing. - - The sales forces for the two companies were consolidated within the first month, including the appointment of sales managers and the assignment of accounts. The consolidation resulted in the vacating of approximately 120 sales offices, reducing lease costs and improving effectiveness. - - Former Uarco forms plants at Roseburg, Oregon; Deep River, Connecticut, and Fulton, Kentucky were closed, shifting the majority of their productive capacity to other production facilities. Seven smaller print centers were also shut down, again relocating most manufacturing capacity into nearby Stanfast centers. - - The former Uarco headquarters in Barrington, Illinois was closed in the third quarter after most administrative support was transferred to the Company's Dayton, Ohio headquarters. - - Other cost saving actions included the buyout of selected operating leases on long-term assets, bringing subcontracted work in-house, warehouse consolidations, and other purchasing savings. The cost saving actions outlined above were implemented as the year progressed with most taking effect in the second half of the year. Management believes that it achieved its cost saving objectives. Conversely, management believes it fell short of its objective to improve price levels at acquired unprofitable accounts. This is attributed in part to weak paper prices, which undermined efforts to raise forms prices. The following table summarizes the results of operations for total 1997 and by quarter for 1998. As the table illustrates, the Company achieved its objective of improving earnings in each successive quarter of 1998. Comments on individual line items follow the table.
1998 (Dollars in thousands, except 1997 -------------------------------------------------------------- per share amounts) Total 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Total ----- -------- -------- -------- -------- ----- Revenue $965.7 $344.1 $333.7 $340.6 $378.5 $1,396.9 Gross Margin 389.4 121.6 123.5 130.2 147.3 522.6 % Revenue 40.3% 35.3% 37.0% 38.2% 38.9% 37.4% SG&A Expenses 241.5 88.6 85.7 84.9 95.2 354.4 EBITDA 147.9 33.0 37.8 45.3 52.1 168.2 % Revenue 15.3% 9.6% 11.3% 13.3% 13.8% 12.0% Depreciation and Amortization 36.6 13.5 13.5 12.8 14.3 54.1 Interest Expense 0.3 3.4 3.6 3.4 3.6 14.0 Pretax Profit 110.9 16.0 20.7 29.2 34.2 100.0 % Revenue 11.5% 4.7% 6.2% 8.6% 9.0% 7.2% Net Profit $66.9 $9.7 $12.4 $17.2 $20.3 $59.6 % Revenue 6.9% 2.8% 3.7% 5.1% 5.4% 4.3% Earnings per basic share $2.35 $0.34 $0.44 $0.61 $0.71 $2.10
-11- 12 Revenue increased 45% for the year and was impacted by two significant factors: the acquisition of Uarco and the unfavorable effect of a change in Uarco's revenue recognition policy. The Company originally expected to lose approximately $60 million in 1998 Uarco revenue as a result of sales turnover and other acquisition-related factors. Although it is not possible to determine the extent of acquisition related business loss, management believes its original estimate is reasonable. Overall, on a pro-forma basis, the favorable effects of new business and pricing gains achieved during 1998 exceeded lost business by $20 million, as indicated below.
(Dollars in thousands) SRC 1997 Revenue $ 966 Uarco 1997 Revenue 474 ------- Total 1,440 Effect of Uarco Policy Change (63) ------- Pro-forma Revenue 1,377 SRC 1998 Revenue 1,397 ------- Net Increase $ 20 =======
Revenue for 1998 was adversely affected by a change in Uarco's revenue recognition policy to conform to that of Standard Register. Prior to the acquisition, Uarco had recognized revenue when custom forms were shipped from its plants to its warehouses for storage and subsequent shipment and invoicing to customers, which normally occurs over a 6 to 12 month period. Standard Register's more conservative policy is to recognize revenue when product is shipped and invoiced to the customer. This change had the effect of reducing reported revenue in 1998 by $63 million. The gross margin improved in each successive quarter of 1998, reflecting declining paper prices, cost reductions from consolidations realized as the year progressed, and increased seasonal volume in the fourth quarter. Overall for the year, however, the gross margin was 2.9 percentage points lower in 1998, primarily as a result of the addition of the generally less profitable Uarco business. At this writing, paper companies have announced an approximate 10% increase in white bond paper prices to be effective March 1, 1999, which should provide improved footing for higher prices at less profitable accounts. SG&A expenses were 25.4% of revenue in 1998, compared to 25.0% for 1997. Excluding expenses related to acquisition integration and Year 2000 activities of $9.1 million and $6.5 million, respectively, 1998's expense ratio would have been 24.3%. The increase of $17.5 million in annual depreciation and amortization reflects the addition of $98 million in Uarco capital assets, $65.7 million in 1998 capital spending, and $60.1 million in goodwill amortized over 15 years. The $14.0 million in interest expense results primarily from $230 million in debt borrowed under a bank revolving credit agreement to finance the acquisition. The Company entered into a five-year interest rate swap agreement that effectively fixes the interest rate on $200 million of the debt at an all-inclusive annual cost of 6.09%. The balance of the debt floats at the London Interbank Offered Rate, plus a spread. The table below summarizes the revenue and pretax profit for the two operating divisions of the Company. Operating profits shown below are expressed in millions and incorporate allocations of all corporate expenses except interest, LIFO inventory adjustments, goodwill amortization and taxes.
