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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, 1997
Commission file number 1-12551
MAIL-WELL, INC.
(Exact name of Registrant as specified in its charter.)
COLORADO 84-1250533
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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
Convertible Subordinated Notes due 2002 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. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 10, 1998 was $683,780,224.
As of March 11, 1998, the Registrant had 21,324,991 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 April 29, 1998.
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TABLE OF CONTENTS
PART I
Page
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . 1
History . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Products and Services . . . . . . . . . . . . . . . . . . . . . 2
Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Marketing and Distribution. . . . . . . . . . . . . . . . . . . 7
Printing and Manufacturing. . . . . . . . . . . . . . . . . . . 8
Materials and Supply Arrangements . . . . . . . . . . . . . . . 9
Patents, Trademarks and Brand Names . . . . . . . . . . . . . . 10
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Seasonality . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Environmental . . . . . . . . . . . . . . . . . . . . . . . . . 11
New Segments. . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . 14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Dividend Policy . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . . 17
Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Results of Operations . . . . . . . . . . . . . . . . . . . . . 18
Liquidity and Capital Resources . . . . . . . . . . . . . . . . 24
Recent Developments . . . . . . . . . . . . . . . . . . . . . . 25
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . 27
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure. . . . . . . . . . . . . . . . . . . . . . . 54
PART III
Item 10. Directors and Executive Officers of Registrant. . . . . . . . . . 55
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . 56
Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Item 13. Certain Relationships and Related Transactions. . . . . . . . . . 57
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
PART I
ITEM 1. BUSINESS
THE COMPANY
Mail-Well, Inc. (the "Company") is a leading consolidator in the highly
fragmented envelope and high-impact commercial printing industries. From
December 1, 1994 through January 6, 1998, the Company completed twelve
acquisitions in the envelope and commercial printing industries, ranging in
size from $6.1 million to $97.4 million. As a result of its consolidation
strategy, the Company has become the largest printer and manufacturer of
envelopes in the United States and Canada and the leading high-impact color
printer in the United States. As of January 1998, the Company and its
subsidiaries operated approximately 70 envelope and commercial printing
facilities throughout North America.
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's Quality Park Products division ("QPP") is a printer and
manufacturer of a broad line of envelopes and filing supplies for the office
products market. Pac National Group Products, Inc. ("PNG"), a part of the
Company's Supremex operations, is a printer of custom designed envelopes and
courier packaging.
The Company's Graphic Arts Center, Inc. ("GAC") subsidiary is a leading
high-impact color printer in the United States. "High-impact" refers to the
effect or impact the printed piece has on the reader. GAC specializes in
producing advertising literature, high-end catalogs, annual reports,
calendars and four color computer books and is recognized as an innovative
provider of quality printed products to leading companies throughout the
United States. GAC operates six state-of-the-art commercial printing
facilities, four on the west coast and one each in Indianapolis and Atlanta.
See Note 10 to the Company's consolidated financial statements included
elsewhere in this report for additional information concerning the Company's
operating and geographic segments.
The envelope and commercial printing industries are highly fragmented,
with approximately 215 independent envelope companies in the United States
and Canada and approximately 500 commercial printing companies in the United
States competing in the high-impact color segment of the printing industry.
The Company believes that there continues to be significant consolidation
opportunities in the envelope and commercial printing industries.
HISTORY
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 QPP, an
envelope manufacturer; PNG, a Canadian envelope printer and Shepard Poorman
Communications Corporation ("SPCC"), a high-impact color printer.
On June 27, 1997, the Company acquired all of the outstanding shares of
common stock of Griffin Envelope, Inc. ("Griffin"), a manufacturer and
distributor of envelopes located in Seattle, Washington. On July 11, 1997,
the Company acquired all of the outstanding shares of common stock of The
Allied Printers ("Allied"), a high-impact color printer located in Seattle,
Washington. On July 14, 1997, the Company acquired all of the outstanding
shares of common stock of Murray Envelope Corporation ("Murray"), located in
Hattiesburg, Mississippi. Murray manufactures envelopes primarily for sales
through distributors in the southeastern and south
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central U.S. markets. Additionally, the Barkley division of Murray
manufactures and distributes filing products for the national market. On
September 10, 1997, the Company acquired substantially all the assets of
National Color Graphics, Inc. ("Color Graphics"), a high-impact sheet-fed
color printer located in Atlanta, Georgia. On October 1, 1997, the Company
acquired substantially all the assets of Intertec Mailing Services
("Intertec"), a division of Intertec Publishing Corporation. Intertec,
located in Nashville, Tennessee, is a direct mail service company. This
division has been renamed "Mail-Well Services." On December 2, 1997, the
Company acquired all the assets of the Cambridge, Maryland commercial
printing plant of Western Graphics Communications ("Cambridge"), a subsidiary
of Golden Books Publishing, Inc.
See Note 2 to the Company's consolidated financial statements included
elsewhere in this report for additional information concerning the Company's
acquisitions.
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 by offering printed
customized conventional envelopes primarily to direct mail marketing
customers and other end-users, such as financial services customers. 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. The Company also competes in the Wholesale segment, particularly in
the office products market. Through its QPP division, the Company
manufactures and prints a broad line of custom envelopes, which are featured
in national catalogs for the office products market or offered through office
products retailers, including contract stationers. For the fiscal year ended
December 31, 1997, customized conventional envelopes accounted for
approximately 61.0% and plain stock envelopes accounted for approximately
19.4% of the envelope segment's net sales, respectively.
Management believes that the Company's success is largely attributable
to an emphasis on customer responsiveness and service. The Company's
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-Registered Trademark-, currency and
credit card holders, airline and car rental ticket jackets, photofinishing
packaging, expandable folders and innovative inter-office envelopes.
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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.
COMMODITY ORIENTED PRODUCTS. Commodity oriented products include those
products sold to wholesalers, paper merchants, printers, brokers, office
product establishments and contract stationers. The Company provides both
private label and QPP brand products to customers.
Plain stock envelopes range from common products such as #10, #9, 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 typically 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 and the number of people involved in
the production of plates.
