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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 March 31, 2000
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, Suite 160, 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 May 5, 2000, the Registrant had 49,271,308 shares of Common
Stock, $0.01 par value, outstanding.
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1
MAIL-WELL, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
- -----------------------------------------------------------------------------
PAGE
----
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 22
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 23
Signature Page 26
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAIL-WELL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
(UNAUDITED)
CURRENT ASSETS
Cash and cash equivalents $ 10,700 $ 3,618
Receivables, net 226,015 85,044
Investment in accounts receivable securitization 87,541 54,396
Accounts receivable -- other 19,903 20,764
Inventories, net 192,692 144,756
Other current assets 36,995 25,551
---------- ----------
Total current assets 573,846 334,129
PROPERTY, PLANT AND EQUIPMENT, NET 621,852 532,156
GOODWILL, NET 644,229 453,483
OTHER ASSETS, NET 64,045 24,273
---------- ----------
TOTAL $1,903,972 $1,344,041
========== ==========
CURRENT LIABILITIES
Accounts payable $ 160,187 $ 122,740
Accrued compensation and vacation 56,586 50,042
Other current liabilities 79,660 52,999
Current portion of long-term debt and capital leases 34,940 13,889
---------- ----------
Total current liabilities 331,373 239,670
LONG-TERM DEBT AND CAPITAL LEASES 1,085,673 653,090
DEFERRED INCOME TAXES 57,518 64,112
OTHER LONG-TERM LIABILITIES 37,067 8,351
---------- ----------
Total liabilities 1,511,631 965,223
MINORITY INTEREST IN NON VOTING STOCK OF SUBSIDIARY - 3,508
SHAREHOLDERS' EQUITY
Preferred stock, $0.01 par value; 25,000 shares
authorized, none issued and outstanding - -
Common stock, $0.01 par value; 100,000,000 shares
authorized, 49,237,326 and 49,215,078 shares issued
and outstanding, respectively 492 492
Paid-in capital 219,905 219,795
Retained earnings 173,005 155,222
Accumulated other comprehensive income (loss) (1,061) (199)
---------- ----------
Total shareholders' equity 392,341 375,310
---------- ----------
TOTAL $1,903,972 $1,344,041
========== ==========
See notes to unaudited consolidated financial statements.
3
MAIL-WELL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
THREE MONTHS ENDED
------------------
MARCH 31,
---------
2000 1999
---- ----
NET SALES $ 568,038 $ 440,417
COST OF SALES 434,674 341,803
--------- ---------
GROSS PROFIT 133,364 98,614
OTHER OPERATING COSTS 85,692 60,986
--------- ---------
OPERATING INCOME 47,672 37,628
OTHER (INCOME) EXPENSE
Interest expense 20,102 12,767
Other (income) expense (119) (176)
--------- ---------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 27,689 25,037
PROVISION FOR INCOME TAXES 11,353 10,265
--------- ---------
NET INCOME BEFORE EXTRAORDINARY ITEM 16,336 14,772
EXTRAORDINARY ITEM, NET OF TAX BENEFIT
OF $907 1,447 -
--------- ---------
NET INCOME $ 17,783 $ 14,772
========= =========
EARNINGS PER SHARE - BASIC
BEFORE EXTRAORDINARY ITEM $ 0.33 $ 0.30
EXTRAORDINARY ITEM $ 0.03 -
EARNINGS PER SHARE - BASIC $ 0.36 $ 0.30
EARNINGS PER SHARE - DILUTED
BEFORE EXTRAORDINARY ITEM $ 0.31 $ 0.28
EXTRAORDINARY ITEM $ 0.02 -
EARNINGS PER SHARE - DILUTED $ 0.33 $ 0.28
WEIGHTED AVERAGE SHARES - BASIC 49,229 48,864
WEIGHTED AVERAGE SHARES - DILUTED 57,753 58,260
See notes to unaudited consolidated financial statements.
4
MAIL-WELL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
------------------
MARCH 31,
---------
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 17,783 $ 14,772
Adjustments to reconcile net income to cash provided
by operations
Depreciation and amortization 18,736 12,705
Extraordinary item pre-tax (2,354) -
Deferred income taxes 3,179 2,874
Other (225) 1,007
Changes in operating assets and liabilities, net of
effects of acquired businesses:
Receivables (16,833) (9,929)
Inventories (14,826) (536)
Accounts payable 10,411 9,880
All other assets and other liabilities (5,463) 22,408
--------- --------
Net cash provided by operating activities 10,408 53,181
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition costs, net of cash acquired (301,700) (46,491)
Equity investment - (22,726)
Capital expenditures (21,512) (21,907)
Investment in marketable securities, net (12,245) -
Other investing activities 551 916
--------- --------
Net cash used in investing activities (334,906) (90,208)
CASH FLOWS FROM FINANCING ACTIVITIES
Changes due to accounts receivable securitization, net (98,500) 32,443
Proceeds from common stock issuance 110 124
Proceeds from long-term debt 843,415 101,376
Repayments of long-term debt and capital leases (396,108) (96,505)
Debt issuance costs (13,831) -
Other financing activities (3,500) (558)
--------- --------
Net cash provided by financing activities 331,586 36,880
EFFECT OF EXCHANGE RATE CHANGES ON CASH (6) 1,073
--------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 7,082 926
BALANCE AT BEGINNING OF PERIOD 3,618 1,375
--------- --------
BALANCE AT END OF PERIOD $ 10,700 $ 2,301
========= ========
See notes to unaudited consolidated financial statements.
5
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS -- Mail-Well, Inc. and subsidiaries
(collectively referred to as the "Company") is a market leader in five
highly fragmented segments of the printing industry. The Company is a
leading commercial printer in the United States and manufactures and
prints envelopes in the United States and Canada. The Company is also a
printer of office products for the distributor market, labels for the
food and beverage industry, and extrusion coating and laminating.
PRINCIPLES OF CONSOLIDATION -- The Company, headquartered in
Englewood, Colorado, is organized under Colorado law and its common
stock is traded on the New York Stock Exchange. Mail-Well I Corporation
("MWI"), a wholly-owned subsidiary of Mail-Well, Inc., conducts most of
the business of Mail-Well, Inc. MWI, together with its subsidiaries, is
the owner of the Company's operating assets and the borrower of the debt
(exclusive of the Convertible Subordinated Notes). 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 Company's fiscal year
ending December 31, 2000.
INVENTORIES -- Detail of inventories, in thousands:
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
Raw materials $ 71,758 $ 55,896
Work in process 41,544 32,020
Finished goods 84,372 61,620
Reserve for obsolescence, loss and other (4,982) (4,780)
-------- --------
$192,692 $144,756
======== ========
SHAREHOLDERS' EQUITY -- The change in Common Stock and Paid-in
Capital is caused by the exercise of stock options. The change in
Retained Earnings is net income. See "Other Comprehensive Income" for
an explanation of the change in those accounts.
