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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ x ] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission file number 0-26692
MAIL-WELL, INC.
(Exact name of Registrant as specified in its charter.)
DELAWARE 84-1250533
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23 INVERNESS WAY EAST, ENGLEWOOD, CO 80112
(Address of principal executive offices) (Zip Code)
303-790-8023
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock, $0.01 par value per share The New York
Stock Exchange
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's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registered stock as of March 14, 1997 was $207,013,598.
As of March 14, 1997, the Registrant had 12,487,420 shares of Common Stock,
$0.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this form (Items 10, 11, 12 and 13) is
incorporated by reference from the registrant's Proxy Statement to be filed
pursuant to Regulation 14A with respect to the registrant's Annual Meeting of
Stockholders to be held on or about May 7, 1997.
TABLE OF CONTENTS
PART I
Page
----
Item 1. Business..................................................................... 1
The Company........................................................... 1
Products and Services................................................. 2
Markets............................................................... 6
Marketing and Distribution............................................ 8
Printing and Manufacturing............................................ 10
Materials and Supply Arrangements..................................... 12
Patents, Trademarks and Brand Names................................... 12
Competition........................................................... 12
Seasonality........................................................... 13
Backlog............................................................... 14
Employees............................................................. 14
Environmental......................................................... 14
Item 2. Properties................................................................... 16
Item 3. Legal Proceedings............................................................ 16
Item 4. Submission of Matters to a Vote of Security Holders.......................... 16
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholders Matters....... 17
Dividend Policy....................................................... 17
Item 6. Selected Financial Data...................................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................... 19
Overview.............................................................. 19
Results of Operations................................................. 21
Liquidity and Capital Resources....................................... 25
Item 8. Financial Statements and Supplementary Data.................................. 27
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure......................................................... 51
PART III
Item 10. Directors and Executive Officers of Registrant............................... 51
Item 11. Executive Compensation....................................................... 53
Item 12. Security Ownership of Certain Beneficial Owners and Management............... 53
Item 13. Certain Relationships and Related Transactions............................... 53
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............. 54
PART I
ITEM 1. BUSINESS
THE COMPANY
Mail-Well, Inc. (the "Company") is the largest printer and manufacturer
of envelopes in the United States and Canada and the leading high-impact color
printer in the United States. The Company and its subsidiaries operate 50
envelope and commercial printing facilities throughout many of the major
metropolitan areas of the United States and Canada.
Within the envelope printing industry the Company competes primarily in
the consumer direct segment of the market in which envelopes are designed,
printed and manufactured to customer specifications. The Company and its
Canadian subsidiary, Supremex, Inc. ("Supremex") focus their business on
customized conventional and specialty envelopes where envelopes generally
include unique features, such as vivid color graphics or action devices. The
Company purchased both Quality Park Products ("QPP") and Pac National Group
Products, Inc. ("PNG") this past year. QPP is a printer of a broad line of
custom envelopes and has expanded the Company's business into the fast-growing
office products market. PNG, a part of the Company's Supremex operations, is a
printer of custom designed envelopes and courier packaging. The addition of PNG
solidifies the Company's presence as the largest envelope printer in Canada,
with facilities in every province.
The Company's Graphic Arts Center, Inc. ("GAC") subsidiary is the leading
high impact color printer in the United States. GAC specializes in producing
advertising literature, high-end catalogs and annual reports and is recognized
as an innovative provider of quality printed products to leading companies
throughout the United States. GAC acquired Shepard Poorman Communications
Corporation ("SPCC") in December 1996. With the addition of SPCC, GAC also
prints calendars and four color computer books. GAC operates four state-of-the-
art commercial printing facilities, three on the west coast and one in
Indianapolis.
The envelope and commercial printing industries are highly fragmented,
with approximately 215 independent envelope companies in the United States and
Canada and approximately 37,000 commercial printing companies in the United
States. The Company's strategy is to grow both internally and externally.
Externally, the Company plans to grow by pursuing acquisition opportunities to
capitalize on the consolidation occurring within these industries. Management
believes that the fragmented nature of these and related industries,
characterized by a large number of small, locally-run and regional facilities,
provides the Company the opportunity to acquire local or regional companies that
cannot compete as effectively as larger and more efficient companies.
Management intends to continue to focus on the development of a network of
strategically located facilities to attract and retain national, regional and
local account business and to achieve greater operating efficiencies.
Internally, the Company plans to continue to develop and utilize its expansive
geographic presence to better serve its larger national accounts while at the
same time serving the local market. The Company also intends to cross-utilize
its facilities for customers who require both envelopes and commercial printing.
Management believes that its strategy of growth and market positioning
has created, and will continue to create, competitive advantages, including (i)
the ability to utilize the Company's network of strategically located plants and
sales offices to attract customers that require production from
multiple locations, (ii) the ability to realize cost savings as a result of
volume related purchases of paper, ink and other raw materials, (iii) the
reduction of overhead expense through the consolidation of certain
administrative functions for insurance, employee health benefits and financial
management, (iv) the ability to increase profitability through the optimization
of equipment utilization among facilities, (v) the reduced risk of constraints
on paper allocation from suppliers during periods of tight supply due to the
significance of the Company's large volume purchases from its suppliers, (vi)
the ability to offer customers greater flexibility in meeting their needs due to
more available capacity and equipment capabilities and (vii) the ability to
combine the responsiveness of a local or regional facility with the advantages
of a large company.
The Company commenced operations in February 1994 with the acquisition of
the envelope businesses of Georgia-Pacific ("GP") and Pavey Envelope and Tag
Corp. ("Pavey"). In December 1994, the Company acquired the envelope business
of American Envelope Company ("American"). In July and August 1995,
respectively, the Company acquired Supremex, the largest Canadian printer and
manufacturer of envelopes, and GAC, one of the leading high impact color
printers in the United States. During 1996, the Company acquired three new
companies. In April 1996, the Company acquired QPP, an envelope manufacturer;
in November 1996 PNG, a Canadian envelope printer was acquired; and in December
1996 SPCC, a high-impact color printer was acquired.
PRODUCTS AND SERVICES
ENVELOPE PRINTING
The approximately $3 billion United States and Canadian envelope market
is divided into two primary market segments: (i) customized conventional and
specialty envelopes and packaging products sold directly to end users or to
independent distributors who sell to end users ("Consumer Direct") and (ii)
commodity-oriented products sold to wholesalers, paper merchants, printers,
brokers, office product establishments and superstores ("Wholesale"). The
Company competes in the Consumer Direct segment where the greatest growth in
recent years has been in printed customized conventional envelopes due primarily
to the continued growth of direct mail marketing. The Company has focused a
significant part of its marketing resources on the direct mail market and has
developed value added features including vivid graphics, multi-colored
envelopes, various closures, and interactive devices such as pull-tabs, scratch-
offs, perforations and three-dimensional viewing devices. Management believes
that many growth opportunities for the envelope industry will continue to be in
Consumer Direct specialty envelopes and packaging products. The Company also
competes in the Wholesale segment, particularly in the fast-growing office
products market. Through its QPP division, the Company manufactures and prints
a broad line of custom envelopes, many of which are featured in national
catalogs for the office products market.
Management believes that the Company's success is largely attributable to
an emphasis on customer responsiveness and service. The Company's 350 person
envelope sales force works closely with customers from product design to
delivery. Most of the Company's products are made to customer specifications.
In addition to high-quality customized products, the Company offers customers
related services, such as flexible "just-in-time" delivery programs,
warehousing, inventory management systems and electronic communications systems.
The Company has a large number of customers across diverse markets, including
the direct mail, commercial, financial services and insurance, forms,
government, distributors and resellers, photofinishing, packaging, medical,
office
products and financial and legal markets. Many of the Company's customers have
been supplied by the Company or its predecessors for over ten years.
CUSTOMIZED CONVENTIONAL ENVELOPES. Customized conventional envelopes
range from commercial and mass billing envelopes to large-size proxy, catalog,
booklet and annual report envelopes. The Company customizes two general types
of conventional envelopes: open side envelopes, on which the flap opens along
the longer side of the envelope (such as standard correspondence) and open end
envelopes, on which the flap opens along the shorter side of the envelope (such
as an inter-office envelope). Custom features include special paper stock, non-
standard placement and sizing of windows, printed messages, non-standard sizes,
partial or full page graphics on both the exterior and interior of the envelope
and special closures, adhesives and perforations.
SPECIALTY ENVELOPES AND PACKAGING PRODUCTS. Specialty envelopes and
packaging products include direct mail advertising envelopes and inserts as well
as envelopes and other items used for purposes other than mailing, such as heavy
stock medical folders, packaging for CD ROM disks and computer cards, customized
tags (ranging from inventory tracking tags with attached multi-form carbons to
retail tags for consumer products), courier packaging envelopes, including those
made of Tyvek(R), currency and credit card holders, airline and car rental
ticket jackets, photofinishing packaging, expandable folders and innovative
inter-office envelopes. Management believes that the Company is among the
industry leaders in the manufacture of innovative specialty envelopes and
packaging products, with a diverse employee base able to adjust and adapt its
equipment to produce these products.
The Company serves the direct mail market by offering products which are
designed to entice consumers to open pieces of mail and hold their attention
while the marketing messages are delivered. Sample custom features contained in
the Company's direct mail products include vivid graphics and interactive
features such as pull-tabs, scratch-offs, perforations and three-dimensional
viewing devices.
The Company also serves the direct mail market with bind-ins, which are
envelopes included in mail order catalogs. A bind-in attaches along the center
seam of a mail order catalog, typically providing the consumer with an order
form and return envelope. Combination order blanks and envelopes are
increasingly used in catalogs. The Company has developed extensive
capabilities, enabling it to produce bind-in envelopes in a wide variety of
sizes and styles on coated and uncoated paper stocks, utilizing high-quality
lithography with options for complex four-color printing. The Company has
extended the bind-in format to include multi-page mini-catalogs. Demand for
Company products used in catalogs has experienced significant growth in recent
years.
