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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
Commission file number 1-12551
MAIL-WELL, INC.
(Exact name of Registrant as specified in its charter.)
COLORADO 84-1250533
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
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)
INDICATE BY CHECKMARK 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 [ ]
As of November 11, 1997, the Registrant had 18,835,669 shares of Common
Stock, $0.01 par value, outstanding.
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1
MAIL-WELL, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
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PAGE
----
Part I - Financial Information
Item 1. Financial Statements................................................ 3
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 10
Item 3 Quantitative and Qualitative Disclosures About
Market Risk......................................................... 19
Part II - Other Information
Item 1. Legal Proceedings................................................... 19
Item 2. Changes in Securities............................................... 19
Item 3. Defaults upon Senior Securities..................................... 19
Item 4. Submission of Matters to a Vote of Securities Holders............... 19
Item 5. Other Information................................................... 19
Item 6. Exhibits and Reports on Form 8-K.................................... 20
2
PART I. FINANCIAL INFORMATION, ITEM 1. FINANCIAL STATEMENTS
MAIL-WELL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1997 1996
CURRENT ASSETS
Cash and cash equivalents................................................................ $ 12,074 $ 9,656
Receivables, net......................................................................... 38,851 31,027
Accounts receivable -- other............................................................. 13,498 7,743
Income tax receivable, net............................................................... 757 3,504
Securitized interest in accounts receivable.............................................. 20,143 9,505
Inventories.............................................................................. 77,891 68,275
Deferred tax asset....................................................................... 2,361 2,309
Other current assets..................................................................... 4,173 3,513
-------- --------
Total current assets................................................................. 169,748 135,532
PROPERTY, PLANT AND EQUIPMENT -- NET.......................................................... 200,766 183,302
DEFERRED FINANCING COSTS -- NET............................................................... 12,402 14,497
GOODWILL -- NET............................................................................... 152,393 128,812
OTHER ASSETS -- NET........................................................................... 8,944 8,723
-------- --------
TOTAL......................................................................................... $544,253 $470,866
======== ========
CURRENT LIABILITIES
Accounts payable......................................................................... $ 44,676 $ 44,539
Accrued compensation and vacation........................................................ 26,096 23,312
Accrued interest......................................................................... 3,482 4,455
Other current liabilities................................................................ 30,752 26,206
Current portion of long-term debt and capital leases..................................... 16,938 14,975
-------- --------
Total current liabilities............................................................ 121,944 113,487
ACCRUED PENSION............................................................................... 872 1,284
CAPITAL LEASES................................................................................ 2,762 2,958
BANK BORROWINGS............................................................................... 150,657 121,992
SUBORDINATED NOTES............................................................................ 85,000 85,000
DEFERRED INCOME TAXES......................................................................... 28,968 23,122
OTHER LONG TERM LIABILITIES................................................................... 7,242 1,865
-------- --------
Total liabilities.................................................................... 397,445 349,708
-------- --------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST............................................................................. 3,500 --
-------- --------
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value; 5,000 shares authorized, none issued and
outstanding............................................................................. -- --
Common stock, $0.01 par value; 30,000,000 shares authorized, 18,834,732
and 19,414,242 shares issued and 18,834,732 and 18,731,130 (including
1,948,272 shares held by ESOP) outstanding, respectively................................. 188 194
Paid-in capital.......................................................................... 99,226 98,216
Retained earnings........................................................................ 47,728 27,631
Unearned ESOP compensation............................................................... (3,307) (2,896)
Cumulative foreign currency translation adjustment....................................... (313) (115)
Pension liability adjustment............................................................. (110) (110)
Unrealized loss, net of taxes, on securitized interest in accounts
receivable.............................................................................. (104) ( 49)
Treasury stock - at cost; 683,112 shares outstanding at December 31, 1996................ -- (1,713)
-------- --------
Total stockholders' equity........................................................... 143,308 121,158
-------- --------
TOTAL......................................................................................... $544,253 $470,866
======== ========
See notes to unaudited consolidated financial statements.
3
MAIL-WELL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS)
QUARTER ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------- ----------------------------------
1997 1996 1997 1996
---------------- ---------------- ---------------- ----------------
NET SALES.......................................... $ 233,496 $ 200,487 $ 653,010 $ 579,322
COST OF SALES
Materials........................................ 99,199 87,883 274,613 263,287
Labor and other.................................. 67,441 56,303 187,115 158,433
Manufacturing.................................... 15,463 10,570 45,029 31,607
Depreciation..................................... 3,675 3,971 10,354 11,450
Waste recovery................................... (2,693) (2,174) (7,427) (6,465)
----------- ----------- ----------- -----------
Total cost of sales........................... 183,085 156,553 509,684 458,312
GROSS PROFIT....................................... 50,411 43,934 143,326 121,010
OTHER OPERATING COSTS
Selling.......................................... 16,771 13,678 47,801 41,339
Administrative................................... 12,231 11,963 37,396 32,094
Amortization..................................... 1,039 1,101 3,096 3,036
Loss on disposal of assets....................... 236 112 1,458 711
----------- ----------- ----------- -----------
Total other operating costs................... 30,277 26,854 89,751 77,180
OPERATING INCOME................................... 20,134 17,080 53,575 43,830
OTHER EXPENSE
Interest expense --debt.......................... 4,847 7,036 13,952 21,181
Interest expense --
amortization of deferred financing costs....... 744 1,315 2,192 2,795
Discount on sale of
accounts receivable............................ 1,020 0 2,981 0
Other (income) expense........................... 348 1 (536) (23)
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES......................... 13,175 8,728 34,986 19,877
PROVISION FOR INCOME TAXES
Current.......................................... 3,692 2,292 9,346 5,718
Deferred......................................... 1,943 1,390 5,543 2,734
----------- ----------- ----------- -----------
NET INCOME......................................... $ 7,540 $ 5,046 $ 20,097 $ 11,425
=========== =========== =========== ===========
NET INCOME PER SHARE............................... $0.40 $0.28 $1.08 $0.64
WEIGHTED AVERAGE SHARES OUTSTANDING................ 18,964,781 17,883,365 18,555,406 17,807,460
See notes to unaudited consolidated financial statements.
