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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
MAY 30, 1998
(DATE OF REPORT)
MAIL-WELL, INC.
(Exact name of Registrant as specified in its charter.)
COLORADO 1-12551 84-1250533
(State or other jurisdiction of Commission (IRS Employer
Incorporation or organization) File number 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)
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<PAGE>
<TABLE>
<CAPTION>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. . . . . . . . . . . . . . . . . . . . . . . PAGE
<S> <C> <C>
(a) Supplemental Financial Statements of Mail-Well, Inc. and Subsidiaries:
1. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . .1
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . . . . . .2
3. Independent Auditors' Reports. . . . . . . . . . . . . . . . . . . . . . 15
4. Supplemental Consolidated Balance Sheets as of March 31, 1998
(Unaudited) and December 31, 1997 and 1996 . . . . . . . . . . . . . . 18
5. Supplemental Consolidated Statements of Operations for the Quarters Ended
March 31, 1998 and 1997 (Unaudited) and for the
Years Ended December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . 19
6. Supplemental Consolidated Statements of Cash Flows for the Quarters
Ended March 31, 1998 and 1997 (Unaudited) and for the
Years Ended December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . 20
7. Supplemental Consolidated Statements of Changes in Stockholders'
Equity for the Quarter Ended March 31, 1998 (Unaudited)
and for the Years Ended December 31, 1997, 1996 and 1995 . . . . . . . 22
8. Notes to Supplemental Consolidated Financial Statements . . . . . . . . 23
(b) Pro forma financial information:
None.
(c) Supplemental Financial Statement Schedules and Exhibits:
1. Supplemental Financial Statement Schedules:
Schedule I Supplemental Condensed Balance Sheets as of December 31, 1997
and 1996 and Supplemental Condensed Statements of Operations
for the Years Ended December 31, 1997, 1996 and 1995. . . . 47
Schedule II Supplemental Valuation and Qualifying Accounts for the Years
Ended December 31, 1997, 1996 and 1995. . . . . . . . . . . 51
2. Exhibits:
Exhibit
Number Description of Exhibit
------ ----------------------
23.1* Consent of Deloitte & Touche LLP
23.2* Consent of Rubin, Brown, Gornstein & Co. LLP
27.1* Financial Data Schedule
</TABLE>
* Filed herewith.
<PAGE>
(a) SUPPLEMENTAL FINANCIAL STATEMENTS OF MAIL-WELL, INC. AND SUBSIDIARIES
SELECTED SUPPLEMENTAL FINANCIAL DATA
The summary of supplemental financial data presented below is derived
from the supplemental audited financial statements of the Company and its
predecessors, the envelope business of Georgia-Pacific("GP Envelope") and
Pavey Envelope and Tag Corp. ("Pavey"), and in the opinion of management
reflect all adjustments, consisting of only normal, recurring adjustments,
necessary for a fair presentation of such information. The operations of the
acquisitions accounted for under the purchase method have been included in
the historical income statement data of the Company from their respective
dates of acquisitions. Amounts derived from the supplemental consolidated
financial statements for periods subsequent to February 23, 1994 (inception)
have been restated as appropriate to reflect mergers accounted for as
poolings of interests. The data presented below should be read in
conjunction with the Management's Discussion and Analysis of Financial
Condition and Results of Operations, the supplemental consolidated
financial statements and the related notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
PREDECESSOR
COMPANIES
---------------------
PERIOD PERIOD
FROM FROM
FEB. 24, JAN. 1,
QUARTER ENDED 1994 1994 YEAR
MARCH 31, YEAR ENDED DECEMBER 31, THROUGH THROUGH ENDED
---------------- ----------------------------- DEC. 31, FEB. 23, DEC. 31,
1998 1997 1997 1996 1995 1994 1994 1993
---- ---- ---- ---- ---- ---- ---- ----
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 318.7 $ 253.4 $1073.9 $ 944.5 $ 758.9 $ 389.3 $ 36.6 $ 252.0
Income (loss) before
extraordinary item 9.5 6.9 35.0 21.2 15.4 9.4 (1.3) 3.8
Net income (loss) 9.5 6.9 28.9 21.2 13.0 9.4 (1.3) 3.8
Earnings per basic share: (b)
Income per share before
extraordinary item $ 0.22 $ 0.17 $ 0.86 $ 0.53 $ 0.58 $ 0.42 (a) (a)
Extraordinary item - - (0.15) - (0.09) -
------- ------- ------- ------- ------- -------
Net income per basic share $ 0.22 $ 0.17 $ 0.71 $ 0.53 $ 0.49 $ 0.42 (a) (a)
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
Earnings per diluted share: (b)
Income per share before
extraordinary item $ 0.20 $ 0.17 $ 0.82 $ 0.52 $ 0.56 $ 0.42 (a) (a)
Extraordinary item - - (0.14) - (0.09) -
------- ------- ------- ------- ------- -------
Net income per diluted share $ 0.20 $ 0.17 $ 0.68 $ 0.52 $ 0.47 $ 0.42 (a) (a)
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
Total assets 829.7 N/A 671.4 552.0 582.6 392.5 N/A 136.9
Total long term obligations 365.1 N/A 330.4 237.8 347.4 259.1 N/A 0.0
</TABLE>
(a) Earnings per share is not presented for these periods as operations were
those of predecessor companies.