COMMODITY ORIENTED PRODUCTS. Commodity oriented products include those
products sold to wholesalers, paper merchants, printers, brokers, office product
establishments and superstores. The Company provides both private label and QPP
brand products to customers.
Plain stock envelopes range from common products such as #10, #8, 9x12
and 10x13 envelopes to less common items such as jewelry repair envelopes and
envelopes using special paper and colors. The Company, through its Supremex
subsidiary and QPP division, manufactures and stocks for distribution
approximately 200 lines of plain stock envelopes.
TWO-WAY ENVELOPES. Two-way envelopes are envelopes designed to be reused
by the recipient, usually to send correspondence or payment back to the original
sender. Due to the use of less paper, two-way envelopes are perceived as more
environmentally conscious than single-use envelopes. The Company markets two-
way envelopes through its Supremex subsidiary. Supremex manufactures the two-
way envelope and holds patents on the two-way envelope in both the United States
and Canada.
PREPRESS OPERATIONS. Prior to manufacturing envelopes to fill a specific
order, the Company finalizes the design graphics for the order. This design
phase traditionally requires a manufacturer to set type, incorporate customer-
submitted graphics, photograph the artwork, develop the negative and prepare a
plate that will serve to imprint the envelope. The electronic pre-press
operation is a fully-automated electronic process which allows the customer to
submit its design on a diskette or via modem. The Company can then edit the
design on a computer to create the negative from which the printing plate is
made. Alternatively, hard copy can be provided by the customer and computer-
scanned and edited by the Company to create the negative. This capability is
particularly well-suited to the customized and specialty envelope sectors in
which the Company has focused its efforts. Management believes that the Company
is a leader in the industry in moving toward fully-automated electronic prepress
operations. The electronic prepress system greatly reduces the time needed to
produce the plates and the number of people involved in the production, thereby
enhancing the Company's profitability and its level of customer service.
DELIVERY SYSTEMS. The Company currently maintains a flexible "just-in-
time" delivery program. This program allows customers to receive their products
just prior to when they are needed.
WAREHOUSING SERVICES. A customer will often place an order for
significantly more envelopes than it may need at the time. When this occurs,
the Company can store the finished product and drop-ship the envelopes on an
"as-needed" basis.
INVENTORY MANAGEMENT SYSTEMS. Inventory management systems are currently
being designed, primarily for large national organizations with centralized
purchasing and supply departments that service multiple locations. The system
will facilitate order processing by giving customers information on usage by
item and/or available supply in the Company's warehouses and provides for
summary billing.
EDI. The Company has installed an Electronic Data Communications
Interface ("EDI") at many of its facilities. EDI is a direct computer link
between customers and the Company which allows orders to be sent electronically.
This allows streamlining of the order process which in turn allows for quicker
order delivery and more efficient and accurate communications between customers
and the Company. EDI also allows customers to make payments electronically.
HIGH IMPACT COLOR PRINTING
Management estimates that the domestic commercial printing industry had
1995 sales of approximately $ 3.5 billion. The commercial printing industry in
the United States is highly fragmented, primarily comprised of relatively small,
local and regional firms. Management estimates that there are approximately
37,000 commercial printing companies in the United States, most of such
companies having fewer than 20 employees.
The Company, through its GAC subsidiary, provides premium high impact
color printing services to customers in five main segments. The advertising
literature, catalogs, and annual reports, during the fiscal year ended December
31, 1996, accounted for approximately 35%, 20% and 13% of GAC's net sales,
respectively. With the addition of SPCC, GAC not only increased its sales, but
also added additional product segments, including the printing of calendars and
four color computer instruction books.
The levels of quality and customer service GAC provides are well-suited
for buyers whose marketing and promotional efforts require superior printed
materials to reflect the quality and features of their products, services and
corporate images. GAC serves a broad base of customers from across the United
States, including major manufacturers, retailers, service organizations and
advertising agencies.
The fine color commercial printing market requires superior quality
printing capabilities as well as high levels of customer service. GAC provides
its customers with comprehensive prepress, printing and fulfillment services
through four technologically advanced production facilities. GAC emphasizes
customer service through intensive interaction with customers, including
frequent sales calls and constant monitoring of customer satisfaction during the
prepress and printing process. Management believes that GAC distinguishes
itself from its competitors by the expertise and customer responsiveness
associated with GAC's production operations.
Management believes that the commercial printing industry is undergoing a
period of consolidation, driven in part by the rapid pace of technology change.
Recent advances in computer-based prepress equipment, for example, now enable
commercial printers to output plate-ready film directly from electronic files,
allowing for faster and more precise manipulation of images and text prior to
printing. Similarly, recent advances in photoimaging technology have greatly
increased the quality of the final image produced in the printing process.
These advances have increased the capital requirements for maintaining
technologically advanced equipment. Management believes that many local and
regional commercial printers lack adequate financial resources to remain
competitive in the segments of the fine color commercial printing market in
which the Company operates.
ADVERTISING LITERATURE. Advertising literature ranges from printed
brochures and leaflets to color folders, manuals and posters. GAC prints
promotional material for both the automotive industry and the high-tech industry
in this segment, as well as for a number of foreign companies selling goods in
the United States. Industry specific factors often drive demand for printed
advertising literature. The increase in competition and growth in sales in the
automotive industry in recent years has positively affected the level of
spending on automotive brochures.
CATALOGS. GAC prints both general catalogs and high-end catalogs for a
broad base of customers, including many major retailers. The high-end catalog
segment requires superior quality printing capability as well as intensive
customer service. Within this segment, GAC has printed catalogs for such
customers as FAO Schwarz, Neiman-Marcus, Nordstrom and Patagonia.
ANNUAL REPORTS AND RELATED PRODUCTS. GAC prints annual reports and
related products for a number of large public companies. These products often
integrate color reproductions and graphs with text and financial statements into
a high-quality product which requires extensive prepress and printing services.
GAC prints annual reports and related products for many leading companies and
has printed annual reports for American Express, Apple Computer, Black & Decker,
General Electric, Intel, Monsanto, Starbucks and 3M.
CALENDARS. GAC prints all types of calendars for a variety of customers.
The types of calendars printed by the Company include box, wall, engagement,
wire-o and promotional calendars.
COMPUTER BOOKS. GAC manufactures and prints computer instruction text
books. The majority of these computer text books are general reference and "how
to" books about computer software. Most of the computer instruction books are
four color books.
QUALITY CUSTOMER SERVICE. GAC's goal is to offer the highest standards
in meeting its printing customers' needs with the Company's primary focus on
responding quickly and competitively to customer demands and requirements. Many
of GAC's production facilities are open 24 hours a day, seven days a week, to
allow for timely production of materials. GAC, at certain of its facilities,
also offers a number of unique services to its customers such as complimentary
transportation between the airport and its offices, in-plant overnight
accommodations, on-site meeting rooms and lounge, travel and hotel arrangements,
and computers for use by the customers when on-site. In addition, many of the
GAC's field representatives travel with the customer to the main facility in
Portland to facilitate the processing of the printing work.
MARKETS
ENVELOPE PRINTING
The Company seeks to efficiently serve large numbers of customers across
diverse markets and industries to provide a stable and diversified base for
ongoing sales of printed envelope products and services. In 1996, the Company
sold products to more than 40,000 customers. Products are specifically designed
and printed to serve various markets and industry segments.
DIRECT MAIL MARKET. This market comprises advertising and third-class
mail delivered directly to consumers through the postal system. The Company's
direct mail products consist of customized conventional envelopes which include
vivid graphics, action devices such as pull-tabs, scratch-offs, perforations and
three-dimensional viewing devices, and bar codes. Due primarily to increased
costs, the current trend in direct mail marketing is toward smaller, more
focused mailings that depend on the refinement of mailing lists and extensive
use of sophisticated database management tools to target specific markets
("database marketing"). Management believes that this trend represents a
favorable development for the Company. While database marketing means smaller
mailings, it also means more direct mailings overall, using envelopes with the
Company's value-added features. In addition, smaller companies which cannot
justify participating in mass mailings are able to use database marketing and
direct mail in a more cost-efficient manner. Envelopes that support database
marketing campaigns typically make extensive use of color, precision graphics
and personalized messages which are included in the graphics on the envelope.
The Company expects increased opportunities in the direct mail sector to arise
from improved means of printing high-quality graphics more quickly and cost
effectively.
COMMERCIAL MARKET. The commercial market consists of manufacturers,
professional organizations, utilities, educational institutions and others.
Changes in the volume of envelope usage in this market typically track changes
in the Gross Domestic Product. Most products sold by the
Company to this market are customized conventional envelopes which are used for
such purposes as general correspondence, invoicing and remittance. Customized
conventional envelopes have features such as custom corner card imprints, inside
tints and custom graphics.
FINANCIAL SERVICES AND INSURANCE MARKETS. The financial services market
includes financial institutions, such as banks, savings and loans, credit
unions, mutual funds and others. The insurance market includes companies
primarily in the life, health, property and casualty insurance businesses. The
Company sells both customized conventional envelopes, specialty envelopes and
packaging products to these markets. The Company's products supplied to the
financial services market include statement envelopes, drive-through window
envelopes, teller helper envelopes, general correspondence envelopes and
envelopes used for business transactions, such as personal loans, mortgage loans
and inter-office envelopes. Products supplied to the insurance market include
envelopes used for premium notices, returns, checks, dividends, statements and
general correspondence. The financial services and insurance industries have
experienced consolidation over the past several years, and the Company's
national account effort was initiated to service the larger, centralized
purchasing and supply requirements resulting from consolidations in these
markets.
FORMS MARKET. The Company produces conventional envelopes with
customized printing for customers in the forms market. The forms market
consists primarily of independent forms distributors and major forms
manufacturers who typically do not produce their own envelopes but purchase
envelopes from the Company to resell to their customers.