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
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more efficient and accurate communications between customers and the Company.
EDI also allows customers to make payments electronically.
HIGH IMPACT COLOR PRINTING
High-impact color printing is designed to elicit the maximum response
from the reader, and generally requires 40" high-speed sheet fed or web
presses capable of printing in six or more colors. The Company uses its
high-speed web presses for longer runs, generally over 100,000 units.
Management estimates that there are approximately 500 domestic companies
competing in the high-impact color printing segment of the commercial
printing industry, with annual sales of approximately $3.5 billion in that
segment. The Company, through its GAC subsidiary, provides premium high
impact color printing services to customers in five main product segments:
advertising literature, four-color computer instruction books, catalogs,
annual reports and calendars and posters. For the fiscal year ended December
31, 1997, advertising literature accounted for approximately 36.1%, computer
books and manuals accounted for approximately 16.0%, catalogs accounted for
approximately 15.3%, annual reports accounted for approximately 9.5%, and
calendars and posters accounted for approximately 6.5% of GAC's net sales,
respectively.
The 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.
GAC provides its customers with comprehensive prepress, printing and
fulfillment services through its six 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 ongoing consolidation of the commercial
printing industry is being 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 smaller local and regional commercial printers will find it increasingly
difficult to obtain adequate financial resources to remain competitive in the
segments of the 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 Nordstrom, Patagonia and Dooney & Bourke, Inc.
ANNUAL REPORTS AND RELATED PRODUCTS. GAC prints annual reports and
related products for a number of large and small 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, Boeing, The Equitable Companies, Emerson Electric Co., SBC
Communications and Texaco.
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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.
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 1997, 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 first and third class
advertising mail delivered directly to consumers through the postal system.
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 are able to use database marketing and direct
mail to market their products 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.
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 corner card imprints, inside
tints and 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 has initiated a national sales
account effort to service the larger, centralized purchasing and supply
requirements resulting from consolidations in these markets.
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
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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 Murray and QPP divisions. The Company sells both Consumer Direct
and Wholesale products to paper merchants, envelope jobbers and business
forms manufacturers and distributors. 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 and distributors
sell 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 also a supplier of photofinishing packaging
products, which require extensive application of color graphics.
The Company is a small manufacturer of tags for a 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 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-Registered Trademark- 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 contract
stationers. These products are not generally sold to end users, but are sold
in the resale market. Many of 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 the Company's U.S.
Envelope division. 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.
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HIGH IMPACT COLOR PRINTING
GAC currently focuses on providing high-impact 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's customers include Fortune 500 Companies, graphic designers and
advertising agencies. Calendars are custom printed for publishers who market
them through their own distribution channels. Computer textbooks are
primarily printed for publishers who 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 prints advertising literature for a number of
foreign companies selling goods in the United States. 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.
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 its sales representatives, 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, enhance the internal
dissemination of successful new product ideas, efficiently allocate its
production equipment, share technical expertise and 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.
7
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). In most Canadian markets, Supremex employs a delivery service
to serve customers which has increased Supremex's on-time delivery rate.
HIGH IMPACT COLOR PRINTING
GAC markets primarily on a regional basis in the commercial printing
industry, through sales representatives working out of sales offices across
the United States. Management believes that GAC maintains one of the largest
sales staffs 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 PRINTING
There are essentially two types of folding machines used in the envelope
converting process: (i) high-speed web machines, capable of folding and
printing directly from paper rolls large volume orders with multiple colors
and numerous features and (ii) die cut machines, which require a preliminary
step to provide die cut envelope blanks from paper rolls, and are used
primarily for smaller orders typically including customized value added
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 cut
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 envelope 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, either in-line on the folding machine or
off-line preceding or subsequent to the folding process. 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.
In order to expand its envelope business efficiently, the Company will
require additional high-speed folding machines. The addition of high-speed
machine capacity will allow the Company to attract more high-volume work and
free slower-speed die cut 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 fifty additional
high-speed folding machines over the next three to five years, representing
an aggregate projected capital expenditure of approximately $50 million. For
fiscal year 1998, the Company has budgeted approximately $18 million in
capital expenditures for additional high-speed folding capacity.
Envelope manufacturing equipment typically has a relatively long useful
life. The Company's manufacturing personnel are skilled at maintaining and
rebuilding equipment, 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.
8
Management believes the Company can enhance its competitive position in
the envelope industry by using improved management systems. The Company is
in the process of implementing management systems 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. 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),
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 prepress 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 its six production facilities. GAC primarily uses sheet-fed
presses for short to medium run jobs. The sheet-fed presses are capable of
printing up to 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 1997 accounted for a substantial majority of the cost of envelope
materials and a substantial percentage 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. The Company's primary suppliers of
white-wove or kraft paper include Champion Paper, Boise Cascade,
International Paper and Union Camp. Management believes that the Company's
large volume paper purchases should continue to ensure the receipt of
adequate supplies in the future.
9
HIGH IMPACT COLOR PRINTING
The primary materials used by GAC in the commercial printing industry
are paper (chiefly high quality heavy-stock paper), ink, film, offset plates,
chemicals and cartons, with paper accounting for the majority of total
material costs. GAC purchases these materials from a number of suppliers and
has not experienced any significant difficulties in obtaining the raw
materials necessary for operations. In 1996, GAC implemented an inventory
management system in which a limited number of paper suppliers supply all its
paper needs. 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. The Company also holds or has rights to use various patents relating
to its envelope business, which expire at various times through 2012. The
Company's sales do not materially depend upon any single or related group of
patents.
COMPETITION
ENVELOPE PRINTING
The envelope printing and manufacturing industry is 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, the
internet, 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 delivery of mail to residences and
businesses through the United States Postal Service and the Canadian Post
Corporation and (iii) the ability of the Company's direct mail customers to
include return materials in their mail-outs.
Principal bases of competition are quality, service and price. 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.
