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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ x ] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission file number 0-26692
MAIL-WELL, INC.
(Exact name of Registrant as specified in its charter.)
DELAWARE 84-1250533
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23 INVERNESS WAY EAST, ENGLEWOOD, CO 80112
(Address of principal executive offices) (Zip Code)
303-790-8023
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock, $0.01 par value per share The New York
Stock Exchange
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports),and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registered stock as of March 14, 1997 was $207,013,598.
As of March 14, 1997, the Registrant had 12,487,420 shares of Common Stock,
$0.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this form (Items 10, 11, 12 and 13) is
incorporated by reference from the registrant's Proxy Statement to be filed
pursuant to Regulation 14A with respect to the registrant's Annual Meeting of
Stockholders to be held on or about May 7, 1997.
TABLE OF CONTENTS
PART I
Page
----
Item 1. Business..................................................................... 1
The Company........................................................... 1
Products and Services................................................. 2
Markets............................................................... 6
Marketing and Distribution............................................ 8
Printing and Manufacturing............................................ 10
Materials and Supply Arrangements..................................... 12
Patents, Trademarks and Brand Names................................... 12
Competition........................................................... 12
Seasonality........................................................... 13
Backlog............................................................... 14
Employees............................................................. 14
Environmental......................................................... 14
Item 2. Properties................................................................... 16
Item 3. Legal Proceedings............................................................ 16
Item 4. Submission of Matters to a Vote of Security Holders.......................... 16
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholders Matters....... 17
Dividend Policy....................................................... 17
Item 6. Selected Financial Data...................................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................... 19
Overview.............................................................. 19
Results of Operations................................................. 21
Liquidity and Capital Resources....................................... 25
Item 8. Financial Statements and Supplementary Data.................................. 27
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure......................................................... 51
PART III
Item 10. Directors and Executive Officers of Registrant............................... 51
Item 11. Executive Compensation....................................................... 53
Item 12. Security Ownership of Certain Beneficial Owners and Management............... 53
Item 13. Certain Relationships and Related Transactions............................... 53
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............. 54
PART I
ITEM 1. BUSINESS
THE COMPANY
Mail-Well, Inc. (the "Company") is the largest printer and manufacturer
of envelopes in the United States and Canada and the leading high-impact color
printer in the United States. The Company and its subsidiaries operate 50
envelope and commercial printing facilities throughout many of the major
metropolitan areas of the United States and Canada.
Within the envelope printing industry the Company competes primarily in
the consumer direct segment of the market in which envelopes are designed,
printed and manufactured to customer specifications. The Company and its
Canadian subsidiary, Supremex, Inc. ("Supremex") focus their business on
customized conventional and specialty envelopes where envelopes generally
include unique features, such as vivid color graphics or action devices. The
Company purchased both Quality Park Products ("QPP") and Pac National Group
Products, Inc. ("PNG") this past year. QPP is a printer of a broad line of
custom envelopes and has expanded the Company's business into the fast-growing
office products market. PNG, a part of the Company's Supremex operations, is a
printer of custom designed envelopes and courier packaging. The addition of PNG
solidifies the Company's presence as the largest envelope printer in Canada,
with facilities in every province.
The Company's Graphic Arts Center, Inc. ("GAC") subsidiary is the leading
high impact color printer in the United States. GAC specializes in producing
advertising literature, high-end catalogs and annual reports and is recognized
as an innovative provider of quality printed products to leading companies
throughout the United States. GAC acquired Shepard Poorman Communications
Corporation ("SPCC") in December 1996. With the addition of SPCC, GAC also
prints calendars and four color computer books. GAC operates four state-of-the-
art commercial printing facilities, three on the west coast and one in
Indianapolis.
The envelope and commercial printing industries are highly fragmented,
with approximately 215 independent envelope companies in the United States and
Canada and approximately 37,000 commercial printing companies in the United
States. The Company's strategy is to grow both internally and externally.
Externally, the Company plans to grow by pursuing acquisition opportunities to
capitalize on the consolidation occurring within these industries. Management
believes that the fragmented nature of these and related industries,
characterized by a large number of small, locally-run and regional facilities,
provides the Company the opportunity to acquire local or regional companies that
cannot compete as effectively as larger and more efficient companies.
Management intends to continue to focus on the development of a network of
strategically located facilities to attract and retain national, regional and
local account business and to achieve greater operating efficiencies.
Internally, the Company plans to continue to develop and utilize its expansive
geographic presence to better serve its larger national accounts while at the
same time serving the local market. The Company also intends to cross-utilize
its facilities for customers who require both envelopes and commercial printing.
Management believes that its strategy of growth and market positioning
has created, and will continue to create, competitive advantages, including (i)
the ability to utilize the Company's network of strategically located plants and
sales offices to attract customers that require production from
multiple locations, (ii) the ability to realize cost savings as a result of
volume related purchases of paper, ink and other raw materials, (iii) the
reduction of overhead expense through the consolidation of certain
administrative functions for insurance, employee health benefits and financial
management, (iv) the ability to increase profitability through the optimization
of equipment utilization among facilities, (v) the reduced risk of constraints
on paper allocation from suppliers during periods of tight supply due to the
significance of the Company's large volume purchases from its suppliers, (vi)
the ability to offer customers greater flexibility in meeting their needs due to
more available capacity and equipment capabilities and (vii) the ability to
combine the responsiveness of a local or regional facility with the advantages
of a large company.
The Company commenced operations in February 1994 with the acquisition of
the envelope businesses of Georgia-Pacific ("GP") and Pavey Envelope and Tag
Corp. ("Pavey"). In December 1994, the Company acquired the envelope business
of American Envelope Company ("American"). In July and August 1995,
respectively, the Company acquired Supremex, the largest Canadian printer and
manufacturer of envelopes, and GAC, one of the leading high impact color
printers in the United States. During 1996, the Company acquired three new
companies. In April 1996, the Company acquired QPP, an envelope manufacturer;
in November 1996 PNG, a Canadian envelope printer was acquired; and in December
1996 SPCC, a high-impact color printer was acquired.
PRODUCTS AND SERVICES
ENVELOPE PRINTING
The approximately $3 billion United States and Canadian envelope market
is divided into two primary market segments: (i) customized conventional and
specialty envelopes and packaging products sold directly to end users or to
independent distributors who sell to end users ("Consumer Direct") and (ii)
commodity-oriented products sold to wholesalers, paper merchants, printers,
brokers, office product establishments and superstores ("Wholesale"). The
Company competes in the Consumer Direct segment where the greatest growth in
recent years has been in printed customized conventional envelopes due primarily
to the continued growth of direct mail marketing. The Company has focused a
significant part of its marketing resources on the direct mail market and has
developed value added features including vivid graphics, multi-colored
envelopes, various closures, and interactive devices such as pull-tabs, scratch-
offs, perforations and three-dimensional viewing devices. Management believes
that many growth opportunities for the envelope industry will continue to be in
Consumer Direct specialty envelopes and packaging products. The Company also
competes in the Wholesale segment, particularly in the fast-growing office
products market. Through its QPP division, the Company manufactures and prints
a broad line of custom envelopes, many of which are featured in national
catalogs for the office products market.
Management believes that the Company's success is largely attributable to
an emphasis on customer responsiveness and service. The Company's 350 person
envelope sales force works closely with customers from product design to
delivery. Most of the Company's products are made to customer specifications.
In addition to high-quality customized products, the Company offers customers
related services, such as flexible "just-in-time" delivery programs,
warehousing, inventory management systems and electronic communications systems.
The Company has a large number of customers across diverse markets, including
the direct mail, commercial, financial services and insurance, forms,
government, distributors and resellers, photofinishing, packaging, medical,
office
products and financial and legal markets. Many of the Company's customers have
been supplied by the Company or its predecessors for over ten years.
CUSTOMIZED CONVENTIONAL ENVELOPES. Customized conventional envelopes
range from commercial and mass billing envelopes to large-size proxy, catalog,
booklet and annual report envelopes. The Company customizes two general types
of conventional envelopes: open side envelopes, on which the flap opens along
the longer side of the envelope (such as standard correspondence) and open end
envelopes, on which the flap opens along the shorter side of the envelope (such
as an inter-office envelope). Custom features include special paper stock, non-
standard placement and sizing of windows, printed messages, non-standard sizes,
partial or full page graphics on both the exterior and interior of the envelope
and special closures, adhesives and perforations.
SPECIALTY ENVELOPES AND PACKAGING PRODUCTS. Specialty envelopes and
packaging products include direct mail advertising envelopes and inserts as well
as envelopes and other items used for purposes other than mailing, such as heavy
stock medical folders, packaging for CD ROM disks and computer cards, customized
tags (ranging from inventory tracking tags with attached multi-form carbons to
retail tags for consumer products), courier packaging envelopes, including those
made of Tyvek(R), currency and credit card holders, airline and car rental
ticket jackets, photofinishing packaging, expandable folders and innovative
inter-office envelopes. Management believes that the Company is among the
industry leaders in the manufacture of innovative specialty envelopes and
packaging products, with a diverse employee base able to adjust and adapt its
equipment to produce these products.
The Company serves the direct mail market by offering products which are
designed to entice consumers to open pieces of mail and hold their attention
while the marketing messages are delivered. Sample custom features contained in
the Company's direct mail products include vivid graphics and interactive
features such as pull-tabs, scratch-offs, perforations and three-dimensional
viewing devices.
The Company also serves the direct mail market with bind-ins, which are
envelopes included in mail order catalogs. A bind-in attaches along the center
seam of a mail order catalog, typically providing the consumer with an order
form and return envelope. Combination order blanks and envelopes are
increasingly used in catalogs. The Company has developed extensive
capabilities, enabling it to produce bind-in envelopes in a wide variety of
sizes and styles on coated and uncoated paper stocks, utilizing high-quality
lithography with options for complex four-color printing. The Company has
extended the bind-in format to include multi-page mini-catalogs. Demand for
Company products used in catalogs has experienced significant growth in recent
years.
COMMODITY ORIENTED PRODUCTS. Commodity oriented products include those
products sold to wholesalers, paper merchants, printers, brokers, office product
establishments and superstores. The Company provides both private label and QPP
brand products to customers.
Plain stock envelopes range from common products such as #10, #8, 9x12
and 10x13 envelopes to less common items such as jewelry repair envelopes and
envelopes using special paper and colors. The Company, through its Supremex
subsidiary and QPP division, manufactures and stocks for distribution
approximately 200 lines of plain stock envelopes.
TWO-WAY ENVELOPES. Two-way envelopes are envelopes designed to be reused
by the recipient, usually to send correspondence or payment back to the original
sender. Due to the use of less paper, two-way envelopes are perceived as more
environmentally conscious than single-use envelopes. The Company markets two-
way envelopes through its Supremex subsidiary. Supremex manufactures the two-
way envelope and holds patents on the two-way envelope in both the United States
and Canada.
PREPRESS OPERATIONS. Prior to manufacturing envelopes to fill a specific
order, the Company finalizes the design graphics for the order. This design
phase traditionally requires a manufacturer to set type, incorporate customer-
submitted graphics, photograph the artwork, develop the negative and prepare a
plate that will serve to imprint the envelope. The electronic pre-press
operation is a fully-automated electronic process which allows the customer to
submit its design on a diskette or via modem. The Company can then edit the
design on a computer to create the negative from which the printing plate is
made. Alternatively, hard copy can be provided by the customer and computer-
scanned and edited by the Company to create the negative. This capability is
particularly well-suited to the customized and specialty envelope sectors in
which the Company has focused its efforts. Management believes that the Company
is a leader in the industry in moving toward fully-automated electronic prepress
operations. The electronic prepress system greatly reduces the time needed to
produce the plates and the number of people involved in the production, thereby
enhancing the Company's profitability and its level of customer service.
DELIVERY SYSTEMS. The Company currently maintains a flexible "just-in-
time" delivery program. This program allows customers to receive their products
just prior to when they are needed.
WAREHOUSING SERVICES. A customer will often place an order for
significantly more envelopes than it may need at the time. When this occurs,
the Company can store the finished product and drop-ship the envelopes on an
"as-needed" basis.
INVENTORY MANAGEMENT SYSTEMS. Inventory management systems are currently
being designed, primarily for large national organizations with centralized
purchasing and supply departments that service multiple locations. The system
will facilitate order processing by giving customers information on usage by
item and/or available supply in the Company's warehouses and provides for
summary billing.
EDI. The Company has installed an Electronic Data Communications
Interface ("EDI") at many of its facilities. EDI is a direct computer link
between customers and the Company which allows orders to be sent electronically.
This allows streamlining of the order process which in turn allows for quicker
order delivery and more efficient and accurate communications between customers
and the Company. EDI also allows customers to make payments electronically.
HIGH IMPACT COLOR PRINTING
Management estimates that the domestic commercial printing industry had
1995 sales of approximately $ 3.5 billion. The commercial printing industry in
the United States is highly fragmented, primarily comprised of relatively small,
local and regional firms. Management estimates that there are approximately
37,000 commercial printing companies in the United States, most of such
companies having fewer than 20 employees.
The Company, through its GAC subsidiary, provides premium high impact
color printing services to customers in five main segments. The advertising
literature, catalogs, and annual reports, during the fiscal year ended December
31, 1996, accounted for approximately 35%, 20% and 13% of GAC's net sales,
respectively. With the addition of SPCC, GAC not only increased its sales, but
also added additional product segments, including the printing of calendars and
four color computer instruction books.
The levels of quality and customer service GAC provides are well-suited
for buyers whose marketing and promotional efforts require superior printed
materials to reflect the quality and features of their products, services and
corporate images. GAC serves a broad base of customers from across the United
States, including major manufacturers, retailers, service organizations and
advertising agencies.
The fine color commercial printing market requires superior quality
printing capabilities as well as high levels of customer service. GAC provides
its customers with comprehensive prepress, printing and fulfillment services
through four technologically advanced production facilities. GAC emphasizes
customer service through intensive interaction with customers, including
frequent sales calls and constant monitoring of customer satisfaction during the
prepress and printing process. Management believes that GAC distinguishes
itself from its competitors by the expertise and customer responsiveness
associated with GAC's production operations.
Management believes that the commercial printing industry is undergoing a
period of consolidation, driven in part by the rapid pace of technology change.
Recent advances in computer-based prepress equipment, for example, now enable
commercial printers to output plate-ready film directly from electronic files,
allowing for faster and more precise manipulation of images and text prior to
printing. Similarly, recent advances in photoimaging technology have greatly
increased the quality of the final image produced in the printing process.
These advances have increased the capital requirements for maintaining
technologically advanced equipment. Management believes that many local and
regional commercial printers lack adequate financial resources to remain
competitive in the segments of the fine color commercial printing market in
which the Company operates.
ADVERTISING LITERATURE. Advertising literature ranges from printed
brochures and leaflets to color folders, manuals and posters. GAC prints
promotional material for both the automotive industry and the high-tech industry
in this segment, as well as for a number of foreign companies selling goods in
the United States. Industry specific factors often drive demand for printed
advertising literature. The increase in competition and growth in sales in the
automotive industry in recent years has positively affected the level of
spending on automotive brochures.
CATALOGS. GAC prints both general catalogs and high-end catalogs for a
broad base of customers, including many major retailers. The high-end catalog
segment requires superior quality printing capability as well as intensive
customer service. Within this segment, GAC has printed catalogs for such
customers as FAO Schwarz, Neiman-Marcus, Nordstrom and Patagonia.
ANNUAL REPORTS AND RELATED PRODUCTS. GAC prints annual reports and
related products for a number of large public companies. These products often
integrate color reproductions and graphs with text and financial statements into
a high-quality product which requires extensive prepress and printing services.
GAC prints annual reports and related products for many leading companies and
has printed annual reports for American Express, Apple Computer, Black & Decker,
General Electric, Intel, Monsanto, Starbucks and 3M.
CALENDARS. GAC prints all types of calendars for a variety of customers.
The types of calendars printed by the Company include box, wall, engagement,
wire-o and promotional calendars.
COMPUTER BOOKS. GAC manufactures and prints computer instruction text
books. The majority of these computer text books are general reference and "how
to" books about computer software. Most of the computer instruction books are
four color books.
QUALITY CUSTOMER SERVICE. GAC's goal is to offer the highest standards
in meeting its printing customers' needs with the Company's primary focus on
responding quickly and competitively to customer demands and requirements. Many
of GAC's production facilities are open 24 hours a day, seven days a week, to
allow for timely production of materials. GAC, at certain of its facilities,
also offers a number of unique services to its customers such as complimentary
transportation between the airport and its offices, in-plant overnight
accommodations, on-site meeting rooms and lounge, travel and hotel arrangements,
and computers for use by the customers when on-site. In addition, many of the
GAC's field representatives travel with the customer to the main facility in
Portland to facilitate the processing of the printing work.
MARKETS
ENVELOPE PRINTING
The Company seeks to efficiently serve large numbers of customers across
diverse markets and industries to provide a stable and diversified base for
ongoing sales of printed envelope products and services. In 1996, the Company
sold products to more than 40,000 customers. Products are specifically designed
and printed to serve various markets and industry segments.
DIRECT MAIL MARKET. This market comprises advertising and third-class
mail delivered directly to consumers through the postal system. The Company's
direct mail products consist of customized conventional envelopes which include
vivid graphics, action devices such as pull-tabs, scratch-offs, perforations and
three-dimensional viewing devices, and bar codes. Due primarily to increased
costs, the current trend in direct mail marketing is toward smaller, more
focused mailings that depend on the refinement of mailing lists and extensive
use of sophisticated database management tools to target specific markets
("database marketing"). Management believes that this trend represents a
favorable development for the Company. While database marketing means smaller
mailings, it also means more direct mailings overall, using envelopes with the
Company's value-added features. In addition, smaller companies which cannot
justify participating in mass mailings are able to use database marketing and
direct mail in a more cost-efficient manner. Envelopes that support database
marketing campaigns typically make extensive use of color, precision graphics
and personalized messages which are included in the graphics on the envelope.
The Company expects increased opportunities in the direct mail sector to arise
from improved means of printing high-quality graphics more quickly and cost
effectively.
COMMERCIAL MARKET. The commercial market consists of manufacturers,
professional organizations, utilities, educational institutions and others.
Changes in the volume of envelope usage in this market typically track changes
in the Gross Domestic Product. Most products sold by the
Company to this market are customized conventional envelopes which are used for
such purposes as general correspondence, invoicing and remittance. Customized
conventional envelopes have features such as custom corner card imprints, inside
tints and custom graphics.