GOVERNMENT MARKET. In the United States, this market includes the
Government Printing Office, the United States Postal Service, the General
Services Administration and state and local governments. The Company's
government contracts are awarded primarily through a competitive bid process.
Such contracts, which are usually of short duration, are primarily fixed price
contracts and generally do not contain quantity commitments. These contracts
typically contain customary provisions for termination at the convenience of the
government without cause and are subject to appropriation of funds. In Canada,
this market includes large orders from the federal government, ministries and
agencies, and from provincial governments, cities, school boards, universities
and hospitals.
DISTRIBUTORS AND RESELLERS MARKET. The Company has a substantial market
share in the distributors and resellers market in Canada and in the U.S. through
its QPP division. The Company sells both Consumer Direct and Wholesale products
to paper merchants, envelope jobbers and business forms manufacturers. Paper
merchants generally sell to printers that, in turn, print the envelopes with
letterhead and sell them to consumers. Envelope jobbers are printers who
specialize in printing envelopes but no other products. The business forms
manufacturers distribute special size envelopes to match their own custom
designed forms. To a lesser extent, the Company also sells to stationers, large
retailers and greeting card companies who sell the envelopes or distribute them
to retailers.
PHOTOFINISHING PACKAGING, TAGS AND CD ROM PACKAGING. Film processing
outlets comprise the photofinishing packaging market. Primary processing
outlets include mass merchandisers who have film developed at wholesale labs,
mini-labs operating as stand-alone operations and counter services as part of
camera shops, as well as drug stores that feature on-site processing of customer
film. The Company is a significant supplier of photofinishing packaging
products, which require extensive application of color graphics.
The market for tags is diverse due to the wide range of applications. In
the manufacturing sector, tags are used for production tracking, shipping,
labeling, raw materials identification, inspection records and safety/hazard
warnings. Retail outlets use tags for product description, content
identification, care and use instructions, inventory control and promotions.
The Company also prints and produces bar-coded tags for inventory tracking in
warehouses and stores.
The Company is currently developing and selling packaging for CD ROM
disks, which management believes is an emerging market within the envelope
industry.
MEDICAL MARKET. The medical market consists of (i) diagnostic imaging
equipment and supplies manufacturers, (ii) medical forms companies, (iii)
regional independent dealers, and (iv) dealer buying groups, all of which sell
to hospitals and clinics across the country. The Company's medical market
products include diagnostic imaging or X-ray color coded jackets, category
insert jackets, negative preservers, film mailers, file pockets and color-coding
labels. These products are designed to provide easy, efficient and reliable
filing and mailing systems for doctors and hospitals. The Company has improved
its medical products line by utilizing high-quality materials, adding Mylar
color-coded labels to jacket edges and custom printing to place additional
information on jacket panels.
FINANCIAL AND LEGAL MARKETS. The legal and financial market consists of
legal, accounting and professional offices. The Company sells expanding
envelopes, pockets, pressboard folders, envelopes and other filing supplies to
these markets. These products are sold primarily through the Company's Kruysman
division which sells its products under its brand name Redweld(R) directly to
many major accounting firms and law firms.
OFFICE PRODUCTS MARKET. The office products market includes national
wholesale stationers, large national office products dealers and superstores.
These products are not generally sold to end users, but are sold in the resale
market. Many of the QPP"s office products are featured in national catalogs
published for the office products industry.
COURIER PACKAGING MARKET. The courier packaging market consists of large
international air couriers, as well as regional couriers and delivery companies.
The Company services a large part of the courier packaging market, primarily
through Supremex's PNG division, as well as Mail-Well's Cleveland facility.
These products include overnight letter envelopes, multi-walled polyethylene
pouches, security envelopes, diagnostic pouches and a broad range of stock and
custom corrugated shipping containers.
HIGH IMPACT COLOR PRINTING
GAC currently focuses on providing premium fine color printing services
to customers in five primary market areas: advertising literature, high-end
catalogs, annual reports, calendars and four color computer instruction books.
GAC sells many of its products to Fortune 500 Companies, leading edge graphic
designers, as well as advertising agencies. Calendars are custom printed for
publishers who market them through their own distribution channels. Computer
text books are primarily printed for publishers who generally sell to customers
through the retail market.
Management believes that the levels of quality and customer service that
GAC provides is well-suited for buyers in these market segments whose marketing
efforts require superior printed materials to complement the quality and
features of their products, services and corporate images. GAC serves a broad
base of customers, including major manufacturers, retailers, service
organizations and advertising agencies. GAC draws its customers from across the
United States and additionally prints advertising literature for a number of
foreign companies selling goods in the United States. During the fiscal year
ended December 31, 1996, GAC served in excess of 650 customers, the top 10
customers of which accounted for approximately 27% of GAC's net sales. Due to
the project-oriented nature of the commercial printing industry, sales to
particular customers may vary significantly from year to year depending upon the
number and size of their projects. During the fiscal year ended December 31,
1996, GAC's largest customer accounted for approximately 5% of its net sales.
MARKETING AND DISTRIBUTION
ENVELOPE PRINTING
As a result of the wide array of applications, customer preferences and
order sizes, the Company's marketing and advertising efforts vary significantly
among markets and by region. Management believes that the Company's customer
responsiveness and service have resulted in the long-term retention of a
significant number of its customers. The Company continues to emphasize a more
focused national account program to attract customers whose needs are national
or cover multiple regions.
The Company markets the majority of its printed envelope products through
a sales force of approximately 350 people who generally work with customers from
the initial product design stage through product delivery to ensure that
finished products meet both customers' applications and marketing needs. The
Company's salespeople represent the primary points of contact for customers in
the Consumer Direct market segment. Accordingly, the Company attempts to
retain an experienced, well-qualified sales force by providing appropriate
training and competitive compensation. Compensation is typically either salary
plus commission or straight commission depending on several factors including
customer size and type, plant location and order size. Management believes that
the Company's sales force provides an important competitive advantage and the
Company has been successful in developing loyalty within this important employee
group. Many of the Company's salespeople have been employed by the Company for
ten years or longer. The Company's sales force is organized by manufacturing
facility with salespeople reporting to division managers supplemented by a
national accounts group. The Company plans to leverage its sales force by
increasing the utilization of plant capabilities as well as the cross-selling of
product lines to enhance the performance of each of the Company's regions.
Increased coordination among regions will help the Company to compete for
national account business, to enhance the internal dissemination of successful
new product ideas, to efficiently allocate its production equipment, to share
technical expertise and to increase Company-wide selling of specialty products
manufactured at selected facilities.
Products not marketed by the Company's sales force are sold through
distributors to better serve selected wholesale markets, geographic regions
without direct sales representation and certain specialty markets, including the
medical and photofinishing packaging markets. The Company's office products
sales staff attends trade shows to market products. These products are also
featured in national catalogs produced for the office products market.
Most of the Company's envelope sales are pursuant to either contracts for
a specific number of envelopes or blanket purchase orders. Most blanket purchase
orders are for a term of one year or less and for a specified number of
envelopes, although there usually is no requirement that envelopes be ordered in
any set quantity. Blanket purchase orders may generally be renewed from year to
year. Each contract or order is tailored to the specifications of the desired
products and therefore there are no Company-wide pricing guidelines. Each plant
is responsible for negotiating its own contracts and purchase orders.
In most United States markets, the Company utilizes its own trucks to
make local deliveries. Generally, for shipments over 50 miles, the Company uses
common carriers to transport products to customers' locations. These shipments
are usually made on a less-than-truckload basis. United Parcel Service is used
primarily for low volume shipments (orders of less than 10,000 units).
Transportation expenses have been declining as more customers absorb these costs
directly. In most Canadian markets, Supremex employs a delivery service to
serve customers which has significantly increased Supremex's on-time delivery
rate.
HIGH IMPACT COLOR PRINTING
GAC markets primarily on a regional basis in the commercial printing
industry. GAC maintains a large national sales staff, consisting of
approximately 62 salespeople who work out of sales offices across the United
States. Management believes that GAC maintains the largest sales staff in the
high impact commercial printing industry. GAC's sales staff represents the
primary point of contact for many customers and reinforces its policy of
providing the highest level of customer service possible. With offices located
in many major metropolitan areas, GAC is able to offer greater personalized
customer attention, with frequent meetings and calls to existing and potential
customers.
PRINTING AND MANUFACTURING
ENVELOPE MANUFACTURING AND PRINTING
There are essentially two types of machines used in the envelope
manufacturing or "converting" process: (i) high-speed web converting machines,
capable of handling on-line large volume orders with multiple colors and
numerous features and (ii) die cutter/blanker machines, used primarily for
smaller orders to be customized off-line or for orders with certain limited
customized features. The manufacturing process used is dependent upon the size
of a particular order, custom features required, machine availability and
delivery requirements.
The Company purchases most of its paper in rolls. In the die
cutter/blanker process, typically used for small to medium-sized orders of
500,000 units or less, paper is cut into varying sizes by a sheeter. Stacks of
sheets are then cut into blanks using either manually-placed dies or by
computer-controlled die-cutting machines. In almost all cases, envelopes are
imprinted on one or both sides. An adhesive is typically applied to the blank,
which is then folded. Large volume envelope orders (generally over 500,000
units) can bypass the separate sheeting and cutting operations to be
manufactured directly from the paper roll using the web machine process. The
paper is fed as one continuous roll through the equipment where it is printed,
cut, folded and glued, emerging as finished envelopes ready for packing and
shipping.
The Company is currently operating its high-speed web machines at levels
close to capacity. Accordingly, in order to expand its business efficiently,
the Company will require additional high-speed web machines. The availability
of web machine capacity not only allows the Company to attract high-volume work,
but it frees die cutter/blanker machines and related equipment for utilization
on higher-margin, typically smaller volume, specialty work. Management
estimates that, based on current utilization of its existing equipment and
expected demand, the Company will need approximately 6 to 7 additional high-
speed web machines over the next five years representing an aggregate projected
capital expenditure of approximately $4.5 million to $5.0 million. Management
believes that the Company has adequate manufacturing capacity on its die
cutter/blanker machines for current and foreseeable manufacturing requirements.