4
MAIL-WELL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------
1997 1996
----------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income....................................................................... $ 20,097 $ 11,425
Adjustments to reconcile net income to cash provided by operations
Depreciation..................................................................... 10,354 11,450
Amortization..................................................................... 5,288 5,831
Deferred tax provision........................................................... 5,543 2,734
Loss on disposal of assets....................................................... 1,458 711
ESOP compensation expense........................................................ 68 1,089
Other............................................................................ 79 (660)
Change in operating assets and liabilities
Receivables...................................................................... (13,264) (6,992)
Current income taxes............................................................. 2,330 4,219
Inventories...................................................................... (2,357) 14,662
Accounts payable................................................................. (3,668) 1,996
Accrued interest................................................................. (973) (3,189)
Other working capital............................................................ 24,291 (490)
Accrued pension, current and long term........................................... (78) (367)
Other assets and other long-term liabilities..................................... 1,049 (690)
-------- ---------
Net cash provided by operating activities....................................... 50,217 41,729
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition costs................................................................ (55,317) (27,560)
Capital expenditures............................................................. (20,218) (7,902)
Proceeds from sale of property, plant and equipment.............................. 262 2,630
Maturity of temporary cash investments........................................... -- 250
-------- ---------
Net cash used in investing activities........................................... (75,273) (32,582)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from common stock issuance.............................................. 1,186 15
Cash overdrafts.................................................................. 1,443 (2,161)
Proceeds from long-term debt..................................................... 67,197 126,291
Repayments of long-term debt..................................................... (41,527) (132,745)
Repayments of capital lease obligations.......................................... (470) (460)
-------- ---------
Net cash provided by (used in) financing activities............................. 27,829 (9,060)
-------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH........................................... (355) (87)
-------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS............................................. 2,418 0
BALANCE AT BEGINNING OF PERIOD.................................................... 9,656 0
-------- ---------
BALANCE AT END OF PERIOD.......................................................... $ 12,074 $ 0
======== =========
SUPPLEMENTAL DISCLOSURES
Cash paid for interest........................................................... $ 14,925 $ 24,369
Cash paid for taxes.............................................................. 8,289 4,731
Issuance of convertible stock of subsidiary relating to minority interest........ 3,500 0
Issuance of common stock for compensation........................................ 0 51
See notes to unaudited consolidated financial statements.
5
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
NATURE OF OPERATIONS -- Mail-Well, Inc. (the "Company") is one of the largest
printers in North America, manufacturing both envelopes and high impact color
commercial products. Within envelope printing, the Company competes primarily
in the consumer direct segment in which envelopes are designed and manufactured
to customer specifications. In addition, the Company manufactures stock
envelopes sold in the office products and merchant/ printer markets. 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").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements for all
periods presented include the accounts of the Company and its subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
INTERIM FINANCIAL INFORMATION -- The interim financial information contained
herein is unaudited and includes all normal and recurring adjustments which, in
the opinion of management, are necessary to present fairly the information set
forth. The consolidated financial statements should be read in conjunction with
the Notes to the Consolidated Financial Statements which are included in the
Company's Form 10-K. The results for interim periods are not necessarily
indicative of results to be expected for the fiscal year of the Company ending
December 31, 1997. The Company believes that the report filed on Form 10-Q is
representative of its financial position, its results of operations and its cash
flow for the quarter and nine months ended September 30, 1997 and 1996.
EMPLOYEE STOCK OWNERSHIP PLAN -- Unearned ESOP compensation balance is
presented in the accompanying financial statements as a reduction of equity. As
the ESOP shares are allocated to participants, the unearned ESOP compensation
balance will decrease and compensation expense will be recorded.
EARNINGS PER SHARE -- In June 1997, the Company's common stock split 3:2; all
shares and per share information has been retroactively restated to reflect the
split.
Net income per share is computed by dividing net income by the weighted
average number of common shares. Common shares outstanding excludes unallocated
and uncommitted shares held by the ESOP.
QUARTER ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------- -------------------------------
1997 1996 1997 1996
------ ------ ------ ------
Common shares............................... 17,974,150 17,485,155 17,863,700 17,482,147
Common stock equivalents.................... 990,631 398,210 691,706 325,313
Weighted average shares outstanding......... 18,964,781 17,883,365 18,555,406 17,807,460
RECLASSIFICATION -- Certain amounts in the 1996 financial statements have been
reclassified to conform to the 1997 presentation.
6
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS (IN THOUSANDS)
INVENTORIES:
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------- ------------------
Raw materials................................................ $ 30,429 $ 25,953
Work in process.............................................. 7,749 7,549
Finished goods............................................... 42,523 37,385
Reserve for obsolescence and loss............................ (2,810) (2,612)
-------- --------
Total........................................................ $ 77,891 $ 68,275
======== ========
PROPERTY, PLANT AND EQUIPMENT:
SEPTEMBER 30, 1997 DECEMBER 31, 1996
-------------------- -------------------
Land and land improvements................................... $ 12,523 $ 11,429
Buildings.................................................... 49,277 45,385
Leasehold improvements....................................... 6,406 3,627
Machinery and equipment...................................... 133,094 124,028
Furniture and fixtures....................................... 3,588 3,066
Automobiles and trucks....................................... 677 556
Computers and software....................................... 10,843 7,457
Assets under capital lease................................... 3,732 3,584
Construction in progress..................................... 12,864 6,576
-------- --------
233,004 205,708
Less accumulated depreciation................................ (32,238) (22,406)
-------- --------
Total........................................................ $200,766 $183,302
======== ========
4. LONG-TERM DEBT
Long-term debt consists of the following
(in thousands):
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
Bank borrowings:
Revolving credit loans....................................... $ 37,500 $ 768
Term loans................................................... 124,289 135,000
Subordinated notes........................................... 85,000 85,000
Other........................................................ 5,472 651
-------- --------
252,261 221,419
Less current maturities...................................... (16,604) (14,427)
-------- --------
Long-term debt............................................... $235,657 $206,992
======== ========
The bank credit agreements of the Company include 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 acquisitions loan facility, a $12.0 million letter
of credit facility and a C$8.0 million letter of credit facility. The Company'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 a Canadian subsidiary.
An interest rate cap agreement is used to reduce the potential impact of
increases in the rates on floating-rate long-term debt. At September 30, 1997,
the Company was party to an interest rate cap agreement for the notional amount
of $55.0 million which provides an effective LIBOR interest rate cap of 9.0% and
expires June 30, 1999. The agreement entitles the Company to receive from
counterparties the amounts, if any, by which the Company's interest payments
exceed the interest rate cap.
7
5. PRO FORMA EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS
128 establishes standards for computing and presenting earnings per share and
applies to all entities with publicly held common stock or potential common
stock. SFAS 128 replaces the presentation of primary earnings per share and
fully diluted earnings per share with a presentation of basic earnings per share
and diluted earnings per share, respectively. Basic earnings per share excludes
dilution and is computed by dividing earnings available to common stockholders
by the weighted average number of common shares outstanding for the period.