Revenue Operating Profit -------------------------------- -------------------------------- (Dollars in millions) 1998 1997 %Chg. 1998 1997 %Chg. ---- ---- ----- ---- ---- ----- DM&S Division $1,010.3 $667.6 51.3% $98.0 $87.0 12.6% % Revenue 9.7% 13.0% Impressions(R)Division $ 385.3 $294.7 30.7% $15.9 $23.9 (33.5%) % Revenue 4.1% 8.1%
-12- 13 DM&S' 51% revenue increase included increases of 102% in pressure sensitive products, 44% in business forms and related management services, and 51% in document systems and support services. These increases were primarily the result of the Uarco acquisition. Operating profit increased compared to 1997, but represented a lesser percentage of revenue as a result of the generally lower profitability of the acquired Uarco business. Margins improved as the year progressed in response to the cost reductions and other actions taken, as described earlier. The 31% increase in Impressions Division revenue was led by a 61% increase in Stanfast print center shipments and a 25% growth in Imaging Services billings; Communicolor revenue declined 1%. The acquisition had little effect on Communicolor or Imaging Services revenues or operating profits. The impact to Stanfast was significant, however, both in terms of revenue and operating profit. Eight Stanfast print centers were gained in the acquisition. As a result of geographic overlap and a relatively high cost structure, six of the eight former Uarco print centers were closed, unprofitable business was jettisoned and, as a result, second half operating margins improved. The Company plans to add six new Stanfast print centers in 1999, continuing to implement its plan to put centers in 60 major metropolitan markets. Results of Operations: 1997 Compared to 1996 - --------------------------------------------- Total Revenue for 1997 was $965.7 million, up 2.3% from $944 million in fiscal 1996. Document Management and Systems Division's revenue declined 1.9% (restating the results in each of the years to correspond to the new divisional organizational structure put in place early in 1998), primarily reflecting a drop in traditional business forms. Revenue from equipment, supplies, and maintenance declined 3.3% as a result of the continuing transition from traditional forms handling equipment to newer generation intelligent printing systems; the drop in maintenance was due to the elimination of selected unprofitable business. Pressure sensitive labels increased 2.1%. The Impressions Division (restated) reported a 13.0% revenue increase, driven by increases in Imaging Services and Stanfast Groups of 21.0% and 26.2%, respectively. The division's promotional direct mail group, Communicolor, reported a 4.2% revenue decline that was attributed to customers mailing fewer pieces and to increasing competitive pressures from commercial printers. The gross margin improved from 39.1% of revenue in 1996 to 40.3% in 1997 and was the major contributing factor to the Company's improved profitability. This improvement was primarily to modestly improved pricing, lower average paper prices, and other manufacturing cost improvements. Selling, administrative, and engineering costs increased 7.0% over 1996, reflecting increased information systems expenditures and increases in field sales support personnel. The Company also undertook its program to make its systems Year 2000 compliant; expenditures in the year were $.8 million. Depreciation rose 5.3% in response to higher capital spending during the last two years. The income tax rate dropped from 41.4% to 39.7%; 1996's higher rate included capital losses on the Company's Russian joint venture write-off for which a tax deduction could not be recorded as a result of the absence of offsetting capital gains. Net Income for 1997 was $66.9 million, 5.9% above the $63.2 million reported for the prior year. Basic Earnings Per Share were $2.35 compared to 1996's $2.20 result. On a divisional basis, DM&S Division pretax operating profits rose 10.3% while margins for the Impressions Division declined 13.0%. The decline in profitability for the Impressions Division is attributed to continued weakness in Communicolor sales, and costs associated with the rapid growth in the Imaging Services and Stanfast groups. -13- 14 Year 2000 - --------- The Company's program to ensure that its systems will be Year 2000 compliant was undertaken in 1997. Through year-end 1998, $7.3 million has been expended and an additional $6.0 million in spending is budgeted in order to bring the Company's systems into compliance no later than September 1999. With regard to its critical internal information systems, the Company has undertaken a rigorous three-phase process to identify potential date-related problems in all applications, make necessary modifications, and test for compliance. At this writing, this process has been completed for the Company's order entry and manufacturing systems. Modifications are currently underway for invoicing, accounts receivable, and financial systems; testing of these systems is scheduled for completion by September 1999. With regard to potential Year 2000 problems in equipment products sold to customers, the Company employed the same three-phase approach and has brought its current product line offering into Year 2000 compliance. Equipment sales in 1998 represented approximately 3% of total Company revenue. The Company has elected not to evaluate, modify, or test selected discontinued products. In certain cases, owners of discontinued products may purchase new equipment that is Year 2000 compliant; for certain other products, the Company will make available an upgrade to a Year 2000 compliant version. The Company is using its best efforts to notify equipment customers of their options. The Company has initiated inquiries to its major vendors in order to judge the likelihood and probable impact of interruptions in raw materials and other critical supplies. Responses are continuing to come in and the Company has not completed its analysis. The Company has a very broad customer base and does not plan to test its customers' Year 2000 readiness. Given the focus and scope of the Company's program, management believes its most likely Year 2000 problem will originate from a non-mission critical system and will represent an inconvenience rather than a significant business interruption. However, the Company intends to put contingency plans in place prior to year-end that would take effect should there be such a failure in a critical system. Environmental Matters - --------------------- The Company has been named as one of a number of potentially responsible parties at several waste disposal sites, none of which has ever been Company owned. The Company has accrued for investigation and remediation at sites where costs are probable and estimable. At this writing, there are no identified environmental liabilities that are expected to have a material adverse effect on the operating results or financial condition of the Company. Liquidity and Capital Resources - ------------------------------- The Company's capital structure changed in 1998 primarily as a result of the financing and integration of the Uarco acquisition:
(Dollars in thousands) 1998 1997 Change ------- ------- ------ Cash and Short Term Investments $ 16.3 $83.6 ($67.3) Total Debt 234.6 4.6 230.0 ------ ------ ------ Net Debt $218.3 ($79.0) $297.3 ====== ====== ====== Shareholders' Equity $521.0 $487.9 $ 33.1 ====== ====== =======