Envelope manufacturing equipment typically has a relatively long useful
life. The Company's plant engineers are skilled at maintaining and rebuilding
equipment, which requires limited capital expenditures and can convert existing
equipment to that needed for specialized products, such as those sold to the
medical, photofinishing packaging and diskette markets.
The Company also has established programs to implement new production
technologies related to flexographic printing, lithographic web printing and
variable imaging technology. Flexographic printing has long been the mainstay
of the envelope industry and the Company has flexographic printing capabilities
at virtually all of its facilities. The Company continues to implement
improvements to its flexographic printing processes which management believes
will provide higher-quality products. In addition, the Company also seeks to
combine lithographic technology with web converting capability, which will
improve the quality of the Company's graphics. The Company also has installed
at one manufacturing facility variable imaging process capabilities, which
create the flexibility to customize products during the manufacturing process.
Envelopes can be individually addressed, bar codes can be added and imprints can
be personalized. These technologies have allowed the Company to become a more
complete supplier to customers, particularly in the direct mail and
photofinishing markets.
Management believes the Company can enhance its competitive position in
the envelope industry through the implementation of improved management systems.
The management systems currently being implemented by the Company are designed
to improve order flow, improve turnaround capabilities and provide more
information with respect to equipment utilization, asset management, customer
requirements and product line profitability.
The process of manufacturing envelopes produces two types of waste.
Skeletal waste is the excess paper produced when a die punches the blanks from a
sheet. Process waste is generated in the process of setting up a machine to run
a job. The Company sells both skeletal and process waste and accounts for such
sales as a reduction to cost of sales. For the year ended December 31, 1996,
waste sales accounted for approximately $ 8.9 million (1.1% of net sales).
Waste paper prices generally follow the fluctuations in the price of paper. The
Company maximizes waste collection yield by using highly automated waste paper
segregation systems which utilize a centralized vacuum-driven separation process
on the Company's high-speed web systems.
HIGH IMPACT COLOR PRINTING
The process of manufacturing in the commercial printing industry combines
advanced prepress technology with high-quality color presses and extensive
binding and finishing operations.
Many of GAC's facilities are open 7 days a week, 24 hours a day to meet customer
printing requirements.
PREPRESS SERVICES. GAC's prepress services include all the processes
necessary to prepare the media (art, photographs, typed copy), go to press,
photographically duplicate and/or digitally produce images, separate color
images into process colors, assemble films and burn film images onto plates.
GAC uses electronic technology to compose the elements of the individual pages
of the project and to create screen tints, produce color blends and retouch
photos. These images can then be reviewed for exact color and content. The
digital information is then processed to a film plotter for film output. GAC's
film plotters are capable of plotting 3600 dots per inch resolution, giving a
clean detail of the imagery. GAC has also developed GAC Color Plus(TM), an
advanced screening process which allows larger quantities of ink to be used in
the printing process, thereby producing a higher quality image than is available
using conventional techniques. GAC has capitalized on the market opportunities
in this area by building a state of the art electronic pre-press department.
PRINTING SERVICES. GAC currently operates heatset web presses, including
half-webs, full-webs and double-web presses, as well as sheet-fed presses at
four production facilities. GAC primarily uses sheet-fed presses for short to
medium run jobs. The sheet-fed presses are capable of printing up to two, four,
six or eight colors, running at standard press speeds of 6,000 to 10,000 sheets
per hour. The web presses are higher-production presses which start with a roll
of paper at one end, print on both sides and produce a product which may be
folded, glued and perforated on the press. The Company's web presses are
capable of simultaneously printing up to 16 colors at one time.
POSTPRESS AND FULFILLMENT SERVICES. GAC provides extensive postpress and
fulfillment services in the final stages of the production cycle. These
services include cutting, folding, binding, finishing and distribution of the
finished product. GAC also provides warehousing, packaging and distribution
services to customers, a critical element to quality service. In addition, GAC
maintains a catalog packaging assembly line which uses both computer-printed
mailing labels and ink-jet applied addresses to facilitate its customers' mass
mailings.
MATERIALS AND SUPPLY ARRANGEMENTS
ENVELOPE PRINTING
The primary material needed for the manufacture of envelopes is paper,
which in 1996 accounted for approximately 71.0% of the Company's cost of
envelope materials and represented approximately 33.1% of net sales related to
envelopes. Other materials include cartons/boxes, window film, adhesives and
ink. Except for a very small amount of coated paper, envelopes are made
primarily from the following major grades of uncoated free-sheet papers: white-
wove, unbleached kraft and semi-bleached and bleached kraft. Most of the
Company's products are made from white-wove grades.
Suppliers of white-wove or kraft paper include Georgia-Pacific, Champion
Paper, Boise Cascade, International Paper and Union Camp. The Company has an
oral agreement with Georgia-Pacific to purchase 45,000 tons of paper during the
year ending February 24, 1997.
Management believes that the Company's large volume paper purchases
should continue to ensure the receipt of adequate supplies in the future.
HIGH IMPACT COLOR PRINTING
The primary materials used by GAC in the commercial printing industry are
paper, ink, film, offset plates, chemicals and solvents, with paper accounting
for approximately 87% of total material costs. GAC purchases these materials
from a number of suppliers and has not experienced any significant difficulties
in obtaining any raw materials necessary for operations. The principal raw
material used by GAC in printing operations is high quality heavy-stock paper.
GAC expended in excess of $46.7 million for paper supplies for its printing
operations for the year ended December 31, 1996. GAC implemented an inventory
management system in which a limited number of paper suppliers supply all its
paper needs at its Portland facility, while holding and managing paper inventory
for this facility. These suppliers are responsible for delivering paper on a
"just-in-time" basis directly to GAC's facilities. Management believes that
this system has allowed GAC to enhance the flexibility and speed with which it
can serve customers, improve pricing on paper purchases, eliminate a significant
amount of paper inventory and reduce costs by reducing warehousing capacity.
PATENTS, TRADEMARKS AND BRAND NAMES
The Company markets products under a number of trademarks and brand
names. Additionally, the Company currently owns 36 patents relating to its
envelope business, 29 in the United States and 7 in Canada. Two of the patents
consist of the United States and Canadian patents for two-way envelopes, which
the Company acquired in the Supremex acquisition. The Company's sales do not
depend to any significant extent upon any single or related group of patents.
The patents expire at various times through 2012.
COMPETITION
ENVELOPE PRINTING
The envelope printing and manufacturing industry is extremely fragmented
and highly competitive with a few multi-plant and many single-plant companies
that primarily service regional and local markets. Manufacturing requirements
and technologies do not present significant barriers to entry into the business.
The printing and manufacturing processes for most products are readily available
and capital outlays are relatively low, although high-speed envelope
manufacturing equipment requires significant capital outlays.
In marketing its products, the Company competes with a few multi-plant
and many single-plant companies servicing regional and local markets. The
Company also faces competition from alternative sources of communication and
information transfer such as facsimile machines, electronic mail, interactive
video disks, interactive television and electronic retailing. Although these
sources of communication and advertising may eliminate some domestic envelope
sales in the future, management believes that the Company will experience
continued demand for envelope products due to (i) the ability of the Company's
customers to obtain a relatively low-cost information delivery vehicle that may
be customized with text, color, graphics and action devices to achieve the
desired presentation effect, (ii) the ability of the Company's direct mail
customers to penetrate desired markets as a result of the widespread
deliverability of mail to residences and businesses through the United States
Postal Service, and (iii) the ability of the Company's direct mail customers to
include return materials in their mail-outs.
Principal bases of competition are price, quality and service. Although
all three are equally important, various customers may emphasize one or more
over the others. For example, direct mail customers may consider service and
quality to be relatively more important than price. In contrast, an envelope
plant's proximity is very important to certain customers due to freight charges
and turnaround time.
HIGH IMPACT COLOR PRINTING
The commercial printing industry is highly competitive and fragmented.
GAC competes against a number of large, diversified and financially stronger
printing companies, as well as regional and local commercial printers, many of
which are capable of competing with GAC in both volume and production quality.
Although GAC believes customers are price sensitive, it also believes that
customer service and high-quality products are important competitive factors.
Management believes GAC provides premium quality and customer service while
maintaining competitive prices through stringent cost control efforts.
The main competitive factors in GAC's markets are customer service,
product quality, reliability, flexibility, technical capabilities and price.
Management believes GAC competes effectively in each of these areas.
SEASONALITY
Several Consumer Direct market segments served by the Company, such as
photofinishing packaging and certain segments of the direct mail market,
experience seasonality, with a higher percentage of the volume of products sold
to these markets occurring during the fourth quarter of the year. This
seasonality is due to the increase in sales to the direct mail market due to
holiday purchases. Seasonality is offset by the diversity of the Company's
other products and markets which are not materially affected by seasonal
conditions.
The commercial printing industry experiences seasonal variations. GAC's
revenues from annual reports are generally concentrated from February through
April. Revenues associated with holiday catalogs and automobile brochures tend
to be concentrated from July through October, and calendars from May to
September. As a result of these seasonal variations, GAC is at or near capacity
at certain times during these periods.
BACKLOG
The Company's envelope production backlog was $58.7 million as of
December 31, 1996, compared to $55.8 million at December 31, 1995. Backlog
consists only of purchase orders and short-term contracts that are typically
filled within three weeks to six months. Orders may generally be rescheduled or
canceled by the payment of cancellation charges and costs incurred until the
time of cancellation. Therefore, the Company's backlog does not necessarily
reflect future sales levels.
The Company's backlog in its commercial printing segment was $11.3
million as of December 31, 1996. Backlog consists of purchase orders and
contracts that are typically filled within 4 to 6 weeks. Backlog does not
necessarily reflect future sales levels.
EMPLOYEES
As of December 31, 1996, the Company employed a total of 6,144 people,
including 1,071 classified as salaried, 4,665 as hourly and 408 as salespeople.