OTHER COMPREHENSIVE INCOME -- Other comprehensive income includes
changes in shareholders' equity that do not result directly from
transactions with shareholders. A summary of comprehensive income
follows:
THREE MONTHS ENDED
------------------
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
(in thousands)
Net income $ 17,783 $ 14,772
Currency translation adjustments, net (717) 3,527
Unrealized gain on investments, net (145) 34
-------- --------
Comprehensive income $ 16,921 $ 18,333
======== ========
6
EARNINGS PER SHARE -- 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
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE THREE MONTHS ENDED MARCH 31, 2000
EARNINGS PER SHARE - BASIC
Income available to common shareholders $ 17,783 49,229 $ 0.36
======
EFFECT OF DILUTIVE SECURITIES
Stock options - 548
Convertible Subordinated Notes 1,310 7,883
Other - 93
-------- ------
EARNINGS PER SHARE - DILUTED
Income available to common shareholders including
assumed conversions $ 19,093 57,753 $ 0.33
======== ====== ======
FOR THE THREE MONTHS ENDED MARCH 31, 1999
EARNINGS PER SHARE - BASIC
Income available to common shareholders $ 14,772 48,864 $ 0.30
======
EFFECT OF DILUTIVE SECURITIES
Stock options - 1,173
Convertible Subordinated Notes 1,313 8,003
Other - 220
-------- ------
EARNINGS PER SHARE - DILUTED
Income available to common shareholders including
assumed conversions $ 16,085 58,260 $ 0.28
======== ====== ======
RECLASSIFICATION -- Certain amounts in the 1999 financial statements
have been reclassified to conform to the 2000 presentation.
2. ACQUISITIONS
On January 28, 2000, the Company acquired Braceland Brothers, Inc., a
commercial printing company located in Philadelphia, Pennsylvania, with
approximate annual sales of $30.3 million.
In February 2000, the Company acquired 13,450,588 shares (or 91%
outstanding) of the common stock of Atlanta-based American Business
Products ("ABP") for $20 per share in a cash tender offer. In the
second step of the acquisition, ABP merged with a wholly-owned
subsidiary of the Company. The total value of the transaction,
including the assumption of debt, was approximately $333.6 million.
ABP is a premier provider of printed office products and specialty
packaging solutions through its Curtis 1000, International Envelope,
Discount Labels and Jen-Coat business units. ABP reported 1999 sales of
$475.9 million and net income and fully diluted earnings per share from
continuing operations of $19.7 million and $1.31, respectively.
These acquisitions have been accounted for as purchases and,
accordingly, the net purchase price of each acquisition was allocated to
the various assets and liabilities according to their estimated fair
values as of the date of the respective purchase. 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.
7
Certain purchase agreements require the payment of additional
consideration in the form of cash payments if specific operating
performance criteria are met. Any subsequent payment will be allocated
to goodwill. In addition, the purchase price allocation to inventory,
property, plant and equipment and restructuring charges for closing
certain plants for certain acquisitions have not been finalized.
Therefore, the amount of goodwill could be adjusted within one year of
the purchase.
The table below presents the results of operations for the three-
months ended March 31, 2000 and 1999 giving effect to the acquisition of
ABP and the $800 million senior secured credit facility (See Note 3) as
if they had occurred on January 1, 2000 and January 1, 1999,
respectively.
(in thousands, except per share data) Three Months ended
------------------
March 31,
---------
2000 1999
---- ----
Net sales $632,155 $551,696
Net income before extraordinary item $ 16,506 $ 16,341
Net income $ 18,344 $ 15,843
Net income before extraordinary item per share:
Basic $ 0.34 $ 0.33
Diluted $ 0.31 $ 0.30
Net income per share:
Basic $ 0.37 $ 0.32
Diluted $ 0.34 $ 0.29
3. LONG-TERM DEBT AND CAPITAL LEASES
Long-term debt consists of the following (in thousands):
INTEREST RATE AT
MARCH 31, 2000 MARCH 31, 2000 DECEMBER 31, 1999
-------------- -------------- -----------------
Bank Borrowings:
Unsecured loan, due June 9, 2003 6.88% $ 21,823 $ 21,876
Unsecured revolving loan facility, due
March 31, 2003 - 172,000
Unsecured revolving loan facility, due
July 31, 2000 - 242
Secured revolving line of credit, due
February 22, 2006 8.19% 81,000 -
Secured Tranche A term loan, due
February 22, 2006 8.19% 300,000 -
Secured Tranche B term loan, due
February 22, 2007 8.45% 250,000 -
Senior Subordinated Notes, due 2008 8.75% 300,000 300,000
Convertible Subordinated Notes, due 2002 5.00% 139,063 152,050
Other Various 28,727 20,811
---------- --------
1,120,613 666,979
Less current maturities (34,940) (13,889)
---------- --------
Long-term debt and capital leases $1,085,673 $653,090
========== ========
8
On February 18, 2000, the Company entered into a $800 million
senior secured credit facility (the "New Facility"). The proceeds were
used to finance the acquisition of ABP, pay related costs and expenses,
refinance the unsecured revolving loan facilities, and reduce the
amounts drawn under the accounts receivable securitization (see Note 5),
with the remainder to provide funds for general corporate purposes. The
availability under the unsecured uncommitted revolving loan facility,
due July 31, 2000, was reduced from $20 million to $10 million. The
unsecured revolving loan facility, due March 31, 2003 was terminated.
The New Facility consists of a $250 million revolving line of
credit, a $300 million Tranche A term loan and a $250 million Tranche B
term loan. The Company is required to repay $25 million of principal in
the first year of the Tranche A term loan, with increases of $10 million
a year until a $75 million payment in the sixth year. The Company is
required to pay $2.5 million per year on the Tranche B term loan, with a
balloon payment in 2007 of $233 million. Any optional prepayments of
principal must be applied proportionately among the Tranche A and B term
loans. The revolving line may be paid down at any time at the option of
the Company.
The New Facility contains certain financial and other covenants
that are customary for credit facilities of its type and size. The New
Facility is secured by substantially all tangible and intangible
property of U.S. entities, except for the accounts receivable sold under
the securitization program and certain property and equipment under
capital lease obligations.
In 2000, the Company wrote off deferred financing costs of
$635,000 (net of $244,000 of income tax benefits) capitalized in
connection with the bank debt which was repaid in February, 2000. The
write-off is shown as an extraordinary item in the statement of
operations. Also, in March 2000, the Company repurchased $12,987,000 of
the outstanding Convertible Subordinated Notes at a discount and
recorded a gain of $2,989,000 (net of $1,151,000 of income tax expense),
which is shown as an extraordinary item in the statement of operations.