-14- 15 The $230 million increase in debt represents borrowings under a $300 million five-year revolving credit agreement used to provide financing for the Uarco acquisition. The balance of the $245.0 million purchase price, $15.0 million, came from corporate cash. Other acquisition-related expenditures in 1998 included $26.8 million charged against the opening restructuring liability, $18.0 million to buyout high cost Uarco operating leases on long-term assets, $5.5 million (net of tax) for integration activities charged as expense, and $8.3 million (net of tax) in interest expense. At year-end 1998, future restructuring expenditures related to the Uarco acquisition are estimated at $14.8 million. Excluding the $73.6 million described above in 1998 acquisition-related expenditures, the balance of cash and short-term investments increased $6.4 million during the year. Expenditures for capital additions and dividends were at record levels - $65.7 million and $23.9 million, respectively. The Company expects 1999 capital spending to be in the $65 million to $75 million range. At year-end 1998, current assets were 3.6 times the level of current liabilities and the ratio of Net Debt to Total Capital was 29.5%, demonstrating that the Company's financial condition continues to be very strong. In management's judgment, the combination of internally generated cash flow and available credit will be sufficient to finance the Company's near-term operating needs. Forward-Looking Statements - -------------------------- This report includes forward-looking statements covered by the safe harbor provisions of The Private Securities Litigation Reform Act of 1995. These statements involve important assumptions, risks, uncertainties and other factors that could cause the Company's actual results for fiscal year 1999 and beyond to differ materially from those expressed in such forward-looking statements. Factors that could cause materially different results include product demand and market acceptance, the frequency and magnitude of raw material price changes, the effect of economic conditions, competitive activities, and other risks described in the Company's filings with The Securities and Exchange Commission. ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rates - -------------- The Company borrowed $230 million against its revolving credit agreement to finance the acquisition of Uarco Incorporated. The credit line bears interest at a floating rate of the London Interbank Offered Rate (LIBOR) plus a spread dependent upon the net debt to total capital ratio. Through an interest rate swap agreement, the Company has effectively converted $200 million of its floating rate debt to a fixed rate of 6.09%. The Company has an additional $4.6 million of debt with a fixed interest rate of 6.125%. Based on the Company's fixed interest rate debt existing at January 3, 1999, a hypothetical 100 basis point decrease in prevailing interest rates would result in the Company's annualized interest expense being $2.046 million greater than would exist if all debt was subject to floating interest rates. Commodity Prices - ---------------- Paper is the principal raw material in the production of business forms. Because the Company has historically been successful in adjusting its sales prices in response to changes in paper costs, management does not believe a 10% change in paper costs would have a material effect on the Company's financial statements. -15- 16 ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements Page Independent Auditors' Report 20 Balance Sheet - January 3, 1999 and December 28, 1997 21 - 22 Statement of Income - Years ended January 3, 1999, December 28, 1997 and December 29, 1996 23 Statement of Shareholders' Equity - Years ended January 3, 1999, December 28, 1997 and December 29, 1996 24 Statement of Cash Flows - Years ended January 3, 1999, December 28, 1997 and December 29, 1996 25 - 26 Notes to Consolidated Financial Statements 27 - 40 Index to Financial Statement Schedule, Years ended January 3, 1999, December 28, 1997 and December 29, 1996 II. Valuation and Qualifying Accounts 41
All other schedules have been omitted because the information is not applicable or is not material or because the information required is included in the financial statements or notes thereto. ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III Items 10, 11, 12 and 13 are incorporated by reference from the Company's Proxy Statement for the 1999 Annual Meeting of shareholders. -16- 17 PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1 and 2. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE The financial statements and financial statement schedule are listed in the accompanying Index to Financial Statements on page 16 and are incorporated herein by reference. 3. EXHIBITS The exhibits as listed on the accompanying index to exhibits on page 19 are filed as part of this Form 10-K. (b) REPORTS ON FORM 8-K The Company filed no current reports on Form 8-K during the quarter ended January 3, 1999. -17- 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, The Standard Register Company has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on March 26, 1999. THE STANDARD REGISTER COMPANY By: /S/ P. S. Redding --------------------------------- P. S. Redding, President, Chief Executive Officer and Director 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 Standard Register Company and in the capacities indicated on March 26, 1999:
Signatures Title ---------- ----- /S/ P. H. Granzow Chairman of the Board and Director - ------------------------ P. H. Granzow /S/ C. J. Brown Senior Vice-President - Administration, Treasurer, - ------------------------ Chief Financial Officer and Chief Accounting Officer C. J. Brown
P. H. Granzow, pursuant to power of attorneys which are being filed with this Annual Report on Form 10-K, has signed below on March 26, 1999 as attorney-in-fact for the following directors of the Registrant: R. W. Begley, Jr. D. L. Rediker F. D. Clarke, III A. Scavullo G. G. Keeping C. F. Sherman P. S. Redding J. Q. Sherman, II /S/ P. H. Granzow -------------------- P. H. Granzow -18- 19 INDEX TO EXHIBITS 3. Amended Articles of Incorporation of the Company and Code of Regulations. Incorporated by reference to Exhibit 4 to the Company's Registration Statement No. 33-8687. 3.1 Certificate of Amendment by the Shareholders to the Amended Articles of Incorporation of The Standard Register Company. Incorporated by reference to Form 10-K for year ended December 31, 1995. 10. Material contracts 10.3 The Standard Register Company Non-Qualified Retirement Plan. Incorporated by reference to Form 10-K for year ended January 2, 1994. 10.4 The Standard Register Company Officers' Supplemental Non-Qualified Retirement Plan. Incorporated by reference to Form 10-K for year ended January 2, 1994. 10.6 The Standard Register Company Incentive Stock Option Plan. Incorporated by reference to the Company's Proxy Statement for the Annual Meeting of Shareholders held on April 17, 1996. 10.8 The Standard Register Company Deferred Compensation Plan. Incorporated by reference to Registration Statement No. 333-43055. 10.9 The Standard Register Company Management Incentive Plan. Incorporated by reference to the Company's Proxy Statement for the Annual Meeting of Shareholders held April 16, 1997. 10.10 Stock Purchase Agreement dated November 26, 1997. Incorporated by reference to Form 8-K filed January 15, 1998. 10.11 The Standard Register Dividend Reinvestment and Common Stock Purchase Plan. Incorporated by reference to Registration Statement No. 333-05321. 13. Financial Statements and Financial Statement Schedule. 23. Consent of Independent Auditors. 24. Power of Attorney of R. W. Begley, Jr., F. D. Clark III, G.G. Keeping, P. S. Redding, D. L. Rediker, A. Scavullo, C. F. Sherman, J. Q. Sherman II. 27. Financial Data Schedule (EDGAR version). -19- EX-13 2 EXHIBIT 13 1 EX-13 INDEPENDENT AUDITORS' REPORT Board of Directors and Shareholders The Standard Register Company Dayton, Ohio We have audited the accompanying balance sheet of The Standard Register Company as of January 3, 1999 and December 28, 1997, and the related statements of income, shareholders' equity, comprehensive income, and cash flows for each of the three years in the period ended January 3, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based upon our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Standard Register Company as of January 3, 1999 and December 28, 1997, and the results of its operations and its cash flows for each of the three years in the period ended January 3, 1999, in conformity with generally accepted accounting principles. /S/ BATTELLE & BATTELLE LLP BATTELLE & BATTELLE LLP Certified Public Accountants Dayton, Ohio February 1, 1999 -20- 2 THE STANDARD BALANCE (DOLLARS IN