10
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
Management believes that backlogs have become less significant to the
Company over the past two years, due to the quicker turn around times on
orders demanded by customers. The Company's envelope production backlog was
$61.7 million as of December 31, 1997, compared to $58.7 million at December
31, 1996. 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 $14.1
million as of December 31, 1997, compared to $11.3 million at December 31,
1996. Backlog consists of purchase orders and contracts that are typically
filled within four to six weeks. Backlog does not necessarily reflect future
sales levels.
EMPLOYEES
As of December 31, 1997, the Company employed a total of 7,523 people,
including 1,471 classified as salaried, 5,619 as hourly and 433 as
salespeople. Approximately 1,953 people employed at the various 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
11
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.
Although certain of the Company's predecessors have been designated as PRPs
under CERCLA with respect to off-site disposal of hazardous waste, management
believes that the Company has minimal exposure as a result of such
designation, particularly because of the indemnifications described below.
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
12
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
Company's various other acquisitions are not subject to separate
indemnification provisions, but are subsumed under the general
indemnification provisions of the applicable purchase agreements.
Management is not aware of any existing environmental claims in connection
with these acquired properties, and believes that the indemnities provided
will be adequate should any future claims arise.
NEW SEGMENTS
CUSTOM BUSINESS COMMUNICATIONS DOCUMENTS
On January 6, 1998, the Company acquired all of the outstanding shares
of Poser Business Forms, Inc. ("Poser"), the second largest printer of custom
business communications documents for the distributor market in the United
States. The custom business communications documents industry is highly
fragmented, and management believes there are significant consolidation
opportunities in this industry.
Poser prints a diverse line of custom products addressing the business
communications needs of small and medium sized end-users, typically
businesses with less than 500 employees and average annual purchases of
communications documents of between $5,000 and $100,000. These products
include traditional products such as custom continuous forms, snap-a-parts,
mailers, binders and index tabs, as well as specialty products such as cut
sheets, labels and high-color web printing. Many of Poser's specialty
products are targeted for non-impact laser applications designed to meet the
desktop needs of the end-user, as well as the growing use of minicomputers
and local area networks.
Poser sells its products through 83 sales service representatives to
over 7,000 independent distributor customers located throughout the United
States. No particular customer accounts for more than 2% of Poser's sales.
Poser competes with several other distributor manufacturers with nationwide
manufacturing capabilities, as well as numerous regional/local manufacturers.
To a limited extent, Poser also competes with direct selling manufacturers of
business communications documents, many of which are considerably larger than
Poser and the Company.
Paper is the primary material used in Poser's products, and is subject
to cyclical pricing. Poser is not dependent upon any one supplier for its
paper needs, and management believes that the Company's overall purchasing
power among paper vendors will enhance Poser's profitability.
Poser employs approximately 830 people at 14 printing facilities located
mostly in the southern and western United States, 5 of which are owned, and
its corporate headquarters in Fairhope, Alabama.
Labels
On March 10, 1998, the Company acquired substantially all of the assets
of the North American paper label division of Lawson Mardon Packaging
("Lawson Mardon"), a leading supplier of glue-applied labels to the North
American food and beverage markets. The Company will operate the division
under the name "Mail-Well Labels." The North American glue-applied label
industry is fragmented, and management believes there are significant
consolidation opportunities in this industry.
Mail-Well Labels produces glue-applied labels primarily for the food and
beverage markets. Glue-applied labels are typically printed for application
to various container formats by customers or third party packing operations.
These products are generally divided into two categories: conventional labels
and premium labels.
13
Conventional labels are typically offset printed in up to 7 colors on coated
one sided paper with standard press varnishes and either square cut or die
cut into other simple shapes. Premium labels are typically characterized by
superior print fidelity, often in 8 or more colors, unique or specialty
substrates, high gloss or matte coatings, and specialized finishes such as
embossing, foil stamping and tailored die-cut shapes. Premium labels are
generally higher priced than conventional labels.
The food and beverage industries have undergone extensive consolidation,
and are dominated by a relatively few large manufacturers with widespread
North American presence. Management estimates that the market for
glue-applied labels for food products in North America is in excess of $1
billion annually, and for the beverage product segment in which the division
competes in excess of $500 million annually. Mail-Well Labels markets its
products through a sales force that is specialized according to product lines
and geographic coverage, and is supported by a team of customer service
representatives located at each plant. No customer accounts for more than 6%
of the division's sales.
The main raw materials used to produce labels are paper and ink, which
are supplied by a variety of vendors. Management does not believe that the
division is dependent upon any one vendor for its raw materials.
The division owns and operates four printing facilities, two each in the
United States and Canada, and maintains a small corporate office in Toronto.
The division employs approximately 600 people, approximately 240 of whom are
unionized hourly employees working out of one United States and one Canadian
plant.
ITEM 2. PROPERTIES
As of December 31, 1997, the Company occupied 58 envelope and commercial
printing facilities in the United States and Canada, of which 24 were owned
and 34 were leased. In addition to on-site storage at each of the foregoing
facilities, the Company also stores products in 13 warehouses, of which 11
are owned. The Company also leases 12,000 square feet of office space in
Englewood, Colorado for its corporate headquarters and an additional 5,000
square feet of office space in Chicago, Illinois for information systems
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
14
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 included in the Nasdaq Stock Market's National Market System
under the symbol "MLWL." The following table sets forth, for the periods
indicated, the range of the high and low sales prices for the Company's
Common Stock as reported by the New York Stock Exchange or the Nasdaq
National Market, respectively.
1995 HIGH LOW
---- ------ ------
Fourth Quarter $ 9.05 $ 7.12
1996
----
First Quarter $ 8.50 $ 5.44
Second Quarter 6.53 5.19
Third Quarter 6.95 5.53
Fourth Quarter 11.17 7.00
1997
----
First Quarter $14.50 $10.50
Second Quarter 29.00 13.17
Third Quarter 34.50 25.38
Fourth Quarter 41.00 27.38
1998
----
First Quarter (through March 10, 1998) $41.50 $35.25
In June 1997, the Common Stock was split 3-for-2 and all prices reflect
such split. As of March 10, 1998, there were approximately 325 stockholders
of record and, based upon security position listings, the Company believes
that it has in excess of 1,500 beneficial owners.