4. RESTRUCTURING CHARGES
In November 1998, the Company committed to implement a
restructuring program affecting the Envelopes and Commercial Printing
segments and recorded a pre-tax provision of $15,961,000, of which
$11,699,000 represented non-cash charges for asset write-offs and
impairments, primarily machinery and equipment. Impairment losses were
calculated based on the excess of the carrying amount of the assets over
the assets' fair values. The fair value of an asset is generally
determined based on recent comparable sales and independent quotes from
the used equipment market. The remaining $4,262,000 was for severance,
other termination benefits and property exit costs, including
noncancelable operating leases. These charges were a result of the
regionalization of the Company's U.S. Envelopes operations and
reorganization of the Company's Commercial Printing operations,
primarily in the Northwest.
The Company also incurred $499,000 in expenses for the three
months ended March 31, 1999 relating to the relocation of personnel,
equipment and inventory, which under generally accepted accounting
principles could not be accrued for as part of the Company's
restructuring initiative. These costs are included in "Selling,
administrative and other" in the consolidated statements of operations.
Severance costs for the 616 personnel included in the restructuring
provision resulted from regionalizing special manufacturing operations
(490 personnel) and administrative functions (126 personnel) in various
locations of the Company's U.S. operations. Approximately 570 personnel
had been terminated as of March 31, 2000. The remaining asset write-down
is for one building expected to be sold in 2000. The remaining property
exit costs are for one lease, which expires in 2002, which is expected
to be sub-leased or exited by the end of 2000.
9
The following table summarizes the costs associated with the
restructuring program (in thousands):
ASSET SEVERANCE & PROPERTY
WRITE-DOWNS RELATED COSTS EXIT COSTS TOTAL
----------- ------------- ---------- -----
Initial reserve $ 11,699 $ 2,907 $ 1,355 $ 15,961
Utilized in 1998 (10,104) (523) (81) (10,708)
-------- ------- ------- --------
Balance 12/31/98 1,595 2,384 1,274 5,253
Utilized in 1999 (591) (1,608) (1,011) (3,210)
Transferred 19 (418) 399 -
-------- ------- ------- --------
Balance 12/31/99 1,023 358 662 2,043
Utilized in 2000 (33) (358) (224) (615)
-------- ------- ------- --------
Balance 3/31/00 $ 990 $ - $ 438 $ 1,428
======== ======= ======= ========
5. COMMITMENT AND CONTINGENCIES
In July 1999, the Company and certain of its subsidiaries
("Originators") entered into an agreement to sell, on a revolving basis,
trade receivables to a wholly-owned subsidiary, Mail-Well Trade
Receivables Corp. ("MTRC"). MTRC was capitalized by the Company as a
bankruptcy-remote special purpose entity that is subject to certain
covenants and restrictions, including a restriction from engaging in any
business or activity unrelated to acquiring and selling interests in
receivables. New receivables, except those failing certain eligibility
criteria, are sold to MTRC on a daily basis as previously sold accounts
receivables are collected. MTRC, in turn, sells an undivided variable
percentage interest in the pool of receivables, up to a maximum of $75
million (reduced from $150 million at December 31, 1999), to a multi-
seller receivables securitization company, for which there are no
repurchase agreements. The Company maintains a subordinated interest in
the portion of the pooled receivables, which are not transferred to the
securitization company.
The Company's securitization is accounted for as a sale in
accordance with FASB Statement No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities.
Therefore, the Company's accounts receivable have been reduced by the
amount of receivables sold to MTRC and the retained interest in the pool
of receivables has been reported as an investment available for sale,
recorded at its estimated fair value. An allowance for doubtful
accounts is also maintained for both receivables not included in the
pool and for its retained interest in the pool. As of March 31, 2000,
the Company had sold $138.2 million of accounts receivable to MTRC and
MTRC had sold beneficial interests totaling $50.0 million to the
securitization company.
The Company is involved in various lawsuits incidental to its
businesses. In management's opinion, it is not probable that an adverse
determination against the Company relating to these suits would occur
that would be material to the consolidated financial statements.
6. SEGMENT INFORMATION
The Company's operating segments prepare separate financial
information that is evaluated regularly by the Chief Operating Officer
in assessing performance and deciding how to allocate resources.
Corporate expenses include the costs of maintaining a corporate office.
The Company does not allocate corporate overhead, interest (income)
expense, amortization expense, gains and losses on disposal of assets or
income taxes by segment in assessing performance. Operating segments
of the Company are defined primarily by product line and consist
of Commercial Printing, Envelope, Label, Printed Office Products,
and Extrusion Coating & Laminating. ABP segments were included in
Mail-Well's segments as follows: Curtis 1000 is included in Printed
Office Products; International Envelope, Envelope; Discount Labels,
Printed Office Products; and Jen-Coat, Extrusion Coating & Laminating.
Two locations were reclassified from Envelope to Commercial
Printing and Printed Office Products, respectively, since the 1999 Form
10-K. Segment information for all periods has been restated to reflect
these changes. Segment information as of the three months ended March
31, 2000 and 1999 is presented below:
10
Three Months Ended March 31,
----------------------------
2000 1999
---- ----
NET SALES TO EXTERNAL CUSTOMERS:
Commercial Printing $ 223,400 $ 186,078
Envelope 202,353 194,523
Printed Office Products 69,619 34,949
Label 54,270 24,867
Extrusion Coating & Laminating 18,396 -
---------- ----------
Total $ 568,038 $ 440,417
========== ==========
OPERATING INCOME (LOSS):
Commercial Printing $ 17,693 $ 14,426
Envelope 22,142 24,402
Printed Office Products 8,400 2,959
Label 3,344 1,681
Extrusion Coating & Laminating 2,259 -
Corporate (6,166) (5,840)
---------- ----------
Total $ 47,672 $ 37,628
========== ==========
DEPRECIATION AND AMORTIZATION:
Commercial Printing $ 6,495 $ 5,164
Envelope 4,622 3,696
Printed Office Products 1,372 543
Label 1,939 1,123
Extrusion Coating & Laminating 364 -
Corporate 3,163 1,676
---------- ----------
Total $ 17,955 $ 12,202
========== ==========
IDENTIFIABLE ASSETS:
Commercial Printing $ 686,545 $ 637,013
Envelope 578,577 530,733
Printed Office Products 255,059 124,394
Label 222,649 218,023
Extrusion Coating & Laminating 165,294 -
Corporate (4,152) (166,122)
---------- ----------
Total assets $1,903,972 $1,344,041
========== ==========
Intercompany sales by segment include $1,669,000, $1,627,000,
$409,000, $1,033,000 and $216,000 for Commercial Printing, Envelope,
Label, Printed Office Products & Extrusion Coating & Laminating,
respectively. These amounts have been eliminated in consolidation.