(b) Earnings per share data has been retroactively restated to reflect the 3:2
stock split in June 1997 and the 2:1 stock split in June 1998.
1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following should be read in conjunction with the supplemental
consolidated 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, SUPPLEMENTAL FINANCIAL DATA BY SEGMENT
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31, YEAR ENDED DECEMBER 31,
---------------------- -----------------------
(IN THOUSANDS) 1998 1997 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales
U.S. Envelope $ 172,202 $ 139,700 $ 594,238 $ 551,225 $ 510,660
Canadian Envelope 28,197 31,616 115,293 86,928 38,759
High Impact Color Printing 48,684 40,716 188,029 140,371 47,384
Commercial Printing 41,069 41,408 176,377 165,970 162,100
Business Communication
Printing 24,557 -- -- -- --
Label Printing 4,025 -- -- -- --
------- ------- --------- ------- -------
Total net sales 318,734 253,440 1,073,937 944,494 758,903
------- ------- --------- ------- -------
Cost of sales
U.S. Envelope 135,619 108,323 463,495 434,258 403,183
Canadian Envelope 20,146 22,777 79,724 61,020 28,018
High Impact Color Printing 39,315 33,702 153,124 116,117 39,603
Commercial Printing 31,043 32,448 135,616 129,074 125,555
Business Communication
Printing 20,077 -- -- -- --
Label Printing 3,153 -- -- -- --
Corporate 334 596 2,253 196 --
------- ------- --------- ------- -------
Total cost of sales 249,687 197,846 834,212 740,665 596,359
------- ------- --------- ------- -------
Gross profit 69,047 55,594 239,725 203,829 162,544
------- ------- --------- ------- -------
Operating expenses
U.S. Envelope 19,222 16,733 68,414 62,311 56,482
Canadian Envelope 3,556 4,570 15,686 12,124 4,944
High Impact Color Printing 6,821 5,165 24,797 18,183 6,788
Commercial Printing 9,424 7,385 30,064 27,626 27,334
Business Communication
Printing 2,779 -- -- -- --
Label Printing 609 -- -- -- --
Corporate 3,090 3,740 14,936 13,453 10,191
------- ------- --------- ------- -------
Total operating expenses 45,501 37,593 153,897 133,697 105,739
------- ------- --------- ------- -------
</TABLE>
2
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OVERVIEW, SUPPLEMENTAL FINANCIAL DATA BY SEGMENT (CONTINUED)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31, YEAR ENDED DECEMBER 31,
---------------------- -----------------------
(IN THOUSANDS) 1998 1997 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating income (loss)
U.S. Envelope 17,361 14,644 62,329 54,656 50,995
Canadian Envelope 4,495 4,269 19,883 13,784 5,797
High Impact Color Printing 2,548 1,849 10,108 6,071 993
Commercial Printing 602 1,575 10,697 9,270 9,211
Business Communication
Printing 1,701 -- -- -- --
Label Printing 263 -- -- -- --
Corporate (3,424) (4,336) (17,189) (13,649) (10,191)
------- ------- --------- ------- -------
Total operating income 23,546 18,001 85,828 70,132 56,805
Interest expense 6,485 5,466 22,328 30,555 30,840
Interest expense - amortization
of deferred financing costs 98 754 2,913 3,588 2,314
Discount on sale of
accounts receivable 807 1,023 4,916 726 --
Other (income) expense (603) (486) (2,088) 478 152
Income tax expense 7,226 4,392 22,783 13,627 8,118
------- ------- --------- ------- -------
Income before extraordinary item 9,533 6,852 34,976 21,158 15,381
Extraordinary item, net of
tax benefit -- -- 6,100 -- 2,412
------- ------- --------- ------- -------
Net income $ 9,533 $ 6,852 $ 28,876 $ 21,158 $ 12,969
------- ------- --------- ------- -------
------- ------- --------- ------- -------
</TABLE>
OPERATING RESULTS --
Sales for the quarter ended March 31, 1998 rose $65.3 million, or 26%, from the
quarter ended March 31, 1997. Net income for the quarter ended March 31, 1998
increased by $2.7 million ($0.03 per diluted share), or 39%, compared with the
prior year period. Excluding merger expenses of $2.2 million in the first
quarter of 1998, earnings increased by $4.9 million ($0.07 per diluted share)
or 72%. During the most recent quarter the Company continued to focus
its efforts on the operations of recently acquired businesses. These efforts
included establishing the strategic direction in the two new operating segments,
Business Communication Printing and Label Printing, entered via acquisitions in
1998. In addition, the Company reviewed acquired operations in existing
operating segments to determine changes in cost structures and marketing
strategy.