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.
15
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, and in the opinion of management reflect
all adjustments, consisting of only normal, recurring adjustments, necessary
for a fair presentation of such information. The operations of the
acquisitions 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
Feb. 24, Jan. 1,
1994 1994 Year
through through Ended
Year Ended December 31, Dec. 31, Feb. 23, Dec. 31,
1997 1996 1995 1994 1994 1993
---- ---- ---- ---- ---- ----
Net sales $897.6 $778.5 $596.8 $225.7 $ 36.6 $252.0
Income (loss) before
extraordinary item 28.3 16.9 10.4 2.7 (1.3) 3.8
Net income (loss) 22.2 16.9 8.0 2.7 (1.3) 3.8
Earnings per basic share: (b)
Income per share before
extraordinary item $ 1.58 $ 0.97 $ 0.94 $ 0.31 (a) (a)
Extraordinary item (0.34) - (0.22) -
------ ------ ------ ------
Net income per basic share $ 1.24 $ 0.97 $ 0.72 $ 0.31 (a) (a)
------ ------ ------ ------
------ ------ ------ ------
Earnings per diluted share: (b)
Income per share before
extraordinary item $ 1.50 $ 0.95 $ 0.91 $ 0.31 (a) (a)
Extraordinary item (0.32) - (0.21) -
------ ------ ------ ------
Net income per diluted share $ 1.18 $ 0.95 $ 0.70 $ 0.31 (a) (a)
------ ------ ------ ------
------ ------ ------ ------
Total assets 586.2 470.9 500.4 307.7 N/A 136.9
Total long term obligations 300.0 209.9 295.9 229.4 N/A 0.0
(a) Earnings per share is not presented for these periods as operations were
those of predecessor companies.
(b) Earnings per share data has been retroactively restated to reflect 3:2
stock split in June 1997.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following should be read in conjunction with the consolidated
historical financial statements and related notes of Mail-Well, Inc. and its
subsidiaries (the "Company") included elsewhere in this report. 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 controls,
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 debt 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, labor relations 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, HISTORICAL FINANCIAL DATA
BY SEGMENT (IN THOUSANDS) YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
-------- -------- --------
Net sales
U.S. Envelope $594,238 $551,225 $510,660
Canadian Envelope 115,293 86,928 38,759
High Impact Color Printing 188,029 140,371 47,384
-------- -------- --------
Total net sales 897,560 778,524 596,803
-------- -------- --------
Cost of sales
U.S. Envelope 463,495 434,258 403,183
Canadian Envelope 79,724 61,020 28,018
High Impact Color Printing 153,124 116,117 39,603
Corporate 2,253 196 0
-------- -------- --------
Total cost of sales 698,596 611,591 470,804
-------- -------- --------
Gross profit 198,964 166,933 125,999
-------- -------- --------
Operating expenses
U.S. Envelope 68,414 62,311 56,482
Canadian Envelope 15,686 12,124 4,944
High Impact Color Printing 24,797 18,183 6,788
Corporate 14,936 13,453 10,191
-------- -------- --------
Total operating expenses 123,833 106,071 78,405
-------- -------- --------
Operating income
U.S. Envelope 62,329 54,656 50,995
Canadian Envelope 19,883 13,784 5,797
High Impact Color Printing 10,108 6,071 993
Corporate (17,189) (13,649) (10,191)
-------- -------- --------
Total operating income 75,131 60,862 47,594
Interest expense 18,850 26,936 27,043
Interest expense - amortization of deferred
financing costs 2,844 3,556 2,291
Discount on sale of accounts receivable 4,916 726 0
Other (income) expense (1,436) 454 668
Income tax expense 21,681 12,263 7,219
-------- -------- --------
Income before extraordinary item 28,276 16,927 10,373
Extraordinary item, net of tax benefit 6,100 0 2,412
-------- -------- --------
Net income $ 22,176 $ 16,927 $ 7,961
-------- -------- --------
-------- -------- --------
17
OPERATING RESULTS -- Income before extraordinary item for the year ended
December 31, 1997, increased by $11.4 million ($0.55 per diluted share), or 67%,
compared with the prior year. For the year ended December 31, 1996, income
before extraordinary item increased by $6.6 million ($0.04 per diluted share),
or 63%, compared with the prior year. Net sales for the year ended December 31,
1997, rose $119.0 million, or 15%, from the prior year, and for the year ended
December 31, 1996, increased by $181.7 million, or 30%, over the prior year.
During 1997 the Company focused its efforts on integrating the operations of
recently acquired businesses including changes made to cost structures, pricing
and strategic markets. In addition, the High Impact Color Printing segment
continued to address market pressures by repositioning its marketing efforts
toward higher margin products and adding sales staff.
ACQUISITIONS
The presentation below summarizes the Company's acquisitions. See Note 2 to the
Consolidated Financial Statements included elsewhere in this document for more
information.
ESTIMATED
(IN MILLIONS) MONTH ANNUAL
LOCATION ACQUIRED SALES
1995 ACQUISITIONS
Supremex, Inc. ("Supremex") Canada July $ 93
Graphic Arts Center, Inc. ("GAC") Portland, Oregon August 150
1996 ACQUISITIONS
Quality Park Products, Inc. ("Quality") St. Paul, Minnesota April 80
Pac National Group Products, Inc. ("PNG") Canada November 30
Shepard Poorman Communications Corporation ("SP") December 50
1997 ACQUISITIONS
Griffin Envelope, Inc. ("Griffin") Seattle, Washington June 12
The Allied Printers ("Allied") Seattle, Washington July 17
Murray Envelope Corporation ("Murray") Hattiesburg, Mississippi July 48
National Color Graphics, Inc. ("Color Graphics") Atlanta, Georgia September 23
Intertec Mailing Services ("Intertec") Nashville, Tennessee October 7
Cambridge, Maryland plant of Western Graphics
Communications ("Cambridge") Cambridge, Maryland December 33
18
All of the acquisitions have been accounted for as purchases. Accordingly,
the historical results of operations of the Company include results of
operations of each of the acquisitions from their date of purchase. The
table below presents the historical sales and cost of sales of the Company
adjusted to show the effects of the acquisitions as if the acquisitions had
occurred on the January 1 of the year prior to their actual purchase date.