FINANCIAL SERVICES AND INSURANCE MARKETS. The financial services market
includes financial institutions, such as banks, savings and loans, credit
unions, mutual funds and others. The insurance market includes companies
primarily in the life, health, property and casualty insurance businesses. The
Company sells both customized conventional envelopes, specialty envelopes and
packaging products to these markets. The Company's products supplied to the
financial services market include statement envelopes, drive-through window
envelopes, teller helper envelopes, general correspondence envelopes and
envelopes used for business transactions, such as personal loans, mortgage loans
and inter-office envelopes. Products supplied to the insurance market include
envelopes used for premium notices, returns, checks, dividends, statements and
general correspondence. The financial services and insurance industries have
experienced consolidation over the past several years, and the Company's
national account effort was initiated to service the larger, centralized
purchasing and supply requirements resulting from consolidations in these
markets.
FORMS MARKET. The Company produces conventional envelopes with
customized printing for customers in the forms market. The forms market
consists primarily of independent forms distributors and major forms
manufacturers who typically do not produce their own envelopes but purchase
envelopes from the Company to resell to their customers.
GOVERNMENT MARKET. In the United States, this market includes the
Government Printing Office, the United States Postal Service, the General
Services Administration and state and local governments. The Company's
government contracts are awarded primarily through a competitive bid process.
Such contracts, which are usually of short duration, are primarily fixed price
contracts and generally do not contain quantity commitments. These contracts
typically contain customary provisions for termination at the convenience of the
government without cause and are subject to appropriation of funds. In Canada,
this market includes large orders from the federal government, ministries and
agencies, and from provincial governments, cities, school boards, universities
and hospitals.
DISTRIBUTORS AND RESELLERS MARKET. The Company has a substantial market
share in the distributors and resellers market in Canada and in the U.S. through
its QPP division. The Company sells both Consumer Direct and Wholesale products
to paper merchants, envelope jobbers and business forms manufacturers. Paper
merchants generally sell to printers that, in turn, print the envelopes with
letterhead and sell them to consumers. Envelope jobbers are printers who
specialize in printing envelopes but no other products. The business forms
manufacturers distribute special size envelopes to match their own custom
designed forms. To a lesser extent, the Company also sells to stationers, large
retailers and greeting card companies who sell the envelopes or distribute them
to retailers.
PHOTOFINISHING PACKAGING, TAGS AND CD ROM PACKAGING. Film processing
outlets comprise the photofinishing packaging market. Primary processing
outlets include mass merchandisers who have film developed at wholesale labs,
mini-labs operating as stand-alone operations and counter services as part of
camera shops, as well as drug stores that feature on-site processing of customer
film. The Company is a significant supplier of photofinishing packaging
products, which require extensive application of color graphics.
The market for tags is diverse due to the wide range of applications. In
the manufacturing sector, tags are used for production tracking, shipping,
labeling, raw materials identification, inspection records and safety/hazard
warnings. Retail outlets use tags for product description, content
identification, care and use instructions, inventory control and promotions.
The Company also prints and produces bar-coded tags for inventory tracking in
warehouses and stores.
The Company is currently developing and selling packaging for CD ROM
disks, which management believes is an emerging market within the envelope
industry.
MEDICAL MARKET. The medical market consists of (i) diagnostic imaging
equipment and supplies manufacturers, (ii) medical forms companies, (iii)
regional independent dealers, and (iv) dealer buying groups, all of which sell
to hospitals and clinics across the country. The Company's medical market
products include diagnostic imaging or X-ray color coded jackets, category
insert jackets, negative preservers, film mailers, file pockets and color-coding
labels. These products are designed to provide easy, efficient and reliable
filing and mailing systems for doctors and hospitals. The Company has improved
its medical products line by utilizing high-quality materials, adding Mylar
color-coded labels to jacket edges and custom printing to place additional
information on jacket panels.
FINANCIAL AND LEGAL MARKETS. The legal and financial market consists of
legal, accounting and professional offices. The Company sells expanding
envelopes, pockets, pressboard folders, envelopes and other filing supplies to
these markets. These products are sold primarily through the Company's Kruysman
division which sells its products under its brand name Redweld(R) directly to
many major accounting firms and law firms.
OFFICE PRODUCTS MARKET. The office products market includes national
wholesale stationers, large national office products dealers and superstores.
These products are not generally sold to end users, but are sold in the resale
market. Many of the QPP"s office products are featured in national catalogs
published for the office products industry.
COURIER PACKAGING MARKET. The courier packaging market consists of large
international air couriers, as well as regional couriers and delivery companies.
The Company services a large part of the courier packaging market, primarily
through Supremex's PNG division, as well as Mail-Well's Cleveland facility.
These products include overnight letter envelopes, multi-walled polyethylene
pouches, security envelopes, diagnostic pouches and a broad range of stock and
custom corrugated shipping containers.
HIGH IMPACT COLOR PRINTING
GAC currently focuses on providing premium fine color printing services
to customers in five primary market areas: advertising literature, high-end
catalogs, annual reports, calendars and four color computer instruction books.
GAC sells many of its products to Fortune 500 Companies, leading edge graphic
designers, as well as advertising agencies. Calendars are custom printed for
publishers who market them through their own distribution channels. Computer
text books are primarily printed for publishers who generally sell to customers
through the retail market.
Management believes that the levels of quality and customer service that
GAC provides is well-suited for buyers in these market segments whose marketing
efforts require superior printed materials to complement the quality and
features of their products, services and corporate images. GAC serves a broad
base of customers, including major manufacturers, retailers, service
organizations and advertising agencies. GAC draws its customers from across the
United States and additionally prints advertising literature for a number of
foreign companies selling goods in the United States. During the fiscal year
ended December 31, 1996, GAC served in excess of 650 customers, the top 10
customers of which accounted for approximately 27% of GAC's net sales. Due to
the project-oriented nature of the commercial printing industry, sales to
particular customers may vary significantly from year to year depending upon the
number and size of their projects. During the fiscal year ended December 31,
1996, GAC's largest customer accounted for approximately 5% of its net sales.
MARKETING AND DISTRIBUTION
ENVELOPE PRINTING
As a result of the wide array of applications, customer preferences and
order sizes, the Company's marketing and advertising efforts vary significantly
among markets and by region. Management believes that the Company's customer
responsiveness and service have resulted in the long-term retention of a
significant number of its customers. The Company continues to emphasize a more
focused national account program to attract customers whose needs are national
or cover multiple regions.
The Company markets the majority of its printed envelope products through
a sales force of approximately 350 people who generally work with customers from
the initial product design stage through product delivery to ensure that
finished products meet both customers' applications and marketing needs. The
Company's salespeople represent the primary points of contact for customers in
the Consumer Direct market segment. Accordingly, the Company attempts to
retain an experienced, well-qualified sales force by providing appropriate
training and competitive compensation. Compensation is typically either salary
plus commission or straight commission depending on several factors including
customer size and type, plant location and order size. Management believes that
the Company's sales force provides an important competitive advantage and the
Company has been successful in developing loyalty within this important employee
group. Many of the Company's salespeople have been employed by the Company for
ten years or longer. The Company's sales force is organized by manufacturing
facility with salespeople reporting to division managers supplemented by a
national accounts group. The Company plans to leverage its sales force by
increasing the utilization of plant capabilities as well as the cross-selling of
product lines to enhance the performance of each of the Company's regions.
Increased coordination among regions will help the Company to compete for
national account business, to enhance the internal dissemination of successful
new product ideas, to efficiently allocate its production equipment, to share
technical expertise and to increase Company-wide selling of specialty products
manufactured at selected facilities.
Products not marketed by the Company's sales force are sold through
distributors to better serve selected wholesale markets, geographic regions
without direct sales representation and certain specialty markets, including the
medical and photofinishing packaging markets. The Company's office products
sales staff attends trade shows to market products. These products are also
featured in national catalogs produced for the office products market.
Most of the Company's envelope sales are pursuant to either contracts for
a specific number of envelopes or blanket purchase orders. Most blanket purchase
orders are for a term of one year or less and for a specified number of
envelopes, although there usually is no requirement that envelopes be ordered in
any set quantity. Blanket purchase orders may generally be renewed from year to
year. Each contract or order is tailored to the specifications of the desired
products and therefore there are no Company-wide pricing guidelines. Each plant
is responsible for negotiating its own contracts and purchase orders.
In most United States markets, the Company utilizes its own trucks to
make local deliveries. Generally, for shipments over 50 miles, the Company uses
common carriers to transport products to customers' locations. These shipments
are usually made on a less-than-truckload basis. United Parcel Service is used
primarily for low volume shipments (orders of less than 10,000 units).
Transportation expenses have been declining as more customers absorb these costs
directly. In most Canadian markets, Supremex employs a delivery service to
serve customers which has significantly increased Supremex's on-time delivery
rate.
HIGH IMPACT COLOR PRINTING
GAC markets primarily on a regional basis in the commercial printing
industry. GAC maintains a large national sales staff, consisting of
approximately 62 salespeople who work out of sales offices across the United
States. Management believes that GAC maintains the largest sales staff in the
high impact commercial printing industry. GAC's sales staff represents the
primary point of contact for many customers and reinforces its policy of
providing the highest level of customer service possible. With offices located
in many major metropolitan areas, GAC is able to offer greater personalized
customer attention, with frequent meetings and calls to existing and potential
customers.
PRINTING AND MANUFACTURING
ENVELOPE MANUFACTURING AND PRINTING
There are essentially two types of machines used in the envelope
manufacturing or "converting" process: (i) high-speed web converting machines,
capable of handling on-line large volume orders with multiple colors and
numerous features and (ii) die cutter/blanker machines, used primarily for
smaller orders to be customized off-line or for orders with certain limited
customized features. The manufacturing process used is dependent upon the size
of a particular order, custom features required, machine availability and
delivery requirements.
The Company purchases most of its paper in rolls. In the die
cutter/blanker process, typically used for small to medium-sized orders of
500,000 units or less, paper is cut into varying sizes by a sheeter. Stacks of
sheets are then cut into blanks using either manually-placed dies or by
computer-controlled die-cutting machines. In almost all cases, envelopes are
imprinted on one or both sides. An adhesive is typically applied to the blank,
which is then folded. Large volume envelope orders (generally over 500,000
units) can bypass the separate sheeting and cutting operations to be
manufactured directly from the paper roll using the web machine process. The
paper is fed as one continuous roll through the equipment where it is printed,
cut, folded and glued, emerging as finished envelopes ready for packing and
shipping.
The Company is currently operating its high-speed web machines at levels
close to capacity. Accordingly, in order to expand its business efficiently,
the Company will require additional high-speed web machines. The availability
of web machine capacity not only allows the Company to attract high-volume work,
but it frees die cutter/blanker machines and related equipment for utilization
on higher-margin, typically smaller volume, specialty work. Management
estimates that, based on current utilization of its existing equipment and
expected demand, the Company will need approximately 6 to 7 additional high-
speed web machines over the next five years representing an aggregate projected
capital expenditure of approximately $4.5 million to $5.0 million. Management
believes that the Company has adequate manufacturing capacity on its die
cutter/blanker machines for current and foreseeable manufacturing requirements.
Envelope manufacturing equipment typically has a relatively long useful
life. The Company's plant engineers are skilled at maintaining and rebuilding
equipment, which requires limited capital expenditures and can convert existing
equipment to that needed for specialized products, such as those sold to the
medical, photofinishing packaging and diskette markets.
The Company also has established programs to implement new production
technologies related to flexographic printing, lithographic web printing and
variable imaging technology. Flexographic printing has long been the mainstay
of the envelope industry and the Company has flexographic printing capabilities
at virtually all of its facilities. The Company continues to implement
improvements to its flexographic printing processes which management believes
will provide higher-quality products. In addition, the Company also seeks to
combine lithographic technology with web converting capability, which will
improve the quality of the Company's graphics. The Company also has installed
at one manufacturing facility variable imaging process capabilities, which
create the flexibility to customize products during the manufacturing process.
Envelopes can be individually addressed, bar codes can be added and imprints can
be personalized. These technologies have allowed the Company to become a more
complete supplier to customers, particularly in the direct mail and
photofinishing markets.
Management believes the Company can enhance its competitive position in
the envelope industry through the implementation of improved management systems.
The management systems currently being implemented by the Company are designed
to improve order flow, improve turnaround capabilities and provide more
information with respect to equipment utilization, asset management, customer
requirements and product line profitability.
The process of manufacturing envelopes produces two types of waste.
Skeletal waste is the excess paper produced when a die punches the blanks from a
sheet. Process waste is generated in the process of setting up a machine to run
a job. The Company sells both skeletal and process waste and accounts for such
sales as a reduction to cost of sales. For the year ended December 31, 1996,
waste sales accounted for approximately $ 8.9 million (1.1% of net sales).
Waste paper prices generally follow the fluctuations in the price of paper. The
Company maximizes waste collection yield by using highly automated waste paper
segregation systems which utilize a centralized vacuum-driven separation process
on the Company's high-speed web systems.
HIGH IMPACT COLOR PRINTING
The process of manufacturing in the commercial printing industry combines
advanced prepress technology with high-quality color presses and extensive
binding and finishing operations.
Many of GAC's facilities are open 7 days a week, 24 hours a day to meet customer
printing requirements.
PREPRESS SERVICES. GAC's prepress services include all the processes
necessary to prepare the media (art, photographs, typed copy), go to press,
photographically duplicate and/or digitally produce images, separate color
images into process colors, assemble films and burn film images onto plates.
GAC uses electronic technology to compose the elements of the individual pages
of the project and to create screen tints, produce color blends and retouch
photos. These images can then be reviewed for exact color and content. The
digital information is then processed to a film plotter for film output. GAC's
film plotters are capable of plotting 3600 dots per inch resolution, giving a
clean detail of the imagery. GAC has also developed GAC Color Plus(TM), an
advanced screening process which allows larger quantities of ink to be used in
the printing process, thereby producing a higher quality image than is available
using conventional techniques. GAC has capitalized on the market opportunities
in this area by building a state of the art electronic pre-press department.
PRINTING SERVICES. GAC currently operates heatset web presses, including
half-webs, full-webs and double-web presses, as well as sheet-fed presses at
four production facilities. GAC primarily uses sheet-fed presses for short to
medium run jobs. The sheet-fed presses are capable of printing up to two, four,
six or eight colors, running at standard press speeds of 6,000 to 10,000 sheets
per hour. The web presses are higher-production presses which start with a roll
of paper at one end, print on both sides and produce a product which may be
folded, glued and perforated on the press. The Company's web presses are
capable of simultaneously printing up to 16 colors at one time.
POSTPRESS AND FULFILLMENT SERVICES. GAC provides extensive postpress and
fulfillment services in the final stages of the production cycle. These
services include cutting, folding, binding, finishing and distribution of the
finished product. GAC also provides warehousing, packaging and distribution
services to customers, a critical element to quality service. In addition, GAC
maintains a catalog packaging assembly line which uses both computer-printed
mailing labels and ink-jet applied addresses to facilitate its customers' mass
mailings.
MATERIALS AND SUPPLY ARRANGEMENTS
ENVELOPE PRINTING
The primary material needed for the manufacture of envelopes is paper,
which in 1996 accounted for approximately 71.0% of the Company's cost of
envelope materials and represented approximately 33.1% of net sales related to
envelopes. Other materials include cartons/boxes, window film, adhesives and
ink. Except for a very small amount of coated paper, envelopes are made
primarily from the following major grades of uncoated free-sheet papers: white-
wove, unbleached kraft and semi-bleached and bleached kraft. Most of the
Company's products are made from white-wove grades.
Suppliers of white-wove or kraft paper include Georgia-Pacific, Champion
Paper, Boise Cascade, International Paper and Union Camp. The Company has an
oral agreement with Georgia-Pacific to purchase 45,000 tons of paper during the
year ending February 24, 1997.
Management believes that the Company's large volume paper purchases
should continue to ensure the receipt of adequate supplies in the future.
HIGH IMPACT COLOR PRINTING
The primary materials used by GAC in the commercial printing industry are
paper, ink, film, offset plates, chemicals and solvents, with paper accounting
for approximately 87% of total material costs. GAC purchases these materials
from a number of suppliers and has not experienced any significant difficulties
in obtaining any raw materials necessary for operations. The principal raw
material used by GAC in printing operations is high quality heavy-stock paper.
GAC expended in excess of $46.7 million for paper supplies for its printing
operations for the year ended December 31, 1996. GAC implemented an inventory
management system in which a limited number of paper suppliers supply all its
paper needs at its Portland facility, while holding and managing paper inventory
for this facility. These suppliers are responsible for delivering paper on a
"just-in-time" basis directly to GAC's facilities. Management believes that
this system has allowed GAC to enhance the flexibility and speed with which it
can serve customers, improve pricing on paper purchases, eliminate a significant
amount of paper inventory and reduce costs by reducing warehousing capacity.
PATENTS, TRADEMARKS AND BRAND NAMES
The Company markets products under a number of trademarks and brand
names. Additionally, the Company currently owns 36 patents relating to its
envelope business, 29 in the United States and 7 in Canada. Two of the patents
consist of the United States and Canadian patents for two-way envelopes, which
the Company acquired in the Supremex acquisition. The Company's sales do not
depend to any significant extent upon any single or related group of patents.
The patents expire at various times through 2012.
COMPETITION
ENVELOPE PRINTING
The envelope printing and manufacturing industry is extremely fragmented
and highly competitive with a few multi-plant and many single-plant companies
that primarily service regional and local markets. Manufacturing requirements
and technologies do not present significant barriers to entry into the business.
The printing and manufacturing processes for most products are readily available
and capital outlays are relatively low, although high-speed envelope
manufacturing equipment requires significant capital outlays.
In marketing its products, the Company competes with a few multi-plant
and many single-plant companies servicing regional and local markets. The
Company also faces competition from alternative sources of communication and
information transfer such as facsimile machines, electronic mail, interactive
video disks, interactive television and electronic retailing. Although these
sources of communication and advertising may eliminate some domestic envelope
sales in the future, management believes that the Company will experience
continued demand for envelope products due to (i) the ability of the Company's
customers to obtain a relatively low-cost information delivery vehicle that may
be customized with text, color, graphics and action devices to achieve the
desired presentation effect, (ii) the ability of the Company's direct mail
customers to penetrate desired markets as a result of the widespread
deliverability of mail to residences and businesses through the United States
Postal Service, and (iii) the ability of the Company's direct mail customers to
include return materials in their mail-outs.
Principal bases of competition are price, quality and service. Although
all three are equally important, various customers may emphasize one or more
over the others. For example, direct mail customers may consider service and
quality to be relatively more important than price. In contrast, an envelope
plant's proximity is very important to certain customers due to freight charges
and turnaround time.
HIGH IMPACT COLOR PRINTING
The commercial printing industry is highly competitive and fragmented.
GAC competes against a number of large, diversified and financially stronger
printing companies, as well as regional and local commercial printers, many of
which are capable of competing with GAC in both volume and production quality.
Although GAC believes customers are price sensitive, it also believes that
customer service and high-quality products are important competitive factors.
Management believes GAC provides premium quality and customer service while
maintaining competitive prices through stringent cost control efforts.