January 3 December 28 A S S E T S 1999 1997 --------- ----------- CURRENT ASSETS Cash and cash equivalents $ 9,792 $ 67,556 Short-term investments 6,530 16,055 Accounts receivable, less allowance for doubtful accounts of $14,158 and $2,864, respectively 288,103 191,031 Inventories 138,376 85,546 Deferred income taxes 19,065 6,168 Prepaid pension expense -- 5,371 Prepaid other expense 11,929 7,091 -------- -------- Total current assets 473,795 378,818 -------- -------- PLANT AND EQUIPMENT Buildings and improvements 93,552 67,874 Machinery and equipment 306,658 237,320 Office equipment 98,209 67,324 -------- -------- Total 498,419 372,518 Less accumulated depreciation 182,218 155,634 -------- -------- Depreciated cost 316,201 216,884 Plant and equipment under construction 44,732 39,070 Land 7,228 4,081 -------- -------- Total plant and equipment 368,161 260,035 -------- -------- OTHER ASSETS Goodwill, less accumulated amortization of $4,491 and $321, respectively 57,825 1,868 Prepaid pension expense 73,538 -- Other 11,758 6,297 -------- -------- Total other assets 143,121 8,165 -------- -------- Total assets $985,077 $647,018 ======== ========
-21- 3 REGISTER COMPANY SHEET THOUSANDS)
January 3 December 28 LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1997 --------- --------- CURRENT LIABILITIES Current portion of long-term debt $ 525 $ -- Accounts payable 29,967 25,296 Dividends payable 6,251 5,968 Accrued compensation 44,406 34,817 Income taxes payable 1,335 1,155 Customer deposits 3,138 21,003 Deferred service contract income 8,404 7,222 Accrued restructuring 14,843 -- Other current liabilities 21,487 11,558 --------- --------- Total current liabilities 130,356 107,019 --------- --------- LONG-TERM LIABILITIES Long-term debt 234,075 4,600 Retiree health care obligation 55,057 28,779 Deferred compensation 3,795 -- Deferred income taxes 40,829 18,685 --------- --------- Total long-term liabilities 333,756 52,064 --------- --------- SHAREHOLDERS' EQUITY Common stock, $1.00 par value: Authorized 50,500,000 shares Issued 1998 - 24,391,072; 1997 - 24,308,437 24,391 24,308 Class A stock, $1.00 par value: Authorized 4,725,000 shares Issued - 4,725,000 4,725 4,725 Capital in excess of par value 33,957 31,599 Accumulated other comprehensive income (1,161) Retained earnings 479,679 444,259 Treasury stock at cost: 1998 - 701,152 shares; 1997 - 615,073 shares (19,614) (16,956) Common stock held in grantor trust, 26,284 shares at cost (1,012) -- --------- --------- Total shareholders' equity 520,965 487,935 --------- --------- Total liabilities and shareholders' equity $ 985,077 $ 647,018 ========= =========
See accompanying notes. -22- 4 THE STANDARD REGISTER COMPANY STATEMENT OF INCOME (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
53 Weeks Ended 52 Weeks Ended 52 Weeks Ended January 3 December 28 December 29 1999 1997 1996 -------------- -------------- -------------- REVENUE $1,396,869 $965,674 $943,979 ---------- -------- -------- COST AND EXPENSE Cost of products sold 874,302 576,292 575,316 Engineering and research 9,399 9,100 7,842 Selling and administrative 345,007 232,418 217,671 Depreciation and amortization 54,112 36,646 34,814 Interest 14,044 288 532 ---------- -------- -------- Total cost and expense 1,296,864 854,744 836,175 ---------- -------- -------- INCOME BEFORE INCOME TAXES 100,005 110,930 107,804 INCOMES TAXES Current 37,928 40,098 42,009 Deferred 2,494 3,938 2,638 ---------- -------- -------- Total income taxes 40,422 44,036 44,647 ---------- -------- -------- NET INCOME $ 59,583 $ 66,894 $ 63,157 ========== ======== ======== EARNINGS PER SHARE Basic $2.10 $2.35 $2.20 ========== ======== ======== Diluted $2.08 $2.33 $2.19 ========== ======== ========
See accompanying notes. -23- 5 THE STANDARD REGISTER COMPANY STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (DOLLARS IN THOUSANDS)
53 Weeks Ended 52 Weeks Ended 52 Weeks Ended January 3 December 28 December 29 1999 1997 1996 -------------- -------------- -------------- COMMON STOCK Beginning balance $ 24,308 $ 24,204 $ 24,142 Add shares issued under: Management Incentive Plan 6 50 55 Dividend Reinvestment Plan 23 22 7 Stock Option Plan 54 32 - --------- --------- --------- Ending balance 24,391 24,308 24,204 --------- --------- --------- CLASS A STOCK 4,725 4,725 4,725 --------- --------- --------- CAPITAL IN EXCESS OF PAR VALUE Beginning balance 31,599 28,705 27,450 Add excess of market over par value of shares issued under: Management Incentive Plan 195 1,562 1,062 Dividend Reinvestment Plan 739 709 193 Stock Option Plan 1,141 623 - Establish grantor trust with treasury shares 283 - - --------- --------- --------- Ending balance 33,957 31,599 28,705 --------- --------- --------- OTHER COMPREHENSIVE INCOME (1,161) - - --------- --------- --------- RETAINED EARNINGS Beginning balance 444,259 400,387 359,334 Add net income 59,583 66,894 63,157 Less dividends declared (1998 - $.85 per share; 1997 - $.81 per share; 1996 - $.77 per share) (24,163) (23,022) (22,104) --------- --------- --------- Ending balance 479,679 444,259 400,387 --------- --------- --------- TREASURY STOCK AT COST Beginning balance (16,956) (4,775) (4,434) Cost of common shares purchased (3,387) (12,181) (341) Establish grantor trust with treasury shares 729 - - --------- --------- --------- Ending balance (19,614) (16,956) (4,775) --------- --------- --------- COMMON STOCK HELD IN GRANTOR TRUST Beginning balance - - - Establish grantor trust with treasury shares (1,012) - - --------- --------- --------- Ending balance (1,012) - - --------- --------- --------- Total shareholders' equity $ 520,965 $ 487,935 $ 453,246 ========= ========= ========= COMPREHENSIVE INCOME Net income $ 59,583 $ 66,894 $ 63,157 Minimum pension liability, net of $782 deferred income tax benefit (1,161) - - --------- --------- --------- Total comprehensive income $ 58,422 $ 66,894 $ 63,157 ========= ========= =========
See accompanying notes. -24- 6 THE STANDARD REGISTER COMPANY STATEMENT OF CASH FLOWS (DOLLARS IN THOUSANDS)
53 Weeks Ended 52 Weeks Ended 52 Weeks Ended January 3 December 28 December 29 1999 1997 1996 --------- -------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 59,583 $ 66,894 $ 63,157 --------- -------- --------- Add (deduct) items not affecting cash: Depreciation and amortization 54,112 36,646 34,814 Loss on sale of assets 19 346 1,508 Net securities gains (7) (294) - Loss on other investments - 1,852 4,383 Provision for deferred income taxes 2,494 3,938 2,638 Increase (decrease) in cash arising from changes in assets and liabilities: Trading securities 8,771 (15,000) Accounts receivable 22,523 (12,320) 2,998 Inventories (38,194) 606 11,665 Other assets (2,243) (6,309) (2,494) Accounts payable and accrued expenses (50,827) 5,653 220 Income taxes payable 261 (1,469) 90 Customer deposits (17,865) 16,818 (4,149) Deferred income 1,182 (52) (1,181) Other liabilities 3,146 1,136 1,542 --------- -------- --------- Net adjustments (16,628) 31,551 52,034 --------- -------- --------- Net cash provided by operating activities 42,955 98,445 115,191 --------- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to plant and equipment (65,733) (61,287) (57,783) Proceeds from sale of plant and equipment 5,657 432 1,692 Proceeds from sale of held-to-maturity securities 760 455 115 Acquisition (245,000) - - Additions to other investments - (3,028) (1,008) Other investing activities - (36) - --------- -------- --------- Net cash used in investing activities (304,316) (63,464) (56,984) --------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on long-term debt (1,294) - (6,471) Proceeds from issuance of long-term debt 230,000 - - Proceeds from issuance of common stock 2,158 2,998 1,317 Purchase of treasury stock (3,387) (12,181) (341) Dividends paid (23,880) (22,792) (21,808) --------- -------- --------- Net cash provided by (used in) financing activities 203,597 (31,975) (27,303) --------- -------- --------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (57,764) 3,006 30,904 Cash and cash equivalents at beginning of year 67,556 64,550 33,646 --------- -------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 9,792 $ 67,556 $ 64,550 ========= ======== =========
See accompanying notes. -25- 7 THE STANDARD REGISTER COMPANY STATEMENT OF CASH FLOWS (Continued) (DOLLARS IN THOUSANDS)
53 Weeks Ended 52 Weeks Ended 52 Weeks Ended January 3 December 28 December 29 1999 1997 1996 -------------- -------------- -------------- SUPPLEMENTAL CASH FLOW DISCLOSURES Cash paid during the year for: Interest $ 14,453 $ 141 $ 565 Income taxes 37,667 41,317 42,115 Non-cash investing activities: Note receivable from sale of assets $ - $ - $ 650 Issuance of treasury stock to grantor trust 1,012 - - Minimum pension liability 1,943 - - Details of acquisiton: Working capital $ 56,841 $ - $ - Property, plant and equipment 98,011 - - Other assets 74,412 -- - Other liabilities (44,391) -- - Excess of purchase price over fair value of net assets acquired 60,127 - - --------- ------- ------- Cash paid for acquisition $ 245,000 $ - $ - ========= ======= =======