YEAR ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
Net sales, as reported $ 897,560 $ 778,524 $ 596,803
Supremex 48,408
GAC 102,383
Quality 23,266 98,567
Other 1996 acquisitions 96,490 97,895
1997 acquisitions 87,905 129,340
---------- ---------- ----------
Net sales, pro forma 985,465 1,027,620 944,056
Cost of sales, as reported 698,596 611,591 470,804
Supremex 34,546
GAC 81,846
Quality 19,654 89,724
Other 1996 acquisitions 77,996 76,972
1997 acquisitions 72,377 107,469
---------- ---------- ----------
Cost of sales, pro forma 770,973 816,710 753,892
Gross profit, as reported % $ 198,964 $ 166,933 $ 125,999
---------- ---------- ----------
---------- ---------- ----------
22.2% 21.4% 21.1%
Gross profit, pro forma % $ 214,492 $ 210,910 $ 190,164
---------- ---------- ----------
---------- ---------- ----------
21.8% 20.5% 20.1%
RESULTS OF OPERATIONS
U.S. ENVELOPE
The following table presents historical financial data for the U.S.
Envelope operations of the Company, including acquisitions (Quality, Griffin,
Murray, Intertec, Cambridge) from their purchase dates.
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
(dollars in thousands) $ % $ % $ %
---------- ----- ---------- ----- ---------- -----
Net sales $ 594,238 100.0 $ 551,225 100.0 $ 510,660 100.0
Cost of sales 463,495 78.0 434,258 78.8 403,183 79.0
Operating expenses 68,414 11.5 62,311 11.3 56,482 11.1
--------- ----- --------- ----- --------- -----
Operating income $ 62,329 10.5 $ 54,656 9.9 $ 50,995 9.9
--------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- -----
19
YEAR ENDED DECEMBER 31, 1997, COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
NET SALES -- Net sales increased by $43.0 million (7.8%) for the year ended
December 31, 1997 compared to the year ended December 31, 1996. The average
selling price per thousand envelopes decreased 3.0% to $19.49 for the year
ended December 31, 1997, from $20.10 for the year ended December 31, 1996, due
primarily to the pass through of material cost reductions to customers, offset
somewhat by the higher price product mix effect from acquisitions. Because
material cost changes have historically been passed through to customers, the
Company uses volumes of units sold and material gross margin (that is, net sales
less cost of materials net of waste recovery revenue) as revenue trend
indicators in its envelope operations. Unit volume increased 11.3% to 30.5
billion units for the year ended December 31, 1997 from 27.4 billion units for
the year ended December 31, 1996, with acquisitions accounting for 7.5% of this
increase. Material gross margin per thousand envelopes sold increased 2.5% to
$11.28 for the year ended December 31, 1997 from $11.01 for the year ended
December 31, 1996.
COST OF SALES -- Total cost of sales, as a percent of sales, decreased from
78.8% for the year ended December 31, 1996 to 78.0% for the year ended December
31, 1997. Cost of sales includes material net of waste recovery revenue, labor,
depreciation and other manufacturing and distribution costs. Material costs net
of waste recovery revenue, as a percentage of sales, were 42.1% and 45.2% for
the years ended December 31, 1997 and 1996, respectively. The decline is
attributable to material cost reductions passed through to customers as
discussed above. Other manufacturing costs, as a percent of sales, increased
from 33.6% for the year ended December 31, 1996 to 35.9% for the year ended
December 31, 1997, due primarily to the decreased selling price previously
discussed. On a per thousand envelopes sold basis, other manufacturing and
distribution costs, excluding the product mix effect from acquisitions,
increased only 0.1% from $6.76 for the year ended December 31, 1996 to $6.77 for
the year ended December 31, 1997. Inflationary cost increases were offset by
efficiency improvements and volume increases.
OPERATING EXPENSES -- Operating expenses include selling and administrative
expenses. For the year ended December 31, 1997, operating expenses, as a percent
of sales, increased 0.2% to 11.5% from 11.3% compared to the prior year again
primarily due to the decrease in selling prices. Excluding the effect of
acquisitions during the years, the increase in operating expenses for the year
ended December 31, 1997 was 2.5% compared to the prior year primarily due to
increased selling expenses attributable to increased emphasis on sales growth.
YEAR ENDED DECEMBER 31, 1996, COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
NET SALES -- Net sales increased 7.9% ($40.6 million) from net sales
recorded for the year ended December 31, 1995. The dollar increase included
$61.2 million of net sales from the acquisition of Quality for the nine
months ended December 31, 1996, offset by a $20.6 million decrease on the
other U.S. Envelope operations. Exclusive of Quality's sales dollars and
volumes, 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 value-added product mix and managing selling prices relative to
paper costs. Total volume for the U.S. envelope operations (excluding
Quality) decreased 4.9% to 25.3 billion units in 1996 from 26.6 billion units
in 1995. Volume in 1996 was negatively impacted by lower direct mail and
merchant volume, and a shift towards more complex, higher-margin products
for which fewer units were sold at higher selling prices.
COST OF SALES -- Total cost of sales, as a percentage of sales, remained
steady at 78.8% for 1996 as compared to 79.0% in 1995. In total dollars, cost
of sales includes an additional $52.8 million as a result of the acquisition of
Quality for the nine months ended December 31, 1996. The remaining $381.5
million represents 77.9% of net sales (exclusive of Quality) as compared to cost
of sales of 78.9% in the prior year.
Again, because material costs have historically been passed through to
customers, the Company uses material gross margin (net sales less cost of
materials net of waste recovery revenue) and volume of units sold as its revenue
trend indicators in envelope operations. When measured on a unit basis,
material gross margin (exclusive of Quality's operations) increased from $10.42
per thousand units in the year ended December 31, 1995 to $11.02 per thousand
units for the year ended December 31, 1996. Material gross margin (including
Quality's operations) was $11.03 per thousand units in 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. The
20
favorable effect of lower paper costs on gross margin was largely offset by
decreased proceeds 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 to $8.3 million from $18.9 million in 1995.