The main competitive factors in GAC's markets are customer service,
product quality, reliability, flexibility, technical capabilities and price.
Management believes GAC competes effectively in each of these areas.
SEASONALITY
Several Consumer Direct market segments served by the Company, such as
photofinishing packaging and certain segments of the direct mail market,
experience seasonality, with a higher percentage of the volume of products sold
to these markets occurring during the fourth quarter of the year. This
seasonality is due to the increase in sales to the direct mail market due to
holiday purchases. Seasonality is offset by the diversity of the Company's
other products and markets which are not materially affected by seasonal
conditions.
The commercial printing industry experiences seasonal variations. GAC's
revenues from annual reports are generally concentrated from February through
April. Revenues associated with holiday catalogs and automobile brochures tend
to be concentrated from July through October, and calendars from May to
September. As a result of these seasonal variations, GAC is at or near capacity
at certain times during these periods.
BACKLOG
The Company's envelope production backlog was $58.7 million as of
December 31, 1996, compared to $55.8 million at December 31, 1995. Backlog
consists only of purchase orders and short-term contracts that are typically
filled within three weeks to six months. Orders may generally be rescheduled or
canceled by the payment of cancellation charges and costs incurred until the
time of cancellation. Therefore, the Company's backlog does not necessarily
reflect future sales levels.
The Company's backlog in its commercial printing segment was $11.3
million as of December 31, 1996. Backlog consists of purchase orders and
contracts that are typically filled within 4 to 6 weeks. Backlog does not
necessarily reflect future sales levels.
EMPLOYEES
As of December 31, 1996, the Company employed a total of 6,144 people,
including 1,071 classified as salaried, 4,665 as hourly and 408 as salespeople.
Approximately 2,046 people employed at the Company's facilities are represented
by unions affiliated with the AFL-CIO or Affiliated National Federation of
Independent Unions. These employees are governed by collective bargaining
agreements, each of which covers the workers at a particular facility, expires
from time to time and are negotiated separately. Accordingly, management
believes that no single collective bargaining agreement is material to the
operations of the Company as a whole.
Except for a five-week walk-out at the Cleveland plant in June 1988,
there have been no labor strikes during the last 10 years at any facility now
owned by the Company. The 1988 Cleveland strike was settled by reaching a new
three-year collective bargaining agreement. The Company considers relations
with employees in the United States and Canada to be good.
ENVIRONMENTAL
The Company's operations are subject to federal, state and local
environmental laws and regulations relating to air emissions, waste generation,
handling, management and disposal, and at certain facilities, wastewater
treatment and discharge. The Company has implemented environmental programs
designed to ensure that the Company operates in compliance with the applicable
laws and regulations governing environmental protection. The Company's policy is
that management at all levels be aware of the environmental impact of operations
and direct such operations in compliance with applicable standards. Management
believes the Company is in substantial compliance with applicable federal, state
and local laws and regulations relating to environmental protection.
Although the Company does not anticipate that material capital
expenditures will be required to achieve or maintain compliance with
environmental laws and regulations, changing environmental laws and regulations
might affect the printing industry as well as the manufacture or transportation
of envelopes and related packaging products. For example, the Company will be
subject to regulations being developed by the federal Environmental Protection
Agency ("EPA") and state environmental agencies to implement the Clean Air Act
Amendments of 1990. Accordingly, there can be no assurance that environmental
matters resulting in material liabilities or expenditures will not be discovered
or that, in the future, material expenditures for environmental matters will not
be required by changes in law or regulations.
The Comprehensive Environmental Response, Compensation and Liability Act
of 1980 ("CERCLA"), as amended (also known as the "Superfund" legislation),
imposes joint and several liability, without regard to fault or the legality of
the original conduct, on certain classes of persons for the costs of
investigation and remediation of sites at which there have been releases or
threatened releases of hazardous substances. These persons, known as
potentially responsible parties ("PRPs"), include the owners and operators of
property and persons that generated, disposed of or arranged for the disposal of
hazardous substances found at a site. Many states have similar programs. The
Company has not been named as a PRP at any Superfund sites as a result of its
ongoing operations. Due to waste management and minimization programs
implemented by the Company and the Company's current use of permitted hazardous
waste disposal facilities, management does not believe that the Company's
current operations will give rise to future material liability under CERCLA.
In the asset purchase agreement related to the Georgia Pacific
acquisition ("GP Acquisition"), GP Envelope agreed to retain all liabilities
arising from releases of hazardous substances at any off-site locations
occurring prior to the closing date of the GP Acquisition (other than the
migration of hazardous substances from adjacent locations to the plants or from
the plants to adjacent locations ("Migration")). Accordingly, except for
liability associated with Migration, if any, the GP Acquisition should not
expose the Company to liability under CERCLA for historical off-site disposal
practices.
Additionally, GP Envelope also agreed to indemnify and hold the Company
harmless from damages that relate to the use, condition, ownership or operation
of any purchased assets or the conduct of GP Envelope on or prior to the closing
date of the GP Acquisition, including environmental third party claims. Such
damages include on-site liabilities under CERCLA or corresponding state laws
attributable to operations prior to the closing date. GP Envelope's
indemnification obligation is subject to (i) a $35.0 million limitation and (ii)
a six-year term limit. This indemnity also is subject to contribution
arrangements with the Company, which begin with GP Envelope paying 90% of the
indemnifiable damages in the first two years and decreasing annually to 50% in
the sixth year. The indemnity for environmental third party claims is not
subject to any contribution arrangements. Conversely, the Company has agreed to
indemnify GP Envelope for (i) environmental liabilities incurred subsequent to
the closing date, (ii) environmental cleanup liabilities at the sites or related
to Migration to or from such sites incurred prior to the closing date, subject
to contribution arrangements with GP Envelope, which begin with the Company
paying 10% of the indemnifable damages in the first two years increasing
annually to 50% in the sixth year, and (iii) third party claims for pre-closing
events arising six years after the closing date. Georgia-Pacific guaranteed all
of GP Envelope's obligations under the asset purchase agreement related to the
GP Acquisition.
In the asset purchase agreement related to the American Envelope Company
acquisition ("American Acquisition"), American agreed to indemnify and hold
harmless the Company from certain liabilities and obligations. In addition to an
indemnification for certain retained liabilities, the indemnification provides
that (i) American's indemnification obligation for out of pocket costs arising
out of or related to certain disclosed environmental matters and the presence of
any hazardous materials on the purchased assets ("Costs of Remediation") is
subject to a $25.0 million limitation and a six year claims period, and (ii) to
the extent that a claim consists of costs and expenses related to any Costs of
Remediation as to which American is obligated to indemnify the Company, the
parties shall contribute and share in the items on a sliding scale, such that
American bears 90% of each item of Costs of Remediation for which a claim has
been made during the first two years after closing of the American Acquisition,
with American's share decreasing by 10% each year thereafter until the sixth
anniversary of such closing date, when American's indemnification obligations
related to unclaimed Cost of Remediation matters cease. These sharing
percentages are fixed based upon the date the claim is made with respect to any
claim for Costs of Remediation and the parties' relative obligations with
respect to any such claim do not change thereafter. The indemnity for
environmental third party claims is not subject to any contribution by the
Company.
In connection with the American Acquisition, American and the Company
applied to and/or filed notices with regulatory agencies for the transfer or
issuance of all material permits or authorizations relating to the operations of
its plants and related facilities, including but not limited to, wastewater
permits and air permits. All such permits and authorizations have been
transferred or issued, as applicable.
Environmental claims relating to the properties acquired in the Supremex
Acquisition, the GAC Acquisition, the QPP Acquisition, the PNG Acquisition and
the SPCC Acquisition are not subject to separate indemnification provisions but
are subsumed under the general indemnification provisions of the applicable
purchase agreements.
ITEM 2. PROPERTIES
The Company occupies 52 envelope printing and commercial printing
facilities in the United States and Canada, 40 of which are leased. In
addition to on-site storage at each of the foregoing facilities, the Company
also stores products in one owned and three leased warehouses. Substantially
all of the printing and manufacturing facilities are pledged to secure
indebtedness under the bank credit agreements. The Company also leases 9,405
square feet of office space in Englewood, Colorado for its corporate
headquarters and 8,573 square feet of office space in Chicago, Illinois for
additional corporate headquarters support persons. The Company's Supremex, GAC,
PNG and QPP headquarters are each maintained in one of the Company's printing
and manufacturing facilities. Management believes that the Company has adequate
facilities for the conduct of current and future operations.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries may from time to time be involved in
claims or lawsuits that arise in the ordinary course of business. Accruals for
claims or lawsuits have been provided for to the extent that losses are deemed
probable and estimable. Although the ultimate outcome of these claims or
lawsuits cannot be ascertained, on the basis of present information and advice
received from counsel, it is the opinion of management that the disposition or
ultimate determination of such claims or lawsuits will not have a material
adverse effect on the Company. In the case of administrative proceedings
related to environmental matters involving governmental authorities, management
does not believe that any imposition of monetary damages or fines would be
material.
The Company settled the Skrudland v. Mail-Well Corporation d/b/a Mail-
---------------------------------------------
Well Envelope lawsuit in December 1996 for $300,000 plus attorney's fees. The
- -------------
settlement amount had already been reserved by the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is currently traded on the New York Stock
Exchange under the symbol "MWL." Prior to December 19, 1996 the Company's
Common Stock was traded over-the-counter in the Nasdaq National Market System
under the symbol "MLWL." As of March 14, 1997, there were 369 shareholders of
record and, based on security position listings, the Company believes that it
has in excess of 1,500 beneficial owners.
Following are the range of the high and low sales prices for the
Company's Common Stock as reported by the Nasdaq National Market System and New
York Stock Exchange during each fiscal quarter for the year ended December 31,
1996.
QUARTER ENDING: HIGH LOW
--------------- ------- -------
September 30, 1995 (from 9/22/95) $ 13.50 $ 13.25
December 31, 1995 $ 13.50 $10.625
March 31, 1996 $ 12.75 $ 8.125
June 30, 1996 $ 9.75 $ 7.75
September 30, 1996 $10.375 $ 8.25
December 31, 1996 $16.375 $10.125
DIVIDEND POLICY
The Company has not paid a dividend on Common Stock since its
incorporation. The Company does not anticipate paying any dividends on Common
Stock in the foreseeable future because it intends to retain earnings to finance
the expansion of its business, to repay indebtedness and for general corporate
purposes. Any payment of future dividends will be at the discretion of the
Board of Directors and will depend upon, among other things, the Company's
earnings, financial condition, capital requirements, level of indebtedness,
contractual restrictions with respect to the payment of dividends and other
relevant factors. The Company's bank credit agreements and senior subordinated
notes indenture limit the amount of dividends the Company could pay before
causing a default.
ITEM 6. SELECTED FINANCIAL DATA
The summary of historical financial data presented below is derived from
the historical audited financial statements of the Company and its predecessors,
GP Envelope & Pavey, except for the data presented below as of December 31, 1992
and for GP Envelope which is derived from the unaudited financial statements
which, in the opinion of management, reflect all adjustments, consisting of only
normal, recurring adjustments, necessary for a fair presentation of such
information. The historical balance sheet data as of December 31, 1994 include
Pavey which was acquired on February 24, 1994 and American which was acquired on
December 19, 1994. The operations of Pavey, American, Supremex, GAC, QPP, PNG
and SPCC have been included in the historical income statement data of the
Company from their respective dates of acquisition. The data presented below
should be read in conjunction with the Management's Discussion and Analysis of
Financial Condition and Results of Operations, the historical financial
statements and the related notes thereto included elsewhere herein.
(in millions, except per share amounts)
Predecessor Companies
-----------------------------------------
Period from Period from
February 24, January 1,
1994 1994
Year Ended through through Year Ended
December 31, December 31, February 23, December 31,
1996 1995 1994 1994 1993 1992
------------ ------------ ------------ ------------- ------------- -----------
Net sales $778.5 $596.8 $225.7 $36.6 $ 252.0 $262.7
Income (loss) before
extraordinary item 16.9 10.4 2.7 (1.3) 3.8 7.1
Net income (loss) 16.9 8.0 2.7 (1.3) 3.8 7.1
Income per share before
extraordinary item $ 1.42 $ 1.36 $ 0.47 (a) (a) (a)
Extraordinary item - 0.31 -
------ ------ ------
Net income per share $ 1.42 $ 1.05 $ 0.47 (a) (a) (a)
====== ====== ======
Total assets 470.9 500.4 307.7 n/a 136. 9 146.2
Total long term obligations 209.9 295.9 229.4 n/a 0.0 0.0
(a) Earnings per share is not presented for these periods as operations were
those of predecessor companies.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In addition to the historical information contained herein, this report contains
forward-looking statements. The reader of this information should understand
that all such forward-looking statements are subject to various uncertainties
and risks that could affect their outcome. The Company's actual results could
differ materially from those suggested by such forward-looking statements.
Factors which could cause or contribute to such differences include, but are not
limited to, product demand and sales, growth rate, ability to obtain assumed
productivity savings, quality control, availability of acquisition opportunities
and their related costs, cost savings due to integration and synergies
associated with acquisitions, ability to obtain additional financings and bank
restructuring, interest rates, foreign currency exchange rates, paper and raw
material costs, waste paper prices, ability to pass through paper costs to
customers, postage rates, changes in the direct mail industry, competition,
ability to develop new products, labor costs and advertising costs. This
entire report should be read to put such forward-looking statements in context
and to gain a more complete understanding of the uncertainties and risks
involved in the Company's business.
OVERVIEW - During the first half of 1996, Mail-Well, Inc. (the "Company")
encountered bad weather in the east and midwest, pricing pressures and lower
profit margins at Graphic Arts Center, Inc. ("GAC"), and weaker than expected
demand for envelope products in the U.S. due to lower demand in the direct mail
industry. The Company quickly reacted to these conditions as reflected in the
strong earnings performance for the year. Also during 1996, the Company
acquired two envelope companies and one printing company. In November 1996, the
bank credit agreement was amended, the Company refinanced certain equipment
under a sale/leaseback arrangement and a receivable securitization facility was
arranged.
ACQUISITIONS - The Company commenced operations in February 1994 with the
acquisition of the envelope businesses of Georgia-Pacific Corporation ("GP
Envelope") and Pavey Envelope and Tag Corp. ("Pavey"). In December 1994, the
Company acquired American Envelope Company ("American"), a manufacturer and
printer of envelopes. In July 1995, the Company acquired Supremex, Inc.
("Supremex"), a Canadian printer and manufacturer of envelopes. In August 1995,
the Company acquired GAC, one of the leading high impact color printers in the
United States. In April 1996, the Company acquired Quality Park Products, Inc.
("QPP"), a printer and manufacturer of envelopes. In November 1996, the Company
acquired Pac National Group Products, Inc. ("PNG"), a Canadian envelope printer
and manufacturer based in Ontario. In December 1996, the Company acquired
Shepard Poorman Communications Corporation ("SP"), a high impact color printer
located in Indianapolis, Indiana.
The following charts illustrate the historical and pro forma sales and operating
income of the U.S. Envelope, Canadian Envelope, High Impact Color Printing and
Corporate segments of the Company. Pro forma sales and operating income include
the operations of GP Envelope, Pavey, American, Supremex and GAC as if the
acquisitions occurred on January 1 of the year of acquisition, the acquisition
of QPP occurred on April 1, 1995 and the amended bank borrowings and leasing
transactions occurred on January 1, 1994.
The paper version of this document includes two charts: Sales by Segment and
Operating Income by Segment. The data included in these charts is as follows
(dollars in millions):
Sales by Segment
1996 1995 1995 Pro 1994 1994 Pro
Historical Historical Forma Historical Forma
SALES
US Envelope $551,225 $510,660 $584,712 $225,678 $444,576
Canadian Envelope 86,928 38,759 87,167 - -
High Impact Color Printing 140,371 47,384 149,767 - -
--------------------------------------------------------------
Total $778,524 $596,803 $821,646 $225,678 $444,576
==============================================================
Operating Income by Segment
1996 1995 1995 Pro 1994 1994 Pro
Historical Historical Forma Historical Forma
US Envelope $ 52,376 $ 50,995 $ 54,484 $ 24,408 $ 31,754
Canadian Envelope 13,784 5,797 11,986 - -
High Impact Color
Printing 6,010 993 6,046 - -
Corporate (11,308) (10,191) (14,132) (5,851) (11,983)
--------------------------------------------------------------
Total $ 60,862 $ 47,594 $ 58,384 $ 18,557 $ 19,771
==============================================================
RESULTS OF OPERATIONS
- ---------------------
U.S. ENVELOPE
- -------------
The following table presents 1996 historical financial data for the U.S.
Envelope operations of the Company including the operations of QPP since the
date of acquisition. The 1995 data includes the historical operations of the
Company and the historical operations of QPP for the nine months ended December
31, 1995 which was included to provide comparability to the 1996 information.
Information for 1994 combines the information derived from the historical
financial statements of the Company with financial information of GP Envelope,
Pavey and American for the portion of 1994 prior to the acquisition of each of
the businesses by the Company.
Year Ended December 31,
-------------------------------------------------------
1996 1995 1994
---- ---- ----
(dollars in thousands) $ % $ % $ %
--------- ------ --------- ------ --------- ------
Net sales $551,225 100.0 $584,712 100.0 $444,576 100.0
Cost of sales 434,392 78.8 469,544 80.3 354,922 79.8
Operating expenses 64,457 11.7 60,684 10.4 57,900 13.1
-------- ----- -------- ----- -------- -----
Operating income $ 52,376 9.5 $ 54,484 9.3 $ 31,754 7.1
======== ====== ======== ===== ======== =====
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
OPERATIONS OF ACQUIRED BUSINESS - Included in the operations of U.S. Envelope
for the year ended 1996 are the operations of QPP since the date of acquisition
and the corresponding period in 1995. QPP's net sales of $61.2 million for the
period represents a $12.9 million decrease from the same period in 1995. This
decrease was due to the loss of a major customer (which occurred prior to the
acquisition of QPP by the Company) representing sales of $13.3 million offset by
sales increases to other customers of $0.4 million. The gross margins for QPP
have improved from the prior year due to the discontinuation of certain
discounted pricing programs and savings from plant restructuring.
The following discussion relates to the U.S. Envelope operations of the Company,
exclusive of QPP's operations which were discussed in the preceding paragraph.
NET SALES - Net sales decreased 4.0% for the year ended December 31, 1996
compared to the year ended December 31, 1995. The average selling price
increased by 1.1% from $19.19 per thousand units in 1995 to $19.40 per thousand
units in 1996. The increase was due to a higher margin, customized product mix
and managing selling prices relative to paper costs. Total volume for the U.S.
Envelope operations decreased 5.1% to 25.3 billion units in 1996 from 26.6
billion units in 1995. Volume in 1996 was negatively impacted by lower direct
mail volume, and a shift towards more complex, higher margin products for which
fewer units were sold.