11
7. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
In December 1998, MWI ("Issuer" or "MWI"), the Company's wholly-
owned subsidiary, and the only direct subsidiary of the Company, issued
$300.0 million aggregate principal amount of 8 3/4% Senior Subordinated
Notes ("Senior Notes") due in 2008. The Senior Notes are guaranteed by
the majority of the U.S. subsidiaries (the "Guarantor Subsidiaries") of
MWI, all of which are wholly owned, and by Mail-Well, Inc. ("Parent
Guarantor"). The guarantees are joint and several, full, complete and
unconditional. There are no material restrictions on the ability of the
Guarantor Subsidiaries to transfer funds to MWI in the form of cash
dividends, loans or advances, other than ordinary legal restrictions
under corporate law, fraudulent transfer and bankruptcy laws.
The following condensed consolidating financial information
illustrates the composition of the Parent Guarantor, Issuer, Guarantor
Subsidiaries and non-guarantor subsidiaries. The Issuer, the Guarantor
Subsidiaries and the non-guarantor subsidiaries comprise all of the
direct and indirect subsidiaries of the Parent Guarantor. Management
has determined that separate complete financial statements would not
provide additional material information that would be useful in
assessing the financial composition of the Guarantor Subsidiaries.
Investments in subsidiaries are accounted for under the equity
method, wherein the investor company's share of earnings and income
taxes applicable to the assumed distribution of such earnings are
included in net income. In addition, investments increase in the amount
of permanent contributions to subsidiaries and decrease in the amount of
distributions from subsidiaries. The elimination entries eliminate the
equity method investment in subsidiaries and the equity in earnings of
subsidiaries, intercompany payables and receivables and other
transactions between subsidiaries.
12
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
Quarter Ended March 31, 2000
(in thousands)
Combined Combined
Parent Guarantor Nonguarantor
Guarantor Issuer Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------ ------------ ------------ ------------ ------------
NET SALES $ - $115,698 $322,991 $129,349 $ - $568,038
COST OF SALES - 92,122 248,123 94,429 - 434,674
------- -------- -------- -------- -------- --------
GROSS PROFIT - 23,576 74,868 34,920 - 133,364
OTHER OPERATING COSTS 42 16,885 49,147 19,618 - 85,692
------- -------- -------- -------- -------- --------
OPERATING INCOME (LOSS) (42) 6,691 25,721 15,302 - 47,672
OTHER (INCOME) EXPENSE
Interest expense 2,116 18,125 7,088 344 (7,571) 20,102
Other (income) expense (2,212) (5,604) (28) 154 7,571 (119)
------- -------- -------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME
TAXES AND EQUITY IN
UNDISTRIBUTED EARNINGS OF
SUBSIDIARIES AND
EXTRAORDINARY ITEM 54 (5,830) 18,661 14,804 - 27,689
PROVISION (BENEFIT) FOR
INCOME TAXES - (2,390) 7,673 6,070 - 11,353
------- -------- -------- -------- -------- --------
INCOME (LOSS) BEFORE EQUITY
IN UNDISTRIBUTED EARNINGS
OF SUBSIDIARIES AND
EXTRAORDINARY ITEM 54 (3,440) 10,988 8,734 - 16,336
EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARIES 15,891 19,722 4,159 - (39,772) -
------- -------- -------- -------- -------- --------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM 15,945 16,282 15,147 8,734 (39,772) 16,336
EXTRAORDINARY ITEM 1,838 (391) - - - 1,447
------- -------- -------- -------- -------- --------
NET INCOME $17,783 $ 15,891 $ 15,147 $ 8,734 $(39,772) $ 17,783
======= ======== ======== ======== ======== ========
13
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
Quarter Ended March 31, 1999
(in thousands)
Combined Combined
Parent Guarantor Nonguarantor
Guarantor Issuer Subsidiaries Subsidiaries Elim. Consolidated
--------- ------ ------------ ------------ ----- ------------
NET SALES $ - $101,195 $290,520 $48,702 $ - $440,417
COST OF SALES - 79,883 225,839 36,081 - 341,803
------- -------- -------- ------- -------- --------
GROSS PROFIT - 21,312 64,681 12,621 - 98,614
OTHER OPERATING COSTS 68 15,984 39,413 5,521 - 60,986
------- -------- -------- ------- -------- --------
OPERATING INCOME (LOSS) (68) 5,328 25,268 7,100 - 37,628
OTHER (INCOME) EXPENSE
Interest expense 2,135 10,606 486 1,752 (2,212) 12,767
Other (income) expense (2,217) 302 13 118 2,212 (176)
------- -------- -------- ------- -------- --------
INCOME (LOSS) BEFORE INCOME
TAXES AND EQUITY IN
UNDISTRIBUTED EARNINGS OF
SUBSIDIARIES 14 (4,976) 24,769 5,230 - 25,037
PROVISION (BENEFIT) FOR
INCOME TAXES - (2,040) 10,240 2,065 - 10,265
------- -------- -------- ------- -------- --------
INCOME (LOSS) BEFORE EQUITY
IN UNDISTRIBUTED EARNINGS
OF SUBSIDIARIES 14 (2,936) 14,529 3,165 - 14,772
EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARIES 14,758 17,694 3,165 - (35,617) -
------- -------- -------- ------- -------- --------
NET INCOME $14,772 $ 14,758 $ 17,694 $ 3,165 $(35,617) $ 14,772
======= ======== ======== ======= ======== ========
14
CONSOLIDATING CONDENSED STATEMENT OF FINANCIAL POSITION
March 31, 2000
(in thousands)
Combined Combined
Parent Guarantor Nonguarantor
Guarantor Issuer Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------ ------------ ------------ ------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ - $ 23,030 $(15,593) $ 3,263 $ - $ 10,700
Receivables, net - 4,408 125,468 96,139 - 226,015
Investment in accounts receivable
Securitization - - - 87,541 - 87,541
Accounts receivable - other - 10,729 6,862 2,312 - 19,903
Inventories, net - 49,697 86,582 56,413 - 192,692
Note receivable from Issuer 147,436 - - - (147,436) -
Other current assets 308 34,546 7,224 5,423 (10,506) 36,995
-------- ---------- -------- -------- ----------- ----------
Total current assets 147,744 122,410 210,543 251,091 (157,942) 573,846
INVESTMENT IN SUBSIDIARIES 392,457 976,133 51,161 - (1,419,751) -
PROPERTY, PLANT AND
EQUIPMENT, NET - 133,149 324,201 164,502 - 621,852
GOODWILL, NET - 48,656 324,469 271,104 - 644,229
NOTES RECEIVABLE FROM
SUBSIDIARIES - 245,000 - - (245,000) -
OTHER ASSETS, NET 2,703 49,550 21,958 31,334 (41,500) 64,045
-------- ---------- -------- -------- ----------- ----------
TOTAL $542,904 $1,574,898 $932,332 $718,031 $(1,864,193) $1,903,972
======== ========== ======== ======== =========== ==========
CURRENT LIABILITIES
Accounts payable $ - $ 28,430 $ 86,132 $ 45,625 $ - $ 160,187
Accrued compensation and vacation - 10,660 30,162 15,764 - 56,586
Other current liabilities 11,500 (6,572) (39,996) 125,234 (10,506) 79,660
Note payable to Parent - 147,436 - - (147,436) -
Current portion of long-term debt
and capital leases - 21,578 4,001 9,361 - 34,940
-------- ---------- -------- -------- ----------- ----------
Total current liabilities 11,500 201,532 80,299 195,984 (157,942) 331,373
LONG-TERM DEBT AND
CAPITAL LEASES 139,063 910,460 5,017 31,133 - 1,085,673
NOTES PAYABLE TO ISSUER - - 245,000 - (245,000) -
DEFERRED INCOME TAXES - 67,917 - 11,109 (21,508) 57,518
OTHER LONG-TERM
LIABILITIES - 2,532 24,395 30,132 (19,992) 37,067
-------- ---------- -------- -------- ----------- ----------
Total liabilities 150,563 1,182,441 354,711 268,358 (444,442) 1,511,631