OPERATING EXPENSES -- Operating expenses include selling and administrative
expenses. For the year ended December 31, 1996, operating expenses, as a
percentage of sales, increased to 11.3% from 11.1% in 1995. Of the total $5.8
million increase, $3.9 million relates to additional operating expenses as a
result of the acquisition of Quality. The increase from 1995 was due to higher
compensation and benefit costs in the administrative area, which were offset, in
part, by the reduction or elimination of redundant functions in acquired
businesses.
CANADIAN ENVELOPE
The following table presents historical financial data for the Canadian
Envelope segment including acquisitions (Supremex, PNG) from their purchase
dates.
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
(dollars in thousands) $ % $ % $ %
--------- ----- ---------- ----- ---------- -----
Net sales $ 115,293 100.0 $ 86,928 100.0 $ 38,759 100.0
Cost of sales 79,724 69.2 61,020 70.2 28,018 72.3
Operating expenses 15,686 13.6 12,124 13.9 4,944 12.7
--------- ----- --------- ----- --------- -----
Operating income $ 19,883 17.2 $ 13,784 15.9 $ 5,797 15.0
--------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- -----
YEAR ENDED DECEMBER 31, 1997, COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
NET SALES -- Net sales for the year ended December 31, 1997 were up 32.6%
over the year ended December 31, 1996, due to the PNG acquisition in November
1996. The Supremex sales without PNG for the year ended December 31, 1997
compared to the year ended December 31, 1996 were down 1.7%, due primarily to an
average Canadian dollar exchange rate decrease of 1.5%. Unit sales were 35%
higher for the year ended December 31, 1997 versus 1996 also due to the PNG
acquisition. Excluding PNG, unit sales were 1.1% higher for the year ended
December 31, 1997 versus 1996. The overall average selling price per unit was
down 1.5% in the year ended December 31, 1997 from the year ended December 31,
1996, due to the average exchange rate decrease and reductions in average
material cost passed through to the customer.
COST OF SALES -- Total cost of sales, as a percent of sales, decreased from
70.2% for the year ended December 31, 1996 to 69.2% for the year ended December
31, 1997. Cost of sales includes material net of waste recovery revenue, labor,
depreciation and other manufacturing and distribution costs. Material costs net
of waste recovery revenue, as a percentage of sales, were 43.0% and 43.8% for
the years ended December 31, 1997 and 1996, respectively. This decline is
attributable to material cost reductions passed through to customers as
reductions in selling price. Other manufacturing costs, as a percent of sales,
also decreased from 26.4% for the year ended December 31, 1996 to 26.2% for the
year ended December 31, 1997. On a per thousand envelopes sold basis
manufacturing costs decreased 2.3% from $5.27 for the year ended December 31,
1996 to $5.15 for the year ended December 31, 1997. The manufacturing decrease
is attributable to cost reductions relating to the consolidation of PNG
operations partially offset by higher wage rates.
OPERATING EXPENSES -- Operating expenses include selling and administrative
expenses. For the year ended December 31, 1997, operating expenses, as a percent
of sales, decreased 0.3% to 13.6% from 13.9% in the
21
year ended December 31, 1996. Operating expenses decreased, as a percent of
sales, due to the assimilation of PNG operations with consolidation of
selling and administrative functions.
YEAR ENDED DECEMBER 31, 1996, COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
NET SALES -- Net sales for the year ended 1996 increased 124.3% as compared
to sales for the year ended 1995. The increase was due to the fact that the 1996
figures include the operations of Supremex for the entire year as compared to
the 1995 figures which include results for only five months. PNG net sales for
the month ended December 31, 1996, were nominal. The average selling price
increased by 1.3% and was due to a higher margin, customized product mix. Total
volume increased 121% to 4.2 billion units from 1.9 billion units in 1995. The
volume increase was due to the timing of the acquisition of Supremex.
COST OF SALES -- Cost of sales, as a percentage of sales, decreased to
70.2% for the year ended December 31, 1996 as compared to 72.3% for the five
months ended December 31, 1995. The $33.0 million increase reflects the fact
that the 1996 figures include the operations of Supremex for the entire year as
compared to the 1995 figures which include results for only five months. The
decline in cost of sales as a percentage of net sales is largely due to the
Company's ability to effectively manage fluctuations in the cost of paper and
related fluctuations in sales prices. Again, because material costs have
historically been passed through to customers, the Company uses material gross
margin (net sales less cost of materials net of waste recovery revenue) and
volume of units sold as its revenue trend indicators in envelope operations.
When measured on a unit basis, material gross margin per thousand units
increased 14.0% from $9.84 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 increased, primarily, due to additional operating expenses as a
result of the acquisition of Supremex in July 1995.
HIGH IMPACT COLOR PRINTING
The following table presents financial information with respect to the High
Impact Color Printing segment including acquisitions ( GAC, SP, Allied, Color
Graphics) from their purchase dates.
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
(dollars in thousands) $ % $ % $ %
---------- ----- ---------- ----- --------- -----
Net sales $ 188,029 100.0 $ 140,371 100.0 $ 47,384 100.0
Cost of sales 153,124 81.4 116,117 82.7 39,603 83.6
Operating expenses 24,797 13.2 18,183 13.0 6,788 14.3
Operating income $ 10,108 5.4 $ 6,071 4.3 $ 993 2.1
YEAR ENDED DECEMBER 31, 1997, COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
NET SALES -- Net sales for the High Impact Color Printing segment for
the year ended December 31, 1997 increased $47.7 million (34.0%) compared to
the year ended December 31, 1996. Net sales for GAC for the year ended
December 31, 1997 declined 15.2% to $116.2 million. The reasons for this
sales decline include the decision to pursue more profitable products and
eliminate certain unprofitable work, high turnover in sales staff during
1996 resulting in the temporary loss of business from some significant
accounts and a continuing trend in computer related companies to utilize
electronic medium as opposed to printed manuals. Acquisitions completed
during the year (Allied and Color Graphics) contributed $14.6 million to net
sales during the year ended December 31, 1997. In addition SP, purchased in
December 1996, had net sales of $57.2 million for the year ended December 31,
1997 compared to $3.3 million for the period owned during 1996. Average
paper costs for the year ended December 31,
22
1997 compared to the year ended December 31, 1996 declined resulting in
approximately a 1.0% decline in sales prices as the lower cost was passed
through to customers.