Income before extraordinary item for the year ended December 31, 1997, increased
by $13.8 million ($0.30 per diluted share), or 65%, compared with the prior
year. For the year ended December 31, 1996, income before extraordinary item
increased by $5.8 million (a decrease of $0.04 per diluted share), or 38%,
compared with the prior year. Net sales for the year ended December 31, 1997,
rose $129.4 million, or 14%, from the prior year, and for the year ended
December 31, 1996, increased by $185.6 million, or 24%, over the prior year.
During 1997 the Company focused its efforts on integrating the operations of
recently acquired businesses including changes made to cost structures, pricing
and strategic markets. In addition, the High Impact Color Printing segment
continued to address market pressures by repositioning its marketing efforts
toward higher margin products and adding sales staff.
MERGERS AND ACQUISITIONS
As more fully described in Note 2 to the Supplemental Consolidated Financial
Statements included elsewhere herein, the Company, through a wholly-owned
subsidiary, consummated its mergers with a group of commercial printing
companies (the "Commercial Printing Group") on May 30, 1998. Each merger was
individually accounted for as a pooling of interests and, accordingly, the
supplemental consolidated financial statements for all periods subsequent to
February 24, 1994 (inception) have been restated to include the operations of
the Commercial Printing Group, adjusted to conform with Mail-Well's
accounting policies and presentation. In connection with the mergers,
transaction costs of approximately $2.2 million incurred by the Commercial
Printing Group in the first quarter of 1998 were charged to operations.
3
<PAGE>
The Commercial Printing Group consists of the following operations, which are
included in the Company's Commercial Printing operating segment; except IPC
Graphics which is included in the Business Communication Printing segment as
of January 1, 1998.
<TABLE>
<CAPTION>
1997
LOCATION NET SALES
(MILLIONS)
<S> <C> <C>
Color Art, Inc. St. Louis, Missouri $ 76.1
Accu-Color, Inc. St. Louis, Missouri 14.4
Industrial Printing Company Toledo, Ohio 19.5
IPC Graphics, Inc. Toledo, Ohio 10.4
United Lithograph, Inc. Somerville, Massachusetts 21.2
French Bray, Inc. Glen Burnie, Maryland 23.4
Clarke Printing, Co. San Antonio, Texas 11.4
-------
Total $ 176.4
-------
-------
</TABLE>
As a result of the mergers, the Company expects to realize pretax annual cost
savings of approximately $4 million in the form of reduced compensation
(primarily that of former officers) and lower fees for professional services.
There can be no assurance, however, that these savings will be realized, or
that additional expenses will not be incurred in connection with the
integration of the merged companies or as ongoing operational expenses which
may offset, in whole or in part, these anticipated cost savings.
Summarized below are the Company's acquisitions. See Note 3 to the
Supplemental Consolidated Financial Statements included elsewhere in this
document for more information.