Approximately 2,046 people employed at the Company's facilities are represented
by unions affiliated with the AFL-CIO or Affiliated National Federation of
Independent Unions. These employees are governed by collective bargaining
agreements, each of which covers the workers at a particular facility, expires
from time to time and are negotiated separately. Accordingly, management
believes that no single collective bargaining agreement is material to the
operations of the Company as a whole.
Except for a five-week walk-out at the Cleveland plant in June 1988,
there have been no labor strikes during the last 10 years at any facility now
owned by the Company. The 1988 Cleveland strike was settled by reaching a new
three-year collective bargaining agreement. The Company considers relations
with employees in the United States and Canada to be good.
ENVIRONMENTAL
The Company's operations are subject to federal, state and local
environmental laws and regulations relating to air emissions, waste generation,
handling, management and disposal, and at certain facilities, wastewater
treatment and discharge. The Company has implemented environmental programs
designed to ensure that the Company operates in compliance with the applicable
laws and regulations governing environmental protection. The Company's policy is
that management at all levels be aware of the environmental impact of operations
and direct such operations in compliance with applicable standards. Management
believes the Company is in substantial compliance with applicable federal, state
and local laws and regulations relating to environmental protection.
Although the Company does not anticipate that material capital
expenditures will be required to achieve or maintain compliance with
environmental laws and regulations, changing environmental laws and regulations
might affect the printing industry as well as the manufacture or transportation
of envelopes and related packaging products. For example, the Company will be
subject to regulations being developed by the federal Environmental Protection
Agency ("EPA") and state environmental agencies to implement the Clean Air Act
Amendments of 1990. Accordingly, there can be no assurance that environmental
matters resulting in material liabilities or expenditures will not be discovered
or that, in the future, material expenditures for environmental matters will not
be required by changes in law or regulations.
The Comprehensive Environmental Response, Compensation and Liability Act
of 1980 ("CERCLA"), as amended (also known as the "Superfund" legislation),
imposes joint and several liability, without regard to fault or the legality of
the original conduct, on certain classes of persons for the costs of
investigation and remediation of sites at which there have been releases or
threatened releases of hazardous substances. These persons, known as
potentially responsible parties ("PRPs"), include the owners and operators of
property and persons that generated, disposed of or arranged for the disposal of
hazardous substances found at a site. Many states have similar programs. The
Company has not been named as a PRP at any Superfund sites as a result of its
ongoing operations. Due to waste management and minimization programs
implemented by the Company and the Company's current use of permitted hazardous
waste disposal facilities, management does not believe that the Company's
current operations will give rise to future material liability under CERCLA.
In the asset purchase agreement related to the Georgia Pacific
acquisition ("GP Acquisition"), GP Envelope agreed to retain all liabilities
arising from releases of hazardous substances at any off-site locations
occurring prior to the closing date of the GP Acquisition (other than the
migration of hazardous substances from adjacent locations to the plants or from
the plants to adjacent locations ("Migration")). Accordingly, except for
liability associated with Migration, if any, the GP Acquisition should not
expose the Company to liability under CERCLA for historical off-site disposal
practices.
Additionally, GP Envelope also agreed to indemnify and hold the Company
harmless from damages that relate to the use, condition, ownership or operation
of any purchased assets or the conduct of GP Envelope on or prior to the closing
date of the GP Acquisition, including environmental third party claims. Such
damages include on-site liabilities under CERCLA or corresponding state laws
attributable to operations prior to the closing date. GP Envelope's
indemnification obligation is subject to (i) a $35.0 million limitation and (ii)
a six-year term limit. This indemnity also is subject to contribution
arrangements with the Company, which begin with GP Envelope paying 90% of the
indemnifiable damages in the first two years and decreasing annually to 50% in
the sixth year. The indemnity for environmental third party claims is not
subject to any contribution arrangements. Conversely, the Company has agreed to
indemnify GP Envelope for (i) environmental liabilities incurred subsequent to
the closing date, (ii) environmental cleanup liabilities at the sites or related
to Migration to or from such sites incurred prior to the closing date, subject
to contribution arrangements with GP Envelope, which begin with the Company
paying 10% of the indemnifable damages in the first two years increasing
annually to 50% in the sixth year, and (iii) third party claims for pre-closing
events arising six years after the closing date. Georgia-Pacific guaranteed all
of GP Envelope's obligations under the asset purchase agreement related to the
GP Acquisition.
In the asset purchase agreement related to the American Envelope Company
acquisition ("American Acquisition"), American agreed to indemnify and hold
harmless the Company from certain liabilities and obligations. In addition to an
indemnification for certain retained liabilities, the indemnification provides
that (i) American's indemnification obligation for out of pocket costs arising
out of or related to certain disclosed environmental matters and the presence of
any hazardous materials on the purchased assets ("Costs of Remediation") is
subject to a $25.0 million limitation and a six year claims period, and (ii) to
the extent that a claim consists of costs and expenses related to any Costs of
Remediation as to which American is obligated to indemnify the Company, the
parties shall contribute and share in the items on a sliding scale, such that
American bears 90% of each item of Costs of Remediation for which a claim has
been made during the first two years after closing of the American Acquisition,
with American's share decreasing by 10% each year thereafter until the sixth
anniversary of such closing date, when American's indemnification obligations
related to unclaimed Cost of Remediation matters cease. These sharing
percentages are fixed based upon the date the claim is made with respect to any
claim for Costs of Remediation and the parties' relative obligations with
respect to any such claim do not change thereafter. The indemnity for
environmental third party claims is not subject to any contribution by the
Company.
In connection with the American Acquisition, American and the Company
applied to and/or filed notices with regulatory agencies for the transfer or
issuance of all material permits or authorizations relating to the operations of
its plants and related facilities, including but not limited to, wastewater
permits and air permits. All such permits and authorizations have been
transferred or issued, as applicable.
Environmental claims relating to the properties acquired in the Supremex
Acquisition, the GAC Acquisition, the QPP Acquisition, the PNG Acquisition and
the SPCC Acquisition are not subject to separate indemnification provisions but
are subsumed under the general indemnification provisions of the applicable
purchase agreements.
ITEM 2. PROPERTIES
The Company occupies 52 envelope printing and commercial printing
facilities in the United States and Canada, 40 of which are leased. In
addition to on-site storage at each of the foregoing facilities, the Company
also stores products in one owned and three leased warehouses. Substantially
all of the printing and manufacturing facilities are pledged to secure
indebtedness under the bank credit agreements. The Company also leases 9,405
square feet of office space in Englewood, Colorado for its corporate
headquarters and 8,573 square feet of office space in Chicago, Illinois for
additional corporate headquarters support persons. The Company's Supremex, GAC,
PNG and QPP headquarters are each maintained in one of the Company's printing
and manufacturing facilities. Management believes that the Company has adequate
facilities for the conduct of current and future operations.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries may from time to time be involved in
claims or lawsuits that arise in the ordinary course of business. Accruals for
claims or lawsuits have been provided for to the extent that losses are deemed
probable and estimable. Although the ultimate outcome of these claims or
lawsuits cannot be ascertained, on the basis of present information and advice
received from counsel, it is the opinion of management that the disposition or
ultimate determination of such claims or lawsuits will not have a material
adverse effect on the Company. In the case of administrative proceedings
related to environmental matters involving governmental authorities, management
does not believe that any imposition of monetary damages or fines would be
material.
The Company settled the Skrudland v. Mail-Well Corporation d/b/a Mail-
---------------------------------------------
Well Envelope lawsuit in December 1996 for $300,000 plus attorney's fees. The
- -------------
settlement amount had already been reserved by the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is currently traded on the New York Stock
Exchange under the symbol "MWL." Prior to December 19, 1996 the Company's
Common Stock was traded over-the-counter in the Nasdaq National Market System
under the symbol "MLWL." As of March 14, 1997, there were 369 shareholders of
record and, based on security position listings, the Company believes that it
has in excess of 1,500 beneficial owners.
Following are the range of the high and low sales prices for the
Company's Common Stock as reported by the Nasdaq National Market System and New
York Stock Exchange during each fiscal quarter for the year ended December 31,
1996.
QUARTER ENDING: HIGH LOW
--------------- ------- -------
September 30, 1995 (from 9/22/95) $ 13.50 $ 13.25
December 31, 1995 $ 13.50 $10.625
March 31, 1996 $ 12.75 $ 8.125
June 30, 1996 $ 9.75 $ 7.75
September 30, 1996 $10.375 $ 8.25
December 31, 1996 $16.375 $10.125
DIVIDEND POLICY
The Company has not paid a dividend on Common Stock since its
incorporation. The Company does not anticipate paying any dividends on Common
Stock in the foreseeable future because it intends to retain earnings to finance
the expansion of its business, to repay indebtedness and for general corporate
purposes. Any payment of future dividends will be at the discretion of the
Board of Directors and will depend upon, among other things, the Company's
earnings, financial condition, capital requirements, level of indebtedness,
contractual restrictions with respect to the payment of dividends and other
relevant factors. The Company's bank credit agreements and senior subordinated
notes indenture limit the amount of dividends the Company could pay before
causing a default.
ITEM 6. SELECTED FINANCIAL DATA
The summary of historical financial data presented below is derived from
the historical audited financial statements of the Company and its predecessors,
GP Envelope & Pavey, except for the data presented below as of December 31, 1992
and for GP Envelope which is derived from the unaudited financial statements
which, in the opinion of management, reflect all adjustments, consisting of only
normal, recurring adjustments, necessary for a fair presentation of such
information. The historical balance sheet data as of December 31, 1994 include
Pavey which was acquired on February 24, 1994 and American which was acquired on
December 19, 1994. The operations of Pavey, American, Supremex, GAC, QPP, PNG
and SPCC have been included in the historical income statement data of the
Company from their respective dates of acquisition. The data presented below
should be read in conjunction with the Management's Discussion and Analysis of
Financial Condition and Results of Operations, the historical financial
statements and the related notes thereto included elsewhere herein.