See accompanying notes. -26- 8 THE STANDARD REGISTER COMPANY NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Standard Register Company is a leading domestic supplier of business forms, pressure sensitive labels, business equipment, direct mail marketing materials, and document management services. The Company markets its products and services through a direct sales organization located in offices throughout the United States. The accounting policies that affect the more significant elements of the financial statements are summarized below. 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 amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. RECLASSIFICATIONS - Certain prior year balances have been reclassified to conform with the current year presentation. FISCAL YEAR - The Company's fiscal year ends on the Sunday nearest to December 31. Fiscal year ending January 3, 1999 includes 53 weeks, while fiscal years ending December 28, 1997 and December 29, 1996 include 52 weeks. CASH EQUIVALENTS - The Company classifies as cash equivalents all highly liquid investments with original maturities of three months or less. These are primarily composed of repurchase agreements, municipal notes and bond funds, which are convertible to a known amount of cash and carry an insignificant risk of change in value. Cash equivalents are valued at cost plus accrued interest, which approximates market value. SHORT-TERM INVESTMENTS - Securities are classified as trading when held for short-term periods in anticipation of market gains and are reported at fair market value, with unrealized gains and losses included in income. Debt securities for which the Company has the intent and ability to hold to maturity are classified as held-to-maturity and are stated at amortized cost. INVENTORIES - Inventories are valued at the lower of cost or market. Substantially all inventory costs are determined by the last-in, first-out (LIFO) method. Finished products include printed forms stored for future shipment and invoicing to customers. PLANT AND EQUIPMENT - These assets are stated at cost less accumulated depreciation. Costs of normal maintenance and repairs are charged to expense when incurred. When the assets are retired or otherwise disposed of, their cost and related depreciation are removed from the respective accounts and the resulting gain or loss is included in current income. Impairment of asset value is recognized whenever events or circumstances indicate that carrying amounts are not recoverable. -27- 9 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DEPRECIATION - For financial statement purposes, depreciation is computed by the straight-line method over the expected useful lives of the depreciable assets. Depreciation expense was $49,896 in 1998, $36,431 in 1997, and $34,601 in 1996. Estimated asset lives are:
Classification Years -------------- ----- Buildings and improvements 10-40 Machinery and equipment 5-15 Office equipment 5-15
GOODWILL - Goodwill represents the excess of purchase price and related costs over the fair value of the net assets of businesses acquired in purchase transactions. Goodwill is being amortized on a straight-line basis over 15 years. Periodically, the Company reviews the recoverability of goodwill. In management's opinion, no material impairment exists at January 3, 1999. Amortized goodwill expense was $4,170 in 1998, $162 in 1997, and $159 in 1996. INCOME TAXES - The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the financial and tax bases, using enacted rates. REVENUE RECOGNITION - The Company generally recognizes product and related services revenue at the time of shipment to the customer. Under contractual arrangements with some customers, custom forms which are stored for future delivery are recognized as revenue when manufacturing is complete and the order is invoiced. Revenue from equipment service contracts is recognized ratably over the term of the contract. EARNINGS PER SHARE - Basic earnings per share is the per share allocation of net income available to shareholders based on the weighted average number of shares outstanding during the period. Diluted earnings per share represents the per share allocation of net income based on the weighted average number of shares outstanding plus all common shares that potentially could have been issued under the Company's stock option program. ACCOUNTING FOR STOCK OPTIONS - The Company follows Accounting Principles Board (APB) Opinion No. 25 "Accounting for Stock Issued to Employees" in accounting for its employee stock options. Under APB 25, no compensation expense is recognized in the financial statements because the exercise price of employee stock options equals the market price of the underlying stock on the date of the grant. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." NEW ACCOUNTING PRONOUNCEMENTS - During 1998, the Company adopted Statements of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"; No. 131, "Disclosures about Segments of an Enterprise and Related Information"; and No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits". The adoption of these standards has no material effect on the Company's financial statements. -28- 10 NOTE 2 - ACQUISITION On December 31, 1997, the Company acquired all outstanding shares of Uarco Incorporated (UARCO) for $245,000, exclusive of acquisition costs. $230,000 of the purchase price was financed under a new five-year bank revolving credit agreement. UARCO produced and marketed business forms, pressure sensitive labels, business equipment, supplies, and workflow systems to the U.S. market. Uarco Incorporated operated as a wholly owned subsidiary for three months until it was merged into The Standard Register Company on March 31, 1998. The acquisition has been accounted for under the purchase method and, accordingly, operating results of the UARCO business subsequent to the date of acquisition are included in the Company's financial statements. The purchase price has been allocated to the assets acquired and liabilities assumed based upon the respective fair values on the date of acquisition. Certain liabilities were also recognized in connection with the UARCO purchase and included in the acquisition cost allocation. These liabilities include costs relating to the closings of former UARCO production and sales facilities, and termination and relocation of former UARCO employees. Such recognized liabilities totaled $41,659, of which $14,843 remains unpaid and is recorded as accrued restructuring liability at January 3, 1999. The excess of purchase price, acquisition costs and recognized liabilities over the fair values of the net assets acquired was $60,127 and has been recorded as goodwill, which is being amortized on a straight-line basis over 15 years. The following unaudited pro forma information has been prepared assuming UARCO had been acquired at the beginning of 1997 and 1996. The pro forma information does not necessarily reflect the results of operations that actually would have been achieved had the acquisition been consummated as of that time.
1997 1996 ------------- ------------- Revenue $ 1,435,862 $ 1,419,892 Net income 28,406 41,044 Earnings per share: Basic $ 1.00 $ 1.43 Diluted $ .99 $ 1.42
-29- 11 NOTE 3 - INVENTORIES Inventories are valued at the lower of cost or market determined by the last-in, first-out (LIFO) method. If the first-in, first-out (FIFO) method had been used, these inventories would have been $31,530 higher at January 3, 1999 and $35,601 higher at December 28, 1997. Inventories at the respective year-ends are as follows:
January 3 December 28 1999 1997 --------- ----------- Finished products $ 104,982 $58,675 Jobs in process 18,075 16,500 Materials and supplies 15,319 10,371 --------- ------- Total $ 138,376 $85,546 ========= =======
NOTE 4 - LONG-TERM DEBT Long-term debt consists of the following:
January 3 December 28 1999 1997 --------- ----------- Revolving credit facility $ 230,000 $ - Industrial development revenue bonds 4,600 4,600 --------- --------- Total 234,600 4,600 Less current portion 525 - --------- --------- Long-term portion $ 234,075 $ 4,600 ========= =========