COST OF SALES -- Cost of sales expressed as a percent of net sales
decreased to 81.4% in the year ended December 31, 1997, from 82.7% in the prior
year. Paper costs expressed as a percent of sales declined to 30.6% for the year
ended December 31, 1997 as compared to 33.3% for the year ended December 31,
1996. Average paper costs expressed as a percent of sales declined due to
changes in product mix resulting from the acquisitions which are primarily
sheet fed operations in addition to negotiated reductions in paper costs.
OPERATING EXPENSES -- Expressed as a percent of sales, operating expenses
increased to 13.2% for the year ended December 31, 1997 compared to 13.0% for
the prior year. The $6.6 million increase in the year ended December 31, 1997
compared to the prior year is due to acquisitions during the years as operating
expense for GAC declined $0.8 million (4.4%) as compared to the prior year.
YEAR ENDED DECEMBER 31, 1996, COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
NET SALES -- Net sales increased $93.0 million from $47.4 million in the
four months ended December 31, 1995 to $140.4 million for the year ended
December 31, 1996. The majority of the increase is due to the fact that the
1996 figures include an entire year of GAC operations and the 1995 figures
include only four months of operations. Also included in net sales for the year
ended 1996 are sales of $3.3 million related to SP. Year to year, net sales at
GAC decreased 8.1% in 1996 from 1995 (taking into account pre-acquisition
sales), due to a competitive pricing environment. 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 -- The cost of sales decreased to 82.7% of sales for the year
ended December 31, 1996 as compared to 83.6% for the four months ended December
31, 1995 indicating operating efficiencies realized. Gross margins decreased as
a percentage of sales to 17.3% in 1996 from 18.9% in 1995 (taking into account
pre-acquisition operations) 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 include selling and administrative
expenses which increased, primarily, due to additional operating expenses as a
result of the acquisition of GAC in August 1995. As a percentage of net sales,
operating expenses declined which demonstrates GAC's ability to reduce these
expenses in a competitive pricing environment. Improvements were made in the
purchasing of supplies, employee headcounts, travel and entertainment expenses
and spoilage.
CORPORATE EXPENSES
COST OF SALES -- Certain equipment of the Company was sold as part of a
sales/leaseback transaction in November 1996 and is accounted for as an
operating lease. The Company classifies the excess of the operating lease
expense over depreciation as a corporate expense in analyzing segment
operations. The increased cost in the year ended December 31, 1997 is a result
of the full year operating lease effect.
OPERATING EXPENSES -- Operating expenses for the year ended December 31,
1997 increased $1.5million compared to the year ended December 31, 1996.
The Company includes amortization of the intangibles recorded in acquisitions
in corporate operating expense in analyzing segment operations. The increase
in amortization expense for the year ended December 31, 1997 was $0.3 million
compared to the prior year. The Company also includes loss on disposal of
assets in corporate operating expense. Loss on disposal of assets was $2.7
million for the year ended December 31, 1997 compared to $2.1 million in
1996. These losses were the result of equipment disposal and equipment idled
due to replacement, as well as consolidation activities and losses on
disposal of buildings also due to consolidation activities. Other operating
expenses for the year ended December 31, 1997 increased 8.5% to
23
$7.7 million compared to $7.1 million in 1996 primarily due to expanded
treasury operations and increased accruals for performance incentive payments
compared to 1996.
INTEREST EXPENSE -- Interest expense for the year ended December 31,
1997 compared to the prior year decreased primarily as a result of lower
average bank debt balances. The sale/leaseback transaction and the accounts
receivable securitization program were initiated toward the end of 1996, as
well as the restructuring of bank debt. In addition, in November 1997 the
Company issued $152.1 million of convertible subordinated notes due in 2002
with interest payable at 5% per annum and used the proceeds to reduce bank
debt which had a higher interest rate. The average interest rate on bank
debt of 7.7% for the year ended December 31, 1997 was slightly higher than
the 7.6% average interest rate on bank debt for the year ended December 31,
1996. Interest expense for the year ended December 31, 1996 decreased from
the prior year primarily due to the lower average interest rate of 7.6% as
compared to 8.5% in 1995.
INTEREST EXPENSE -- AMORTIZATION OF DEFERRED FINANCING COSTS -- The
amortization of deferred financing costs decreased for the year ended
December 31, 1997 since the proceeds from the convertible subordinated notes
were used to repay the underlying debt for which a major portion of the
deferred financing costs were incurred. Accordingly the related deferred
financing costs were written off and accounted for as an extraordinary item
in the fourth quarter of 1997. The amortization of deferred financing costs
increased in the year ended December 31, 1996 compared to 1995 due to a full
year amortization in 1996 of the deferred financing cost capitalized pursuant
to the 1995 acquisitions.
DISCOUNT ON SALE OF ACCOUNTS RECEIVABLE -- 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, 1997 and 1996,
$72.0 million and $71.0 million had been sold under this agreement at a discount
of 0.6% above the prevailing commercial paper rate plus fees. The full year
effect is the primary reason for the increase in discount expense for the year
ended December 31, 1997 compared to 1996.
OTHER (INCOME) expense -- Other (income) expense includes foreign
exchange (gain) loss, interest income, investment (gain) loss and
non-capitalizable acquisition costs. The foreign exchange (gain) loss
amounts were ($0.3) million, $0.3 million and $0.2 million for the years
ended December 31, 1997, 1996 and 1995, respectively. Interest income earned
from the investment of excess funds in cash equivalents totaled $0.7 million,
$0.2 million and $0.2 million for the years ended December 31, 1997, 1996 and
1995, respectively. Also included in other income in 1997 was a $0.8 million
gain from the sale of stock that had been acquired in a failed acquisition
attempt. Finally, in 1997, the Company recorded an $0.8 million expense
related to costs for acquisitions which were not consummated.