<TABLE>
<CAPTION>
ESTIMATED
MONTH OPERATING ANNUAL
LOCATION ACQUIRED SEGMENT NET SALES
(MILLIONS)
<S> <C> <C> <C> <C>
1995 ACQUISITIONS
Supremex, Inc. ("Supremex") Canada July Envelope $ 93
Graphic Arts Center, Inc. ("GAC") Portland, Oregon August High Impact 150
-----
Aggregate purchase price was $148.1 million, with $71.2 million goodwill recorded 243
1996 ACQUISITIONS
Quality Park Products, Inc. ("Quality") St. Paul, Minnesota April Envelope 80
Pac National Group Products, Inc. ("PNG") Canada November Envelope 30
Shepard Poorman Communications
Corporation ("SP") Indianapolis, Indiana December High Impact 50
-----
Aggregate purchase price was $68.2 million, with $17.7 million goodwill recorded 160
1997 ACQUISITIONS
Griffin Envelope, Inc. ("Griffin") Seattle, Washington June Envelope 12
The Allied Printers ("Allied") Seattle, Washington July High Impact 17
Murray Envelope Corporation ("Murray) Hattiesburg, Mississippi July Envelope 48
National Color Graphics, Inc. ("Color Graphics") Atlanta, Georgia September High Impact 23
Intertec Mailing Services ("Intertec") Nashville, Tennessee October Envelope 7
Cambridge, Maryland plant of Western Graphics
Communications ("Cambridge") Cambridge, Maryland December Envelope 33
----
Aggregate purchase price was $87.0 million, with $32.7 million goodwill recorded 140
FIRST QUARTER 1998 ACQUISITIONS
Poser Business Forms, Inc. ("Poser") Fairhope, Alabama January Business 90
Rono Graphic Communications Co. ("Rono") Portland, Oregon March High Impact 12
Lawson Mardon Label Division ("MW Label") Toronto, Ontario March Label 81
Denver Forms Company ("Denver Forms") Denver, Colorado March Business 12
National Graphics Company ("Natl Graphics") Denver, Colorado March Envelope 8
EPX Denver ("EPX") Denver, Colorado March Business 4
----
Aggregate purchase price was $140.9 million, with $68.8 million goodwill recorded 207
</TABLE>
4
<PAGE>
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 supplemental consolidated sales and cost of sales of the Company adjusted to
show the effects of the acquisitions as if consummated on January 1 of the year
prior.
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31, YEAR ENDED DECEMBER 31,
----------------------- -----------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales, as reported $ 318,734 $ 253,440 $ 1,073,937 $ 944,494 $ 758,903
Supremex 48,408
GAC 102,383
Quality 23,266 98,567
Other 1996 acquisitions 96,490 97,895
1997 acquisitions 37,037 87,905 129,340
First quarter 1998
acquisitions 21,967 51,258
-------- -------- --------- --------- ---------
Net sales, pro forma 340,701 341,735 1,161,842 1,193,590 1,106,156
-------- -------- --------- --------- ---------
Cost of sales, as reported 249,687 197,846 834,212 740,665 596,359
Supremex 34,546
GAC 81,846
Quality 19,654 89,724
Other 1996 acquisitions 77,996 76,972
1997 acquisitions 29,875 72,377 107,469
First quarter 1998
acquisitions 17,768 40,923
-------- -------- --------- --------- ---------
Cost of sales, pro forma 267,455 268,644 906,589 945,784 879,447
-------- -------- --------- --------- ---------
Gross profit, as reported $ 69,047 $ 55,594 $ 239,725 $ 203,829 $ 162,544
% -------- -------- --------- --------- ---------
-------- -------- --------- --------- ---------
21.7% 21.9% 22.3% 21.6% 21.4%
Gross profit, pro forma $ 73,246 $ 73,091 $ 255,253 $ 247,806 $ 226,709
% -------- -------- --------- --------- ---------
-------- -------- --------- --------- ---------
21.5% 21.4% 22.0% 20.8% 20.5%
</TABLE>
RESULTS OF OPERATIONS
U.S. ENVELOPE
The following table presents historical financial data for the U.S.
Envelope operations of the Company, including acquisitions (Quality, Griffin,
Murray, Intertec, Cambridge, Natl Graphics) from their purchase dates.