COST OF SALES - Cost of sales, as a percentage of sales, decreased from 78.9% in
1995 to 77.9% in 1996. The Company believes that material gross margin per unit
(measured on a per thousand envelope basis) and volume of units sold are better
indicators of its trend in revenues than its net sales, since historically the
Company has passed on to its customers changes in its cost of paper. When
measured on a unit basis, material gross margin increased from $10.42 per
thousand units in the year ended December 31, 1995 to $11.03 per thousand units
for the year ended December 31, 1996. The
increase in material gross margin on a unit basis was attributable to the
Company's ability to manage selling price relative to declining paper prices as
well as the Company's ability to negotiate paper costs. The favorable effect of
lower paper costs on gross margin was largely offset by decreased revenue from
the sale of waste paper and increases in other costs as a percentage of sales.
Material costs, exclusive of waste revenue, were 44.9% and 49.4% of net sales
for the years ended December 31, 1996 and 1995, respectively. Waste recovery
revenue declined from $0.71 per thousand units in 1995 to $0.33 per thousand
units in 1996 which resulted in a decline in waste recovery revenue from $18.9
million in 1995 to $8.3 million in 1996.
OPERATING EXPENSES - Operating expenses include selling and administrative
expenses. For the year ended December 31, 1996, selling and administrative
expenses, as a percentage of sales, increased to 12.4% from 11.1% in 1995.
Included in 1996 operating expenses was a $2.1 million loss on the disposal of
assets which represented equipment idled from consolidation activities, the
disposal of equipment, impairment of buildings and the write-off of capitalized
software no longer in use. Without this loss, operating expenses as a
percentage of sales would have been 11.9% for 1996. The increase from 1995 was
due to higher compensation and benefit costs in the administrative area. The
increase was offset by the reduction or elimination of redundant functions when
businesses were acquired, resulting in cost savings.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994
The U.S. Envelope table includes the operations of QPP for the nine months ended
December 31, 1995 for comparability with 1996 historical operations; QPP's
operations are excluded from the 1994 column of that table and from the
following discussion.
NET SALES - The 14.9% increase in net sales for the year ended December 31, 1995
compared to the year ended December 31, 1994 was due to price and volume
increases. Total volume for the U.S. Envelope operations increased 4.7% to 26.6
billion units for the year ended December 31, 1995 from 25.4 billion units for
the year ended December 31, 1994. The volume increase was due, in management's
opinion, to the integration of the GP Envelope, Pavey and American acquisitions
into one organization. This integration increased the Company's ability to
serve national clients and efficiently manage production. Prices increased by
9.7% from $17.49 per thousand units in 1994 to $19.19 per thousand units in
1995, as the Company adjusted its prices in response to the significant increase
in the cost of paper. Historical net sales for the period from February 24,
1994 to December 31, 1994 were $225.7 million. The American operations
contributed net sales of $182.3 million in 1994 and volume of 12.7 billion
units. The operations of the predecessor companies (GP Envelope and Pavey) for
the period ended February 23, 1994 contributed net sales of $36.6 million and
volume of 1.8 billion units.
COST OF SALES - Total cost of sales, as a percentage of sales, decreased from
1994 to 1995, largely due to the impact of the Company's ability to effectively
manage the increase in the cost of paper and the related increases in sales
prices. Generally, in periods of increasing paper costs, the Company's gross
profit percentage declines even in situations where the entire increase in cost
can be passed on to its customers. The Company believes that material gross
margin per unit and volume of units sold are better indicators of its trend in
revenues than its net sales, since historically the Company has passed on to its
customers changes in its cost of paper. On a unit basis, material gross margin
increased from $10.19 per thousand units in 1994 to $10.42 per thousand units in
1995. The increase in the material gross margin on a unit basis was
attributable to: (1) the Company's ability to pass on paper cost
increases and (2) an increase in proceeds from the sale of waste paper as waste
paper prices increased concurrently with the cost of paper. The realization of
cost savings from combining American operations with GP Envelope and Pavey
operations in December 1994 was partially offset by increased labor costs due to
wage and salary increases and resulted in lower labor and manufacturing expenses
as a percentage of sales.
OPERATING EXPENSES - For the year ended December 31, 1995, operating expenses
of $56.7 million were $1.2 million less than operating expenses in 1994. As a
percentage of sales, operating expenses decreased compared to the same period in
1994. The dollar decrease in operating expenses was due to the realization of
cost savings from combining the sales and administrative functions of American,
partially offset by the increase in commissions paid. During 1995, the
administrative offices of American were closed and the functions performed at
that location were transferred to the corporate office of the Company.
Additionally, the sales force of the Company was consolidated and deployed to
new markets and segments of the industry.
CANADIAN ENVELOPE
- -----------------
The following table presents financial information with respect to the Canadian
Envelope operations for the years ended December 31, 1996 and 1995. The 1996
information includes the operations of PNG for the one month ended December 31,
1996. Information for 1995 was derived from historical financial statements
both prior to, and after, the acquisition of Supremex by the Company.
Year Ended December 31,
---------------------------------
1996 1995
---- ----
(dollars in thousands) $ % $ %
-------- ----- -------- -----
Net sales $86,928 100.0 $87,167 100.0
Cost of sales 61,020 70.2 62,564 71.8
Operating expenses 12,124 13.9 12,617 14.5
------- ----- ------- -----
Operating income $13,784 15.9 $11,986 13.7
======= ===== ======= =====
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
NET SALES - Net sales for the year ended December 31, 1996 decreased 0.3% as
compared to sales for the year ended December 31, 1995. The average selling
price increased by 1.3% and was due to a higher margin, customized product mix.
Total volume decreased 6.1% to 4.2 billion units from 4.5 billion units in 1995.
Volume in 1996 was negatively impacted by a decrease in the sale of commodity
envelopes which have a lower margin than customized products.
COST OF SALES - Cost of sales, as a percentage of sales, decreased from 1995 to
1996, largely due to the Company's ability to effectively manage fluctuations in
the cost of paper and related fluctuations in sales prices. Material gross
margin per unit (measured on a per thousand envelope basis) and volume of units
sold are better indicators of its trend in revenues than its net sales, since
historically changes in the cost of paper have been passed on to customers.
When measured on a unit basis, material gross margin per unit increased 9.5%
from $10.25 per unit in 1995 to $11.22 per unit in 1996. A favorable effect on
gross margins also occurred due to lower paper costs, which decreased 10% from
the 1995 average.
OPERATING EXPENSES - Operating expenses include selling and administrative
expenses which declined both as a percentage of sales and in absolute dollars
when comparing 1996 to 1995. The closing of the Brantford facility and other
cost centers contributed to this decline. In addition, sales forces were reduced
and administrative responsibilities were combined with other regions.
HIGH IMPACT COLOR PRINTING
- --------------------------
The following table presents financial information with respect to the High
Impact Color Printing operations for the years ended December 31, 1996 and 1995.
The 1996 information includes the operations of SP for the one month ended
December 31, 1996. Information for 1995 reflects the historical results of GAC
prior to, and after, the acquisition by the Company.
Year Ended December 31,
----------------------------------
1996 1995
---- ----
(dollars in thousands) $ % $ %
-------- ----- --------- -----
Net sales $140,371 100.0 $149,767 100.0
Cost of sales 116,179 82.7 121,449 81.1
Operating expenses 18,182 13.0 22,272 14.9
-------- ----- -------- -----
Operating income $ 6,010 4.3 $ 6,046 4.0
======== ===== ======== =====
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
NET SALES - The high impact color printing market is highly competitive and GAC
has lowered prices to meet market expectations. This was a major cause of the
6.3% decline in sales dollars. In response to this decline in sales price, GAC
has targeted higher margin markets and is aggressively allocating sales
resources to these markets. Another factor affecting the decline in sales
dollars was the decrease in paper costs. Fluctuations in paper prices are
generally passed on to customers as an integral part of the price of the
product. As paper prices decreased in 1996, as compared to 1995, the sales
prices also decreased.
COST OF SALES - Gross margins decreased as a percentage of sales to 17.3% in
1996 from 18.9% in 1995 as a result of the competition in major markets.
Reductions in cost of sales were not large enough to offset the decline in
sales. GAC has lowered gross margins to meet the competition and, as stated
previously, it is concentrating its sales efforts on higher-margin product
markets.
OPERATING EXPENSES - Operating expenses as a percentage of sales have decreased
12.8% from 1995. Operating expenses include selling and administrative expenses
and the reduction in this category demonstrates GAC's ability to reduce these
expenses in a time of decreasing gross margins. Improvements were made in the
purchasing of supplies, employee headcounts, travel and entertainment expenses
and spoilage.
CORPORATE EXPENSES
- ------------------
The following table presents historical financial information for the Company
and includes the operations of each acquired company from the date of its
acquisition. The percentage column presents the specific expense items as a
percentage of historical net sales for the year.
Year Ended December 31,
----------------------------------------------
1996 1995 1994
---- ---- ----
(dollars in thousands) $ % $ % $ %
------- ---- ------- ----- -------- -----
Operating expenses $ 7,136 0.9 $ 7,334 1.2 $ 3,844 1.7
Amortization expense 4,172 0.5 2,857 0.5 2,007 0.9
Interest expense 26,936 3.5 27,043 4.5 12,861 5.7
Interest expense -
amortization of deferred
financing costs 3,556 0.5 2,291 0.4 1,027 0.4
Other expense (income) 454 0.1 668 0.1 (245) (0.1)
Income taxes 12,263 1.6 7,219 1.2 2,171 1.0
OPERATING EXPENSES - Operating expenses, as a percentage of net sales and in
total dollars, continues to decline as acquisitions are absorbed without
significant increases in corporate headcount.
AMORTIZATION EXPENSE - Amortization expense increased due to the amortization of
the intangibles recorded in the acquisitions.
INTEREST EXPENSE - Interest expense decreased primarily as a result of a lower
average interest rate on the bank debt of 7.6% in 1996 as compared to 8.5% in
1995. This decrease more than offsets the higher average bank debt balance
which was $206.5 million in 1996 as compared to $187.7 million in 1995. The
bank debt restructuring, the cash proceeds from the sale/leaseback and the cash
proceeds from the accounts receivable securitization discussed in the notes to
the financial statements resulted in the reduction of outstanding bank debt
balances toward the end of 1996.
INTEREST EXPENSE - AMORTIZATION OF DEFERRED FINANCING COSTS - The amortization
of deferred financing costs increased due to the increase in deferred financing
costs capitalized pursuant to the 1995 acquisitions for which there was a full
year of amortization in 1996.
INCOME TAXES - The effective tax rate for the year ended December 31, 1996 was
42.0 % as compared to 41.0% for the year ended December 31, 1995. The effective
tax rate for both periods was higher than the federal statutory rate due to
state and provincial income taxes. Additionally, certain goodwill amortization
and a portion of the employee stock ownership contribution was not tax
deductible.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
HISTORICAL CASH FLOW - Net cash provided by operating activities was $141.4
million and $32.0 million for the years ended December 31, 1996 and 1995,
respectively, and $19.6 million for the period from February 24, 1994 to
December 31, 1994. The acquisitions of Quality, PNG and SP required cash
payments in the amounts of $27.8 million, $20.5 million and $14.9 million,
respectively, which was borrowed under the Company's bank credit agreement. In
November 1996, the Company
entered into a five year agreement whereby it can sell, on a revolving basis, an
undivided percentage ownership interest in a designated pool of accounts
receivable up to a maximum of $100.0 million. At December 31, 1996, $68.4
million was sold under this agreement and the sale was reflected as a reduction
of accounts receivable in the Company's consolidated balance sheet. Other
investing activities include capital expenditures of $18.7 million, $13.8
million and $4.5 million in 1996, 1995 and 1994, respectively. The 1996
expenditures were offset by the proceeds of $33.6 million from the disposal of
assets including $30.0 million from the sale/leaseback.
DEBT OBLIGATIONS - In November 1996, the Company amended its bank credit
agreement which now includes a $30.0 million revolving credit facility, a C$10.0
million revolving credit facility, $135.0 million of term loans, a $30.0 million
acquisition loans facility, a $12.0 million letter of credit facility and an
C$8.0 million letter of credit facility. As of December 31, 1996, the Company
had borrowed $6.6 million (including $5.8 million in letters of credit) under
the revolving credit facility of the bank credit agreement and $135.0 million
under the term loans. Availability at December 31, 1996 included $36.6 million
under the revolving credit facilities and $30.0 million under the acquisition
loan facility. Interest rates on the Company's bank debt ranged from 5.25% to
8.75% as of December 31, 1996. The weighted average interest rate on bank debt
was 7.6%.
CAPITAL REQUIREMENTS - The Company estimates that, based on current utilization
of its existing equipment and expected demand, it will spend $20.0 to $23.0
million per year on capital expenditures, exclusive of acquisitions.
EFFECTS OF INFLATION - The effects of inflation have not been material to the
Company. However, due to the competitive nature of its business, it may not
always be able to pass on inflationary cost increases in the future.
Manufacturing costs may be affected by inflation and the effects of inflation
may be experienced by the Company in future periods.
EFFECTS OF FOREIGN CURRENCY - The effects of foreign currency exchange have not
been material to the Company to date. The Company recognized a net foreign
exchange loss of $0.3 million in 1996 which relates, primarily, to U.S. dollar
denominated debt borrowed by the Canadian subsidiary. Term loans with a face
value of $65.0 million were borrowed in U.S. dollars and are included in the
balance sheet of Supremex. Supremex entered into two foreign currency swap
contracts which involve the exchange of floating rate U.S. dollar denominated
debt for floating rate Canadian dollar denominated debt at a contracted exchange
rate. The swap agreements are intended to minimize the exchange rate risk to
the Company.
SEASONALITY AND ENVIRONMENTAL - The effects of seasonality and environmental
matters had no material financial impact on the historical operations of the
Company and are not expected to have an effect on the Company's liquidity and
capital resources.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Mail-Well, Inc. and Subsidiaries
Independent Auditors' Report.......................................... 28
Consolidated Balance Sheets as of December 31, 1996 and 1995.......... 29
Consolidated Statements of Operations for the Years Ended
December 31, 1996 and 1995 and for the period from February 24, 1994
through December 31, 1994............................................. 31
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996 and 1995 and for the Period from February 24, 1994
through December 31, 1994............................................. 32
Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended December 31, 1996 and 1995 and for the period from
February 24, 1994 through December 31, 1994........................... 33
Notes to Consolidated Financial Statements............................ 34
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Mail-Well, Inc.:
We have audited the accompanying consolidated balance sheets of Mail-Well, Inc.
and Subsidiaries (''Company,'' see Note 1) as of December 31, 1996 and 1995, and
the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for the years ended December 31, 1996 and 1995 and for
the period from February 24, 1994 through December 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Mail-Well, Inc. and Subsidiaries as
of December 31, 1996 and 1995, and the results of their operations and their
cash flows for the years ended December 31, 1996 and 1995 and for the period
from February 24, 1994 through December 31, 1994 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Denver, Colorado
February 10, 1997
MAIL-WELL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
- ----------------------------------------------------------------------------
ASSETS DECEMBER 31,
1996 1995
CURRENT ASSETS
Cash and cash equivalents $ 9,656 $ -
Receivables (net of allowance for doubtful accounts of $3,002 and $1,965) 40,612 95,550
Accounts receivable-other 7,743 3,855
Income tax receivable 3,504 2,104
Inventories 68,275 67,598
Deferred tax asset 2,309 3,846
Other current assets 3,513 1,330
-------- --------
Total current assets 135,612 174,283
PROPERTY, PLANT AND EQUIPMENT 183,302 205,096
DEFERRED FINANCING COSTS (net of accumulated amortization of
$6,746 and $3,191) 14,497 15,897
GOODWILL (net of accumulated amortization of $5,408 and $2,506) 128,812 101,026
OTHER ASSETS (net of accumulated amortization of $3,578 and $2,307) 8,723 4,134
-------- --------
TOTAL $470,946 $500,436
======== ========
See notes to consolidated financial statements.
MAIL-WELL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY DECEMBER 31,
1996 1995
CURRENT LIABILITIES
Accounts payable $ 44,539 $ 31,764
Accrued compensation and vacation 23,312 20,216
Accrued interest 4,455 4,497
Other current liabilities 26,206 16,530
Current portion of long-term debt and capital leases 14,975 11,523
--------- ---------
Total current liabilities 113,487 84,530
ACCRUED PENSION 1,284 2,266
CAPITAL LEASES 2,958 3,399
BANK BORROWINGS 121,992 207,482
SENIOR SUBORDINATED NOTES 85,000 85,000
DEFERRED INCOME TAXES 23,153 14,853
OTHER LONG-TERM LIABILITIES 1,865 588
--------- ---------
Total liabilities 349,739 398,118
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value; 25,000 shares authorized, none issued and outstanding - -
Common stock, $0.01 par value; 15,000,000 shares authorized, 12,942,828 shares
and 12,928,060 shares issued and 12,487,420 shares and 12,472,652 shares (including
1,298,848 shares held by ESOP) outstanding at December 31, 1996 and
December 31, 1995, respectively 130 130
Non-voting convertible common stock; $0.01 par value; 35,000 shares authorized,
none issued and outstanding - -
Paid-in capital 98,280 96,958
Retained earnings 27,631 10,704
Unearned ESOP compensation (2,896) (3,530)
Cumulative foreign currency translation adjustment (115) (20)
Pension liability adjustment (110) (211)
Treasury stock-at cost; 455,408 shares (1,713) (1,713)
--------- ---------
Total stockholders' equity 121,207 102,318
--------- ---------
TOTAL $ 470,946 $ 500,436
========= =========
See notes to consolidated financial statements.
MAIL-WELL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- -----------------------------------------------------------------------------------------------------------------
PERIOD FROM
FEBRUARY 24, 1994
YEAR ENDED DECEMBER 31, THROUGH
1996 1995 DECEMBER 31, 1994
NET SALES $ 778,524 $ 596,803 $ 225,678
COST OF SALES
Materials 350,425 291,441 101,770
Labor and other 212,841 165,670 65,668
Manufacturing 42,308 22,787 10,853
Depreciation 14,904 9,841 4,058
Waste recovery (8,887) (18,935) (5,644)
----------- ---------- ----------
Total cost of sales 611,591 470,804 176,705
----------- ---------- ----------
GROSS PROFIT 166,933 125,999 48,973
----------- ---------- ----------
OTHER OPERATING COSTS
Selling 55,314 40,444 14,504
Administrative 44,440 35,104 13,216
Amortization 4,172 2,857 2,007
Loss on disposal of assets 2,145 - 689
----------- ---------- ----------
Total other operating costs 106,071 78,405 30,416
----------- ---------- ----------
OPERATING INCOME 60,862 47,594 18,557
OTHER (INCOME) EXPENSE
Interest expense-debt 26,936 27,043 12,861
Interest expense-amortization of deferred financing costs 3,556 2,291 1,027
Discount on sale of accounts receivable 726 - -
Other (income) expense 454 668 (245)
----------- ---------- ----------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 29,190 17,592 4,914
PROVISION FOR INCOME TAXES
Current 3,270 6,007 415
Deferred 8,993 1,212 1,756
----------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM 16,927 10,373 2,743
EXTRAORDINARY ITEM, NET OF TAX
BENEFIT OF $1,608 - 2,412 -
----------- ---------- ----------
NET INCOME $ 16,927 $ 7,961 $ 2,743
=========== ========== ==========
INCOME PER SHARE BEFORE
EXTRAORDINARY ITEM $1.42 $1.36 $.47
EXTRAORDINARY ITEM - 0.31 -
----------- ---------- ----------
NET INCOME PER SHARE $1.42 $1.05 $.47
=========== ========== ==========
WEIGHTED AVERAGE SHARES 11,918,547 7,614,708 5,878,631
=========== ========== ==========
See notes to consolidated financial statements.