Similar to fully diluted earnings per share, diluted earnings per share reflects
the potential dilution of securities that could share in the earnings. SFAS 128
is effective for periods ending after December 15, 1997, including interim
periods, and will require restatement of all prior period earnings per share
data presented; earlier application is not permitted. The following pro forma
disclosure illustrates earnings per share if calculated in accordance with SFAS
128. The unallocated shares issued under the Employee Stock Ownership Plan are
excluded from both the basic and diluted earnings per share calculations.
INCOME SHARES PER-SHARE
(DOLLARS IN THOUSANDS) (NUMERATOR) (DENOMINATOR) AMOUNT
- ---------------------------------------------------------------------------------------------------------------------
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
----------------------------------------------------
Basic Earnings Per Share
Income available to common stockholders.......................... $ 7,540 17,974,150 $0.42
=====
Effect of Dilutive Securities
Stock options, primarily......................................... 0 990,631
------- ----------
Diluted Earnings Per Share
Income available to common stockholders including assumed
conversions..................................................... $ 7,540 18,964,781 $0.40
======= ========== =====
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
----------------------------------------------------
Basic Earnings Per Share
Income available to common stockholders.......................... $ 5,046 17,485,155 $0.29
=====
Effect of Dilutive Securities
Stock options, primarily......................................... 0 398,210
------- ----------
Diluted Earnings Per Share
Income available to common stockholders including assumed
conversions..................................................... $ 5,046 17,883,365 $0.28
======= ========== =====
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
----------------------------------------------------
Basic Earnings Per Share
Income available to common stockholders.......................... $20,097 17,863,700 $1.13
======
Effect of Dilutive Securities
Stock options, primarily......................................... 0 691,706
------- ----------
Diluted Earnings Per Share
Income available to common stockholders including assumed
conversions..................................................... $20,097 18,555,406 $1.08
======= ========== =====
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
----------------------------------------------------
Basic Earnings Per Share
Income available to common stockholders.......................... $11,425 17,482,147 $0.65
=====
Effect of Dilutive Securities
Stock options, primarily......................................... 0 325,313
------- ----------
Income available to common stockholders including assumed
conversions..................................................... $11,425 17,807,460 $0.64
======= ========== =====
8
6. STOCK OPTIONS
On March 31, 1997, the Company's Board of Directors adopted a non-qualified
stock option plan for key employees and directors, authorizing future grants of
stock options to purchase up to 975,000 shares of the Company's common stock.
Also at that time, stock options were granted under the non-qualified stock
option plan for the purchase of up to approximately 600,000 shares of common
stock, in addition to the granting of stock options under the Company's 1994
stock option plan for the purchase of approximately 187,500 shares of common
stock. 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.
On July 11, 1997, the Company issued options to purchase 62,400 shares of
common stock in connection with the acquisition of The Allied Printers
("Allied"). The options were granted to a former shareholder and to certain key
employees of Allied under the Company's Allied Acquisition Non-Qualified Stock
Option Plan. The exercise price of such options equals the average closing
price of the common stock on the NYSE for the five days prior to the closing
date of the acquisition.
7. ACQUISITIONS
The statement of operations includes the operations of acquisitions from their
acquisition date.
On June 27, 1997, the Company acquired all of the outstanding shares of common
stock of Griffin Envelope, Inc. ("Griffin"). Griffin, which is located in
Seattle, Washington, manufactures and distributes envelopes in the northwestern
United States. Annual sales for Griffin approximate $12 million.
On July 11, 1997, the Company acquired all of the outstanding shares of common
stock of The Allied Printers ("Allied"). Allied, which is located in Seattle,
Washington, is a high impact color printer servicing customers with sheet-fed
printing needs. Annual sales for Allied approximate $17 million. The Company
issued 36,531 shares of common stock in connection with this acquisition.
On July 14, 1997, the Company acquired all of the outstanding shares of common
stock of Murray Envelope Corporation ("Murray"). Murray, which is located in
Hattiesburg, Mississippi, manufactures envelopes primarily for sales through
distributors in the southeastern and south central markets. Additionally, the
Barkley division of Murray distributes filing products for the national market.
Annual sales for Murray approximate $48 million. In connection with the
acquisition, a wholly-owned subsidiary of the Company issued 110,236 shares of
common stock which are convertible into an equal number of shares of Company
common stock.
On September 10, 1997, the Company acquired substantially all of the assets
of National Color Graphics, Inc. ("Color Graphics"). Color Graphics, located in
Atlanta, Georgia, is a high-impact sheet-fed color printer with annual sales
approximating $23 million.
8. SECURITIES OFFERING AND BANK RESTRUCTURING
The Company announced on October 30, 1997, that it planned to offer for sale
3.125 million shares of common stock and $150.0 million convertible debt
securities. In addition .7 million shares of common stock were to be offered for
sale by certain shareholders of the Company. The Company intends to use the net
proceeds from any sale of either its common stock or the convertible debt to
repay balances outstanding under its existing bank credit facilities, with the
balance, if any, available for general corporate purposes. Registration
statements relating to the securities offerings have been filed with the
Securities and Exchange Commission.
9
On November 13, 1997, the Company's shelf registration statement on Form S-3 was
declared effective by the Securities and Exchange Commission. The shelf
registration will permit the Company to offer up to $300 million in debt
securities, common stock, preferred stock or warrants for sale over the next two
years. The Company may use some of the availability under the shelf in
connection with the offering of convertible debt securities or common stock
described above.
The Company is in the process of replacing its current secured bank term and
revolving loans with an unsecured revolving credit line. The Company
anticipates closing on its new bank facility in either the fourth quarter of
1997 or the first quarter of 1998. In connection with the repayment of the
current banking facilities the Company anticipates recording an extraordinary
charge to eliminate deferred financing costs of $5.4 million, net of taxes.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following should be read in conjunction with the consolidated historical
financial statements and related notes of Mail-Well, Inc. and its subsidiaries
(the "Company") included elsewhere in this report. In addition to the
historical information contained herein, this report contains forward-looking
statements. The reader of this information should understand that all such
forward-looking statements are subject to various uncertainties and risks that
could affect their outcome. The Company's actual results could differ
materially from those suggested by such forward-looking statements. Factors
which could cause or contribute to such differences include, but are not limited
to, product demand and sales, growth rate, ability to obtain assumed
productivity savings, quality controls, availability of acquisition
opportunities and their related costs, cost savings due to integration and
synergies associated with acquisitions, ability to obtain additional financings
and bank debt restructuring, interest rates, foreign currency exchange rates,
paper and raw material costs, waste paper prices, ability to pass through paper
costs to customers, postage rates, changes in the direct mail industry,
competition, ability to develop new products, labor costs, labor relations and
advertising costs. This entire report should be read to put such forward-
looking statements in context and to gain a more complete understanding of the
uncertainties and risks involved in the Company's business.