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31, YEAR ENDED DECEMBER 31,
----------------------- -----------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(DOLLARS IN MILLIONS) $ % $ % $ % $ % $ %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales 172.2 100.0 139.7 100.0 $ 594.2 100.0 $ 551.2 100.0 $ 510.7 100.0
Cost of sales 135.6 78.7 108.4 77.5 463.5 78.0 434.2 78.8 403.2 79.0
Operating expenses 19.2 11.2 16.7 12.0 68.4 11.5 62.3 11.3 56.5 11.1
------ ----- ----- ----- ----- ----- ----- ----- ----- -----
Operating income $ 17.4 10.1 $ 14.6 10.5 $ 62.3 10.5 $ 54.7 9.9 $ 51.0 9.9
------ ----- ----- ----- ----- ----- ----- ----- ----- -----
------ ----- ----- ----- ----- ----- ----- ----- ----- -----
</TABLE>
QUARTER ENDED MARCH 31, 1998, COMPARED TO THE QUARTER ENDED MARCH 31, 1997
NET SALES -- Net sales increased by $32.5 million (23.3%) for the
quarter ended March 31, 1998 compared to the quarter ended March 31, 1997, due
primarily to acquisitions. Excluding acquisitions, the average selling price
per thousand units decreased 3.4% to $18.80 for the quarter ended March 31,
1998, from the same period in the prior year. However, because of its ability to
pass through paper cost fluctuations to customers, the Company uses volumes of
units sold and material gross margin (that is, net sales less net cost of
materials) per thousand units as revenue trend indicators in its envelope
operations. Again excluding acquisitions, unit volume increased 6.9% to 7.7
5
<PAGE>
billion units in the first quarter of 1998 from 7.2 billion units in the same
quarter in 1997. Material gross margin per thousand units, excluding
acquisitions, decreased 4.3% to $10.79 in the first quarter of 1998 from $11.27
in the year-ago period. Overall material gross margin dollars increased 24.8% in
the first quarter of 1998 compared to the same period in 1997, with 22.7% of
this increase coming from acquisitions.
COST OF SALES -- Total cost of sales, as a percentage of sales, increased
from 77.5% in the first quarter of 1997 to 78.7% in the first quarter of 1998,
primarily as a result of the decrease in average selling price. Cost of sales
includes materials, net of waste recovery revenue, labor, depreciation and other
manufacturing costs. Net material cost, as a percent of sales, decreased from
42.1% for the first quarter of 1997 to 41.3% for the first quarter of 1998. All
other manufacturing costs, as a percent of sales, increased to 37.4% in the
first quarter of 1998 from 35.5% in the first quarter of 1997. The majority of
this shift is due to sales mix changes resulting from acquisitions. Excluding
acquisitions, net material cost, as a percent of sales, increased 0.5% to 42.6%
in the first quarter of 1998 from the year earlier period due to increased paper
costs. Again excluding acquisitions, all other manufacturing costs decreased
0.3% to 29.6% in the first quarter of 1998 from the year earlier period due to
efficiency improvements attributable to ongoing consolidation activities and new
equipment installations.
OPERATING EXPENSES -- For the first quarter ended March 31, 1998, operating
expenses decreased to 11.2% of sales from 12.0% of sales in the same period in
1997. This decline is due to the continuing consolidation and reorganization of
our envelope operations including acquisitions.
YEAR ENDED DECEMBER 31, 1997, COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
NET SALES -- Net sales increased by $43.0 million (7.8%) for the year ended
December 31, 1997 compared to the year ended December 31, 1996. The average
selling price per thousand envelopes decreased 3.0% to $19.49 for the year
ended December 31, 1997, from $20.10 for the year ended December 31, 1996, due
primarily to the pass through of material cost reductions to customers, offset
somewhat by the higher price product mix effect from acquisitions. Because
material cost changes have historically been passed through to customers, the
Company uses volumes of units sold and material gross margin (that is, net sales
less cost of materials net of waste recovery revenue) as revenue trend
indicators in its envelope operations. Unit volume increased 11.3% to 30.5
billion units for the year ended December 31, 1997 from 27.4 billion units for
the year ended December 31, 1996, with acquisitions accounting for 7.5% of this
increase. Material gross margin per thousand envelopes sold increased 2.5% to
$11.28 for the year ended December 31, 1997 from $11.01 for the year ended
December 31, 1996.
COST OF SALES -- Total cost of sales, as a percent of sales, decreased from
78.8% for the year ended December 31, 1996 to 78.0% for the year ended December
31, 1997. Cost of sales includes material net of waste recovery revenue, labor,
depreciation and other manufacturing and distribution costs. Material costs net
of waste recovery revenue, as a percentage of sales, were 42.1% and 45.2% for
the years ended December 31, 1997 and 1996, respectively. The decline is
attributable to material cost reductions passed through to customers as
discussed above. Other manufacturing costs, as a percent of sales, increased
from 33.6% for the year ended December 31, 1996 to 35.9% for the year ended
December 31, 1997, due primarily to the decreased selling price previously
discussed. On a per thousand envelopes sold basis, other manufacturing and
distribution costs, excluding the product mix effect from acquisitions,
increased only 0.1% from $6.76 for the year ended December 31, 1996 to $6.77 for
the year ended December 31, 1997. Inflationary cost increases were offset by
efficiency improvements and volume increases.