(in millions, except per share amounts)
Predecessor Companies
-----------------------------------------
Period from Period from
February 24, January 1,
1994 1994
Year Ended through through Year Ended
December 31, December 31, February 23, December 31,
1996 1995 1994 1994 1993 1992
------------ ------------ ------------ ------------- ------------- -----------
Net sales $778.5 $596.8 $225.7 $36.6 $ 252.0 $262.7
Income (loss) before
extraordinary item 16.9 10.4 2.7 (1.3) 3.8 7.1
Net income (loss) 16.9 8.0 2.7 (1.3) 3.8 7.1
Income per share before
extraordinary item $ 1.42 $ 1.36 $ 0.47 (a) (a) (a)
Extraordinary item - 0.31 -
------ ------ ------
Net income per share $ 1.42 $ 1.05 $ 0.47 (a) (a) (a)
====== ====== ======
Total assets 470.9 500.4 307.7 n/a 136. 9 146.2
Total long term obligations 209.9 295.9 229.4 n/a 0.0 0.0
(a) Earnings per share is not presented for these periods as operations were
those of predecessor companies.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In addition to the historical information contained herein, this report contains
forward-looking statements. The reader of this information should understand
that all such forward-looking statements are subject to various uncertainties
and risks that could affect their outcome. The Company's actual results could
differ materially from those suggested by such forward-looking statements.
Factors which could cause or contribute to such differences include, but are not
limited to, product demand and sales, growth rate, ability to obtain assumed
productivity savings, quality control, availability of acquisition opportunities
and their related costs, cost savings due to integration and synergies
associated with acquisitions, ability to obtain additional financings and bank
restructuring, interest rates, foreign currency exchange rates, paper and raw
material costs, waste paper prices, ability to pass through paper costs to
customers, postage rates, changes in the direct mail industry, competition,
ability to develop new products, labor costs and advertising costs. This
entire report should be read to put such forward-looking statements in context
and to gain a more complete understanding of the uncertainties and risks
involved in the Company's business.
OVERVIEW - During the first half of 1996, Mail-Well, Inc. (the "Company")
encountered bad weather in the east and midwest, pricing pressures and lower
profit margins at Graphic Arts Center, Inc. ("GAC"), and weaker than expected
demand for envelope products in the U.S. due to lower demand in the direct mail
industry. The Company quickly reacted to these conditions as reflected in the
strong earnings performance for the year. Also during 1996, the Company
acquired two envelope companies and one printing company. In November 1996, the
bank credit agreement was amended, the Company refinanced certain equipment
under a sale/leaseback arrangement and a receivable securitization facility was
arranged.
ACQUISITIONS - The Company commenced operations in February 1994 with the
acquisition of the envelope businesses of Georgia-Pacific Corporation ("GP
Envelope") and Pavey Envelope and Tag Corp. ("Pavey"). In December 1994, the
Company acquired American Envelope Company ("American"), a manufacturer and
printer of envelopes. In July 1995, the Company acquired Supremex, Inc.
("Supremex"), a Canadian printer and manufacturer of envelopes. In August 1995,
the Company acquired GAC, one of the leading high impact color printers in the
United States. In April 1996, the Company acquired Quality Park Products, Inc.
("QPP"), a printer and manufacturer of envelopes. In November 1996, the Company
acquired Pac National Group Products, Inc. ("PNG"), a Canadian envelope printer
and manufacturer based in Ontario. In December 1996, the Company acquired
Shepard Poorman Communications Corporation ("SP"), a high impact color printer
located in Indianapolis, Indiana.
The following charts illustrate the historical and pro forma sales and operating
income of the U.S. Envelope, Canadian Envelope, High Impact Color Printing and
Corporate segments of the Company. Pro forma sales and operating income include
the operations of GP Envelope, Pavey, American, Supremex and GAC as if the
acquisitions occurred on January 1 of the year of acquisition, the acquisition
of QPP occurred on April 1, 1995 and the amended bank borrowings and leasing
transactions occurred on January 1, 1994.
The paper version of this document includes two charts: Sales by Segment and
Operating Income by Segment. The data included in these charts is as follows
(dollars in millions):
Sales by Segment
1996 1995 1995 Pro 1994 1994 Pro
Historical Historical Forma Historical Forma
SALES
US Envelope $551,225 $510,660 $584,712 $225,678 $444,576
Canadian Envelope 86,928 38,759 87,167 - -
High Impact Color Printing 140,371 47,384 149,767 - -
--------------------------------------------------------------
Total $778,524 $596,803 $821,646 $225,678 $444,576
==============================================================
Operating Income by Segment
1996 1995 1995 Pro 1994 1994 Pro
Historical Historical Forma Historical Forma
US Envelope $ 52,376 $ 50,995 $ 54,484 $ 24,408 $ 31,754
Canadian Envelope 13,784 5,797 11,986 - -
High Impact Color
Printing 6,010 993 6,046 - -
Corporate (11,308) (10,191) (14,132) (5,851) (11,983)
--------------------------------------------------------------
Total $ 60,862 $ 47,594 $ 58,384 $ 18,557 $ 19,771
==============================================================
RESULTS OF OPERATIONS
- ---------------------
U.S. ENVELOPE
- -------------
The following table presents 1996 historical financial data for the U.S.
Envelope operations of the Company including the operations of QPP since the
date of acquisition. The 1995 data includes the historical operations of the
Company and the historical operations of QPP for the nine months ended December
31, 1995 which was included to provide comparability to the 1996 information.
Information for 1994 combines the information derived from the historical
financial statements of the Company with financial information of GP Envelope,
Pavey and American for the portion of 1994 prior to the acquisition of each of
the businesses by the Company.
Year Ended December 31,
-------------------------------------------------------
1996 1995 1994
---- ---- ----
(dollars in thousands) $ % $ % $ %
--------- ------ --------- ------ --------- ------
Net sales $551,225 100.0 $584,712 100.0 $444,576 100.0
Cost of sales 434,392 78.8 469,544 80.3 354,922 79.8
Operating expenses 64,457 11.7 60,684 10.4 57,900 13.1
-------- ----- -------- ----- -------- -----
Operating income $ 52,376 9.5 $ 54,484 9.3 $ 31,754 7.1
======== ====== ======== ===== ======== =====
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
OPERATIONS OF ACQUIRED BUSINESS - Included in the operations of U.S. Envelope
for the year ended 1996 are the operations of QPP since the date of acquisition
and the corresponding period in 1995. QPP's net sales of $61.2 million for the
period represents a $12.9 million decrease from the same period in 1995. This
decrease was due to the loss of a major customer (which occurred prior to the
acquisition of QPP by the Company) representing sales of $13.3 million offset by
sales increases to other customers of $0.4 million. The gross margins for QPP
have improved from the prior year due to the discontinuation of certain
discounted pricing programs and savings from plant restructuring.
The following discussion relates to the U.S. Envelope operations of the Company,
exclusive of QPP's operations which were discussed in the preceding paragraph.
NET SALES - Net sales decreased 4.0% for the year ended December 31, 1996
compared to the year ended December 31, 1995. The average selling price
increased by 1.1% from $19.19 per thousand units in 1995 to $19.40 per thousand
units in 1996. The increase was due to a higher margin, customized product mix
and managing selling prices relative to paper costs. Total volume for the U.S.
Envelope operations decreased 5.1% to 25.3 billion units in 1996 from 26.6
billion units in 1995. Volume in 1996 was negatively impacted by lower direct
mail volume, and a shift towards more complex, higher margin products for which
fewer units were sold.
COST OF SALES - Cost of sales, as a percentage of sales, decreased from 78.9% in
1995 to 77.9% in 1996. The Company believes that material gross margin per unit
(measured on a per thousand envelope basis) and volume of units sold are better
indicators of its trend in revenues than its net sales, since historically the
Company has passed on to its customers changes in its cost of paper. When
measured on a unit basis, material gross margin increased from $10.42 per
thousand units in the year ended December 31, 1995 to $11.03 per thousand units
for the year ended December 31, 1996. The
increase in material gross margin on a unit basis was attributable to the
Company's ability to manage selling price relative to declining paper prices as
well as the Company's ability to negotiate paper costs. The favorable effect of
lower paper costs on gross margin was largely offset by decreased revenue from
the sale of waste paper and increases in other costs as a percentage of sales.
Material costs, exclusive of waste revenue, were 44.9% and 49.4% of net sales
for the years ended December 31, 1996 and 1995, respectively. Waste recovery
revenue declined from $0.71 per thousand units in 1995 to $0.33 per thousand
units in 1996 which resulted in a decline in waste recovery revenue from $18.9
million in 1995 to $8.3 million in 1996.
OPERATING EXPENSES - Operating expenses include selling and administrative
expenses. For the year ended December 31, 1996, selling and administrative
expenses, as a percentage of sales, increased to 12.4% from 11.1% in 1995.
Included in 1996 operating expenses was a $2.1 million loss on the disposal of
assets which represented equipment idled from consolidation activities, the
disposal of equipment, impairment of buildings and the write-off of capitalized
software no longer in use. Without this loss, operating expenses as a
percentage of sales would have been 11.9% for 1996. The increase from 1995 was
due to higher compensation and benefit costs in the administrative area. The
increase was offset by the reduction or elimination of redundant functions when
businesses were acquired, resulting in cost savings.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994
The U.S. Envelope table includes the operations of QPP for the nine months ended
December 31, 1995 for comparability with 1996 historical operations; QPP's
operations are excluded from the 1994 column of that table and from the
following discussion.