OVERVIEW
Quarter Ended September 30, Nine Months Ended September 30,
----------------------------------- ------------------------------------
1997 1996 1997 1996
------- ------- ------ ------
Net sales
U.S. Envelope $150,207 $142,017 $429,584 $411,373
Canadian Envelope 26,901 19,665 85,983 61,991
High Impact Color Printing 56,388 38,805 137,443 105,958
-------- -------- -------- --------
Total net sales 233,496 200,487 653,010 579,322
-------- -------- -------- --------
Cost of sales
U.S. Envelope 117,999 111,941 334,647 326,923
Canadian Envelope 18,998 13,720 60,792 44,029
High Impact Color Printing 45,655 30,892 112,676 87,360
Corporate 433 0 1,569 0
-------- -------- -------- --------
Total cost of sales 183,085 156,553 509,684 458,312
-------- -------- -------- --------
Gross profit 50,411 43,934 143,326 121,010
-------- -------- -------- --------
Operating expenses
U.S. Envelope 16,779 16,325 50,250 46,682
Canadian Envelope 3,507 2,800 12,253 8,726
High Impact Color Printing 6,885 4,712 17,305 13,688
Corporate 3,106 3,017 9,943 8,084
-------- -------- -------- --------
Total operating expenses 30,277 26,854 89,751 77,180
-------- -------- -------- --------
10
Operating income 20,134 17,080 53,575 43,830
Corporate expenses:
Interest expense - debt 4,847 7,036 13,952 21,181
Interest expense -
amortization of deferred
financing costs 744 1,315 2,192 2,795
Discount on sale of accounts
receivable 1,020 0 2,981 0
Other (income) expense 348 1 (536) (23)
Income tax expense 5,635 3,682 14,889 8,452
-------- -------- -------- --------
Net income $ 7,540 $ 5,046 $ 20,097 $ 11,425
======== ======== ======== ========
OPERATING RESULTS -- Net income for the quarter ended September 30, 1997
increased by $2.5 million ($0.12 per share), or 50%, compared with the prior
year period. For the nine months ended September 30, 1997, net income increased
by $8.7 million ($0.44 per share), or 76%, compared with the nine months ended
September 30, 1996. Sales for the quarter ended September 30, 1997 rose $33.0
million, or 17%, from the prior year's quarter, and for the first nine months of
1997 increased by $73.7 million, or 13%, over the first nine months of 1996.
During the most recent quarter and the first nine months of 1997, the Company
focused its efforts on integrating the operations of recently acquired
businesses. These efforts included reviewing the acquired operations to
determine changes to be made to cost structures, pricing and strategic markets.
In addition the High Impact Color Printing segment continued to address market
pressures by repositioning its marketing efforts toward higher margin products
within this segment. 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. The positive effects of
these transactions are reflected in the results for 1997.
ACQUISITIONS
In April 1996, the Company acquired Quality Park Products, Inc. ("Quality"), 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.
On June 27, 1997, the Company acquired all of the outstanding shares of common
stock of Griffin Envelope, Inc. ("Griffin"). Griffin, which is located in
Seattle, Washington, manufactures and distributes envelopes in the northwestern
United States. Annual sales for Griffin approximate $12 million.
On July 11, 1997, the Company acquired all of the outstanding shares of common
stock of The Allied Printers ("Allied"). Allied, which is located in Seattle,
Washington, is a high-impact color printer servicing customers with sheet fed
printing needs. Annual sales for Allied approximate $17 million. The Company
issued 36,531 shares of common stock in connection with this acquisition.
On July 14, 1997, the Company acquired all of the outstanding shares of common
stock of Murray Envelope Corporation ("Murray"). Murray, which is located in
Hattiesburg, Mississippi, manufactures envelopes primarily for sales through
distributors in the southeastern and south central U.S. markets. Additionally,
the Barkley division of Murray distributes filing products nationally. Annual
sales for Murray approximate $48 million. In connection with the acquisition, a
wholly-owned subsidiary of the Company issued 110,236 shares of its common stock
which are convertible into an equal number of shares of the Company common
stock.
On September 10, 1997, the Company acquired substantially all the assets of
National Color Graphics, Inc. ("Color Graphics"). Color Graphics, located in
Atlanta, Georgia, is a high-impact sheet-fed color printer with annual sales
approximating $23 million.
11
The Company paid approximately $59.0 million in the aggregate, in cash, Company
common stock, notes and convertible securities (as described above with respect
to Murray) for the 1997 acquisitions.
All of the acquisitions have been accounted for as purchases. Accordingly the
historical results of operations of the Company include results of operations of
each of the acquisitions from their date of purchase. The table below presents
the historical sales and cost of sales of the Company adjusted to show the
effects of the acquisitions as if the acquisitions had occurred on the January 1
of the year prior to their actual purchase date.
Quarter Ended September 30, Nine Months Ended September 30,
--------------------------- --------------------------------
1997 1996 1997 1996
---- ---- ---- ----
Net sales as reported $233,496 $200,487 $653,010 $579,322
Quality 23,266
All other acquisitions in the
aggregate 4,713 49,169 53,000 144,880
--------------- --------------- --------------- ----------------
Total net sales 238,209 249,656 706,010 747,468
--------------- --------------- --------------- ----------------
Cost of sales as reported 183,085 156,553 509,684 458,312
Quality 19,654
All other acquisitions in the
aggregate 3,886 40,320 41,835 116,766
--------------- --------------- --------------- ----------------
Total cost of sales 186,971 196,873 551,519 594,732
--------------- --------------- --------------- ----------------
Gross profit $ 51,238 $ 52,783 $154,491 $152,736
=============== =============== =============== ================
12
RESULTS OF OPERATIONS
U.S. Envelope
The following table presents historical financial data for the U.S.
Envelope operations of the Company, including acquisitions (Quality, Griffin
and Murray) from their purchase dates.