OPERATING EXPENSES -- Operating expenses include selling and administrative
expenses. For the year ended December 31, 1997, operating expenses, as a percent
of sales, increased 0.2% to 11.5% from 11.3% compared to the prior year again
primarily due to the decrease in selling prices. Excluding the effect of
acquisitions during the years, the increase in operating expenses for the year
ended December 31, 1997 was 2.5% compared to the prior year primarily due to
increased selling expenses attributable to increased emphasis on sales growth.
YEAR ENDED DECEMBER 31, 1996, COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
NET SALES -- Net sales increased 7.9% ($40.6 million) from net sales
recorded for the year ended December 31, 1995. The dollar increase included
$61.2 million of net sales from the acquisition of Quality for the nine months
ended December 31, 1996, offset by a $20.6 million decrease on the other U.S.
Envelope operations. Exclusive of Quality's sales dollars and volumes, the
average selling price increased by 1.1% from $19.19 per thousand units in 1995
to $19.40 per thousand units in 1996. The increase was due to a higher
value-added product mix and managing selling prices relative to paper costs.
Total volume for the U.S. envelope operations (excluding Quality) decreased 4.9%
to 25.3 billion units in 1996 from 26.6 billion units in 1995. Volume in 1996
was negatively impacted by lower direct mail and merchant volume, and a shift
towards more complex, higher- margin products for which fewer units were sold at
higher selling prices.
6
<PAGE>
COST OF SALES -- Total cost of sales, as a percentage of sales, remained
steady at 78.8% for 1996 as compared to 79.0% in 1995. In total dollars, cost
of sales includes an additional $52.8 million as a result of the acquisition of
Quality for the nine months ended December 31, 1996. The remaining $381.5
million represents 77.9% of net sales (exclusive of Quality) as compared to cost
of sales of 78.9% in the prior year.
Again, because material costs have historically been passed through to
customers, the Company uses material gross margin (net sales less cost of
materials net of waste recovery revenue) and volume of units sold as its revenue
trend indicators in envelope operations. When measured on a unit basis,
material gross margin (exclusive of Quality's operations) increased from $10.42
per thousand units in the year ended December 31, 1995 to $11.02 per thousand
units for the year ended December 31, 1996. Material gross margin (including
Quality's operations) was $11.03 per thousand units in the year ended December
31, 1996. The increase in material gross margin on a unit basis was
attributable to the Company's ability to manage selling price relative to
declining paper prices. The favorable effect of lower paper costs on gross
margin was largely offset by decreased proceeds from the sale of waste paper and
increases in other costs as a percentage of sales. Material costs, exclusive of
waste revenue, were 44.9% and 49.4% of net sales for the years ended December
31, 1996 and 1995, respectively. Waste recovery revenue declined from $0.71 per
thousand units in 1995 to $0.33 per thousand units in 1996 which resulted in a
decline in waste recovery revenue to $8.3 million from $18.9 million in 1995.
OPERATING EXPENSES -- Operating expenses include selling and administrative
expenses. For the year ended December 31, 1996, operating expenses, as a
percentage of sales, increased to 11.3% from 11.1% in 1995. Of the total $5.8
million increase, $3.9 million relates to additional operating expenses as a
result of the acquisition of Quality. The increase from 1995 was due to higher
compensation and benefit costs in the administrative area, which were offset, in
part, by the reduction or elimination of redundant functions in acquired
businesses.
CANADIAN ENVELOPE
The following table presents historical financial data for the Canadian
Envelope segment including acquisitions (Supremex, PNG) from their purchase
dates.
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31, YEAR ENDED DECEMBER 31,
------------------------------------ ----------------------------------------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(DOLLARS IN MILLIONS) $ % $ % $ % $ % $ %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales 28.2 100.0 31.6 100.0 $ 115.3 100.0 $ 86.9 100.0 $ 38.8 100.0
Cost of sales 20.1 71.5 22.7 72.0 79.7 69.2 61.0 70.2 28.0 72.3
Operating expenses 3.6 12.6 4.6 14.5 15.7 13.6 12.1 13.9 5.0 12.7
----- ----- ----- ---- ----- ----- ----- ----- ---- -----
Operating income $ 4.5 15.9 $ 4.3 13.5 $ 19.9 17.2 $ 13.8 15.9 $ 5.8 15.0
----- ----- ----- ---- ----- ----- ----- ----- ---- -----
----- ----- ----- ---- ----- ----- ----- ----- ---- -----
</TABLE>
QUARTER ENDED MARCH 31, 1998 COMPARED TO THE QUARTER ENDED MARCH 31, 1997
NET SALES -- Net sales for the first quarter of 1998 were down 10.8%
compared to the first quarter of 1997. The average selling price was down 8.3%
primarily due to a 5.0% reduction in the average exchange rate in the first
quarter of 1998 compared to the same period in 1997. Again, due to the ability
to pass through material cost changes to customers, the Company primarily uses
unit sales and material gross margin (that is, net sales less net cost of
materials) per thousand units as revenue trend indicators in its envelope
operations. Unit sales declined 2.0% to 1.5 billion in the first quarter of 1998
from the first quarter of 1997, which is attributable to exiting certain low
margin markets served by PNG prior to acquisition. Material gross margin per
thousand units decreased 5.7% in the first quarter of 1998 compared to the first
quarter of 1997 due primarily to the 5.0% reduction in the average exchange
rate.