NET SALES - The 14.9% increase in net sales for the year ended December 31, 1995
compared to the year ended December 31, 1994 was due to price and volume
increases. Total volume for the U.S. Envelope operations increased 4.7% to 26.6
billion units for the year ended December 31, 1995 from 25.4 billion units for
the year ended December 31, 1994. The volume increase was due, in management's
opinion, to the integration of the GP Envelope, Pavey and American acquisitions
into one organization. This integration increased the Company's ability to
serve national clients and efficiently manage production. Prices increased by
9.7% from $17.49 per thousand units in 1994 to $19.19 per thousand units in
1995, as the Company adjusted its prices in response to the significant increase
in the cost of paper. Historical net sales for the period from February 24,
1994 to December 31, 1994 were $225.7 million. The American operations
contributed net sales of $182.3 million in 1994 and volume of 12.7 billion
units. The operations of the predecessor companies (GP Envelope and Pavey) for
the period ended February 23, 1994 contributed net sales of $36.6 million and
volume of 1.8 billion units.
COST OF SALES - Total cost of sales, as a percentage of sales, decreased from
1994 to 1995, largely due to the impact of the Company's ability to effectively
manage the increase in the cost of paper and the related increases in sales
prices. Generally, in periods of increasing paper costs, the Company's gross
profit percentage declines even in situations where the entire increase in cost
can be passed on to its customers. The Company believes that material gross
margin per unit and volume of units sold are better indicators of its trend in
revenues than its net sales, since historically the Company has passed on to its
customers changes in its cost of paper. On a unit basis, material gross margin
increased from $10.19 per thousand units in 1994 to $10.42 per thousand units in
1995. The increase in the material gross margin on a unit basis was
attributable to: (1) the Company's ability to pass on paper cost
increases and (2) an increase in proceeds from the sale of waste paper as waste
paper prices increased concurrently with the cost of paper. The realization of
cost savings from combining American operations with GP Envelope and Pavey
operations in December 1994 was partially offset by increased labor costs due to
wage and salary increases and resulted in lower labor and manufacturing expenses
as a percentage of sales.
OPERATING EXPENSES - For the year ended December 31, 1995, operating expenses
of $56.7 million were $1.2 million less than operating expenses in 1994. As a
percentage of sales, operating expenses decreased compared to the same period in
1994. The dollar decrease in operating expenses was due to the realization of
cost savings from combining the sales and administrative functions of American,
partially offset by the increase in commissions paid. During 1995, the
administrative offices of American were closed and the functions performed at
that location were transferred to the corporate office of the Company.
Additionally, the sales force of the Company was consolidated and deployed to
new markets and segments of the industry.
CANADIAN ENVELOPE
- -----------------
The following table presents financial information with respect to the Canadian
Envelope operations for the years ended December 31, 1996 and 1995. The 1996
information includes the operations of PNG for the one month ended December 31,
1996. Information for 1995 was derived from historical financial statements
both prior to, and after, the acquisition of Supremex by the Company.
Year Ended December 31,
---------------------------------
1996 1995
---- ----
(dollars in thousands) $ % $ %
-------- ----- -------- -----
Net sales $86,928 100.0 $87,167 100.0
Cost of sales 61,020 70.2 62,564 71.8
Operating expenses 12,124 13.9 12,617 14.5
------- ----- ------- -----
Operating income $13,784 15.9 $11,986 13.7
======= ===== ======= =====
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
NET SALES - Net sales for the year ended December 31, 1996 decreased 0.3% as
compared to sales for the year ended December 31, 1995. The average selling
price increased by 1.3% and was due to a higher margin, customized product mix.
Total volume decreased 6.1% to 4.2 billion units from 4.5 billion units in 1995.
Volume in 1996 was negatively impacted by a decrease in the sale of commodity
envelopes which have a lower margin than customized products.
COST OF SALES - Cost of sales, as a percentage of sales, decreased from 1995 to
1996, largely due to the Company's ability to effectively manage fluctuations in
the cost of paper and related fluctuations in sales prices. Material gross
margin per unit (measured on a per thousand envelope basis) and volume of units
sold are better indicators of its trend in revenues than its net sales, since
historically changes in the cost of paper have been passed on to customers.
When measured on a unit basis, material gross margin per unit increased 9.5%
from $10.25 per unit in 1995 to $11.22 per unit in 1996. A favorable effect on
gross margins also occurred due to lower paper costs, which decreased 10% from
the 1995 average.
OPERATING EXPENSES - Operating expenses include selling and administrative
expenses which declined both as a percentage of sales and in absolute dollars
when comparing 1996 to 1995. The closing of the Brantford facility and other
cost centers contributed to this decline. In addition, sales forces were reduced
and administrative responsibilities were combined with other regions.
HIGH IMPACT COLOR PRINTING
- --------------------------
The following table presents financial information with respect to the High
Impact Color Printing operations for the years ended December 31, 1996 and 1995.
The 1996 information includes the operations of SP for the one month ended
December 31, 1996. Information for 1995 reflects the historical results of GAC
prior to, and after, the acquisition by the Company.
Year Ended December 31,
----------------------------------
1996 1995
---- ----
(dollars in thousands) $ % $ %
-------- ----- --------- -----
Net sales $140,371 100.0 $149,767 100.0
Cost of sales 116,179 82.7 121,449 81.1
Operating expenses 18,182 13.0 22,272 14.9
-------- ----- -------- -----
Operating income $ 6,010 4.3 $ 6,046 4.0
======== ===== ======== =====
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
NET SALES - The high impact color printing market is highly competitive and GAC
has lowered prices to meet market expectations. This was a major cause of the
6.3% decline in sales dollars. In response to this decline in sales price, GAC
has targeted higher margin markets and is aggressively allocating sales
resources to these markets. Another factor affecting the decline in sales
dollars was the decrease in paper costs. Fluctuations in paper prices are
generally passed on to customers as an integral part of the price of the
product. As paper prices decreased in 1996, as compared to 1995, the sales
prices also decreased.
COST OF SALES - Gross margins decreased as a percentage of sales to 17.3% in
1996 from 18.9% in 1995 as a result of the competition in major markets.
Reductions in cost of sales were not large enough to offset the decline in
sales. GAC has lowered gross margins to meet the competition and, as stated
previously, it is concentrating its sales efforts on higher-margin product
markets.
OPERATING EXPENSES - Operating expenses as a percentage of sales have decreased
12.8% from 1995. Operating expenses include selling and administrative expenses
and the reduction in this category demonstrates GAC's ability to reduce these
expenses in a time of decreasing gross margins. Improvements were made in the
purchasing of supplies, employee headcounts, travel and entertainment expenses
and spoilage.
CORPORATE EXPENSES
- ------------------
The following table presents historical financial information for the Company
and includes the operations of each acquired company from the date of its
acquisition. The percentage column presents the specific expense items as a
percentage of historical net sales for the year.
Year Ended December 31,
----------------------------------------------
1996 1995 1994
---- ---- ----
(dollars in thousands) $ % $ % $ %
------- ---- ------- ----- -------- -----
Operating expenses $ 7,136 0.9 $ 7,334 1.2 $ 3,844 1.7
Amortization expense 4,172 0.5 2,857 0.5 2,007 0.9
Interest expense 26,936 3.5 27,043 4.5 12,861 5.7
Interest expense -
amortization of deferred
financing costs 3,556 0.5 2,291 0.4 1,027 0.4
Other expense (income) 454 0.1 668 0.1 (245) (0.1)
Income taxes 12,263 1.6 7,219 1.2 2,171 1.0
OPERATING EXPENSES - Operating expenses, as a percentage of net sales and in
total dollars, continues to decline as acquisitions are absorbed without
significant increases in corporate headcount.
AMORTIZATION EXPENSE - Amortization expense increased due to the amortization of
the intangibles recorded in the acquisitions.
INTEREST EXPENSE - Interest expense decreased primarily as a result of a lower
average interest rate on the bank debt of 7.6% in 1996 as compared to 8.5% in
1995. This decrease more than offsets the higher average bank debt balance
which was $206.5 million in 1996 as compared to $187.7 million in 1995. The
bank debt restructuring, the cash proceeds from the sale/leaseback and the cash
proceeds from the accounts receivable securitization discussed in the notes to
the financial statements resulted in the reduction of outstanding bank debt
balances toward the end of 1996.
INTEREST EXPENSE - AMORTIZATION OF DEFERRED FINANCING COSTS - The amortization
of deferred financing costs increased due to the increase in deferred financing
costs capitalized pursuant to the 1995 acquisitions for which there was a full
year of amortization in 1996.
INCOME TAXES - The effective tax rate for the year ended December 31, 1996 was
42.0 % as compared to 41.0% for the year ended December 31, 1995. The effective
tax rate for both periods was higher than the federal statutory rate due to
state and provincial income taxes. Additionally, certain goodwill amortization
and a portion of the employee stock ownership contribution was not tax
deductible.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
HISTORICAL CASH FLOW - Net cash provided by operating activities was $141.4
million and $32.0 million for the years ended December 31, 1996 and 1995,
respectively, and $19.6 million for the period from February 24, 1994 to
December 31, 1994. The acquisitions of Quality, PNG and SP required cash
payments in the amounts of $27.8 million, $20.5 million and $14.9 million,
respectively, which was borrowed under the Company's bank credit agreement. In
November 1996, the Company
entered into a five year agreement whereby it can sell, on a revolving basis, an
undivided percentage ownership interest in a designated pool of accounts
receivable up to a maximum of $100.0 million. At December 31, 1996, $68.4
million was sold under this agreement and the sale was reflected as a reduction
of accounts receivable in the Company's consolidated balance sheet. Other
investing activities include capital expenditures of $18.7 million, $13.8
million and $4.5 million in 1996, 1995 and 1994, respectively. The 1996
expenditures were offset by the proceeds of $33.6 million from the disposal of
assets including $30.0 million from the sale/leaseback.
DEBT OBLIGATIONS - In November 1996, the Company amended its bank credit
agreement which now includes a $30.0 million revolving credit facility, a C$10.0
million revolving credit facility, $135.0 million of term loans, a $30.0 million
acquisition loans facility, a $12.0 million letter of credit facility and an
C$8.0 million letter of credit facility. As of December 31, 1996, the Company
had borrowed $6.6 million (including $5.8 million in letters of credit) under
the revolving credit facility of the bank credit agreement and $135.0 million
under the term loans. Availability at December 31, 1996 included $36.6 million
under the revolving credit facilities and $30.0 million under the acquisition
loan facility. Interest rates on the Company's bank debt ranged from 5.25% to
8.75% as of December 31, 1996. The weighted average interest rate on bank debt
was 7.6%.