MAIL-WELL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------------------
PERIOD FROM
FEBRUARY 24, 1994
YEAR ENDED DECEMBER 31, THROUGH
1996 1995 DECEMBER 31, 1994
CASH FLOWS FROM OPERATIONS
Net income $ 16,927 $ 7,961 $ 2,743
Adjustments to reconcile net income to cash provided by
operations:
Depreciation 14,904 9,841 4,058
Amortization 7,728 5,148 3,034
Accretion of original issue discount - 1,650 1,717
(Gain) loss on repurchase of deferred coupon notes - pre-tax - 4,020 (17)
Deferred tax provision 8,993 1,212 1,756
ESOP compensation expense 1,973 1,612 752
Loss on disposal of assets 2,145 - 689
Other 393 208 284
Changes in operating assets and liabilities, net of effects
of acquired businesses:
Receivables 75,985 (3,634) (6,109)
Inventories 22,049 5,578 (3,269)
Accounts payable (1,236) (5,944) 4,723
Accrued interest (304) 722 3,522
Current income taxes 997 (1,269) -
Other working capital 1,340 3,031 5,734
Other assets and other long-term liabilities (10,452) 1,869 (35)
--------- --------- ---------
Net cash provided by operating activities 141,442 32,005 19,582
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions, net of cash acquired (63,179) (79,613) (253,061)
Capital expenditures (18,742) (13,766) (4,474)
Proceeds from sale of property, plant and equipment 33,594 2,440 -
Purchase of marketable securities - (62,750) -
Sale of marketable securities 250 62,500 -
--------- --------- ---------
Net cash used in investing activities (48,077) (91,189) (257,535)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash overdrafts 2,496 4,779 423
Net proceeds from common stock issuance 40 68,181 19,631
Proceeds from issuance of deferred coupon notes - - 17,883
Proceeds from long-term debt 319,486 236,269 302,164
Repayments of long-term debt and capital leases (403,649) (224,768) (81,745)
Debt issuance costs (1,800) (5,571) (14,090)
Repurchase of deferred coupon notes - (19,712) (4,607)
Repurchase of common stock - - (1,713)
--------- --------- ---------
Net cash provided by (used in) financing activities (83,427) 59,178 237,946
--------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (282) 6 -
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 9,656 0 (7)
BALANCE AT BEGINNING OF PERIOD 0 0 7
--------- --------- ---------
BALANCE AT END OF PERIOD $ 9,656 $ 0 $ 0
========= ========= =========
Supplemental disclosure of cash paid for:
Interest $ 25,144 $ 24,177 $ 7,445
Income taxes 5,831 6,479 2,912
Stock issued for debt and equity issuance costs 0 430 1,254
See notes to consolidated financial statements.
MAIL-WELL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
FEBRUARY 24, 1994 TO DECEMBER 31, 1994
(Dollars in Thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
UNEARNED TOTAL
COMMON PAID-IN RETAINED ESOP STOCKHOLDERS'
STOCK CAPITAL EARNINGS COMPENSATION OTHER EQUITY
Issuance of common stock:
For cash $ 50 $18,786 $18,836
In acquisition of Pavey 6 2,082 2,088
With units 6 2,111 2,117
Costs incurred from issuance of stock (173) (173)
Repurchase of common stock $(1,713) (1,713)
Purchase of shares by ESOP (1) (244) (245)
Net income $ 2,743 2,743
------- ------- ------- ---------- ------- -------
Balance at December 31, 1994 61 22,562 2,743 (1,713) 23,653
Issuance of common stock:
In initial public offering 50 69,950 70,000
Other 5 4,014 4,019
Costs incurred from issuance of stock (5,823) (5,823)
Transfer of ESOP accounts 13 5,196 $(3,674) 1,535
Exercise of stock options 1 414 415
Change in unearned ESOP 645 144 789
Translation adjustments (20) (20)
Pension liability adjustment (211) (211)
Net income 7,961 7,961
------- ------- ------- ---------- ------- -------
Balance at December 31, 1995 130 96,958 10,704 (3,530) (1,944) 102,318
Issuance of common stock 51 51
Exercise of stock options 40 40
Change in unearned ESOP 1,231 634 1,865
Translation adjustments (95) (95)
Pension liability adjustment 101 101
Net income 16,927 16,927
------- ------- ------- ---------- ------- -------
Balance at December 31, 1996 $ 130 $98,280 $27,631 $(2,896) $(1,938) $121,207
======= ======= ======= ========== ======= ========
See notes to consolidated financial statements.
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - Mail-Well, Inc., headquartered in Englewood,
Colorado, is organized under Delaware law and its common stock is traded on
the New York Stock Exchange. Mail-Well I Corporation, a wholly-owned
subsidiary of Mail-Well, Inc. conducts most of the business of Mail-Well,
Inc. Mail-Well I Corporation, together with its subsidiaries, is the owner
of the operating assets and the borrower of debt. These financial
statements include the accounts of Mail-Well, Inc., Mail-Well I Corporation
and its subsidiaries (collectively referred to as the "Company"). All
significant intercompany accounts and transactions have been eliminated.
NATURE OF OPERATIONS - The Company is one of the largest printers in North
America, manufacturing both envelopes and high impact color commercial
work. Within envelope printing, the Company competes in the consumer direct
segment in which envelopes are designed and manufactured to customer
specifications. In addition, the Company manufactures envelopes sold into
the office products market. The Company is also a leading high impact
commercial printer specializing in printing advertising literature, high-
end catalogs, annual reports, calendars and computer instruction books and
is recognized as an innovative provider of quality printed products to
leading companies in the United States. The Company commenced operations on
February 24, 1994 with the acquisition of the envelope businesses of
Georgia-Pacific Corporation ("GP Envelope") and Pavey Envelope and Tag
Corp. ("Pavey").
INITIAL PUBLIC OFFERING - On September 21, 1995, the Company completed an
initial public offering of 5,000,000 shares of common stock at $14.00 per
share. The net proceeds of the offering, after underwriting commissions and
expenses, were approximately $64.4 million; the net proceeds were used to
repay bank indebtedness and repurchase the remaining Deferred Coupon Notes.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents includes cash on
hand, demand deposits, and short-term investments with original maturities
of three months or less. The Company's domestic banking system provides for
the daily replenishment of major bank accounts for check clearing
requirements. Accordingly, outstanding checks that had not yet been paid by
the banks at year end are reflected in accounts payable in the consolidated
balance sheets.
INVENTORIES - Inventories are generally valued at the lower of first-in,
first-out ("FIFO") cost or market and include the cost of materials,
labor and manufacturing overhead.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are recorded
at cost. Replacements of major units of property are capitalized and the
replaced properties are retired. Replacements of minor units of property
and repair and maintenance costs are charged to expense as incurred.
Depreciation for financial reporting purposes is calculated using the
straight-line method based on the estimated useful lives of the respective
assets, as follows:
Land improvements 25 years
Buildings and building improvements 15-45 years
Leasehold improvements 15 years
Machinery and equipment 15 years
Furniture and fixtures 3-10 years
Automobiles and trucks 5 years
Computers and software 3-5 years
Depreciation for tax purposes is calculated using accelerated methods. Upon
retirement or disposition of assets, cost and accumulated depreciation are
removed from the related accounts and any gain or loss is included in income.
INTANGIBLE ASSETS - In connection with the issuance of both bank debt and public
debt as well as in connection with acquisitions, the Company recorded certain
intangible assets. The following schedule summarizes the amortization periods
and amortization expense recorded in connection with the intangible assets (in
thousands):
USEFUL
LIFE 1996 1995 1994
Amortization of Deferred Financing Costs 5-6 years $3,556 $2,291 $1,027
Amortization of Goodwill 40 years 2,900 1,586 920
Amortization of Non-Competition Agreement 3 years 1,000 1,000 833
Amortization of Covenant Not to Complete 5 years 120 120 100
Amortization of Acquisition Costs 151 5-21 years 152 151 154
------ ------ ------
Total $7,728 $5,148 $3,034
====== ====== ======
IMPAIRMENT OF LONG-LIVED ASSETS - Long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability is based on future net cash
flows from the use of the asset. The Company recorded no adjustment for
impairment of long-lived assets in 1995. In 1996, the Company wrote off certain
assets with a net book value of $1,014,000 which is included in the consolidated
statements of operations in the loss on disposal of assets.
NET INCOME PER SHARE - Net income per share is computed by dividing net income
by the weighted average number of outstanding common shares and common stock
equivalents. Common shares and common stock equivalents outstanding exclude
unallocated and uncommitted shares held by the Company's employee stock
ownership plan ("ESOP").
DECEMBER 31,
1996 1995 1994
Common shares 11,656,604 7,522,861 5,878,631
Common stock equivalents 261,943 91,847 0
---------- --------- ---------
Total 11,918,547 7,614,708 5,878,631
========== ========= =========
Supplementary pro forma net income per share data, assuming the initial public
offering and related repayment of debt had taken place at January 1, 1995, are
is follows (dollars in thousands, except per share amounts):
DECEMBER 31, 1995
Income before extraordinary item $13,201
Extraordinary item 2,412
-------
Net income $10,789
=======
Weighted average common shares
and equivalents 11,334
Per common share:
Income before extraordinary item $ 1.16
Extraordinary item (0.21)
-------
Net income $ 0.95
=======
FOREIGN CURRENCY TRANSLATION - The financial statements include the results
of Canadian operations which are translated from Canadian dollars, their
functional currency, into U.S. dollars. The balance sheet is translated at
the year end rate of exchange. Results of operations are translated at
average rates prevailing during the year. The effects of translation at the
balance sheet date are accumulated as the cumulative foreign currency
translation adjustment in stockholders' equity.
ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
RECLASSIFICATION - Certain amounts in the 1994 and 1995 financial statements
have been reclassified to conform to 1996 presentation.
2. ACQUISITIONS
In December 1994, the Company acquired substantially all of the assets of
American Envelope Company ("American"), a manufacturer of envelopes and a
wholly-owned subsidiary of CC Industries. In July 1995, the Company acquired
all of the outstanding shares of common stock of Supremex Inc. ("Supremex"),
a Canadian manufacturer of envelopes. In August 1995, the Company acquired
all of the outstanding shares of common stock of Graphic Arts Centers, Inc.
("GAC"), one of the leading high impact commercial printers in the United
States. In April 1996, the Company acquired substantially all of the assets
of Quality Park Products, Inc. ("QPP"), a printer and manufacturer of
envelopes. In November 1996, the Company acquired substantially all of the
Canadian assets of Pac National Group ("PNG"), a Canadian envelope
manufacturer based in Ontario. In December 1996, the Company acquired all of
the outstanding shares of Shepard Poorman Communications Corporation ("SP"),
a high impact color printer located in Indianapolis, Indiana. The purchase
prices for PNG and SP are preliminary and adjustments may be recorded in
1997. These acquisitions were accounted for as purchases and, accordingly,
the net purchase price of each acquisition was allocated to the various
assets and liabilities according to their fair values as of the date of the
respective purchase. The presentation below summarizes the purchase price
including all adjustments made through December 31, 1996. The results of
operations of each of the acquisitions have been included in the accompanying
consolidated statements of operations from the date of the acquisition.
Cash Debt Total Purchase Goodwill
Paid Assumed Price Recorded
(in millions)
Predecessor Companies:
G-P Envelope $155.1 $0.0 $155.1 $44.7
Pavey 4.4 0.0 4.4 0.6
1994 Acquisition:
American 97.4 0.0 97.4 0.0
1995 Acquisitions:
Supremex 65.5 0.0 65.5 33.6
GAC 82.6 0.0 82.6 37.6
1996 Acquisitions:
QPP 27.6 0.7 28.3 3.4
PNG 20.2 0.0 20.2 6.4
SP 18.9 0.8 19.7 7.9
The following table presents the unaudited pro forma results of operations as if
the GP Envelope, Pavey, American, Supremex and GAC acquisitions and the initial
public offering had occurred on January 1, 1994 and as if the QPP acquisition
had occurred on January 1, 1995. Due to the immateriality of the PNG and SP
acquisitions, their operations have not been included in the pro forma financial
information. The summary pro forma results are based on assumptions and are not
necessarily indicative of the actual results which would have occurred had these
acquisitions occurred on January 1 of the year preceding the acquisition date,
or of the future results of operations of the Company.
YEAR ENDED
DECEMBER 31,
1996 1995 1994
(IN MILLIONS,
EXCEPT PER SHARE)
Net sales $801.8 $846.1 $653.5
Net income 17.9 13.2 9.8
Net income per share $ 1.50 $ 1.13 $ 0.85
The following table presents the unaudited pro forma results of operations
including the assumptions used in the previous table and also including the
effect of the amended bank borrowings (see note 4) as if the amendment had
occurred on January 1, 1994 which would have had a significant effect on the
presentation of the financial statements. The summary pro forma results are
based on assumptions and are not necessarily indicative of the actual results
which would have occurred had these acquisitions and transactions occurred on
January 1 of the year preceding the acquisition date or of the future results of
operations of the Company.
YEAR ENDED
DECEMBER 31,
1996 1995 1994
(IN MILLIONS,
EXCEPT PER SHARE)
Net sales $801.8 $846.1 $653.5
Net income 18.4 13.9 10.3
Net income per share $ 1.55 $ 1.19 $ 0.90
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS (IN THOUSANDS)
DECEMBER 31,
1996 1995
INVENTORIES:
Raw materials $25,953 $ 28,344
Work in process 7,549 11,544
Finished goods 37,385 29,851
-------- --------
70,887 69,739
Reserve for obsolescence, loss and other (2,612) (2,141)
-------- --------
Total $68,275 $ 67,598
======== ========
DECEMBER 31,
1996 1995
PROPERTY, PLANT AND EQUIPMENT:
Land and land improvements $ 11,429 $ 10,357
Buildings and building improvements 45,385 46,860
Leasehold improvements 3,627 2,177
Machinery and equipment 127,612 143,843
Furniture and fixtures 3,066 3,574
Automobiles and trucks 556 468
Computers and software 7,457 6,987
Construction in progress 6,576 4,503
-------- --------
205,708 218,769
Less accumulated depreciation (22,406) (13,673)
-------- --------
Total 183,302 $205,096
======== ========
4. LONG-TERM DEBT
Long term debt consists of the following (in thousands):
INTEREST RATE AT DECEMBER 31,
DECEMBER 31, 1996 1996 1995
Bank Borrowings:
Revolving Credit Facility, due March 31, 2003
Mail-Well I Corporation $ - $ 52,000
Supremex 5.25% 768 6,159
Term Loans, due in quarterly installments
through March 31, 2003
Mail-Well I Corporation 7.375% 70,000 113,684
Supremex 7.375% - 8.75% 65,000 46,544
Acquisition Loans Facility, due in quarterly
installments through March 31, 2003
Mail-Well I Corporation - -
Senior Subordinated Notes, due 2004 10.5% 85,000 85,000
Other 651 -
---------- --------
221,419 303,387
Less current maturities (14,427) (10,905)
---------- --------
Long term debt $ 206,992 $292,482
========== ========
In November 1996, Mail-Well I Corporation amended its bank credit agreement
which now includes a $30.0 million revolving credit facility, $70.0 million of
term loans, a $30.0 million acquisition loans facility and a $12.0 million
letter of credit facility. Mail-Well I Corporation's obligations under the bank
credit agreement are secured by substantially all of the assets of the domestic
subsidiaries of the Company and by 66% of the common stock of Supremex. In
November 1996, Supremex modified its bank credit agreement which now includes a
C$10.0 million revolving credit facility, $65.0 million of term loans and a
C$8.0 million letter of credit facility. Supremex's obligations under the bank
credit agreement are secured by substantially all of the assets of the Company.
Borrowings under the Mail-Well I Corporation bank credit agreement bear interest
at the bank's prime rate plus 0.5% per annum or at LIBOR plus 2.0% per annum, as
elected by the Company. Supremex borrowings under its bank credit agreement bear
interest at the bank's Canadian prime rate plus 0.5% per annum or at the
Canadian Banker's Acceptance discount rate plus 2.0% per annum, as elected by
Supremex. Outstanding letters of credit were $5.8 million at December 31, 1996.
Both of the bank credit agreements and the indenture to the Senior Subordinated
Notes contain certain restrictive covenants that, among other things and with
certain exceptions, limit the ability of the Company to incur additional
indebtedness, prepay subordinated debt, transfer assets outside of the Company,
pay dividends or repurchase shares of common stock. In addition to these
restrictions, the Company is required to satisfy certain financial covenants and
tests and to limit capital expenditures to amounts specified by the bank credit
agreements. The bank credit agreements also include mandatory prepayment
provisions in the event that the Company or Supremex realizes excess cash flow,
as defined in the agreements.
Interest rate cap agreements are used to reduce the potential impact of
increases in the rates on floating-rate long-term debt. At December 31, 1996 and
1995, the Company was party to two interest rate cap agreements. Agreements for
a notional value of $20.0 million provide an effective LIBOR interest rate cap
of 8.5% and expire May 16, 1997; agreements for a notional value of $35.0
million provide an effective LIBOR interest rate cap of 9.0% and expire March
31, 1997. The agreements entitle the Company to receive from counterparties the
amounts, if any, by which the Company's interest payments exceed the interest
rate caps.
The Company entered into foreign currency swap contracts with a third
party to offset exposure to Canadian exchange rate fluctuations on its
U.S. dollar denominated term loans. The foreign currency swap
contracts provide that Supremex pay to the third party principal
payments denominated in fixed rate Canadian dollars and interest at
the Bankers Acceptance rate. The third party will pay the principal
payments on the U.S. dollar denominated term loans in U.S. dollars and
interest at LIBOR. At December 31, 1996, $45.0 million of the Supremex
term loans were hedged by a foreign currency swap contract. In January
1997, the remaining $20.0 million of Supremex term loans were hedged
by a foreign currency swap contract.