QUARTER ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------- ----------------------------------
1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) $ % $ % $ % $ %
- --------------------------------------------------------------------------------------------------------------------
Net sales.................................... $150,207 100.0 $142,017 100.0 $429,584 100.0 $411,373 100.0
Cost of sales................................ 117,999 78.5 111,941 78.8 334,647 77.9 326,923 79.5
Operating expenses........................... 16,779 11.2 16,325 11.5 50,250 11.7 46,682 11.3
-------- ----- -------- ----- -------- ----- -------- -----
Operating income............................. $ 15,429 10.3 $ 13,751 9.7 $ 44,687 10.4 $ 37,768 9.2
======== ===== ======== ===== ======== ===== ======== =====
QUARTER ENDED SEPTEMBER 30, 1997 COMPARED TO THE QUARTER ENDED SEPTEMBER 30,
1996
NET SALES -- Net sales increased by $8.2 million (or 5.8%) for the quarter
ended September 30, 1997 compared to the quarter ended September 30, 1996. The
average selling price increased 1.0% to $19.88 per thousand units for the
quarter ended September 30, 1997, from $19.68 per thousand units for the quarter
ended September 30, 1996, due mainly to the inclusion of Murray, which has a
higher average selling price for its filing product line. Because of its ability
to pass through changes in paper costs to customers, the Company uses volumes of
units sold and material gross margin (that is, net sales less cost of materials
net of waste recovery revenue) per thousand units as revenue trend indicators in
its envelope operations. Unit volume increased 6.9% to 7.7 billion units in the
third quarter of 1997 from 7.2 billion units in the same quarter of 1996,
primarily due to the acquisition of Murray and Griffin. Material gross margin
increased 5.8% to $11.47 per thousand units in the third quarter of 1997 from
$10.84 per thousand units in the year-ago period partially due to inclusion of
Murray's higher margin filing products but also from selling price management.
COST OF SALES -- Total cost of sales, as a percentage of sales, decreased
from 78.8% in 1996 to 78.5% in 1997. Cost of sales includes materials, labor,
manufacturing, depreciation and other manufacturing costs, net of waste recovery
revenue. A decrease in average material cost per unit of approximately 5% in the
third quarter of 1997 from the third quarter of 1996, offset by corresponding
price decreases, was the major factor in the reduction in cost of sales
expressed as a percentage of sales. Gross profit per thousand units increased
only 4.2% from quarter to quarter as manufacturing labor and overhead costs
increased 7.3%, offsetting the material gross margin improvement detailed above.
OPERATING EXPENSES -- For the third quarter ended September 30, 1997,
operating expenses decreased to 11.2% of sales from 11.5% of sales compared to
the same period in 1996. The year ago quarter included a $1.5 million charge for
an adjustment to the estimated profit sharing accrual.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1996
NET SALES -- Net sales increased $18.2 million or 4.4% for the nine months
ended September 30, 1997 compared to the nine months ended September 30, 1996.
The increase in net sales includes $31.4 million of net sales related to the
acquisitions which is offset by a 2.7% decrease in net sales on the other U.S.
Envelope operations. The total average selling price decreased 3.7% to $19.48
per thousand units for the nine months ended September 30, 1997 from $20.22 per
thousand units for the nine months ended September 30, 1996, due to lower paper
costs and competitive pricing pressures. Unit volume increased 9.4% to 22.2
billion units in the first nine months of 1997 from 20.3 billion units in the
same period of 1996. Acquisitions accounted for 6.3%, or 1.4 billion units, of
the year to year increase in unit volume. Material gross margin increased 2.6%
to $11.28 per thousand units in the nine months ended September 30, 1997 from
$10.99 per thousand in the year-ago period again partially due to inclusion of
Murray's higher margin filing products, but also from selling price management.
13
COST OF SALES -- Total cost of sales, as a percentage of sales, decreased
from 79.5% in 1996 to 77.9% in 1997. A decrease in average material costs of
approximately 11% as compared with the prior year period, offset by
corresponding price decreases, was the major factor in the reduction in cost of
sales expressed as a percentage of sales. Gross profit per thousand units
increased 2.3% in the nine months ended September 30, 1997 as compared to the
year-ago period.
OPERATING EXPENSES -- For the nine months ended September 30, 1997,
operating expenses, as a percent of sales, increased to 11.7% compared to 11.3%
from the same period in 1996 due to the decrease in selling prices. The $3.6
million increase includes $2.8 million additional operating expenses relating to
acquisitions, the remaining $0.8 million represents only a 1.7% year to year
increase.
Canadian Envelope
The following table presents financial information with respect to the
Canadian Envelope operations (Supremex), including acquisitions (PNG) from their
purchase dates. All amounts are in U.S. dollars.
QUARTER ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- ----------------------------------------
1997 1996 1997 1996
------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) $ % $ % $ % $ %
- -------------------------------------------------------------------------------------------------------------------------
Net sales.................................. $26,901 100.0 $19,665 100.0 $85,983 100.0 $61,991 100.0
Cost of sales.............................. 18,998 70.6 13,720 69.8 60,792 70.7 44,029 71.0
Operating expenses......................... 3,507 13.0 2,800 14.2 12,253 14.2 8,726 14.1
------- ----- ------- ----- ------- ----- ------- -----
Operating income........................... $ 4,396 16.4 $ 3,145 16.0 $12,938 15.1 $ 9,236 14.9
======= ===== ======= ===== ======= ===== ======= =====
QUARTER ENDED SEPTEMBER 30, 1997 COMPARED TO THE QUARTER ENDED SEPTEMBER 30,
1996
NET SALES -- Net sales for the 1997 quarter of $26.9 million for the
Canadian Envelope segment included $7.4 million of net sales attributable to
PNG. The 1997 net sales for Supremex excluding PNG of $19.5 million represented
a $0.2 million, or 1.0%, decline in net sales dollars as compared to the quarter
ended September 30, 1996. Unit volume at Supremex was stable at 1.0 billion
units for both years, while PNG added .4 billion units to the 1997 quarter
sales. The average selling price increased .4% to $19.29 per thousand units in
the most recent quarter as compared to $19.21 per thousand units for the year-
ago quarter. Paper prices decreased approximately 1% in the 1997 quarter as
compared to 1996, which was passed through to customers in lower prices. The
Company has exited certain low margin markets offsetting the paper price
decrease and resulting in the slight increase in average unit selling price.
Material gross margin increased 5.3% from $10.37 per thousand units in the
quarter ended Septemer 30, 1996 to $10.92 per thousand units for the same
quarter in 1997. The higher material gross margin was attributable to the shift
away from less profitable markets.
COST OF SALES -- Total cost of sales, as a percentage of sales, increased
from 69.8% in 1996 to 70.6% in 1997 as a result of the material cost increase.
The gross profit per thousand units decreased 1.6% to $5.67 per thousand units
from $5.76 per thousand units in 1996 primarily as a result of the lower margin
business added by the PNG acquisition. Gross margins per thousand units are
expected to improve as Supremex's operating strategies are fully integrated into
PNG.