CAPITAL REQUIREMENTS - The Company estimates that, based on current utilization
of its existing equipment and expected demand, it will spend $20.0 to $23.0
million per year on capital expenditures, exclusive of acquisitions.
EFFECTS OF INFLATION - The effects of inflation have not been material to the
Company. However, due to the competitive nature of its business, it may not
always be able to pass on inflationary cost increases in the future.
Manufacturing costs may be affected by inflation and the effects of inflation
may be experienced by the Company in future periods.
EFFECTS OF FOREIGN CURRENCY - The effects of foreign currency exchange have not
been material to the Company to date. The Company recognized a net foreign
exchange loss of $0.3 million in 1996 which relates, primarily, to U.S. dollar
denominated debt borrowed by the Canadian subsidiary. Term loans with a face
value of $65.0 million were borrowed in U.S. dollars and are included in the
balance sheet of Supremex. Supremex entered into two foreign currency swap
contracts which involve the exchange of floating rate U.S. dollar denominated
debt for floating rate Canadian dollar denominated debt at a contracted exchange
rate. The swap agreements are intended to minimize the exchange rate risk to
the Company.
SEASONALITY AND ENVIRONMENTAL - The effects of seasonality and environmental
matters had no material financial impact on the historical operations of the
Company and are not expected to have an effect on the Company's liquidity and
capital resources.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Mail-Well, Inc. and Subsidiaries
Independent Auditors' Report.......................................... 28
Consolidated Balance Sheets as of December 31, 1996 and 1995.......... 29
Consolidated Statements of Operations for the Years Ended
December 31, 1996 and 1995 and for the period from February 24, 1994
through December 31, 1994............................................. 31
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996 and 1995 and for the Period from February 24, 1994
through December 31, 1994............................................. 32
Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended December 31, 1996 and 1995 and for the period from
February 24, 1994 through December 31, 1994........................... 33
Notes to Consolidated Financial Statements............................ 34
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Mail-Well, Inc.:
We have audited the accompanying consolidated balance sheets of Mail-Well, Inc.
and Subsidiaries (''Company,'' see Note 1) as of December 31, 1996 and 1995, and
the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for the years ended December 31, 1996 and 1995 and for
the period from February 24, 1994 through December 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Mail-Well, Inc. and Subsidiaries as
of December 31, 1996 and 1995, and the results of their operations and their
cash flows for the years ended December 31, 1996 and 1995 and for the period
from February 24, 1994 through December 31, 1994 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Denver, Colorado
February 10, 1997
MAIL-WELL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
- ----------------------------------------------------------------------------
ASSETS DECEMBER 31,
1996 1995
CURRENT ASSETS
Cash and cash equivalents $ 9,656 $ -
Receivables (net of allowance for doubtful accounts of $3,002 and $1,965) 40,612 95,550
Accounts receivable-other 7,743 3,855
Income tax receivable 3,504 2,104
Inventories 68,275 67,598
Deferred tax asset 2,309 3,846
Other current assets 3,513 1,330
-------- --------
Total current assets 135,612 174,283
PROPERTY, PLANT AND EQUIPMENT 183,302 205,096
DEFERRED FINANCING COSTS (net of accumulated amortization of
$6,746 and $3,191) 14,497 15,897
GOODWILL (net of accumulated amortization of $5,408 and $2,506) 128,812 101,026
OTHER ASSETS (net of accumulated amortization of $3,578 and $2,307) 8,723 4,134
-------- --------
TOTAL $470,946 $500,436
======== ========
See notes to consolidated financial statements.
MAIL-WELL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY DECEMBER 31,
1996 1995
CURRENT LIABILITIES
Accounts payable $ 44,539 $ 31,764
Accrued compensation and vacation 23,312 20,216
Accrued interest 4,455 4,497
Other current liabilities 26,206 16,530
Current portion of long-term debt and capital leases 14,975 11,523
--------- ---------
Total current liabilities 113,487 84,530
ACCRUED PENSION 1,284 2,266
CAPITAL LEASES 2,958 3,399
BANK BORROWINGS 121,992 207,482
SENIOR SUBORDINATED NOTES 85,000 85,000
DEFERRED INCOME TAXES 23,153 14,853
OTHER LONG-TERM LIABILITIES 1,865 588
--------- ---------
Total liabilities 349,739 398,118
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value; 25,000 shares authorized, none issued and outstanding - -
Common stock, $0.01 par value; 15,000,000 shares authorized, 12,942,828 shares
and 12,928,060 shares issued and 12,487,420 shares and 12,472,652 shares (including
1,298,848 shares held by ESOP) outstanding at December 31, 1996 and
December 31, 1995, respectively 130 130
Non-voting convertible common stock; $0.01 par value; 35,000 shares authorized,
none issued and outstanding - -
Paid-in capital 98,280 96,958
Retained earnings 27,631 10,704
Unearned ESOP compensation (2,896) (3,530)
Cumulative foreign currency translation adjustment (115) (20)
Pension liability adjustment (110) (211)
Treasury stock-at cost; 455,408 shares (1,713) (1,713)
--------- ---------
Total stockholders' equity 121,207 102,318
--------- ---------
TOTAL $ 470,946 $ 500,436
========= =========
See notes to consolidated financial statements.
MAIL-WELL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- -----------------------------------------------------------------------------------------------------------------
PERIOD FROM
FEBRUARY 24, 1994
YEAR ENDED DECEMBER 31, THROUGH
1996 1995 DECEMBER 31, 1994
NET SALES $ 778,524 $ 596,803 $ 225,678
COST OF SALES
Materials 350,425 291,441 101,770
Labor and other 212,841 165,670 65,668
Manufacturing 42,308 22,787 10,853
Depreciation 14,904 9,841 4,058
Waste recovery (8,887) (18,935) (5,644)
----------- ---------- ----------
Total cost of sales 611,591 470,804 176,705
----------- ---------- ----------
GROSS PROFIT 166,933 125,999 48,973
----------- ---------- ----------
OTHER OPERATING COSTS
Selling 55,314 40,444 14,504
Administrative 44,440 35,104 13,216
Amortization 4,172 2,857 2,007
Loss on disposal of assets 2,145 - 689
----------- ---------- ----------
Total other operating costs 106,071 78,405 30,416
----------- ---------- ----------
OPERATING INCOME 60,862 47,594 18,557
OTHER (INCOME) EXPENSE
Interest expense-debt 26,936 27,043 12,861
Interest expense-amortization of deferred financing costs 3,556 2,291 1,027
Discount on sale of accounts receivable 726 - -
Other (income) expense 454 668 (245)
----------- ---------- ----------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 29,190 17,592 4,914
PROVISION FOR INCOME TAXES
Current 3,270 6,007 415
Deferred 8,993 1,212 1,756
----------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM 16,927 10,373 2,743
EXTRAORDINARY ITEM, NET OF TAX
BENEFIT OF $1,608 - 2,412 -
----------- ---------- ----------
NET INCOME $ 16,927 $ 7,961 $ 2,743
=========== ========== ==========
INCOME PER SHARE BEFORE
EXTRAORDINARY ITEM $1.42 $1.36 $.47
EXTRAORDINARY ITEM - 0.31 -
----------- ---------- ----------
NET INCOME PER SHARE $1.42 $1.05 $.47
=========== ========== ==========
WEIGHTED AVERAGE SHARES 11,918,547 7,614,708 5,878,631
=========== ========== ==========
See notes to consolidated financial statements.
MAIL-WELL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------------------
PERIOD FROM
FEBRUARY 24, 1994
YEAR ENDED DECEMBER 31, THROUGH
1996 1995 DECEMBER 31, 1994
CASH FLOWS FROM OPERATIONS
Net income $ 16,927 $ 7,961 $ 2,743
Adjustments to reconcile net income to cash provided by
operations:
Depreciation 14,904 9,841 4,058
Amortization 7,728 5,148 3,034
Accretion of original issue discount - 1,650 1,717
(Gain) loss on repurchase of deferred coupon notes - pre-tax - 4,020 (17)
Deferred tax provision 8,993 1,212 1,756
ESOP compensation expense 1,973 1,612 752
Loss on disposal of assets 2,145 - 689
Other 393 208 284
Changes in operating assets and liabilities, net of effects
of acquired businesses:
Receivables 75,985 (3,634) (6,109)
Inventories 22,049 5,578 (3,269)
Accounts payable (1,236) (5,944) 4,723
Accrued interest (304) 722 3,522
Current income taxes 997 (1,269) -
Other working capital 1,340 3,031 5,734
Other assets and other long-term liabilities (10,452) 1,869 (35)
--------- --------- ---------
Net cash provided by operating activities 141,442 32,005 19,582
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions, net of cash acquired (63,179) (79,613) (253,061)
Capital expenditures (18,742) (13,766) (4,474)
Proceeds from sale of property, plant and equipment 33,594 2,440 -
Purchase of marketable securities - (62,750) -
Sale of marketable securities 250 62,500 -
--------- --------- ---------
Net cash used in investing activities (48,077) (91,189) (257,535)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash overdrafts 2,496 4,779 423
Net proceeds from common stock issuance 40 68,181 19,631
Proceeds from issuance of deferred coupon notes - - 17,883
Proceeds from long-term debt 319,486 236,269 302,164
Repayments of long-term debt and capital leases (403,649) (224,768) (81,745)
Debt issuance costs (1,800) (5,571) (14,090)
Repurchase of deferred coupon notes - (19,712) (4,607)
Repurchase of common stock - - (1,713)
--------- --------- ---------
Net cash provided by (used in) financing activities (83,427) 59,178 237,946
--------- --------- ---------
EFFECT OF EXCHANGE