The interest rate cap agreements and foreign currency swap contracts
hedge transactions and balances for periods consistent with committed
exposures and do not constitute investments independent of these
exposures. The Company does not hold or issue financial instruments
for trading purposes. The interest rate differential on foreign
currency swap contracts used to hedge underlying debt obligations is
reflected as an adjustment to interest expense over the life of the
swaps.
In 1995, the Company repurchased all outstanding Deferred Coupon Notes
at a total cost of $19,712,000. The Deferred Coupon Notes had a yield
to maturity of 12.89% and were due February 15, 2006. In connection
with this debt extinguishment the Company recognized an extraordinary
loss of $2,412,000, net of taxes of $1,608,000.
The aggregate annual maturities for all long-term debt during the
fiscal years subsequent to December 31, 1996 are (in thousands):
1997 $ 14,427
1998 17,144
1999 18,037
2000 18,022
2001 18,012
2002 and thereafter 135,777
--------
$221,419
========
5. COMMITMENTS AND CONTINGENCIES
In November 1996, the Company entered into a five year agreement
whereby it can sell, on a revolving basis, an undivided percentage
ownership interest in a designated pool of accounts receivable up to a
maximum of $100.0 million. At December 31, 1996, $68.4 million has
been sold under this agreement and the sale has been reflected as a
reduction of accounts receivable in the Company's consolidated balance
sheet. The receivables are sold at a discount of 0.60% above the
prevailing commercial paper rate plus certain other fees. The discount
expense of $0.7 million on the receivables sold has been recorded in
the Company's statement of operations for the year ended December 31,
1996.
In 1996, the Company refinanced certain equipment under a
sale/leaseback arrangement. The equipment was sold for $30.0 million.
The transaction was accounted for as a sale whereby the property was
removed from the Company's financial statements. The equipment was
then leased by the Company and is being accounted for as an operating
lease where the lease payments are based upon LIBOR plus 2.0%. The
total rent expense recorded in 1996 was $0.4 million. At the end of
the lease term, the Company has the option to repurchase the equipment
at the fair market value at that date or to pay to the purchaser $25.0
million. The Company records an additional rent expense that will
accrue to a total which will equal the estimated fair market value of
the equipment at the end of the lease term.
The Company leases various office, warehouse and manufacturing facilities under
operating leases. Minimum annual lease commitments at December 31, 1996 were as
follows (in thousands):
1997 $ 8,532
1998 7,996
1999 7,074
2000 6,520
2001 5,521
2002 and thereafter 11,697
-------
Total $47,340
=======
Lease expense for the years ended December 31, 1996 and 1995 and for the period
February 24, 1994 through December 31, 1994 was $6,531,000, $4,808,000 and
$1,267,000, respectively.
Property, plant and equipment under capital lease totals $3,584,000 at
December 31, 1996. Related accumulated depreciation at December 31, 1996 is
$966,000. Capital lease obligations as of December 31, 1996 are as follows (in
thousands):
Capital lease obligations $5,814
Less: interest 2,308
------
Total principal obligations 3,506
Less: current maturities 548
------
Long-term capital lease obligations $2,958
======
Total capital lease obligations during the fiscal years subsequent to December
31, 1996 are as follows (in thousands):
1997 $ 843
1998 515
1999 353
2000 389
2001 387
2002 and thereafter 3,327
------
Total $5,814
======
The Company is involved in various lawsuits incidental to its businesses. In
management's opinion, an adverse determination against the Company relating to
these suits would not be material to the consolidated financial statements. In
the case of administrative proceedings related to environmental matters
involving governmental authorities, management does not believe that any
imposition of monetary sanctions would be material.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following is a comparison of the fair value and carrying value at
December 31, 1996 and 1995 of the Company's financial instruments (in
thousands):
1996 1995
FAIR CARRYING FAIR CARRYING
VALUE VALUE VALUE VALUE
Financial assets
Cash and cash equivalents $ 9,656 $ 9,656 $ - $ -
Receivables (trade) 40,612 40,612 95,550 95,550
Foreign currency swap contracts 161 161 - -
Financial liabilities
Revolving credit loans 768 768 58,159 58,159
Term loans 135,000 135,000 160,228 160,228
Capital leases 3,506 3,506 4,017 4,017
Senior subordinated notes 84,575 85,000 82,025 85,000
Interest rate cap agreements 0 0 0 0
CASH AND CASH EQUIVALENTS AND RECEIVABLES - The carrying value of cash and
cash equivalents and receivables approximates fair value due to the short
term maturities of these investments.
LONG-TERM DEBT - The fair value of the Company's long term debt to banks is
based on quoted interest rates for borrowings of similar quality and terms.
The fair value of the senior subordinated notes is based upon quoted market
prices. The fair value of capital leases is based on lease arrangements with
similar terms.
INTEREST RATE CAP AGREEMENTS AND FOREIGN CURRENCY SWAP CONTRACTS - Fair
values reflect the estimated amounts that the Company would receive or pay to
terminate the contracts at the reporting date based on quoted market prices
of comparable contracts.
CONCENTRATIONS OF CREDIT RISK - Financial instruments which potentially
subject the Company to significant concentrations of credit risk consist
primarily of accounts receivable. Concentrations of credit risk with respect
to accounts receivable are limited due to the large number of entities
comprising the Company's customer base and their dispersion across many
different industries and geographic areas. As of December 31, 1996, the
Company had no significant concentrations of credit risk as the largest
customer's receivable balance was less than 5.1% of total receivables.
7. STOCKHOLDERS' EQUITY AND STOCK OPTION PLAN
PREFERRED STOCK - The Company authorized 25,000 shares of $0.01 par value
preferred stock. No shares have been issued at December 31, 1996 or 1995.
STOCK OPTION PLAN - During 1994, the board of directors approved the adoption
of a stock option plan which provided for the grant of options to purchase up
to 355,250 shares of Company common stock to directors and key employees
selected by the compensation committee. During 1995, the board of directors
increased the number of options under the stock option plan by 284,200 to
639,450. The stock options granted in 1995 and 146,500 of the stock options
granted in 1996 vest over a four year period and expire over a maximum period
of ten years from the grant date. The remaining stock options granted in 1996
were made to directors of the Company and vested immediately. They are
exercisable six months after the date of grant and expire ten years from the
grant date or upon termination of directorship. The stock options granted to
the directors are subject to shareholder approval at the Company's annual
meeting on May 7, 1997. The exercise price of
all options granted equals or exceeds the fair market value of the Company's
common stock on the date of grant.
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
EXERCISE CONTRACTUAL EXERCISE
OPTIONS PRICE LIFE PRICE
1995
Granted 333,858 $3.96 - $7.74 $ 4.58
Exercised (53,642) $ 7.74 $ 7.74
Canceled (2,558) $ 3.96 $ 3.96
-------
Outstanding, December 31, 1995 277,658 $ 3.96 - 4.28 8.8 years $ 3.98
1996
Granted 160,500 $9.03 - 11.20 $11.01
Exercised (10,086) $ 3.96 $ 3.96
Canceled (2,558) $ 3.96 $ 3.96
-------
Outstanding, December 31, 1996 425,514 $3.96 - 11.20 9.2 years $ 6.63
=======
Vested and exercisable at December 31, 1996 73,325 $3.96 - 11.20 $4.94
=======
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related Interpretations in accounting for its stock option plan.
Accordingly, no compensation cost has been recognized. Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123") was issued and, if fully adopted by the Company, would change the method
for recognition of cost. Under SFAS 123, cost is based upon the fair value of
each option at the date of grant using an option-pricing model that takes into
account as of the grant date the exercise price and expected life of the option,
the current price of the underlying stock and its expected volatility, expected
dividends on the stock and the risk-free interest rate for the expected term of
the option. Had compensation cost been determined based on the guidance in SFAS
123, the Company's net income and earnings per share would have been reduced to
the pro forma amounts indicated below. The weighted average fair values of
options granted in 1996 and 1995 were $5.15 and $1.74, respectively.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for
grants on March 1, 1995, May 8, 1996 and October 1, 1996, respectively: dividend
yield of 0 percent for all grants; expected volatility of 33%, 38% and 44%;
risk-free interest rates of 7.2%, 6.2% and 6.7%; and expected lives of 5 and 6
years for the March 1, 1995 options, 4 years for the May 8, 1996 options and 5
and 6 years for the October 1, 1996 options.
1996 1995
AS PRO AS PRO
REPORTED FORMA REPORTED FORMA
(in thousands, except per share amounts)
Income before extraordinary item $16,927 $16,725 $10,373 $10,309
Extraordinary item - - 2,412 2,412
Net income 16,927 16,725 7,961 7,897
Income per share before extraordinary item $ 1.42 $ 1.40 $ 1.36 $ 1.35
Net income per share $ 1.42 $ 1.40 $ 1.05 $ 1.04
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. Additional awards in future years are anticipated.
exit
8. INCOME TAXES
Taxes are based on income before income taxes and extraordinary item as
follows (in thousands):
1996 1995 1994
Domestic $20,853 $14,412 $4,914
Foreign 8,337 3,180 -
------- ------- ------
$29,190 $17,592 $4,914
======= ======= ======
The provision (benefit) for income taxes consists of the following (in
thousands):
1996 1995 1994
Current:
Federal $1,132 $ 4,158 $ 291
Foreign 2,138 1,563 -
State 0 286 124
------ ------- ------
$3,270 $ 6,007 $ 415
====== ======= ======
Deferred:
Federal $6,633 $ 848 $1,411
Foreign 1,475 (207) -
State 885 571 345
------ ------- ------
$8,993 $ 1,212 $1,756
====== ======= ======
Components of the Company's deferred tax liabilities and assets at December 31
are as follows (in thousands):
1996 1995
Deferred tax assets:
Alternative minimum tax credit
carryforwards $ 5,633 $4,074
Net operating loss
carryforwards 4,377 2,996
Compensation related accruals 84 2,875
Intangibles 3,501 2,769
Miscellaneous accruals and
reserves 3,458 1,446
Accounts receivable and
inventories 1,370 1,336
Land basis differences 625 632
Pension liability adjustment 79 132
Valuation allowance (1,038) (527)
------- -------
Total deferred tax assets 18,089 15,733
------- -------
Deferred tax liabilities:
Property, plant and equipment 33,783 25,142
Deferred financing costs $ 1,542 $ 0
Intangibles 3,022 1,388
Prepaids and inventories 586 210
------- -------
Total deferred tax
liabilities 38,933 26,740
------- -------
Deferred tax liability, net $20,844 $11,007
======= =======
The change in the valuation allowance from the prior year is due to an AMT
carryforward purchased from SP for which the Company has recorded a
valuation allowance.
The difference between the statutory federal income tax rate and the
Company's effective income tax rate for the years ended December 31, 1996
and 1995 and the period ended December 31, 1994 is summarized as follows:
1996 1995 1994
Statutory federal income tax rate 34.0% 34.0% 34.0%
State income tax, net of federal benefit 3.8 5.0 8.3
Goodwill amortization 2.1 0.7 0.0
Employee stock ownership plan 1.6 2.1 0.0
Other 0.5 (0.8) 1.9
---- ---- ----
Effective income tax rate 42.0% 41.0% 44.2%
==== ==== ====
At December 31, 1996, the following net federal operating loss and tax
credit carryforwards are available. The Company is limited in the amounts
of net operating loss carryforwards which may be used in any one year.
OPERATING EXPIRATION TAX
LOSSES DATES CREDITS
Consolidated Company $ 4,326 2009-2011 $3,764
Acquired from Pavey 571 2008 155
Acquired from GAC 6,698 2004-2008 1,203
Acquired from SP - 511
------- ------
Total $11,595 $5,633
======= ======
9. BENEFIT PLANS
U.S. PENSION PLANS - The Company sponsors three noncontributory defined
benefit pension plans under collective bargaining agreements with unions
representing certain employees in the U.S. The Company also has obligations
under a noncontributory defined benefit plan, which was curtailed in 1994.
The continuing plans provide for benefits based on either a percentage of
pay or a dollar multiplier, and years of credited service. Pension costs
are funded so as to meet minimum funding requirements under the Employee
Retirement Income Security Act of 1974. Pension assets are invested
primarily in bank common trust funds.
Accumulated plan benefits for all plans exceed plan assets. The following table
summarizes the funded status of the plans and the related amounts that are
recognized in the consolidated balance sheets at December 31 (in thousands):
1996 1995
Actuarial present value of benefit obligations:
Vested benefit obligation $4,306 $3,868
Nonvested benefit obligation 617 638
------ ------
Accumulated benefit obligation 4,923 4,506
Effect of projected future compensation levels 267 375
------ ------
Projected benefit obligation for services rendered to date 5,190 4,881
Less plan assets at fair value 4,382 2,625
------ ------
Projected benefit obligation in excess of plan assets 808 2,256
Unrecognized prior service costs (161) (174)
Unrecognized net gain (loss) 3 (727)
Additional minimum liability 222 517
------ ------
Accrued pension cost $ 872 $1,872
====== ======
The provisions of SFAS No. 87, "Employers' Accounting for Pensions," require the
recognition of an additional minimum liability for each defined benefit plan for
which the accumulated benefit obligation exceeds plan assets. This amount has
been recorded as a long-term liability with an offsetting intangible asset.
Because the asset recognized may not exceed the amount of unrecognized prior
service cost and transition obligation on an individual plan basis, the balance,
net of tax benefits, is reported as a separate reduction of stockholders' equity
at December 31, 1996 and 1995, as follows (in thousands):
1996 1995
Minimum liability adjustment $ 222 $ 517
Intangible asset 33 174
----- -----
189 343
Tax benefit 79 132
----- -----
Pension liability adjustment to
stockholders' equity $ 110 $ 211
===== =====
Net pension expense for the plans included the following components (in thousands):
1996 1995 1994
Service cost $ 792 $ 700 $ 308
Interest cost on projected benefit obligation 312 281 209
Actual return on plan assets (557) (426) (54)
Net amortization and deferral 359 305 (208)
----- ----- -----
Net periodic pension cost $ 906 $ 860 $ 255
===== ===== =====
The significant assumptions used as of December 31 in computing the net pension
expense and funded status information shown above are as follows:
1996 1995 1994
Weighted average discount rate 7.0% 7.0% 8.5%
Expected long term rate of return on assets 8.5% 8.5% 8.5%
Rate of compensation increase 4.0% 4.0% 4.0%
Certain other U.S. employees covered by union agreements are included
in multi-employer pension plans to which the Company makes contributions in
accordance with the contractual union agreements. Such contributions are made
on a monthly basis in accordance with the requirements of the plans and the
actuarial computations and assumptions of the administrators of the plans.
Contributions to such multi-employer plans were $721,000, $151,000 and $0 for
1996, 1995 and 1994, respectively. Benefits and net asset data for these
multi-employer pension plans for union employees are not available.
CANADIAN PENSION PLANS - Supremex maintains five defined benefit
pension plans covering certain salaried and hourly employees who have bargained
for such benefits. Supremex's policy is to contribute annually at least the
minimum amount required by law. Pension funds are invested primarily in mutual
funds. The actuarial present value of accumulated benefits related to
Supremex's plans at December 31, 1996 and 1995 was $34,193,000 and $12,632,000,
respectively, compared with net assets available for benefits of $25,660,000 and
$13,952,000 at December 31, 1996 and 1995, respectively. Included in the
consolidated balance sheets at December 31, 1996 and 1995 are pension
liabilities for the Supremex plans of $412,000 and $394,000, respectively.
Net pension expense for the Supremex defined benefit pension plans
included the following components (in thousands):
1996 1995
Service cost $ 321 $ 141
Interest cost on projected benefit obligation 867 334
Actual return on plan assets (1,014) (377)
Net amortization and deferral (93) (7)
------- -----
Net periodic pension cost $ 81 $ 91
======= =====
The significant assumptions used as of December 31, 1996 and 1995 in computing
net periodic pension expense and funded status information shown above are as
follows:
1996 1995
Weighted average discount rate 8.5% 8.5%
Expected long term rate of return on assets 8.5% 8.5%
Rate of compensation increase 5.0% 5.0%
EMPLOYEE STOCK OWNERSHIP PLAN - In 1994, the Company established an ESOP for
certain U.S. employees. The ESOP borrowed monies from the Company to purchase
1,298,848 shares of Company common stock. These shares are held in trust and are
issued to employees' accounts in the ESOP as the loan is repaid. The loan
obligation of the ESOP is considered unearned employee benefit expense and, as
such, is recorded as a reduction of the Company's stockholders' equity. The
Company's contributions to the ESOP are used to repay the loan principal and
interest. Both the loan obligation and the unearned benefit expense are reduced
by the amount of loan principal repayments made by the ESOP. Amounts charged to
expense are based on the average market value of shares allocated to
participants and were $1,973,000 and $1,612,000 for the years ended December 31,
1996 and 1995 and $752,000 for the period from February 24, 1994 through
December 31, 1994.
At December 31, 1996 and 1995 the ESOP held the following shares of common
stock:
1996 1995
Shares allocated to participant accounts 412,116 194,708
Shares committed to be allocated to participant
accounts in connection with current year contribution 185,823 217,408
Unallocated shares held for future years contributions 700,909 886,732
--------- ---------
Total 1,298,848 1,298,848
========= =========
The fair market value of the unallocated shares of common stock held for future
contributions was $11,477,000 and $10,565,000 at December 31, 1996 and 1995,
respectively.
401(K) PLANS - The Company has three employee savings plans which are designed
to qualify under Section 401(k) of the Internal Revenue Code. All U.S. salaried
and non-union hourly employees who meet the eligibility requirements are covered
under one of these plans. In addition, U.S. employees covered by union
agreements where these benefits have been collectively bargained are also
covered by one of these plans. Each of the plans allows eligible employees to
make salary reduction contributions. The provisions of certain plans include
mandatory or discretionary contributions by the Company. Amounts charged to
expense in connection with Company contributions were $1,620,000 and $1,656,000
for the years ended December 31, 1996 and 1995, respectively, and $694,000 for
the period from February 24, 1994 through December 31, 1994.
PROFIT DISTRIBUTION PLAN - The Company has established a Profit Distribution
Plan covering full time employees and executive officers of certain
subsidiaries. The Profit Distribution Plan is administered by the Compensation
Committee of the Board of Directors. Amounts paid under the Profit Distribution
Plan are based on the Company's financial performance. Distributions under the
Profit Distribution Plan of $1,268,000 and $1,312,000 were expensed for the
years ended December 31, 1996 and 1995, respectively, and $500,000 was expensed
for the period from February 24, 1994 through December 31, 1994.