OPERATING EXPENSES - As a percentage of sales, operating expenses decreased
to 13.0% of net sales for the quarter ended September 30, 1997 from 14.2% of net
sales in the same quarter of 1996 due to adding the PNG sales volume in 1997
with a lower corresponding increase in operating expense by implementing
Supremex's management systems in PNG.
14
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1996
NET SALES -- Net sales of $86.0 million for the Canadian Envelope segment
included $25.0 million of net sales attributable to PNG. The net sales for
Supremex of $61.0 million for the nine months ended September 30, 1997
represented a $1.0 million, or 1.6%, decline in net sales dollars as compared to
the same period in 1996. Unit volume at Supremex was stable at 3.1 billion units
for both periods, while PNG added 1.2 billion units to the 1997 sales volume.
The average selling price decreased 1.3% to $19.80 per thousand units as
compared to $20.06 per thousand units for the nine months ended September 30,
1996. Paper prices decreased approximately 6% in the nine months ended
September 30, 1997 as compared to paper prices for the nine months ended
September 30, 1996, which is passed through as a reduction in selling prices. As
a result of the Company exiting markets with relatively low selling prices and
margins, the average selling price did not decline as much as expected.
Material gross margin increased from $10.76 per thousand units in the year-ago
period to $11.31 per thousand units for the same period in 1997 due to the shift
away from less profitable markets.
COST OF SALES -- Total cost of sales, as a percentage of sales, decreased from
71.0% for the nine months ended September 30, 1996 to 70.7% in the same period
in 1997. The gross profit per thousand units increased .5% to $5.80 per thousand
units from $5.77 per thousand units in 1996 due to the decrease in paper cost
partially offset by selling price declines. In addition to the shift away from
less profitable markets, as Supremex's operating strategies are fully applied to
PNG, manufacturing cost per unit produced is expected to decrease.
OPERATING EXPENSES -- As a percentage of sales, operating expenses increased
to 14.2% of net sales for nine months ended September 30, 1997 from 14.1% of net
sales in the year-ago period, due to adding the higher cost structure of PNG.
Operating expenses as a percentage of net sales decreased in the most recent
quarter however as a result of assimilating PNG into the Supremex management
systems. This trend is expected to continue as PNG is fully merged into the
Supremex management organization.
High Impact Color Printing
The following table presents financial information with respect to the High
Impact Color Printing (GAC) operations including acquisitions (SP, Allied and
Color Graphics) from their purchase dates.
QUARTER ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------------
1997 1996 1997 1996
(DOLLARS IN THOUSANDS) $ % $ % $ % $ %
- ------------------------------------------------------------------------------------------------------------------------
Net sales............................... $56,388 100.0 $38,805 100.0 $137,443 100.0 $105,958 100.0
Cost of sales........................... 45,655 81.0 30,892 79.6 112,676 82.0 87,360 82.5
Operating expenses...................... 6,885 12.2 4,712 12.1 17,305 12.6 13,688 12.9
------- ----- ------- ----- -------- ----- -------- -----
Operating income........................ $ 3,848 6.8 $ 3,201 8.3 $ 7,462 5.4 $ 4,910 4.6
======= ===== ======= ===== ======== ===== ======== =====
QUARTER ENDED SEPTEMBER 30, 1997 COMPARED TO THE QUARTER ENDED SEPTEMBER 30,
1996
NET SALES -- Net sales of the Company's Graphic Arts Center, Inc. subsidiary
("GAC") for the quarter ended September 30, 1997 were $35.7 million of the
quarter's net sales for the High Impact Color Printing segment of the Company,
an 8.0% decrease from the prior year. Net sales produced at SP constituted
$16.0 million of the quarter's net sales and represented an increase of 3.2%
compared with those of the prior year (before SP was owned by the Company). The
remaining $4.7 million of the 1997 quarter's sales were attributable to the
Allied and Color Graphics acquisitions. The decline in net sales at GAC is
attributable to declines in the production of both catalogs and manuals. Some
customers are increasing their use of electronic medium to replace printed
manuals, while other customers are moving production, including printed
literature, offshore. GAC lost two significant catalog customers (one of which
recently returned) while another eliminated several publications. The total
volume decline is estimated at 8.5%. In addition GAC has faced increased price
competition as the overall market has been soft quarter to quarter resulting in
an overall 1.3% price decline. Partially offsetting the declines in catalogs
and
15
manuals has been an increase in the advertising printing attributable to a
number of new customers resulting from a management focus on this market.
COST OF SALES -- Cost of sales expressed as a percent of net sales increased
to 81.0% in the quarter ended September 30, 1997, from 79.6% in the year-ago
quarter. Changing paper prices, due to product mix variations, had a negligible
effect on cost of sales from quarter to quarter. The increase in cost of sales
expressed as a percent of net sales is partially attributable to the reduction
in selling price, but is due mainly to the 8.5% volume decline resulting in loss
of production efficiencies.
OPERATING EXPENSES -- Total operating expense was $2.2 million higher than the
amount for the quarter ended September 30, 1996, $2.1 million of which was
attributable to acquisitions.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1996
NET SALES -- Net sales of $137.4 million for the nine months ended September
30, 1997, for the High Impact Color Printing segment includes $46.6 million of
net sales attributable to acquisitions. The net sales for GAC of $90.8 million
for the nine months ended September 30, 1997 represented a $15.4 million, or
14.6%, decline in net sales dollars as compared to the same period in 1996. This
decline in net sales at GAC was primarily due to the Company targeting the
higher margin markets and allocating sales resources to those markets with a
resulting decline in sales volumes. The decrease in paper costs between 1996 and
1997, which caused a corresponding decrease in net sales dollars, resulted in an
estimated 1.6% decrease in sales dollars. Operating income margins for the High
Impact Color Printing segment of the Company have increased to 5.4% of net sales
from 4.6% of net sales.
COST OF SALES -- Total cost of sales decreased to 82.0% of sales for the nine
months ended September 30, 1997, as compared to 82.5% for the nine months ended
September 30, 1996. Cost of sales for GAC for the nine months ended September
30, 1997, were $74.3 million, a $13.1 million decrease from 1996. The decline in
GAC's cost of sales was comprised of an estimated 8.0% volume decline, as well
as declines in paper prices and other manufacturing costs. Improved control over
overtime and factory chargeability, as well as reduced outside tradework, were
the major factors in reducing manufacturing costs in excess of the volume
declines. Cost of sales attributable to acquisitions of $38.4 million in 1997
represents 82.4% of their net sales, compared to 80.7% in 1996 (prior to
purchase by the Company) due primarily to purchase accounting adjustments to
inventory valuation.