SHAREHOLDERS' EQUITY 392,341 392,457 577,621 449,673 (1,419,751) 392,341
-------- ---------- -------- -------- ----------- ----------
TOTAL $542,904 $1,574,898 $932,332 $718,031 $(1,864,193) $1,903,972
======== ========== ======== ======== =========== ==========
15
CONSOLIDATING CONDENSED STATEMENT OF FINANCIAL POSITION
December 31, 1999
(in thousands)
Combined Combined
Parent Guarantor Nonguarantor
Guarantor Issuer Subsidiaries Subsidiaries Elim. Consolidated
--------- ------ ------------ ------------ ----- ------------
CURRENT ASSETS
Cash and cash equivalents $ - $ 27,667 $(28,003) $ 3,954 $ - $ 3,618
Receivables, net - 87 35,860 49,097 - 85,044
Investment in accounts receivable
Securitization - - - 54,396 - 54,396
Accounts receivable - other - 8,572 10,004 2,188 - 20,764
Inventories, net - 36,337 82,277 26,142 - 144,756
Note receivable from Issuer 147,436 - - - (147,436) -
Other current assets 345 24,247 3,597 4,348 (6,986) 25,551
-------- ---------- -------- -------- ----------- ----------
Total current assets 147,781 96,910 103,735 140,125 (154,422) 334,129
INVESTMENT IN SUBSIDIARIES 377,318 663,928 48,574 - (1,089,820) -
PROPERTY, PLANT AND
EQUIPMENT, NET - 104,938 323,180 104,038 - 532,156
GOODWILL, NET - 45,460 279,252 128,771 - 453,483
NOTE RECEIVABLE FROM
SUBSIDIARIES - 245,000 - - (245,000) -
OTHER ASSETS, NET 2,943 32,517 3,851 8,432 (23,470) 24,273
-------- ---------- -------- -------- ----------- ----------
TOTAL $528,042 $1,188,753 $758,592 $381,366 $(1,512,712) $1,344,041
======== ========== ======== ======== =========== ==========
CURRENT LIABILITIES
Accounts payable $ - $ 19,499 $ 79,447 $ 23,794 $ - $ 122,740
Accrued compensation and vacation - 8,388 32,638 9,016 - 50,042
Other current liabilities 682 99,317 (163,815) 123,801 (6,986) 52,999
Note payable to Parent - 147,436 - - (147,436) -
Current portion of long-term debt
And capital leases - 674 4,652 8,563 - 13,889
-------- ---------- -------- -------- ----------- ----------
Total current liabilities 682 275,314 (47,078) 165,174 (154,422) 239,670
LONG-TERM DEBT AND
CAPITAL LEASES 152,050 472,180 6,690 22,170 - 653,090
NOTE PAYABLE TO ISSUER - - 245,000 - (245,000) -
DEFERRED INCOME TAXES - 57,881 - 9,709 (3,478) 64,112
OTHER LONG-TERM
LIABILITIES - 2,560 25,160 623 (19,992) 8,351
-------- ---------- -------- -------- ----------- ----------
Total liabilities 152,732 807,935 229,772 197,676 (422,892) 965,223
MINORITY INTEREST - 3,500 - 8 - 3,508
SHAREHOLDERS' EQUITY 375,310 377,318 528,820 183,682 (1,089,820) 375,310
-------- ---------- -------- -------- ----------- ----------
TOTAL $528,042 $1,188,753 $758,592 $381,366 $(1,512,712) $1,344,041
======== ========== ======== ======== =========== ==========
16
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
Three-months ended March 31, 2000
(in thousands)
Combined Combined
Parent Guarantor Nonguarantor
Guarantor Issuer Subsidiaries Subsidiaries Elimination Consolidated
--------- ------ ------------ ------------ ----------- ------------
CASH FLOWS FROM
OPERATING ACTIVITIES $(2,994) $ (11,923) $ 49,296 $ (23,971) $ - $ 10,408
CASH FLOWS FROM
INVESTING ACTIVITIES
Acquisition costs, net of
cash acquired - - (10,646) (291,054) - (301,700)
Capital expenditures - (2,764) (16,685) (2,063) - (21,512)
Investment in marketable
securities, net - (100) - (12,145) - (12,245)
Investment in subsidiaries (110) (336,796) - - 336,906 -
Other investing activities 12,992 (63,140) 48,072 101,127 (98,500) 551
------- --------- -------- --------- --------- ---------
Net cash used in investing
activities 12,882 (402,800) 20,741 (204,135) 238,406 (334,906)
CASH FLOWS FROM FINANCING ACTIVITIES
Changes due to accounts receivable
securitization, net - (31,572) (66,928) (98,500) 98,500 (98,500)
Net proceeds from common stock
issuance 110 - - - - 110
Proceeds from long-term debt - 841,000 - 2,415 - 843,415
Repayments of long-term debt and
capital lease obligations (9,998) (382,121) (1,337) (2,652) - (396,108)
Debt issuance costs - (13,831) - - - (13,831)
Investment by parent - 110 10,638 326,158 (336,906) -
Other financing activities - (3,500) - - - (3,500)
------- --------- -------- --------- --------- ---------
Net cash provided by
financing activities (9,888) 410,086 (57,627) 227,421 (238,406) 331,586
EFFECT OF EXCHANGE RATE CHANGES ON CASH - - - (6) - (6)
------- --------- -------- --------- --------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS - (4,637) 12,410 (691) - 7,082
BALANCE AT BEGINNING OF YEAR - 27,667 (28,003) 3,954 - 3,618
------- --------- -------- --------- --------- ---------
BALANCE AT END OF YEAR $ - $ 23,030 $(15,593) $ 3,263 $ - $ 10,700
======= ========= ======== ========= ========= =========
17
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
Quarter ended March 31, 1999
(in thousands)
Combined Combined
Parent Guarantor Nonguarantor
Guarantor Issuer Subsidiaries Subsidiaries Consolidated
--------- ------ ------------ ------------ ------------
CASH FLOWS FROM
OPERATING ACTIVITIES $ - $ 33,715 $ 21,620 $(2,154) $ 53,181
CASH FLOWS FROM
INVESTING ACTIVITIES
Acquisition costs, net of cash acquired - (117) (46,374) - (46,491)
Equity investment - (22,726) - - (22,726)
Capital expenditures - (2,661) (18,433) (813) (21,907)
Other investing activities (124) - 981 59 916
------ -------- -------- ------- --------
Net cash used in investing activities (124) (25,504) (63,826) (754) (90,208)
------ -------- -------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Changes due to accounts receivable securitization,
net - 10,923 21,520 - 32,443
Net proceeds from common stock issuance 124 - - - 124
Proceeds from long-term debt - 93,000 - 8,376 101,376
Repayments of long-term debt and capital lease
obligations - (89,009) (837) (6,659) (96,505)
Investment by parent - (558) - - (558)
------ -------- -------- ------- --------
Net cash provided by financing activities 124 14,356 20,683 1,717 36,880
EFFECT OF EXCHANGE RATE CHANGES ON CASH - - - 1,073 1,073
------ -------- -------- ------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS - 22,567 (21,523) (118) 926
------ -------- -------- ------- --------
BALANACE AT BEGINNING OF YEAR - 6,952 (7,311) 1,734 1,375
------ -------- -------- ------- --------
BALANCE AT END OF YEAR $ - $ 29,519 $(28,834) $ 1,616 $ 2,301
====== ======== ======== ======= ========
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
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, the
following:
* paper and other raw material costs and the ability to pass
through paper costs to customers
* general labor conditions
* ability to obtain productivity savings
* postage rates and other changes in the direct mail industry
* competition from electronic media, including the internet
* demand for printed materials
* interest rates and foreign currency exchange rates
* ability to obtain additional financing
* availability of acquisition opportunities and their related
costs
* ability to achieve cost savings from integration of
acquisitions
This entire report should be read to put such forward-looking statements
in context and to gain a more complete understanding of the
uncertainties and risks involved in the company's business.