10. SEGMENT INFORMATION (IN THOUSANDS)
The Company's operations by business segment and geographic area were
as follows:
CANADA UNITED STATES
-------- -----------------------------------
ENVELOPE ENVELOPE HIGH IMPACT
PRINTING PRINTING PRINTING CORPORATE TOTAL
-------- -------- ------------- ---------- --------
Net sales:
1996 $ 86,928 $551,225 $140,371 $778,524
1995 38,759 510,660 47,384 596,803
1994 225,678 225,678
Operating income:
1996 13,784 52,376 6,010 $(11,308) 60,862
1995 5,797 50,995 993 (10,191) 47,594
1994 24,408 (5,851) 18,557
Identifiable assets:
1996 100,687 245,312 118,368 6,579 470,946
1995 79,501 306,187 112,407 2,341 500,436
1994 305,091 2,598 307,689
Depreciation and
amortization:
1996 2,527 6,076 4,792 5,681 19,076
1995 1,031 9,975 1,395 297 12,698
1994 5,988 77 6,065
Capital expenditures:
1996 1,711 11,431 5,600 18,742
1995 426 11,969 521 850 13,766
1994 4,307 167 4,474
The corporate column includes expenses not allocated to the other segments. The
1996 amounts include corporate office administrative expenses of $7,136,000 and
amortization of intangibles of $4,172,000.
11. SUMMARY QUARTERLY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS) (UNAUDITED)
QUARTERS ENDED
1996 12/31/96 9/30/96 6/30/96 3/31/96
Net sales $ 199,202 $200,487 $185,110 $193,725
Gross profit 45,922 43,934 39,382 37,695
Net income 5,502 5,046 3,612 2,767
Net income per share $ 0.46 $ 0.42 $ 0.30 $ 0.23
QUARTERS ENDED
1995 12/31/95 9/30/95 6/30/95 3/31/95
Net sales $ 182,129 $160,836 $129,439 $124,399
Gross profit 37,996 30,815 28,328 28,860
Income before
extraordinary item 3,992 1,470 2,387 2,524
Extraordinary item 2,412
Net income 1,580 1,470 2,387 2,524
Income per share before
extraordinary item $ 0.34 $ 0.22 $ 0.37 $ 0.40
Net income per share $ 0.13 0.22 $ 0.37 $ 0.40
PERIOD FROM
QUARTERS ENDED 2/24/94 TO
1994 12/31/94 9/30/94 6/30/94 3/31/94
Net sales $ 71,428 $ 62,356 $ 66,076 $ 25,818
Gross profit 14,679 14,255 14,117 5,922
Net income 1,323 268 420 732
Net income per share $ 0.23 $ 0.05 $ 0.07 $ 0.12
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
NAME AGE POSITION(S)
- ---- --- -----------
Gerald F. Mahoney 53 Director, Chairman of the Board
and Chief Executive
Officer
Robert J. Terry 56 Director, President and
Chief Operating
Officer
Paul V. Reilly 44 Vice President-Finance and
Chief Financial
Officer
Jana L. Brown 45 Vice President-Controller
Roger Wertheimer 38 Vice President-General Counsel and
Secretary
Frank J. Hevrdejs (2) 51 Director
Susan O. Rheney (1) 37 Director
Frank P. Diassi (2) 64 Director
J. Bruce Duty (1)(2) 45 Director
Jerome W. Pickholz (1) 64 Director
J. Virgil Waggoner 69 Director
- -------------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
GERALD F. MAHONEY has been a director, Chairman of the Board and Chief Executive
Officer of the Company since February 1994. He was Chairman of the Board,
President and Chief Executive Officer of Pavey Envelope and Tag Corp. from
January 1991, until it became a subsidiary of the Company in February 1994.
From January 1990 to the present, he has also served as President of Saddle
River Capital, an investment banking firm. Mr. Mahoney devotes substantially
all of his time to the Company in his capacity as Chairman and CEO. From June
1987 to September 1989, Mr. Mahoney served as President of Transkrit Corp., a
business forms manufacturing company.
ROBERT J. TERRY has been a director, President and Chief Operating Officer of
the Company since February 1994. He originally joined GP Envelope, the
Company's predecessor, in May 1964. Mr. Terry served as Executive Vice
President of the Mail-Well Envelope Division of Georgia Pacific from December
1991 to February 1994, and served as Regional Vice President of Butler Paper
Company, a subsidiary of Georgia-Pacific, and as Vice President of Georgia
Pacific's Mail-Well Envelope Division prior to that. Mr. Terry has served on
the Board of the Envelope Manufacturers Association of America since 1992.
PAUL V. REILLY has been Vice-President-Finance and Chief Financial Officer of
the Company since June 1995. Mr. Reilly spent 14 years with Polychrome
Corporation, a prepress supplier to the printing industry, where he held a
number of positions including Assistant Corporate Treasurer, Corporate
Treasurer, Vice President and Chief Financial Officer, and General Manager of
United States Operations. During 1994 and 1995, Mr. Reilly worked with Saddle
River Capital, an investment banking firm which purchased and managed small
businesses and more recently as Vice President with a direct marketer of
educational materials. Mr. Reilly is a Certified Public Accountant.
JANA L. BROWN has been Vice President-Controller of the Company since June 1995.
From February 1994 to June 1995, Ms. Brown served as Vice President of Finance
of the Company. She joined GP Envelope as Division Controller in December 1990.
Previously, she served as Controller for a Georgia-Pacific subsidiary, Hopper
Paper, from January 1988 to November 1990 and as a Controller for a Georgia-
Pacific container plant in West Monroe, Louisiana from May 1986 to December
1987.
ROGER WERTHEIMER has been Vice President-General Counsel and Secretary of the
Company since February 1995. Mr. Wertheimer has been engaged in the practice of
law since 1984. He previously served as Corporate Counsel for PACE Membership
Warehouse, Inc., from 1988 to 1994 and practiced as a private legal practitioner
from March 1994 until February 1995, when he joined the Company.
FRANK J. HEVRDEJS has been a director of the Company since its inception in
November 1993. In 1982, Mr. Hevrdejs and co-founded The Sterling Group, Inc., a
major management buyout company. Mr. Hevrdejs is a principal and president of
The Sterling Group, Inc. Additionally, he is Chairman of First Sterling
Ventures, Corp., an investment company, Enduro Holdings, Inc., a structural and
electrical manufacturing company, and Fibreglass Holdings, Inc., a truck
accessory manufacturer. He is also a board member and a member of the executive
committee of Purina Mills, Inc., an animal feed producer, and a board member of
Eagle U.S.A., an air-freight company. Mr. Hevrdejs serves as Chairman of the
Compensation Committee of the Board of Directors.
SUSAN O. RHENEY has been a director since the inception of the Company in
November 1993. She is currently a principal of The Sterling Group, Inc. and has
been since 1992. Ms. Rheney worked as an independent financial consultant from
December 1990 to January 1992. Prior to that time, from June 1987 to November
1990, she was an associate with The Sterling Group, Inc. Ms. Rheney serves as
Chairwoman of the Audit Committee of the Board of Directors.
FRANK P. DIASSI has been a director of the Company since February 1994. He is
currently Managing General Partner of The Unicorn Group, an investment company.
He organized The Unicorn Group in 1982 and has originated investments in over 39
entrepreneurial companies. His primary area of interest is in chemical and
related industries. Since August 1996, Mr. Diassi has been Chairman of Sterling
Chemicals, Inc., a manufacturer of commodity petrochemicals and chemicals used
primarily in the pulp and paper industry. He was a founding director of
Arcadian Corporation, the largest nitrogen fertilizer company in North America.
Mr. Diassi was formerly a Director and Chairman of the Finance Committee of
Arcadian Corporation from 1989 to 1994. Mr. Diassi serves as a member of the
Compensation Committee of the Board of Directors.
J. BRUCE DUTY has been a director of the Company since February 1994. Since
July 1993 he has been Senior Vice President of Capital Southwest Corporation, a
venture capital investment firm. From July 1982 to June 1993, he was Vice
President of Capital Southwest Corporation. Mr. Duty serves as a member of the
Audit Committee and the Compensation Committee of the Board of Directors.
JEROME W. PICKHOLZ has been a director of the Company since June 1994. From
1978 to 1994, he was Chief Executive Officer of Ogilvy & Mather Direct
Worldwide, a direct advertising agency. From 1994 to June 1995, he served as
Chairman of the Board of Ogilvy & Mather Direct Worldwide where he is now
Chairman Emeritus. Since January 1, 1996, Mr. Pickholz has served as founder
and Chairman of Pickholz, Tweedy, Cowan, L.L.C., a marketing communications
company. Mr. Pickholz serves as a member of the Audit Committee of the Board of
Directors.
W. THOMAS STEPHENS has been a director of the Company since March 1996. Since
September 1996, Mr. Stephens has been retired from Schuller Corporation. From
1986 to September, 1996, he was Chairman, Chief Executive Officer and President
of Schuller Corporation (formerly known as Manville Corporation), a building
materials company. Mr. Stephens was Chief Executive Officer and President from
1986 to 1996 and Chairman from June 1990 to September 1996. He also served as
Executive Vice President and Chief Financial Officer from 1984 to 1986. Mr.
Stephens serves as a director on the boards of Ball Corporation, an aerospace
and glass and food packaging company, Public Service of Colorado and Stillwater
Mining Company.
J. VIRGIL WAGGONER has been a director of the Company since February 1994.
Since August 1996, Mr. Waggoner has been retired. From 1986 to August 1996 he
was President, Chief Executive Officer and a director of Sterling Chemicals,
Inc., a manufacturer of commodity petrochemicals and chemicals used primarily in
the pulp and paper industry. Mr. Waggoner serves as a director of Kirby
Corporation, a transport company.
ITEM 11. EXECUTIVE COMPENSATION
The sections labeled "Director Compensation", "Compensation Committee
Interlocks and Insider Participation", "Certain Relationships and Related
Transactions", "Executive Compensation", "Summary Compensation Table", "Option
Grants in the Last Fiscal Year", "Aggregated Option Exercises in the Last Fiscal
Year and Fiscal Year End Option Values", "Compensation Committee Report on
Executive Compensation" and "Stock Price Performance Graph" appearing on pages
nine through sixteen in the Company's Proxy Statement filed in connection with
the 1997 Annual Meeting of Stockholders are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section labeled "Security Ownership of Certain Beneficial Owners
and Management" appearing on pages six through nine in the Company's Proxy
Statement filed in connection with the 1997 Annual Meeting of Stockholders is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The sections labeled "Compensation Committee Interlocks and Insider
Participation" and "Certain Relationships and Related Transactions" appearing on
page six in the Company's Proxy Statement filed in connection with the 1997
Annual Meeting of Stockholder's is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
Included in Part II, Item 8 of the Report:
Page
----
Mail-Well, Inc. and Subsidiaries
Independent Auditors' Report........................................ 28
Consolidated Balance Sheets as of December 31, 1996 and 1995........ 29
Consolidated Statements of Operations for the Years Ended
December 31, 1996 and 1995 and for the period from February 24, 1994
through December 31, 1994........................................... 31
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996 and 1995 and for the Period from February 24, 1994
through December 31, 1994........................................... 32
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31 , 1996 and 1995 and for the period from
February 24 , 1994 through December 31, 1994........................ 33
Notes to Consolidated Financial Statements.......................... 34
(a)(2) FINANCIAL STATEMENT SCHEDULES
Included in Part IV of the Report:
Page
Schedule I Condensed Financial Statements of the Company and
Footnotes to Condensed Financial Statements for
the years ended December 31, 1996 and 1995 and for
the period from February 24, 1994 through December
31, 1994........................................... 60
Schedule II Valuation and qualifying accounts for the years
ended December 31, 1996 and 1995 and for the
period February 24, 1994 through December 31, 1994. 64
(a)(3) EXHIBITS
Exhibit
Number Description of Exhibit
- ------ ----------------------
3.1 Certificate of Incorporation of the Company, as amended - incorporated
by reference from Exhibit 3.1 of the Company's Registration Statement
on Form S-1 dated March 25, 1994.
3.2 Certificate of Amendment of Certificate of Incorporation of the
Company dated December 8, 1994 -incorporated by reference from Exhibit
3.1 of the Company's Registration Statement on Form S-1 dated May 9,
1995.
3.3 Certificate of Amendment of Certificate of Incorporation of the
Company - incorporated by reference from Exhibit 3.3 of the Company's
Registration Statement on Form S-1 dated September 21, 1995.
3.4 Bylaws of the Company - incorporated by reference from Exhibit 3.4 of
the Company's Registration Statement on Form S-1 dated September 21,
1995.
4.1 Form of Certificate representing the Common Stock, par value $0.01 per
share, of the Company -incorporated by reference from Exhibit 4.1 of
the Company's Registration Statement on Form S-1 dated March 25, 1994.
4.2 Indenture dated February 24, 1994 by and between the Company and
Shawmut Bank, National Association, as Trustee, with respect to the
$39,500,000 in aggregate principal amount of Original Senior Deferred
Coupon Notes and Exchange Senior Deferred Coupon Notes due 2006,
including the form of Deferred Coupon Note - incorporated by reference
from Exhibit 4.2 of the Company's Registration Statement on Form S-1
dated March 25, 1994.
4.3 Indenture dated as of February 24, 1994 by and between M-W Corp. and
Shawmut Bank, National Association, as Trustee, with respect to the 10-
1/2% Original Senior Subordinated Notes and the 10-1/2% Exchange
Senior Subordinated Notes due 2004, including the form of Note and the
guarantees of the Company, Wisco and Pavey - incorporated by reference
from Exhibit 4.3 of the Company's Registration Statement on Form S-1
dated March 25, 1994.
4.3.1 Supplemental Indenture dated July 31, 1995 to the Indenture identified
in Exhibit 4.3 - incorporated by reference from Exhibit 4.4.1 of the
Company's Registration Statement on Form S-1 dated September 21, 1995.
4.3.2 Form of Second Supplemental Indenture to the Indenture identified in
Exhibit 4.3 -incorporated by reference from Exhibit 4.4.2 of the
Company's Registration Statement on Form S-1 dated September 21, 1995.
4.4 Form of Stockholders Agreement among the Company and certain holders
of the Common Stock effective as of February 24, 1994 and Amendment
No. 1 thereto - incorporated by reference from Exhibit 4.4 of the
Company's Registration Statement on Form S-1 dated March 25, 1994.
4.5 Form of Employee Stockholders Agreement among the Company and certain
employee holders of the Common Stock effective as of February 24, 1994 -
incorporated by reference from Exhibit 4.5 of the Company's
Registration Statement on Form S-1 dated March 25, 1994.
4.6 Form of American Mail-Well Employee Stockholders Agreement among the
Company and certain holders of the Common Stock - incorporated by
reference from Exhibit 10.44 of the Company's Registration Statement
on Form S-1 dated May 9, 1995.
4.7 Form of Registration Rights Agreement among the Company and certain
holders of the Common Stock effective as of February 24, 1994 -
incorporated by reference from Exhibit 4.6 of the Company's
Registration Statement on Form S-1 dated March 25, 1994.
4.8 Form of Registration Rights Agreement among M-W Corp., the Company and
Merrill Lynch effective as of February 24, 1994 - incorporated by
reference from Exhibit 4.7 of the Company's Registration Statement on
Form S-1 dated March 25, 1994.
10.1 Asset Purchase Agreement dated December 7, 1993 by and among GP
Envelope, G-P, M- W Corp. and the Company, as amended - incorporated
by reference from Exhibit 10.1 of the Company's Registration Statement
on Form S-1 dated March 25, 1994.
10.2 Letter Agreement dated December 13, 1993 by and between Sterling, M-W
Corp. and the Company relating to compensation payable by M-W Corp.
and the Company to Sterling for services performed in connection with
the Acquisition and the financing thereof - incorporated by reference
from Exhibit 10.2 of the Company's Registration Statement on Form S-1
dated March 25, 1994.
10.3 Letter Agreement dated December 13, 1993 by and between The Unicorn
Group and Sterling regarding engagement of The Unicorn Group by
Sterling -incorporated by
reference from Exhibit 10.3 of the Company's Registration Statement on
Form S-1 dated March 25, 1994.
10.4 Letter Agreement dated December 13, 1993 from Saddle River Capital to
Sterling regarding engagement of Saddle River Capital by Sterling -
incorporated by reference from Exhibit 10.4 of the Company's
Registration Statement on Form S-1 dated March 25, 1994.
10.5 Communications Paper Supply Agreement dated February 24, 1994 between
G-P and M-W Corp. -incorporated by reference from Exhibit 10.11 of the
Company's Registration Statement on Form S-1 dated March 25, 1994.
10.6 Computer Services Agreement dated February 24, 1994 between G-P and M-
W Corp. -incorporated by reference from exhibit 10.12 of the Company's
Registration Statement on Form S-1 dated March 25, 1994.
10.7 Trademark License Agreement dated February 24, 1994 by and among G-P,
Great Northern Nekoosa Corporation and M-W Corp. - incorporated by
reference from Exhibit 10.13 of the Company's Registration Statement
on Form S-1 dated March 25, 1994.
10.8 Securities Exchange Agreement dated February 22, 1994 by and among the
Company First Sterling, Unicorn, The Unicorn Group and Gerald F.
Mahoney, including the form of Escrow Agreement by and among the
parties to the Securities Exchange Agreement - incorporated by
reference from Exhibit 10.14 of the Company's Registration Statement
on Form S-1 dated March 25, 1994.
10.9 Tax Sharing Agreement dated February 24, 1994 among the Company, M-W
Corp., Wisco and Pavey - incorporated by reference from Exhibit 10.15
of the Company's Registration Statement on Form S-1 dated March 25,
1994.
10.10 General Indemnity Agreement between M-W Corp. and Amwest Surety
Insurance Company together with form of Letter of Credit -incorporated
by reference from Exhibit 10.16 of the Company's Registration
Statement on Form S-1 dated March 25, 1994.
10.11 Form of Indemnity Agreement between the Company and each of its
officers and directors -incorporated by reference from Exhibit 10.17
of the Company's Registration Statement on Form S-1 dated March 25,
1994.
10.12 Form of Indemnity Agreement between M-W Corp. and each of its officers
and directors -incorporated by reference from Exhibit 10.18 of the
Company's Registration Statement on Form S-1 dated March 25, 1994.
10.13 Form of M-W Corp. Employee Stock Ownership Plan effective as of
February 23, 1994 and related Employee Stock Ownership Plan Trust
Agreement -incorporated by reference from Exhibit 10.19 of the
Company's Registration Statement on Form S-1 dated March 25, 1994.
10.14 Form of M-W Corp. 401(k) Savings Retirement Plan - incorporated by
reference from Exhibit 10.20 of the Company's Registration Statement
on Form S-1 dated March 25, 1994.
10.15 Company 1994 Stock Option Plan, as amended - incorporated by reference
from Exhibit 10.15 of the Company's Registration Statement on Form S-1
dated September 21, 1995.