COST OF SALES -- Total cost of sales, as a percentage of sales, decreased
from 72.0% in the first quarter of 1997 to 71.5% in the first quarter of 1998.
Cost of sales includes materials, net of waste recovery revenue, labor,
depreciation and other manufacturing costs. Net material costs, as a percent of
sales, increased to 45.0% in the first quarter of 1998 compared to 44.1% in the
first quarter of 1997 due to increased paper costs. All other manufacturing
costs however decreased, as a percent of sales, 1.4% in the first quarter of
1998 compared to the same period in 1997, primarily due to the successful
integration of PNG operations with Supremex.
7
<PAGE>
OPERATING EXPENSES - As a percentage of net sales, operating expenses
decreased to 12.6% for the quarter ended March 31, 1998, from 14.5% in the same
quarter of 1997. Operating expenses decreased 22.2% in the first quarter of 1998
compared to the prior year period due to the complete assimilation of the PNG
operations.
YEAR ENDED DECEMBER 31, 1997, COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
NET SALES -- Net sales for the year ended December 31, 1997 were up 32.6%
over the year ended December 31, 1996, due to the PNG acquisition in November
1996. The Supremex sales without PNG for the year ended December 31, 1997
compared to the year ended December 31, 1996 were down 1.7%, due primarily to an
average Canadian dollar exchange rate decrease of 1.5%. Unit sales were 35%
higher for the year ended December 31, 1997 versus 1996 also due to the PNG
acquisition. Excluding PNG, unit sales were 1.1% higher for the year ended
December 31, 1997 versus 1996. The overall average selling price per unit was
down 1.5% in the year ended December 31, 1997 from the year ended December 31,
1996, due to the average exchange rate decrease and reductions in average
material cost passed through to the customer.
COST OF SALES -- Total cost of sales, as a percent of sales, decreased from
70.2% for the year ended December 31, 1996 to 69.2% for the year ended December
31, 1997. Cost of sales includes material net of waste recovery revenue, labor,
depreciation and other manufacturing and distribution costs. Material costs net
of waste recovery revenue, as a percentage of sales, were 43.0% and 43.8% for
the years ended December 31, 1997 and 1996, respectively. This decline is
attributable to material cost reductions passed through to customers as
reductions in selling price. Other manufacturing costs, as a percent of sales,
also decreased from 26.4% for the year ended December 31, 1996 to 26.2% for the
year ended December 31, 1997. On a per thousand envelopes sold basis
manufacturing costs decreased 2.3% from $5.27 for the year ended December 31,
1996 to $5.15 for the year ended December 31, 1997. The manufacturing decrease
is attributable to cost reductions relating to the consolidation of PNG
operations partially offset by higher wage rates.
OPERATING EXPENSES -- Operating expenses include selling and administrative
expenses. For the year ended December 31, 1997, operating expenses, as a percent
of sales, decreased 0.3% to 13.6% from 13.9% in the year ended December 31,
1996. Operating expenses decreased, as a percent of sales, due to the
assimilation of PNG operations with consolidation of selling and administrative
functions.
YEAR ENDED DECEMBER 31, 1996, COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
NET SALES -- Net sales for the year ended 1996 increased 124.3% as compared
to sales for the year ended 1995. The increase was due to the fact that the 1996
figures include the operations of Supremex for the entire year as compared to
the 1995 figures which include results for only five months. PNG net sales for
the month ended December 31, 1996, were nominal. The average selling price
increased by 1.3% and was due to a higher margin, customized product mix. Total
volume increased 121% to 4.2 billion units from 1.9 billion units in 1995. The
volume increase was due to the timing of the acquisition of Supremex.