OVERVIEW, HISTORICAL FINANCIAL DATA BY SEGMENT (IN THOUSANDS)
The following table presents historical financial data by segment,
including acquisitions from their purchase dates.
QUARTER ENDED MARCH 31,
-----------------------
2000 1999
---- ----
Net sales
Commercial Printing $223,400 $186,078
Envelope 202,353 194,523
Printed Office Products 69,619 34,949
Label 54,270 24,867
Extrusion Coating & Laminating 18,396 -
-------- --------
Total net sales $568,038 $440,417
======== ========
Operating income
Commercial Printing $ 17,693 $ 14,426
Envelope 22,142 24,402
Printed Office Products 8,400 2,959
Label 3,344 1,681
Extrusion Coating & Laminating 2,259 -
Corporate (6,166) (5,840)
-------- --------
Total operating income 47,672 37,628
Interest expense (20,102) (12,767)
Other income (expense) 119 176
Income tax expense (11,353) (10,265)
-------- --------
Net income before extraordinary item $ 16,336 $ 14,772
======== ========
19
Net sales for the quarter ended March 31, 2000 increased 29.0% to
$568.0 million compared to net sales of $440.4 million for the quarter
ended March 31, 1999. This increase in net sales was attributable to
sales from companies acquired during 2000, a full quarter of sales from
companies acquired during 1999 and internal growth in Commercial
Printing and Label offset by a decline in volume within the Envelope
segment. Gross profit of $133.4 million for the quarter ended March 31,
2000 represents a 35.2% increase over the quarter ended March 31, 1999.
Expressed as a percent of net sales, gross profit increased by 110 basis
points to 23.5% for the quarter ended March 31, 2000 compared to 22.4%
for the quarter ended March 31, 1999. The increase is primarily due to
the acquisition of companies with higher than Mail-Well's average gross
profit percentages, productivity improvements, the impact of purchasing
programs and benefits from restructuring initiatives. These factors
were offset in part by unfavorable product mix changes and pricing
pressures in the Envelope segment. Expressed as a percent of net sales,
selling, administrative and other expense increased to 15.1% for the
quarter ended March 31, 2000 from 13.8% in quarter ended March 31, 1999.
The increase was mainly due to increased amortization expense and the
impact of acquisitions. Operating income increased 26.7% from the
quarter ended March 31, 1999.
Net income before extraordinary item for the quarter ended March
31, 2000 increased 10.6% to $16.3 million from $14.8 million in the
first quarter of the prior year. Earnings per diluted share before
extraordinary item increased 10.7% to $0.31 in the quarter ended March
31, 2000 from $0.28 in 1999.
RESULTS OF OPERATIONS FOR SIGNIFICANT BUSINESS SEGMENTS
Commercial Printing
- -------------------
Quarter Ended March 31, 2000 Compared to the Quarter Ended March 31,
1999
Net sales--Net sales increased by $37.3 million (20.1%) for the
quarter ended March 31, 2000 compared to the quarter ended March 31,
1999, primarily due to a volume increase of approximately 4% and the
balance due to acquisitions in 1999 and 2000.
Operating income--The majority of the increase in operating income
from $14.4 million to $17.7 million in the quarter ended March 31, 2000
was due to acquisitions in 1999 and 2000. Total cost of sales, as a
percent of sales, decreased from 78.0% for the quarter ended March 31,
1999 to 77.4% for the quarter ended March 31, 2000. This decrease was
primarily due to the impact of the benefits from new acquisitions
adopting our corporate purchasing programs, offset by general cost
increases and product mix.
Envelope
- --------
Quarter Ended March 31, 2000 Compared to the Quarter Ended March 31,
1999
Net sales--Net sales increased by $7.8 million (4.0%) for the
quarter ended March 31, 2000 compared to the quarter ended March 31,
1999. This increase in net sales was attributable to sales from a
company acquired during 2000, a full quarter of sales from a company
acquired during 1999, offset by a slowdown in the sweepstakes and direct
mail markets.
Operating income--The majority of the decrease in operating income
from $24.4 million to $22.1 million in the quarter ended March 31, 2000
versus the quarter ended March 31, 1999 was due to the reduction in
volumes, product mix changes and general pricing pressures. Total cost
of sales, as a percent of sales, increased from 75.9% for the quarter
ended March 31, 1999 to 77.9% for the quarter ended March 31, 2000. The
increase was due to product mix changes and pricing pressures offset by
the benefits of the Company's restructuring plan.
20
Printed Office Products
- -----------------------
Quarter Ended March 31, 2000 Compared to the Quarter Ended March 31,
1999
Net sales--Net sales increased by $34.7 million (99.2%) for the
quarter ended March 31, 2000 compared to the quarter ended March 31,
1999. This increase in net sales was attributable to sales from a
company acquired during 2000 and a full quarter of sales from companies
acquired during 1999.