OPERATING EXPENSES -- Total operating expense was $3.6 million greater for the
nine months ended September 30, 1997, than that recorded for the nine months
ended September 30, 1996. The increase was due to $4.9 million of operating
expenses related to acquisitions in the High Impact Color Printing segment,
which was partially offset by expense reductions implemented by the GAC
operations of $1.3 million for the nine months ended September 30, 1997. The
GAC reductions were due to declines in sales commissions and sales salaries as
GAC moved certain sales representatives to commission status from salaried
status and lower selling prices have reduced commission expense. Additionally,
reductions have been made to the travel and entertainment and information
services costs, offset by the inclusion in the most recent quarter of ESOP
benefit expense.
16
Corporate Expenses
COST OF SALES -- OPERATING LEASE EXPENSES - Certain property, plant and
equipment of the Company was sold as part of a sales/leaseback transaction in
the fourth quarter of 1996. The expense amounts represent the operating lease
payments for the quarter and nine month periods ending September 30, 1997; there
was no comparable expense in the quarter or nine months ended September 30,
1996.
OPERATING EXPENSES -- Total operating expenses increased by $.1 million, or
2.9%, in the quarter ended September 30, 1997 compared to the quarter ended
September 30, 1996, and increased $1.8 million, or 23.0%, for the nine months
ended September 30, 1997, compared to the nine months ended September 30, 1996.
Included in operating expenses in the quarter and nine months ended September
30, 1997 is $0.2 million and $0.7 million, respectively, of administrative
expenses related to the accounts receivable securitization program. Also
included in operating expenses is the loss on disposal of assets amounting to
$1.5 and $.7 million, respectively for the nine months ended September 30, 1997
and 1996. The majority of the 1997 loss on disposal of assets relates to
building and equipment losses arising from the closing of the Pittsburgh
warehouse and reorganizations of the plants in Salt Lake City, Chicago and GAC.
In 1996, the loss on disposal of assets included costs to relocate the
Philadelphia plant and consolidate the Texas facilities.
INTEREST EXPENSE-DEBT -- Interest expense decreased in 1997 primarily as a
result of the lower average bank debt balances both for the quarter and nine
months ended September 30. The bank debt restructuring, the sale/leaseback
transaction and the accounts receivable securitization transaction resulted in
the reduction of outstanding debt balances toward the end of 1996. The average
interest rate of 7.7% for the nine months ended September 30, 1997 was less
than the average interest rate of 8.1% for the same period in 1996.
DISCOUNT ON SALE OF ACCOUNTS RECEIVABLE -- This amount represents expenses
related to the accounts receivable securitization program, including an
effective interest rate of approximately 6.52% and associated utilization fees.
Since the program was implemented in November 1996, there are no comparisons for
previous periods.
OTHER (INCOME) EXPENSE -- This line item includes a $0.3 million foreign
exchange gain and $.7 million of interest income earned from the investment of
funds in cash equivalents for the nine months ended September 30, 1997, offset
by $.5 million in costs related to an unsuccessful acquisition attempt in the
most recent quarter.
INCOME TAXES -- The effective tax rate for the quarter and nine months ended
September 30, 1997 was 42.8% and 42.6%, respectively, as compared to an
effective tax rate of 42.2% and 42.5% for the quarter and nine months ended
September 30, 1996, respectively. The effective tax rate for all 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 are not tax deductible.
LIQUIDITY AND CAPITAL RESOURCES
HISTORICAL CASH FLOW -- Net cash provided by operating activities was $50.2
million and $41.7 million for the nine months ended September 30, 1997 and 1996,
respectively. Capital expenditures totaled $20.2 million for the first nine
months of 1997 as compared to $7.9 million for the first nine months of 1996.
Proceeds from the sale of property, plant and equipment totaled $2.6 million in
the nine months ended September 30, 1996, as compared to $0.3 million for the
same period in 1997.
In November 1996, the Company entered into a five year agreement whereby it
can sell, on a revolving basis, an undivided percentage interest in a designated
pool of accounts receivable generating maximum proceeds of $100.0 million. At
September 30, 1997, $74.0 million of accounts receivable have been sold to third
parties under this agreement.
17
DEBT OBLIGATIONS -- In November 1996, the Company amended its bank credit
agreements. These credit agreements, as amended, provide 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 September 30, 1997, the Company had borrowed $19.9 million
(including $4.9 million in letters of credit) under the revolving credit
facility, $124.3 million under the term loans and $22.5 million under the
acquisition loan facility. Availability at September 30, 1997 included $10.1
million and C$9.5 million ($0.5 million committed under letter of credit) under
the revolving credit facilities, $10.7 million under the term loans and $7.5
million under the acquisition loan facility. The weighted average interest rate
on the Company's bank debt was 7.73% as of September 30, 1997. The weighted
average interest rate on bank debt was 7.72% for the nine months ended September
30, 1996. The senior subordinated debt balance remained stable at $85.0 million
at an interest rate of 10.5%.
CAPITAL REQUIREMENTS -- The Company estimates that, based on current
utilization of its existing equipment and expected demand, it will spend $20.0
to $30.0 million per year on capital expenditures exclusive of acquisitions. The
Company expects to use net cash from operations and/or bank and leasing company
borrowings to fund these expenditures.
RECENT DEVELOPMENTS
LABOR RELATIONS -- The Company has entered into new union contracts at three
of its larger envelope printing and converting facilities. It continues to
negotiate with two envelope printing and converting facilities, which have been
operating under tentative arrangements which are terminable on short notice, as
well as GAC's Portland plant, which has been operating under an extension of its
existing agreement. In order to mitigate the effect of any potential work
stoppage, the Company has prepared a contingency plan for each affected
location. There can be no assurance, however, that the Company's preparations
will prevent a material adverse effect on the Company's operations in the event
of a protracted work stoppage.
POSTAL RATE INCREASE -- The U.S. Postal Service announced proposed rate
increases of approximately 4% for direct mail and 3% for first class mail. In
addition, a 6% rate decrease was proposed for prepaid, courtesy reply envelopes.
The proposed postal rate increases are significantly less than the cumulative
rate of inflation since the last postal rate increases. Management does not
anticipate that these postal rate increases will go into effect until mid-1998
and, if implemented, does not anticipate the rate increases to negatively impact
mail volume.
SECURITIES OFFERING AND BANK RESTRUCTURING -- The Company announced on October
30, 1997, that it planned to offer for sale 3.125 million shares of common stock
and $150.0 million convertible debt securities. In addition .7 million shares
of common stock were to be offered for sale by certain shareholders of the
Company. The Company intends to use the net proceeds from any sale of either
its common stock or the convertible debt to repay balances outstanding under its
existing bank credit facilities, with the balance, if any, available for general
corporate purposes. Registration statements relating to the securities offerings
have been filed with the Securities and Exchange Commission.