In December 1997, the Company entered into a five-year unsecured revolving credit agreement with nine banks. The credit line provides for borrowings up to $300,000. On December 31, 1997, $230,000 was borrowed against the line for financing the acquisition of Uarco Incorporated. The credit line bears interest at a floating rate of the London Interbank Offered Rate (LIBOR) plus a spread dependent upon the net debt to total capital ratio. In January 1998, the Company entered into an interest rate swap agreement that effectively converts $200,000 of its floating rate debt to a fixed rate of 6.09%. The credit line is scheduled to expire in December 2002. Long-term debt also includes industrial development revenue bonds issued by Rutherford County, Tennessee. Interest is payable semi-annually at 6.125%. Required annual bond principal payments subsequent to January 3, 1999 are as follows: 1999 - $525; 2000 - $555; 2001 - $590; 2002 - $630; and 2003 - $2,300. -30- 12 NOTE 5 - INCOME TAXES The provision for income taxes consists of the following:
1998 1997 1996 ---- ---- ---- Current Federal $ 30,800 $ 32,933 $ 33,285 State and local 7,128 7,165 8,724 -------- -------- -------- 37,928 40,098 42,009 Deferred 2,494 3,938 2,638 -------- -------- -------- Total $ 40,422 $ 44,036 $ 44,647 ======== ======== ========
The significant components of the deferred tax expense (benefit) are as follows:
1998 1997 1996 ---- ---- ---- Depreciation $ 1,848 $ 2,357 $ 853 Pension 1,961 2,039 1,712 Inventories (230) 110 267 Compensation and benefits (2,107) (431) (33) Allowance for doubtful accounts 1,192 312 111 Retiree health care benefits (132) (457) (620) Other (38) 8 348 -------- -------- -------- Total $ 2,494 $ 3,938 $ 2,638 ======== ======== ========
The components of the net deferred tax asset and liability as of January 3, 1999 and December 28, 1997 are as follows:
January 3 December 28 1999 1997 --------- ----------- Deferred tax asset: Allowance for doubtful accounts $ 5,701 $ 1,153 Inventories 3,546 2,524 Compensation and benefits 9,276 5,127 Pension - (2,739) Other 542 103 --------- --------- $ 19,065 $ 6,168 ========= ========= Deferred tax liability: Depreciation $ 32,120 $ 30,272 Pension 30,879 - Retiree health care benefits (22,170) (11,587) --------- --------- $ 40,829 $ 18,685 ========= =========
The reconciliation of the statutory federal income tax rate and the effective tax rate follows:
1998 1997 1996 ---- ---- ---- Statutory federal income tax rate 35.0% 35.0% 35.0% State and local income taxes 5.3 5.3 5.3 Other .1 (.6) 1.1 ---- ---- ---- Effective tax rate 40.4% 39.7% 41.4% ==== ==== ====
-31- 13 NOTE 6 - CAPITAL STRUCTURE The Company has two classes of capital stock issued and outstanding, Common and Class A. These are equal in all respects except voting rights and restrictions on ownership of Class A stock. Each of the 23,663,636 shares of Common outstanding has one vote, while each of the 4,725,000 shares of Class A is entitled to five votes. Class A stock is convertible into Common stock on a share-for-share basis at which time ownership restrictions are eliminated. NOTE 7 - COMMON STOCK HELD IN GRANTOR TRUST During 1998, the Company established a grantor trust ("Trust") with cash and 26,284 shares of treasury stock. The Trust will fund the Company's obligations under a deferred compensation plan for a select group of management. The benefits payable from the Trust are included in the $3,795 "Deferred compensation" liability shown on the Company's balance sheet. Obligations under the deferred compensation plan are intended to be settled only in cash. Therefore, the shares of the Company's common stock held by the Trust are not considered to be potentially dilutive. To record this transaction, the Company reduced "Treasury stock" by the average cost of these shares to the Company, or $729, and the fair market value of the shares was recorded as "Common stock held in grantor trust". "Capital in excess of par value" was increased for the difference of $283 between the cost of the shares and their fair value. Increases or decreases in the deferred compensation liability that result from changes in the value of the Company's common stock held by the Trust, are recognized in current income. -32- 14 NOTE 8 - EARNINGS PER SHARE DATA The following per share data show the amounts used in computing earnings per share (EPS) and the dilutive effects of stock options:
53 Weeks Ended January 3, 1999 --------------------------------------- Net Shares Income Income (000's) Per Share ------ ------- --------- Basic $59,583 28,426 $2.10 ===== Dilutive effect of stock options -- 175 ------- ------ Diluted $59,583 28,601 $2.08 ======= ====== =====
52 Weeks Ended December 28, 1997 --------------------------------------- Net Shares Income Income (000's) Per Share ------ ------- --------- Basic $66,894 28,498 $2.35 ===== Dilutive effect of stock options -- 203 ------- ------ Diluted $66,894 28,701 $2.33 ======= ====== =====
52 Weeks Ended December 29, 1996 --------------------------------------- Net Shares Income Income (000's) Per Share ------ ------- --------- Basic $63,157 28,687 $2.20 ===== Dilutive effect of stock options -- 118 ------- ------ Diluted $63,157 28,805 $2.19 ======= ====== =====
The effects of stock options on diluted EPS are reflected through the application of the treasury stock method. Under this method, proceeds received by the Company, based on assumed exercise, are hypothetically used to repurchase the Company's shares at the average market price for the period. -33- 15 NOTE 9 - STOCK OPTION PLAN In 1995, the Company adopted a stock option plan authorizing the issuance of options for up to 2,000,000 shares of common stock to officers and key employees. Under the terms of the plan, options may be either incentive or non-qualified. The options have a term of ten years. The exercise price per share, determined by a committee of the Board of Directors, may not be less than the fair market value on the grant date. The options are exercisable over periods determined when granted. The Company applies APB Opinion No. 25 "Accounting for Stock Issued to Employees" and related interpretations in accounting for its stock option plan. Accordingly, no compensation cost has been recognized in the Company's financial statements. Had compensation cost for the Company's stock option plan been determined based on the fair value of such awards at the grant dates, consistent with the methods of Financial Accounting Standards Board Statement No. 123 "Accounting for Stock-Based Compensation", the Company's total and per share net income would have been reduced as follows:
1998 1997 1996 ---- ---- ---- Net income As reported $59,583 $66,894 $63,157 Pro forma 57,364 65,101 62,512 Basic earnings per share As reported $ 2.10 $ 2.35 $ 2.20 Pro forma 2.02 2.28 2.18 Diluted earnings per share As reported $ 2.08 $ 2.33 $ 2.19 Pro forma 2.00 2.27 2.17
The weighted average fair values of options granted in fiscal years 1998, 1997, and 1996 were estimated at $9.75, $10.58, and $10.37 per share, respectively, using the Black-Scholes option-pricing model based on the following assumptions:
1998 1997 1996 ---- ---- ---- Risk-free interest rate 4.7% and 5.4% 5.7% 6.2% Dividend yield 2.0% 2.0% 2.0% Expected life 5 years 5 years 5 years Expected volatility 29.8% 29.7% 31.5%
The following summarizes stock option activity during fiscal years 1998, 1997 and 1996:
1998 1997 1996 ----------------------- ----------------------- ---------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ ----- ------ ----- ------ ----- Outstanding, beginning of year 924,420 $ 26.836 776,000 $ 23.772 550,000 $ 20.125 Granted 979,500 33.217 227,000 35.313 231,000 32.375 Exercised (54,180) 22.069 (32,580) 20.125 - - Canceled (92,400) 31.478 (46,000) 21.728 (5,000) 20.125 ---------- -------- ------- Outstanding, end of year 1,757,340 924,420 776,000 ========= ======= =======
-34- 16 NOTE 9 - STOCK OPTION PLAN (CONTINUED) Following is a summary of the status of stock options outstanding at January 3, 1999:
Number Number Exercise Remaining Outstanding Exercisable Price Term ----------- ----------- ----- ---- 408,840 220,840 $ 20.125 7 years 205,000 172,200 32.375 8 years 204,000 112,200 35.313 9 years 710,000 - 34.125 10 years 229,500 - 30.938 10 years