Operating income--The majority of the increase in operating
income from $3.0 million to $8.4 million in the quarter ended March 31,
2000 was due to acquisitions in 1999 and 2000, productivity improvements
and changes in product mix. Total cost of sales, as a percent of sales,
decreased from 82.8% for the quarter ended March 31, 1999 to 69.4% for
the quarter ended March 31, 2000. Total cost of sales, as a percent of
sales, was 81.2% for the quarter ended March 31, 2000 excluding
acquisitions from 1999 and 2000. The decrease was due to lower material
costs through aggressive management of our main supplier agreement and
effects of a new waste reduction program.
Corporate
- ---------
Certain major production equipment is accounted for as an
operating lease on a consolidated basis while treated as a purchase on a
segment level. The Company classifies the excess of the operating lease
expense over depreciation as a corporate expense in analyzing segment
operations. The Company does not include the amortization of intangibles
recorded in acquisitions in segment results but rather includes it on a
corporate basis. In addition, corporate expenses include corporate
administrative expense, loss (gain) on disposal of assets and a
reduction of cost of sales from certain supplier rebate programs not
allocated to segments.
Corporate expenses for the quarter ended March 31, 2000 increased
$0.3 million compared to 1999 as a result of increases in amortization
expense offset by an increase in corporate retained rebates.
Amortization expense increased as a result of the acquisitions made in
1999 and 2000.
Interest expense
- ----------------
Interest expense, including accounts receivable securitization
discount, for the quarter ended March 31, 2000 increased $7.3 million
compared to the quarter ended March 31, 1999. The increase occurred as a
result of higher average bank debt balances, primarily due to
acquisitions, and an increase in the weighted-average borrowing rate due
to the refinancing of certain bank facilities. The Company continued to
participate in its accounts receivable securitization 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
$75.0 million until July 2004. At March 31, 2000 and 1999, $50.0 million
and $85.0 million, respectively, had been sold under this agreement. The
receivables were sold at a discount slightly above the prevailing
commercial paper rate, plus certain other fees.
Income tax expense
- ------------------
The effective tax rate for the quarters ended March 31, 2000 and
1999 was 41%. The effective tax rate was higher than the federal
statutory rates due to state and provincial income taxes and certain
goodwill amortization that is not tax deductible. See Note 9 of the
Notes to Consolidated Financial Statements included in the Company's
1999 Form 10-K.
LIQUIDITY AND CAPITAL RESOURCES
Historical Cash Flow
- --------------------
Net cash flow provided by operating activities was $10.4 million
and $53.2 million for the three-months ended March 31, 2000 and 1999,
respectively. The change in cash flow provided by operating activities
is due to the increase in working capital. The largest contributors to
the increase in working capital are accounts receivable and inventory.
Accounts receivable has increased mostly in the Commercial Printing
segment because of high sales in
21
the quarter ended March 31, 2000 compared to the prior year. Inventory
increased mostly in the Envelope segment due to a build-up of inventory
as sales decreased from the quarter ended March 31, 1999. Acquisitions
required cash payments of $301.7 million and $46.5 million for the
three-months ended March 31, 2000 and 1999, respectively. Other
investing activities, excluding investment in marketable securities,
were $21.0 million for each of the three-months ended March 31, 2000 and
1999. The investment in marketable securities of $12.2 million in the
three-months ended March 31, 2000 resulted from funding of supplemental
retirement benefits of certain employees or former employees of American
Business Products, Inc. Net cash flow from financing activities was
$331.6 and $36.9 for the three-months ended March 31, 2000 and 1999,
respectively. See footnote 3 of the financial statements contained in
Item 1 for explanation of the 2000 financing activities.
At March 31, 2000, the Company had approximately $200.0 million of
available credit under its various credit facilities.
Foreign Currency
- ----------------
The Company's foreign currency exposure primarily relates to its
Canadian operations. Net sales provided by the Canadian operations for
the three-months ended March 31, 2000 and 1999 was USD $51.3 million and
USD $49.3 million, respectively. The impact of the change in Canadian
Dollar exchange rates was immaterial.
Seasonality and Environment
- ---------------------------
As the Company expands its operations into more commercial
printing and labels segments, it has become more impacted by
seasonality. Management expects the first and third quarter to report
higher sales for the Commercial Printing segment because of annual
report and car brochure business. In addition, the third quarter is
traditionally the strongest for the Label segment.
The effects of environmental matters had no material financial
impact on the historical operations of the Company and are not expected
to have a material effect on the Company's liquidity and capital
resources going forward.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (the "Statement"). The
Statement, which will be effective beginning in the year 2001, requires
derivative instruments to be recorded in the balance sheet at their fair
value with changes in fair value being recognized in earnings unless
specific hedging accounting criteria are met. The Company has minimal
hedging and derivative activity, but it has not determined the impact of
this statement on its operations and financial position.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain market risks, including foreign
currency and interest rate risks. The foreign currency risk for foreign
currency denominated debt obligations (USD$21,823,000 at March 31, 2000)
and the interest rate risk for the investment in accounts receivable
securitization ($87,541,000 at March 31, 2000) are not considered to be
significant since the difference between the fair values and carrying
values are not material to the company's financial position. The
Company's cash flows from operations and earnings are affected by
changes in short-term interest rates since a large portion of its credit
agreements include rates variable with LIBOR. As of March 31, 2000,
$631 million of variable rate debt was outstanding. The fair value of
the Company's fixed rate long-term debt is affected by changes in long-
term interest rates.
If LIBOR were to increase 1% from the rate at March 31, 2000 and
the Company borrowed the maximum amount available under its variable
rate debt ($810.0 million), the Company's annual interest expense would
increase by $8.1 million, and annual income after income taxes would
decrease by approximately $5.0 million using a marginal income tax rate
of 38.5%. This analysis does not consider the effects of the reduced
level of overall
22
economic activity that could exist in such an environment. Further, in
the event of a change of such magnitude, management would likely take
actions to further mitigate its exposure to the change. However, due to
the uncertainty of the specific actions that would be taken and their
possible effects, the sensitivity analysis assumes no changes in the
Company's financial structure.
See Item 7A of the Company's 1999 Form 10-K for quantitative and
qualitative disclosures about market risk related to fixed rate long-
term debt. No significant changes in market risk have occurred since
that filing.
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
3(i) Articles of Incorporation of the Company - incorporated by
reference from Exhibit 3(i) of the Company's Form 10-Q
for the quarter ended September 30, 1997.
3(ii) 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.
4.1.1 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 Form S-3 dated October 29, 1997 (Reg. No.
333-35561).
4.1.2 Form of Indenture between the Company and The Bank of New
York, as Trustee, dated November 1997, relating to the
Company's $152,050,000 aggregate principal amount of 5%
Convertible Subordinated Notes due 2002--incorporated by
reference from Exhibit 4.2 to the Company's Amendment
No. 2 to Form S-3 dated November 10, 1997 (Reg. No.
333-36337).