10.16 Form of the Company Incentive Stock Option Agreement - incorporated by
reference from Exhibit 10.22 of the Company's Registration Statement
on Form S-1 dated March 25, 1994.
10.17 Form of the Company Nonqualified Stock Option Agreement - incorporated
by from Exhibit 10.23 of the Company's Registration Statement on Form
S-1 dated March 25, 1994.
10.18 Asset Purchase Agreement dated October 31, 1994 by and between
American and M-W Corp., as amended - incorporated by reference from
Exhibit 10.30 of the Company's Registration Statement on Form S-1
dated May 9, 1995.
10.19 Transition Services Agreement dated December 19, 1994 by and among CC
Industries or American and M-W Corp. - incorporated by reference from
Exhibit 10.31 of the Company's Registration Statement on Form S-1
dated May 9, 1995.
10.20 Guaranty dated December 19, 1994, executed by CC Industries in favor
of M-W Corp. - incorporated by reference from Exhibit 10.33 of the
Company's Registration Statement on Form S-1 dated May 9, 1995.
10.21 Commitment Letter dated December 19, 1994, from Henry Crown & Company
to M-W Corp. -incorporated by reference from Exhibit 10.34 of the
Company's Registration Statement on Form S-1 dated May 9, 1995.
10.22 Second Amended and Restated Credit Agreement dated as of July 31, 1995
by and among M-W Corp., the banks parties thereto and Banque Paribas,
as Agent -incorporated by reference from Exhibit 10.22 of the
Company's Registration Statement on Form S-1 dated September 21, 1995.
10.23 Credit Agreement dated as of July 31, 1995 by and among Supremex, M-W
Corp., the banks parties thereto and Bank Paribas, as Agent -
incorporated by reference from Exhibit 10.23 of the Company's
Registration Statement on Form S-1 dated September 21, 1995.
10.24 Second Amended and Restated Guaranty Agreement dated as of July 31,
1995, executed by the Company in favor of Banque Paribas, as Agent -
incorporated by reference from Exhibit 10.24 of the Company's
Registration Statement on Form S-1 dated September 21, 1995.
10.25 Share Purchase Agreement dated July 20, 1995, by and among the
shareholders of Supremex, 3159051 Canada Inc. and Schroder Investment
Canada Limited and Schroder Venture Managers (North America) Inc. -
incorporated by reference from Exhibit 10.25 of the Company's
Registration Statement on Form S-1 dated September 21, 1995.
10.26 Indemnification Escrow Agent dated July 31, 1995, by and among 3159051
Canada Inc., Royal Trust Company of Canada and Schroder Investment
Canada Limited and Schroder Venture Mangers (North America) Inc. -
incorporated by reference from Exhibit 10.26 of the Company's'
Registration Statement on Form S-1 dated September 21, 1995.
10.27 Guaranty dated July 31, 1995, executed by M-W Corp. in favor of
Schroder Investment Canada Limited and Schroder Venture Mangers (North
America) Inc., as Agents - incorporated by reference from Exhibit
10.27 of the Company's Registration Statement on Form S-1 dated
September 21, 1995.
10.28 Securities Purchase Agreement dated as of August 2, 1995, as amended,
by and among GAC Acquisition Company, Inc., GAC and the
securityholders of GAC and McCown De Leeuw & Co., as Agents -
incorporated by reference from Exhibit 10.28 of the Company's
Registration Statement on Form S-1 dated September 21, 1995.
10.29 Escrow Agreement dated as of August 2, 1995, by and among GAC
Acquisition Company, Inc., GAC and securityholders of GAC and McCown
De Leeuw & Co., as Agents - incorporated by reference from Exhibit
10.29 of the Company's Registration Statement on Form S-1 dated
September 21, 1995.
10.30 Guaranty dated as of August 2, 1995, by M-W Corp. in favor of McCown
De Leeuw & Co., as Agents - incorporated by reference from Exhibit
10.30 of the Company's Registration Statement on Form S-1 dated
September 21, 1995.
10.31 Second Amendment to Second Amended and Restated Credit Agreement -
incorporated by reference from Exhibit 10.31 of the Company's Form 10-
Q dated March 31, 1996.
10.32 Asset Purchase Agreement dated April 26, 1996 by and between Quality
Park Products, Inc. and Mail-Well I Corporation - incorporated by
reference from Exhibit 1 of the Company's Form 8-K dated May 2, 1996.
10.33* Acquisition Agreement and Plan of Share Exchange by and among Graphic
Arts Center, Inc. and Shepard Poorman Communications Corporation dated
November 6, 1996.
10.34* Amendment No. 1 to Acquisition Agreement and Plan of Share Exchange by
and among Graphic Arts Center, Inc. and Shepard Poorman Communications
Corporation dated November 6, 1996.
10.35* Asset Purchase Agreement dated as of October 15, 1996 by and between
Supremex, Inc. and PNG Products, Inc. Pac National Group and PNG
Envelope Internationale, Inc.
10.36* Master Lease Agreement dated as of August 1, 1996 between General
Electric Capital Corporation and Mail-Well, Inc., Mail-Well I
Corporation, Graphic Arts Center, Inc., Mail-Well West, Pavey Envelope
and Tag Corp., Wisco II, L.L.C and Wisco Envelope Corp.
10.37* Third Amended and Restated Credit Agreement dated as of November 15,
1996, executed by Mail-Well I Corporation, as Borrower, and Wisco
Envelope Corp., Pavey Envelope and Tag Corp., Mail-Well West, Inc.,
Wisco II, L.L.C., Mail-Well Canada Holdings, Inc., Graphic Arts Center,
Inc. and Wisco III, L.L.C., as Guarantors, in favor of Banque Paribas,
as Agent, and the Lenders named herein.
10.38* Amended and Restated Credit Agreement dated as of November 15, 1996,
executed by Supremex, Inc., as borrower, and Mail-Well I Corporation
and Innova Envelope, Inc., as Guarantors, in favor of Banque Paribas,
as Agent, and the Lenders named herein.
10.39* Purchase and Contribution Agreement dated as of November 15, 1996
between Mail-Well I Corporation, Wisco Envelope Corp., Pavey Envelope
and Tag Corp., Mail-Well West, Inc., Graphic Arts Center, Inc., Wisco
III, L.L.C., Supremex, Inc., Innova Envelope, Inc., as Sellers, and
Mail-Well Trade Receivables Corp., as Purchaser.
10.40* Mail-Well Receivables Master Trust Pooling and Servicing Agreement
dated as of November 15, 199 by and between Mail-Well Trade Receivables
Corporation, Seller, Mail-Well I Corporation, Servicer, and Norwest
Bank Colorado, National Association, Trustee.
10.41* Series 1996-1 Supplement dated as of November 15, 1996 to Pooling and
Servicing Agreement, dated as of November 15, 1996, by and between Mail-
Well Trade Receivables Corporation, Seller, Mail-Well I Corporation,
Servicer, and Norwest Bank Colorado, National Association, as Trustee
on behalf of the Series 1996-1 Certificateholders.
10.42* Series 1996-1 Certificate Purchase Agreement dated as of November 15,
1996 among Mail-Well Trade Receivables Corporation, as Seller,
Corporate Receivables Corporation, as Purchaser, Norwest Bank Colorado,
National Association, as Trustee, and Mail-Well I Corporation, as
Servicer
10.43* Intercreditor Agreement dated as of November 15, 1996 by and among
Citicorp North America, Inc., as Securitization Company Agent, Banque
Paribas, New York Branch, as Liquidity Agent, Banque Paribas, as Credit
Lenders' Agent, Norwest Bank Colorado, National Association, as
Trustee, Mail-Well Trade Receivables Corporation, as Servicer,
originator and Mail-Well Credit Borrower, Supremex, Inc., as the
Supremex Credit Borrower and the other parties hereto.
10.44* Series 1996-1 Asset Purchase Agreement among Corporate Receivables
Corporation, the Liquidity Providers Parties hereto, Citicorp North
America, Inc., as Securitization Company Agent, Banque Paribas, New
York Branch, as Liquidity Agent, and Norwest Bank Colorado, National
Association, as trustee, dated as of November 15, 1996.
10.45* Participation Agreement dated as of November 15, 1996 among Mail-Well I
Corporation, as Lessee and Guarantor, Certain Subsidiaries of Mail-Well
I Corporation, as Subsidiary Guarantors, Paribas Properties, Inc., as
Lessor, Various Financial Institutions Identified
herein, as Equity Lenders, Various Financial Institutions Identified
herein, as Financing Lenders and Banque Paribas, as Agent for the
Financing Lenders and Equity Lenders.
10.46* Loan Agreement dated as of November 15, 1996 among Paribas Properties,
Inc., as Lessor, Various Financial Institutions Identified herein, as
Financing Lenders, Various Financial Institutions Identified herein, as
Equity Lenders, and Banque Paribas, as Agent for the Lenders.
10.47* Master Equipment Lease and Security Agreement dated November 15, 1996
between Mail-Well I Corporation, as the Lessee or Debtor and Paribas
Properties, Inc., as the Lessor or Secured Party.
10.48* Security Agreement (Second and Subordinated Security Interest) made and
entered into by Paribas Properties, Inc. and Mail-Well I Corporation,
as Debtors, and Banque Paribas, as Agent for Secured Party date
November 15, 1996.
10.49* Appendix A to Participation Agreement, Master Lease, and Loan
Agreement.
10.50* Lease Facility Guaranty dated as of November 15, 1996 made by Mail-Well
I Corporation, Mail-Well, Inc. and certain of their Subsidiaries, as
Guarantors, in favor of Various Financial Institutions, as the Lenders,
and Banque Paribas, as Agent for the Lenders.
10.51* Assignment of Lease and rent dated as of November 15, 1996 from Paribas
Properties, Inc., as Assignor to Banque Paribas, as Agent for the
Lenders, as Assignee.
10.52* Security Agreement (First and Prior Security Interest) made and entered
into by Paribas Properties, Inc. and Mail-Well I Corporation, as
Debtors, and Banque Paribas, as Agent for Secured Party dated November
15, 1996.
10.53* Bill of Sale and Assignment of Equipment made and entered into on this
15th day of November, 1996 by Mail-Well I Corporation to and for the
benefit of Paribas Properties, Inc.
21 * Subsidiaries of the Registrant
23.1 * Report of Deloitte & Touche LLP on Consolidated Financial Statements
Schedules.
23.2 * Consent of Deloitte & Touche LLP.
24 * Powers of Attorney.
_____________
* Filed herewith.
(b) REPORTS ON FORM 8-K
A report on Form 8-K was filed on May 2, 1996 to provide information
under Item 2 of Form 8-K regarding the acquisition by Mail-Well I
Corporation of Quality Park Products, Inc.
A report on Form 8-K was filed on July 1, 1996 to provide information
under Item 7 of Form 8-K regarding the financial statements in regard to
the acquisition by Mail-Well I Corporation of Quality Park Products, Inc.
MAIL-WELL, INC. (PARENT-ONLY FINANCIAL STATEMENTS) SCHEDULE I
CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
- ---------------------------------------------------------------------------------------------
ASSETS DECEMBER 31,
1996 1995
CURRENT ASSETS
Cash $ 45 $ 19
Accounts receivable, other - 85
Income tax receivable - 2,772
Other current assets 172 66
-------- --------
Total current assets 217 2,942
INVESTMENT IN SUBSIDIARY 121,987 103,061
INTANGIBLE ASSETS (net of accumulated amortization of $53 and $34) 256 275
OTHER ASSETS 129 -
-------- --------
TOTAL $122,589 $106,278
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Payable to subsidiary $ 1,381 $ 3,933
Other - 27
-------- --------
Total current liabilities 1,381 3,960
DEFERRED INCOME TAXES 1 -
-------- --------
Total liabilities 1,382 3,960
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY 121,207 102,318
-------- --------
TOTAL $122,589 $106,278
======== ========
See notes to condensed financial statements.
MAIL-WELL, INC. (PARENT-ONLY FINANCIAL STATEMENTS) SCHEDULE I
CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------
PERIOD FROM
FEBRUARY 24, 1994
YEAR ENDED DECEMBER 31, THROUGH
1996 1995 DECEMBER 31, 1994
NET SALES
COST OF SALES
Materials
Manufacturing
Depreciation
Waste recovery
Total cost of sales
GROSS PROFIT
OTHER OPERATING COSTS
Selling
Administrative $ 109 $ 64 $ -
Amortization 19 19 15
------- ------- -------
Total other operating costs 128 83 15
------- ------- -------
OPERATING INCOME (LOSS) (128) (83) (15)
OTHER (INCOME) EXPENSE
Interest expense-debt - 1,650 1,465
Interest expense-amortization of deferred
financing costs - 53 74
Other (income) expense (1) - (17)
------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM (127) (1,786) (1,537)
PROVISION FOR (BENEFIT FROM) INCOME TAXES
Current - 11 (31)
Deferred 1 (554) (619)
------- ------- -------
INCOME (LOSS) BEFORE EQUITY IN
UNDISTRIBUTED EARNINGS OF SUBSIDIARY
AND EXTRAORDINARY ITEM (128) (1,243) (887)
Equity in undistributed earnings of subsidiary 17,055 11,616 3,630
------- ------- -------
INCOME BEFORE EXTRAORDINARY ITEM 16,927 10,373 2,743
EXTRAORDINARY ITEM, NET OF TAX
BENEFIT OF $1,608 - 2,412 -
------- ------- -------
NET INCOME $16,927 $ 7,961 $ 2,743
======= ======= =======
See notes to condensed financial statements.
MAIL-WELL, INC. (PARENT-ONLY FINANCIAL STATEMENTS) SCHEDULE I
CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------
PERIOD FROM
FEBRUARY 24, 1994
YEAR ENDED DECEMBER 31, THROUGH
1996 1995 DECEMBER 31,
1994
CASH FLOWS FROM OPERATIONS
Net income $ 16,927 $ 7,961 $ 2,743
Adjustments to reconcile net income to cash provided by
operations:
Equity in undistributed earnings of subsidiaries (17,055) (11,616) (3,630)
Amortization 19 72 89
Accretion of original issue discount - 1,650 1,717
(Gain) loss on repurchase of deferred coupon notes - pre-tax - 4,020 (17)
Deferred tax provision (benefit) 1 (554) (619)
Changes in operating assets and liabilities, net of effects
of acquired businesses:
Other working capital 223 (3,822) 4,859
Other assets (129) - -
-------- -------- --------
Net cash provided by (used in) operating activities (14) (2,289) 5,142
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in subsidiaries 0 (46,161) (34,682)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from common stock issuance 40 68,181 19,631
Proceeds from issuance of deferred coupon notes - - 17,883
Debt issuance costs - - (1,654)
Repurchase of deferred coupon notes - (19,712) (4,607)
Repurchase of common stock - (1,713)
-------- -------- --------
Net cash provided by financing activities 40 48,469 29,540
-------- -------- --------
INCREASE IN CASH 26 19 0
BALANCE AT BEGINNING OF PERIOD 19 0 0
-------- -------- --------
BALANCE AT END OF PERIOD $ 45 $ 19 $ 0
======== ======== ========
Stock issued for debt and equity issuance costs $ - $ 430 $ 1,254
See notes to condensed financial statements.
MAIL-WELL, INC. (PARENT-ONLY FINANCIAL STATEMENTS) SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The financial statements of Mail-Well,
Inc. (the "Company") reflect the investment in Mail-Well I Corporation
("M-W Corp."), a wholly-owned subsidiary, using the equity method.
INCOME TAXES - The provision (benefit) for income taxes is based on
income recognized for financial statement purposes. Deferred income
taxes are recognized for the effects of temporary differences between
such income and that recognized for income tax purposes. The Company
files a consolidated U.S. income tax return with M-W Corp.
2. CONSOLIDATED FINANCIAL STATEMENTS
Reference is made to the Consolidated Financial Statements and related
Notes of Mail-Well, Inc. and Subsidiaries for additional information.
3. DEBT AND GUARANTEES
Information on the debt of the Company is disclosed in Note 4 of the
Notes to Consolidated Financial Statements of Mail-Well, Inc. and
Subsidiaries included elsewhere herein. The Company has guaranteed all
debt of M-W Corp. ($221 million outstanding at December 31, 1996,
including current maturities) and certain other obligations arising in
the ordinary course of business. The aggregate amounts of M-W Corp.'s
debt maturities for the five years following 1996 are: 1997 -
$14,427,000; 1998 - $17,144,000; 1999 - $18,037,000; 2000 -
$18,022,000; 2001 - $18,012,000 and $135,777,000 thereafter.
4. DIVIDENDS RECEIVED
No dividends have been received from M-W Corp. since the Company's
inception. M-W Corp.'s ability to declare dividends to the Company is
restricted by the terms of its bank credit agreements and the
indenture relating to M-W Corp.'s Senior Subordinated Notes.
5. EXTRAORDINARY ITEM
In 1995, the Company repurchased all outstanding Deferred Coupon Notes
at a total cost of $19,712,000. In connection with this debt
extinguishment, the Company recognized an extraordinary loss of
$2,412,000, net of taxes of $1,608,000.
* * * * *
MAIL-WELL, INC. AND SUBSIDIARIES SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
FOR THE PERIOD FROM FEBRUARY 24, 1994 THROUGH DECEMBER 31, 1994
(AMOUNTS IN THOUSANDS)
- ----------------------------------------------------------------------------------------------
FOR THE PERIOD FROM
FOR THE FEBRUARY 24, 1994
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1996 1995 1994
Balance at beginning of period $ 1,965 $ 1,457 $ -
Charged to costs and expenses 2,057 923 1,513
Charged to other accounts (1) 1,160 (2) 775 (3) 65
Deductions (4) (2,180) (1,190) (121)
--------- ------- ------
Balance at end of period $ 3,002 $ 1,965 $1,457
========= ======= ======
(1) Recoveries of accounts previously written off.
(2) Includes the beginning balances ($718) of the allowance for doubtful
accounts for Supremex, Inc. and Graphic Arts Center, Inc.
(3) Includes the beginning balances ($801) of the allowance for doubtful
accounts for Quality Park Products, Inc., Pac National Group (PNG). and
Shepard Poorman Communications Corporation.
(4) Accounts written off.
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange
Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities indicated.
Signature Title
- --------- -----
/s/ Gerald F. Mahoney
_____________________
Gerald F. Mahoney Chairman of the Board, Chief Executive Officer and
Director
/s/ Robert J. Terry
_____________________
Robert J. Terry President, Chief Operating Officer and Director
______________________
Frank P. Diassi * Director
______________________
J. Bruce Duty * Director
______________________
Frank J. Hevrdejs * Director
______________________
Jerome W. Pickholz * Director
______________________
Susan O. Rheney * Director
______________________
W. Thomas Stephens * Director
______________________
J. Virgil Waggoner * Director
/s/ Roger Wertheimer
* By _______________________
Roger Wertheimer
(Attorney in fact for persons indicated)