NOTE 10 - PENSION PLANS The Company has qualified defined benefit plans covering substantially all of its employees. The benefits are based on years of service and the employee's compensation at the time of retirement, or years of service and a benefit multiplier. The Company funds its pension plans based on allowable federal income tax deductions. Contributions are intended to provide not only for benefits attributed to service to date but also for benefits expected to be earned in the future. The Company also has two non-qualified plans that provide benefits in addition to those provided in the qualified plans. Pension fund assets are invested in a broadly diversified portfolio consisting primarily of publicly-traded common stocks and fixed income securities. During 1998, the Company adopted the disclosure requirements of Statement of Financial Accounting Standards (SFAS) No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits". SFAS 132 standardizes the disclosure requirements for pensions and other postretirement benefits, requires additional information on changes in benefit obligations and fair values of assets, and eliminates certain previous disclosure requirements. The following sets forth the reconciliation of the benefit obligations and plan assets and the funded status for all Company pension plans:
Change in Benefit Obligation 1998 1997 - ---------------------------- ---- ---- Benefit obligation at beginning of year $178,676 $161,934 Service cost 10,291 6,476 Interest cost 29,017 13,265 Plan participants' contributions 2,122 2,056 Amendments 564 1,118 Actuarial loss 50,196 6,820 Acquisition 193,472 -- Benefits paid (29,033) (12,993) -------- -------- Benefit obligation at end of year $435,305 $178,676 ======== ========
-35- 17 NOTE 10 - PENSION PLANS (CONTINUED)
Change in Plan Assets 1998 1997 --------------------- ---- ---- Fair value of plan assets at beginning of year $ 204,935 $ 150,857 Actual return on plan assets 3,739 51,987 Participants' contributions 2,122 2,056 Employer contributions 3,646 13,028 Acquisition 262,031 -- Benefits paid (29,033) (12,993) --------- --------- Fair value of plan assets at end of year $ 447,440 $ 204,935 ========= ========= Funded status $ 12,135 $ 26,259 Unrecognized net actuarial loss (gain) 54,253 (28,285) Unrecognized prior service cost 10,300 8,947 Unrecognized transition amount -- (119) Minimum pension liability (3,150) (1,431) --------- --------- Prepaid pension expense shown in balance sheet $ 73,538 $ 5,371 ========= ========= Minimum pension liability: Intangible asset $ 1,207 $ 1,431 Deferred income tax benefit 782 -- Charge to shareholders' equity 1,161 -- --------- --------- Total $ 3,150 $ 1,431 ========= =========
Net periodic benefit cost includes the following components:
1998 1997 1996 -------- -------- -------- Service cost of benefits earned $ 10,291 $ 6,476 $ 5,734 Interest cost on projected benefit obligation 29,017 13,265 12,431 Expected return on plan assets (41,265) (15,131) (12,433) Amortization of prior service costs 2,322 1,950 1,950 Amortization of transition asset (120) (120) (605) Amortization of net loss from prior periods 238 117 62 Cost of early retirement window 237 1,118 -- -------- -------- -------- Net periodic benefit cost $ 720 $ 7,675 $ 7,139 ======== ======== ========
The weighted average discount rates used in determining the actuarial present value of the projected benefit obligation were 7.0% for 1998 and 8.5% for 1997 and 1996. The rate of increase for future compensation levels used in determining the obligation was 5.0 percent for 1998, 1997 and 1996. The expected long-term rate of return on plan assets in 1998, 1997 and 1996 was 10.5 percent. The Company's two non-qualified plans have no plan assets. The total unfunded projected benefit obligations of these two plans were $22,099, $9,470, and $6,421 at the respective 1998, 1997 and 1996 year ends. The related accumulated benefit obligations were $16,947, $5,172, and $3,440 at the same respective year ends. Minimum pension liability adjustments of $3,150 and $1,431 were recorded in 1998 and 1997, respectively. Corresponding amounts were recognized as intangible assets to the extent of unrecognized prior service cost and unrecognized transition amount. At January 3, 1999, $1,943 of excess minimum liability resulted in a reduction of shareholders' equity, net of $782 related deferred tax benefit. The net $1,161 reduction of shareholders' equity is accounted for as a component of "Comprehensive Income". -36- 18 NOTE 11 - POSTRETIREMENT BENEFITS OTHER THAN PENSIONS In addition to providing pension benefits, the Company provides certain health care benefits for eligible retired employees. The following table sets forth the reconciliation of the benefit obligation and the funded status for this plan:
1998 1997 -------- -------- Change in Accumulated Postretirement Benefit Obligation - ------------------------------------------------------- Beginning balance $ 28,779 $ 29,182 Service cost -- -- Interest cost 4,077 2,401 Actuarial loss (gain) 1,543 (4,721) Acquisition 25,951 0 Net retiree benefits paid (3,702) (1,265) -------- -------- Ending balance $ 56,648 $ 25,597 Plan assets -- -- -------- -------- Funded status $ 56,648 $ 25,597 Unrecognized net actuarial (gain) loss (1,591) 3,182 -------- -------- Retiree health care obligation shown in balance sheet $ 55,057 $ 28,779 ======== ========
The components of postretirement benefit cost are as follows:
1998 1997 1996 ------- ------ ------ Service cost $ -- $ -- $ -- Interest cost 4,077 2,401 2,728 Amortization of net (gain) loss from prior periods (48) -- 266 ------- ------ ------ Net postretirement benefit cost $ 4,029 $2,401 $2,994 ======= ====== ======
The funding policy is to pay claims as they occur. Payments for postretirement health benefits, net of retiree contributions, amounted to $3,702, $1,265 and $1,452 in 1998, 1997, and 1996, respectively. The accumulated benefit obligation was determined using the unit credit method and assumed discount rates of 7.0% for 1998 and 8.5% for 1997 and 1996. The assumed current health care cost trend rate is 10.0% in 1998 and gradually decreases to 5.0% in the year 2007. A one percent increase in the health care cost trend rates used would result in a $211 increase in the service and interest components of expense for 1998 ($298 for 1997) and a $2,771 increase in the postretirement benefit obligation at January 3, 1999 ($3,048 increase at December 28, 1997). A one percent decrease in the health care cost trend rates used would result in a $186 decrease in the service and interest components of expense for 1998 and a $2,445 decrease in the postretirement benefit obligation at January 3, 1999. The effects of a one percent decrease were not determined for 1997. -37- 19 NOTE 12 - CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to a concentration of credit risk principally consist of cash and equivalents, short-term investments, and trade receivables. The Company's credit risk with respect to trade receivables is, in management's opinion, limited due to industry and geographic diversification. As disclosed on the balance sheet, the Company maintains an allowance for doubtful accounts to cover estimated credit losses. NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS
January 3, 1999 December 28, 1997 ---------------------- ---------------------- Fair Carrying Fair Carrying Value Amount Value Amount ----- ------ ----- ------ Assets Cash and equivalents $ 9,792 $ 9,792 $ 67,556 $ 67,556 Securities held to maturity - - 760 760 Trading securities 6,530 6,530 15,295 15,295 Liabilities Long-term debt $237,083 $234,600 $ 4,695 $ 4,600
The carrying amounts of cash equivalents and securities held to maturity approximate fair value because of the short maturities of those instruments. The fair value of trading securities is based on quoted market prices. The fair value of long-term debt, including the current portion, is estimated using a discounted cash flow analysis based on the Company's assumed incremental borrowing rates for similar types of borrowing arrangements. NOTE 14 - COMMITMENTS AND CONTINGENCIES Purchase commitments for capital improvements aggregated $10,036 at January 3, 1999. Also, the Company has purchase commitments for equipment for resale of $923 at January 3, 1999. The Company has no purchase agreements with suppliers extending beyond normal quantity requirements. The Company is obligated under several leases expiring at various dates. Annual expense under these leases was $46,838 in 1998, $25,450 in 1997, and $23,320 in 1996. Rental commitments under existing leases at January 3, 1999, are:
Computer and Real Sales Transportation Other Estate Offices Equipment Equipment Total ------ ------- --------- --------- ----- 1999 $14,621 $9,789 $671 $7,233 $32,314 2000 13,801 7,260 437 5,086 26,584 2001 8,709 5,655 367 3,045 17,776 2002 4,636 3,531 351 1,488 10,006 2003 1,854 1,546 276 932 4,608 Later years 39 238 177 - 454
In the opinion of management, no litigation or claims, including proceedings under governmental laws and regulations related to environmental matters, are pending against the Company which will have an adverse material effect on its financial condition. -38- 20 NOTE 15 - SEGMENT REPORTING INFORMATION During 1998, the Company adopted the disclosure requirements of Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information". SFAS 131 uses a "management approach" to disclose financial and descriptive information about an enterprise's reportable operating segments that is based on reporting information the way management organizes the segments for making operating decisions and assessing performance. The Company has determined that its operating activities consist of two reportable operating segments resulting from its 1998 internal realignment. One operating segment is the Document Management and Systems Division (DM&SD) into which the Company's core businesses have been concentrated. Products and services provided by this division include paper-based and electronic business forms, document security and document management solutions, and pressure sensitive labels. The second operating segment is the faster growing Impressions Division that provides direct mail, commercial printing, print on demand, and phone cards/smart cards products and services. Each division provides marketing, research and development, manufacturing, and administrative support for their respective products and services. Financial information about the Company's reportable operating segments is as follows:
1998 1997 1996 ----------- -------- -------- Revenue: DM&SD $ 1,010,294 $667,726 $680,497 Impressions 385,318 294,722 260,792 Corporate 1,257 3,226 2,689 ----------- -------- -------- Total revenue $ 1,396,869 $965,674 $943,978 =========== ======== ======== Income Before Income Taxes: DM&SD $ 97,987 $ 87,036 $ 78,921 Impressions 15,865 23,867 27,421 Corporate (13,847) 27 1,462 ----------- -------- -------- Total income before income taxes $ 100,005 $110,930 $107,804 =========== ======== ======== Identifiable Assets: DM&SD $ 591,777 $381,419 $363,334 Impressions 183,724 167,362 153,591 Corporate 209,576 98,237 71,188 ----------- -------- -------- Total identifiable assets $ 985,077 $647,018 $588,113 =========== ======== ======== Depreciation and Amortization Expense: DM&SD $ 27,423 $ 18,111 $ 18,221 Impressions 16,727 15,104 13,251 Corporate 9,962 3,431 3,342 ----------- -------- -------- Total depreciation and amortization expense $ 54,112 $ 36,646 $ 34,814 =========== ======== ======== Capital Expenditures: DM&SD $ 20,373 $ 25,266 $ 27,599 Impressions 12,388 18,257 25,516 Corporate 32,972 17,764 4,668 ----------- -------- -------- Total capital expenditures $ 65,733 $ 61,287 $ 57,783 =========== ======== ========
In computing income before income taxes for each operating segment, the following items have been excluded and reported as corporate: interest expense, goodwill amortization, LIFO adjustments, and income from investments. -39- 21 NOTE 16 - QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data follow:
Quarters Ended -------------------------------------------------------------------- March 29 June 28 September 27 January 3 1998 1998 1998 1999 -------- ------- ------------ --------- Revenue $344,057 $333,654 $340,648 $378,510 Gross margin* 121,584 123,477 130,239 147,267 Net income 9,691 12,368 17,217 20,307 Basic earnings per share .34 .44 .61 .71 Diluted earnings per share .34 .43 .60 .71
Quarters Ended -------------------------------------------------------------------- March 30 June 29 September 28 December 28 1997 1997 1997 1997 -------- ------- ------------ ----------- Revenue $230,114 $236,467 $237,243 $261,850 Gross margin* 93,589 96,537 97,454 101,802 Net income 14,948 16,999 16,250 18,697 Basic earnings per share .52 .60 .57 .66 Diluted earnings per share .52 .59 .57 .65
* Revenue less cost of products sold. -40- 22 SCHEDULE II THE STANDARD REGISTER COMPANY VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE THREE YEARS ENDED JANUARY 3, 1999 (Dollars in thousands)
Column A Column B Column C Column D Column E - -------- -------- -------- -------- -------- Additions --------- (1) (2) Charged Balance at (Credited) Balance beginning to costs Other at end Description of period and expenses Additions Deductions of period - ----------- --------- ------------ --------- ---------- --------- Year Ended January 3, 1999 - -------------------------- Allowance for doubtful accounts $ 2,864 $ 5,053 $ 19,667(c) $ 13,426(a) $ 14,158 Inventory obsolescence 2,856 2,685 1,048(c) 2,247(b) 4,342 Restructuring liability -0- -0- $ 41,659(c) 26,816(d) 14,843 Year Ended December 28, 1997 - ---------------------------- Allowance for doubtful accounts $ 3,638 $ 1,051 $ 1,825(a) $ 2,864 Inventory obsolescence 2,303 2,915 2,362(b) 2,856 Year Ended December 29, 1996 - ---------------------------- Allowance for doubtful accounts $ 3,913 $ 1,202 $ 1,477(a) $ 3,638 Inventory obsolescence 1,991 2,810 2,498(b) 2,303
(a) Net uncollectible accounts written off (b) Obsolete inventory scrapped or written down to realizable value (c) Recognized in connection with purchase business combination (d) Payment of exit costs for acquired business -41- EX-23 3 EXHIBIT 23 1 EX-23 CONSENT OF INDEPENDENT AUDITORS As independent auditors, we hereby consent to the incorporation of our reports included in and incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statements File No.'s 333-02683, 333-05231, 333-15851, 333-43055, 333-51189, 333-51181 and 333-57779. /S/ BATTELLE & BATTELLE LLP BATTELLE & BATTELLE LLP Dayton, Ohio March 26, 1999 -42- EX-24 4 EXHIBIT 24 1 EX-24 P O W E R O F A T T O R N E Y We, the undersigned Directors of The Standard Register Company (hereinafter called "Company"), an Ohio corporation, do hereby appoint Paul H. Granzow, Chairman of the Board of Directors of the Company, as our attorney-in-fact to sign on behalf of each of us as Directors of the Company the Annual Report on Form 10-K filed by the Company annually with the Securities and Exchange Commission. We, the undersigned Directors of the Company, have signed this Power of Attorney on February 18, 1999. /S/ R. W. Begley, Jr. /S/ D.L. Rediker - ---------------------------- ---------------------------- R. W. Begley, Jr. D.L. Rediker /S/ F. D. Clark, III /S/ A. Scavullo - ---------------------------- ---------------------------- F. D. Clark, III A. Scavullo /S/ G. G. Keeping /S/ C. F. Sherman - ---------------------------- ---------------------------- G. G. Keeping C. F. Sherman /S/ P. S. Redding /S/ J. Q. Sherman, II - ---------------------------- ---------------------------- P. S. Redding J. Q. Sherman, II Signed and acknowledged in the presence of: /S/ P. H. Granzow /S/ K.A Lamme - ---------------------------- ---------------------------- P. H. Granzow, Chairman of K.A. Lamme, Corporate Vice President, the Board of Directors of Secretary and Deputy General Counsel of The Standard Register Company The Standard Register Company [Corporate Seal] STATE OF OHIO, MONTGOMERY COUNTY: The foregoing Directors of The Standard Register Company personally appeared before me, a Notary Public for the State of Ohio, and each of them acknowledged that they did sign this Power of Attorney, and that it is the free act and deed of each said Director. I have signed and sealed this Power of Attorney at Dayton, Ohio on February 18, 1999. /S/ K.A Lamme --------------------------- K.A. Lamme Notary Public [ Notary Seal ] -43- EX-27 5 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STANDARD REGISTER COMPANY FINANCIAL STATEMENTS FOR THE YEAR ENDED JANUARY 3, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR JAN-3-1999 JAN-3-1999 9,792 6,530 302,261 14,158 138,376 473,795 550,379 182,218 985,077 130,356 234,600 0 0 29,116 491,849 985,077 1,395,119 1,396,869 874,302 1,296,864 0 5,053 14,044 100,005 40,422 59,583 0 0 0 59,583 2.10 2.08
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