On November 13, 1997, the Company's shelf registration statement on Form S-3
was declared effective by the Securities and Exchange Commission. The shelf
registration will permit the Company to offer up to $300 million in debt
securities, common stock, preferred stock or warrants for sale over the next two
years. The Company may use some of the availability under the shelf in
connection with the offering of convertible debt securities or common stock
described above.
The Company is in the process of replacing its current secured bank term and
revolving loans with an unsecured revolving credit line. The Company
anticipates closing on its new bank facility in either the fourth quarter of
1997 or the first quarter of 1998. In connection with the repayment of the
current banking facilities the Company anticipates recording an extraordinary
charge to eliminate deferred financing costs of $5.4 million, net of taxes.
NEW ACCOUNTING STANDARDS -- In June 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income," effective for fiscal years beginning after
December 15, 1997. This statement requires that all items that are required to
be recognized under accounting standards as components of comprehensive income
be reported in a
18
financial statement that is displayed with the same prominence as other
financial statements. This statement further requires that an entity display an
amount representing comprehensive income for the period in that financial
statement. This statement also requires that an entity classify items of other
comprehensive income by their nature in a financial statement. For example,
other comprehensive income may include foreign currency items, minimum pension
liability adjustments and unrealized gains and losses on certain investments in
debt and equity securities. Reclassification of financial statements for earlier
periods, for comparative purposes, is required. Based on current accounting
procedures, this Statement is not expected to have a material impact on the
Company's consolidated financial statements. The Company will adopt this
accounting standard on January 1, 1998, as required.
Also in June 1997, the FASB issued SFAS NO. 131, "Disclosures about Segments
of an Enterprise and Related Information," effective for fiscal years beginning
after December 15, 1997. This Statement establishes standards for reporting
information about operating segments in annual financial statements and requires
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. Operating
segments are defined as components of an enterprise about which separate
financial information is available and evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. This Statement requires reporting segment profit or loss, certain
specific revenue and expense items and segment assets. It also requires
reconciliation of segment revenues, segment profit or loss, segment assets and
other amounts disclosed for segments to corresponding amounts reported in the
consolidated financial statements. Based on current segment disclosure this
Statement is not expected to have a material impact on the Company's financial
statement disclosures. The Company will adopt this accounting standard on
January 1, 1998.
ITEM 3.-- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK --None
PART II -- OTHER INFORMATION
ITEM 1. -- LEGAL PROCEEDINGS -- None
ITEM 2. -- CHANGES IN SECURITIES -- None
ITEM 3. -- DEFAULTS UPON SENIOR SECURITIES -- None
ITEM 4. -- SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS-- None
ITEM 5.--OTHER INFORMATION - NONE
19
ITEM 6.--EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
2 Articles of Merger to effect reincorporation of the Company in Colorado
effective May 30, 1997
3 (i) Articles of Incorporation of the Company
3 (ii) Bylaws of the Company
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 Amendment No. 1 to the Form S-3 filed on October 29, 1997
(Reg. No. 333-35561);
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.
4.7 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.
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.
20
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.
10.32 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 -- incorporated by reference from exhibit 10.33 of the
Company's Form 10-K for the year ended December 31, 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-- incorporated by reference from
exhibit 10.34 of the Company's Form 10-K for the year ended December
31, 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. -- incorporated by reference from exhibit
10.35 of the Company's Form 10-K for the year ended December 31, 1996.
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. -- incorporated
by reference from exhibit 10.36 of the Company's Form 10-K for the year
ended December 31, 1996.
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 -- incorporated by reference
from exhibit 10.37 of the Company's Form 10-K for the year ended
December 31, 1996.
21
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 - incorporated by reference from
exhibit 10.38 of the Company's Form 10-K for the year ended December
31, 1996.
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 -- incorporated by
reference from exhibit 10.39 of the Company's Form 10-K for the year
ended December 31, 1996.
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 -- incorporated by
reference from exhibit 10.40 of the Company's Form 10- K for the year
ended December 31, 1996.
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 --
incorporated by reference from exhibit 10.41 of the Company's Form 10-K
for the year ended December 31, 1996.
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 -- incorporated by reference from exhibit 10.42 of the
Company's Form 10-K for the year ended December 31, 1996.
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 -- incorporated
by reference from exhibit 10.43 of the Company's Form 10-K for the year
ended December 31, 1996.
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 -- incorporated
by reference from exhibit 10.44 of the Company's Form 10-K for the year
ended December 31, 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 -- incorporated by reference from exhibit 10.45 of the
Company's Form 10-K for the year ended December 31, 1996.
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 --
incorporated by reference from exhibit 10.46 of the Company's Form 10-K
for the year ended December 31, 1996.
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 -- incorporated by
reference from exhibit 10.47 of the Company's Form 10-K for the year
ended December 31, 1996.
22
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 -- incorporated by reference from exhibit 10.48 of
the Company's Form 10-K for the year ended December 31, 1996.
10.49 Appendix A to Participation Agreement, Master Lease, and Loan Agreement
-- incorporated by reference from exhibit 10.49 of the Company's Form
10-K for the year ended December 31, 1996.
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 -- incorporated by
reference from exhibit 10.50 of the Company's Form 10-K for the year
ended December 31, 1996.
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 -- incorporated by reference from exhibit 10.51 of
the Company's Form 10-K for the year ended December 31, 1996.
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 -- incorporated by reference from exhibit 10.52 of the
Company's Form 10-K for the year ended December 31, 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. -- incorporated by reference from
exhibit 10.53 of the Company's Form 10-K for the year ended December
31, 1996.
10.54 1997 Non-Qualified Stock Option Plan -- incorporated by reference from
exhibit 10.54 of the Company's Form 10-Q for the quarter ended March
31, 1997
10.55 1997 Non-Qualified Stock Option Agreement -- incorporated by reference
from exhibit 10.54 of the Company's Form 10-Q for the quarter ended
March 31, 1997
10.56 Company's 1994 Stock Option Plan as Amended on May 7, 1997
10.57* Company's Allied Acquisition Non-Qualified Stock Option Plan.
27* Financial Data Schedule
__________
* Filed herewith.
(b) Reports on Form 8-K
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
MAIL-WELL, INC.
(Registrant)
By /s/ PAUL V. REILLY
------------------------
Paul V. Reilly
Senior Vice President,
Chief Financial Officer
November 14, 1997
23