LIQUIDITY AND CAPITAL RESOURCES
HISTORICAL CASH FLOW -- Net cash flow provided by operating activities
was $65.5 million, $141.4 million and $32.0 million for the years ended
December 31, 1997, 1996 and 1995, respectively. Net cash flow from operating
activities in 1997 was negatively impacted by inventory valuation increases
due to rising paper prices while 1996 was positively impacted by the sale of
accounts receivable. Acquisitions required cash payments of $82.9 million,
$63.2 million and $79.6 million for the years ended December 31, 1997, 1996
and 1995, respectively. Other investing activities include capital
expenditures which were $24.7 million, $18.7 million and $13.8 million for
the years ended December 31, 1997, 1996 and 1995, respectively. The capital
expenditures were offset by the proceeds of $0.5 million, $33.6 million and
$2.4 million from the disposal of assets for the years ended December 31,
1997, 1996 and 1995, respectively (including $30.0 million in 1996 from the
sale/leaseback transaction).
DEBT OBLIGATIONS -- In November 1997 the Company issued $152.1 million
of convertible subordinated notes due in 2002 with interest payable at 5% per
annum. The notes are convertible at the option of the holder at any time and
are convertible into shares of the Company's common stock at a conversion
price of $38.00 per share. Proceeds were used to pay off outstanding amounts
on the revolving credit facility and the term loan and these facilities were
cancelled. Concurrently Supremex signed an unsecured demand note with a bank
for $60.0 million at
24
an interest rate of LIBOR plus 0.75% per annum. These proceeds were used to
pay off Supremex's outstanding term loan which was also cancelled. The same
bank has agreed to lend the Company up to an additional $40.0 million at the
same interest rate and terms, which was drawn down in connection with the
Poser acquisition in January 1998. The Company is in the process of
establishing a new $300.0 million credit facility the proceeds from which will
be used to repay the outstanding demand notes.
SECURITIES OFFERING -- On November 13, 1997, the Company's shelf
registration statement ("shelf") on Form S-3 was declared effective by the
Securities and Exchange Commission. The shelf permits the Company to issue
up to $300.0 million in debt securities, common stock, preferred stock or
warrants over the two-year period following the effective date. The
Convertible Subordinated Notes were issued under the shelf registration
statement and, at December 31, 1997, there was availability to issue another
$148.0 million of securities under the shelf registration statement.
CAPITAL REQUIREMENTS -- The Company estimates that, based on current
utilization of its equipment and expected volume growth at existing
businesses it will spend $30.0 to $35.0 million per year on capital
expenditures. In addition the Company expects to spend and capitalize
approximately $5.0 to $7.0 million in 1998 and 1999 to upgrade its existing
computer systems. The Company completed an assessment of all computer
systems in 1997 addressing "Year 2000" among other issues. Management
presently believes that with planned modifications to existing software in
process and conversions to new software, as discussed above, the "Year 2000"
issues will be mitigated. The estimated expense to modify existing software
for "Year 2000" is not considered material.
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.
FOREIGN CURRENCY -- The effects of foreign currency exchange have not
been material to the Company to date. With the strengthening U.S. Dollar,
the Company's foreign currency exposure currently relates to its Canadian
operations. The average 1997 Canadian Dollar exchange rate was 0.72 USD
while current rates are in the 0.69 USD range. Net income provided by the
Canadian operations for the year ended December 31, 1997 was USD $9.2 million.
SEASONALITY AND ENVIRONMENT -- 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 a material effect on
the Company's liquidity and capital resources.
RECENT DEVELOPMENTS
ACQUISITIONS -- On January 6, 1998, the Company acquired all of the
outstanding shares of common stock of Poser Business Forms, Inc. ("Poser"),
a printer of custom business communications documents for the distributor
market with annual sales of approximately $90 million.
In March 1998, the Company acquired substantially all of the United
States and Canadian assets of the paper label division of Lawson Mardon
Packaging, Inc. ("Lawson"), a supplier of label products for the beverage and
food markets with annual sales approximating $80 million. The Company paid
approximately $123 million in the aggregate for Poser and Lawson.
LABOR RELATIONS -- In the fourth quarter of 1997 the Company
successfully settled union contracts with workers at five of its facilities.
It is currently in negotiations with workers at three other facilities.
POSTAL RATE INCREASE -- The U.S. Postal Service announced proposed rate
increases of approximately 4% for direct mail and 3% for first class mail.
In addition, a 6% rate decrease was proposed for prepaid, courtesy reply
envelopes. The proposed postal rate increases are significantly less than the
cumulative rate of inflation since the last postal rate increases.
Management does not anticipate that these postal rate increases will go into
effect until late 1998 and, if implemented, does not anticipate the rate
increases to negatively impact mail volume.
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SECURITIES OFFERdING -- On February 11, 1998, the Company sold 2,432,300
shares of common stock in an underwritten securities offering under the shelf
registration statement describe above. The shares were sold at $39.25 per
share and the net proceeds of approximately $91 million will be used for
general corporate purposes.
NEW ACCOUNTING STANDARDS -- In June 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income," effective for fiscal
years beginning after December 15, 1997. This statement requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements. This
statement further requires that an entity display an amount representing
comprehensive income for the period in that financial statement. This
statement also requires that an entity classify items of other comprehensive
income by their nature in a financial statement. For example, other
comprehensive income may include foreign currency items, minimum pension
liability adjustments and unrealized gains and losses on certain investments
in debt and equity securities. Reclassification of financial statements for
earlier periods, for comparative purposes, is required. This statement is not
expected to have a material impact on the Company's consolidated financial
statements. The Company will adopt this accounting standard on January 1,
1998, including interim reporting in 1998 as required.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Mail-Well, Inc. and Subsidiaries
Independent Auditors' Report 29
Consolidated Balance Sheets as of December 31, 1997 and 1996 30
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995 32
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995