4.1.3 Form of Supplemental Indenture between the Company and The
Bank of New York, as Trustee, dated November 1997,
relating to the Company's $152,050,000 aggregate
principal amount of 5% Convertible Subordinated Notes due
2002 and Form of Convertible Note--incorporated by
reference from Exhibit 4.5 to the Company's Amendment
No. 2 to Form S-3 dated November 10, 1997 (Reg. No.
333-36337).
4.2 Indenture dated as of December 16, 1998 between Mail-Well I
Corporation ("MWI") and State Street Bank and Trust
Company, as Trustee, relating to MWI's $300,000,000
aggregate principal amount of 8 3/4% Senior Subordinated
Notes due 2008 - incorporated by reference from the
Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
4.5 Form of Senior Subordinated Note. Incorporated by reference
from the company's Annual Report of Form 10-K for the
year ended December 31, 1998.
10.1 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.
10.2 Form of Indemnity Agreement between Mail-Well I Corporation
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.
10.3 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.
10.4 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.
10.5 Mail-Well, Inc. 1994 Stock Option Plan, as amended on May 7,
1997 - incorporated by reference from Exhibit 10.56 of
the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997.
23
10.6 Form of 1994 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.
10.7 Form of the Company Nonqualified Stock Option Agreement -
incorporated by reference from Exhibit 10.23 of the
Company's Registration Statement on Form S-1 dated March
25, 1994.
10.8 Mail-Well, Inc. 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.
10.9 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.
10.10 Mail-Well, Inc. 1998 Incentive Stock Option Plan--
incorporated by reference from Exhibit 10.58 to the
Company's Quarterly report on Form 10-Q for the quarter
ended March 31, 1998.
10.11 Form of 1998 Incentive Stock Option Agreement-- incorporated
by reference from Exhibit 10.59 to the Company's
Quarterly report on Form 10-Q for the quarter ended March
31, 1998.
10.12 Credit Agreement dated as of March 16, 1998 among Supremex
Inc., certain Guarantors, Bank of America National Trust
and Savings Association, as Agent and other financial
institutions party thereto -- incorporated by reference
from Exhibit 10.61 to the Company's Quarterly report on
Form 10-Q for the quarter ended March 31, 1998.
10.13 Participation Agreement dated as of December 15, 1997 among
Mail-Well I Corporation, Keybank National Association, as
Trustee and other financial institutions party
thereto--incorporated by reference from Exhibit 10.62 to
the Company's Quarterly report on Form 10-Q for the
quarter ended March 31, 1998.
10.14 Equipment Lease dated as of December 15, 1997 among Mail-Well I
Corporation, Keybank National Association, as Trustee and
other financial institutions party thereto--incorporated by
reference from Exhibit 10.63 to the Company's Quarterly
report on Form 10-Q for the quarter ended March 31, 1998.
10.15 Guaranty Agreement dated as of December 15, 1997 among
Mail-Well, Inc., Graphic Arts Center, Inc., Griffin
Envelope Inc., Murray Envelope Corporation, Shepard
Poorman Communications Corporation, Wisco Envelope Corp.,
Wisco II, LLC, Wisco III, LLC, Mail-Well I Corporation,
Keybank National Association, as Trustee and other
financial institutions party thereto--incorporated by
reference from Exhibit 10.64 to the Company's Quarterly
report on Form 10-Q for the quarter ended March 31, 1998.
10.16 Receivables Purchase Agreement dated as of July 1, 1999
among Mail-Well Trade Receivables Corporation, as Seller,
Quincy Capital Corporation, as Issuer, The Alternative
Purchasers from Time to Time Party thereto, Mail-Well I
Corporation, as Servicer and Bank of America National
Trust and Savings Association, as Administrator; and
First Amendment thereto--incorporated by reference from
the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999
10.17 Purchase and Sales Agreement between Mail-Well I Corporation
as initial Servicer and as Guarantor, The Originators
from Time to Time Party thereto and Mail-Well Trade
Receivable Corporation, as Purchaser dated as of July 1,
1999; and First Amendment thereto--incorporated by
reference from the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1999
10.18 Servicing Agreement dated as of July 1, 1999 by and among
Mail-Well I Corporation, as Servicer, Mail-Well Trade
Receivables Corporation, as Seller under the Receivables
Purchase Agreement and Bank of America National Trust and
Saving Association, as Administrator; and First Amendment
thereto--incorporated by reference from the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999.
10.19 Merger Agreement and Plan of Merger by and among American
Business Products, Inc., Mail-Well, Inc. and Sherman
Acquisition Corporation dated January 13, 2000--
incorporated by reference from Exhibit (c) (1) to the
Registrant's Tender Offer Statement on Schedule 14D-1
filed with the commission on January 21, 2000.
10.20 Change of Control Agreement dated November 15, 1999, between
the Company and Gerald F. Mahoney--incorporated by
reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1999.
10.21 Change of Control Agreement dated November 15, 1999, between
the Company and Paul V. Reilly--incorporated by reference
from the Company's Annual Report on Form 10-K for the
year ended December 31, 1999.
10.22 Change of Control Agreement dated November 15, 1999, between
the Company and Gary Ritondaro--incorporated by reference
from the Company's Annual Report on Form 10-K for the
year ended December 31, 1999.
10.23 Change of Control Agreement dated November 15, 1999, between
the Company and Robert Meyer--incorporated by reference
from the Company's Annual Report on Form 10-K for the
year ended December 31, 1999.
24
10.24 Change of Control Agreement dated November 15, 1999, between
the Company and Michael A. Zawalski--incorporated by
reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1999.
10.25<F*> Credit Agreement dated as of February 18, 2000 among
Mail-Well I Corporation, Bank of American, N.A., as
Administrative Agent and Letter of Credit Issuing Bank,
ABN AMRO Bank, N.V., as Syndication Agents, the Bank of
Nova Scotia, as Documentation Agent and certain other
financial institutions party thereto.
10.26<F*> Security Agreement dated as of February 18, 2000, by and
among Mail-Well I Corporation, Mail-Well, Inc., certain
other affiliates of the Company and Bank of America,
N.A., as agent.
27.1<F*> Financial Data Schedule for three-months ended March 31,
2000.
27.2<F*> Financial Data Schedule for three-months ended March 31,
1999.
[FN]
- -------------
<F*> Filed herewith.
(b) Reports on Form 8-K
A report on Form 8-K was filed on February 23, 2000, announcing
the acquisition of American Business Products, Inc. A report on Form
8-K to amend the Form 8-K filed on February 23, 2000 was filed on May 5,
2000.
25
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/ Gerald F. Mahoney
---------------------------
Date: May 12, 2000 Gerald F. Mahoney
Chairman of the Board/
Chief Executive Officer
By /s/ Gary H. Ritondaro
---------------------------
Date: May 12, 2000 Gary H. Ritondaro
Senior Vice President,
Chief Financial Officer
26