COST OF SALES -- Cost of sales, as a percentage of sales, decreased to
70.2% for the year ended December 31, 1996 as compared to 72.3% for the five
months ended December 31, 1995. The $33.0 million increase reflects the fact
that the 1996 figures include the operations of Supremex for the entire year as
compared to the 1995 figures which include results for only five months. The
decline in cost of sales as a percentage of net sales is largely due to the
Company's ability to effectively manage fluctuations in the cost of paper and
related fluctuations in sales prices. Again, because material costs have
historically been passed through to customers, the Company uses material gross
margin (net sales less cost of materials net of waste recovery revenue) and
volume of units sold as its revenue trend indicators in envelope operations.
When measured on a unit basis, material gross margin per thousand units
increased 14.0% from $9.84 per unit in 1995 to $11.22 per unit in 1996. A
favorable effect on gross margins also occurred due to lower paper costs, which
decreased 10% from the 1995 average.
OPERATING EXPENSES -- Operating expenses include selling and administrative
expenses which increased, primarily, due to additional operating expenses as a
result of the acquisition of Supremex in July 1995.
8
<PAGE>
HIGH IMPACT COLOR PRINTING
The following table presents financial information with respect to the High
Impact Color Printing segment including acquisitions ( GAC, SP, Allied, Color
Graphics, Rono) from their purchase dates.
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31, YEAR ENDED DECEMBER 31,
-------------------------------------- ---------------------------------------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(DOLLARS IN MILLIONS) $ % $ % $ % $ % $ %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales 48.7 100.0 40.7 100.0 $ 188.0 100.0 $ 140.4 100.0 $ 47.4 100.0
Cost of sales 39.4 80.8 33.7 82.8 153.1 81.4 116.1 82.7 39.6 83.6
Operating expenses 6.8 14.0 5.2 12.7 24.8 13.2 18.2 13.0 6.8 14.3
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income $ 2.5 5.2 $ 1.8 4.5 $ 10.1 5.4 $ 6.1 4.3 $ 1.0 2.1
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
</TABLE>
QUARTER ENDED MARCH 31, 1998 COMPARED TO THE QUARTER ENDED MARCH 31, 1997
NET SALES -- Net sales increased by $8.0 million (19.6%) for the first
quarter of 1998 compared to the first quarter of 1997. This increase in net
sales includes $9.9 million of net sales related to acquisitions which is offset
by a $1.9 million decrease in net sales at other print facilities, primarily
Indianapolis and San Francisco. Continuing declines in the computer book
segment, due to higher utilization of electronic medium, is the major factor in
San Francisco, while a temporary decrease in volumes with a single customer is
the reason for reduced sales in Indianapolis.
COST OF SALES -- Cost of sales expressed as a percent of sales decreased to
80.8% in the first quarter of 1998 from 82.8% in the year-ago quarter. Increased
list paper prices, due to product mix variations, had a negligible effect
resulting in a 0.3% decrease in overall material costs, expressed as a percent
of sales, in the first quarter of 1998 compared to the year-ago quarter. Other
manufacturing costs decreased 1.7% to 44.6% of sales in the first quarter of
1998 compared to the prior year first quarter. This reduction is the result of
continuing manufacturing improvements and the assimilation of acquisitions into
GAC's management systems.
OPERATING EXPENSES -- As a percent of sales, operating expense increased from
12.7% in the first quarter of 1997 to 14.0% in the first quarter of 1998.
Selling expenses, as a percent of sales, increased 1.8% to 10.6% in the first
quarter of 1998 compared to the year ago period due to the addition of sales
staff in our effort to increase market share. Administrative expenses as a
percent of sales decreased 0.8% as a result of assimilating acquisitions and
continuing efficiency improvements.
YEAR ENDED DECEMBER 31, 1997, COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
NET SALES -- Net sales for the High Impact Color Printing segment for the
year ended December 31, 1997 increased $47.7 million (34.0%) compared to the
year ended December 31, 1996. Net sales for GAC for the year ended December 31,
1997 declined 15.2% to $116.2 million. The reasons for this sales decline
include the decision to pursue more profitable products and eliminate certain
unprofitable work, high turnover in sales staff during 1996 resulting in the
temporary loss of business from some significant accounts and a continuing trend
in computer related companies to utilize electronic medium as opposed to printed
manuals. Acquisitions completed during the year (Allied and Color Graphics)
contributed $14.6 million to net sales during the year ended December 31, 1997.
In addition SP, purchased in December 1996, had net sales of $57.2 million for
the year ended December 31, 1997 compared to $3.3 million for the period owned
during 1996. Average paper costs for the year ended December 31, 1997 compared
to the year ended December 31, 1996 declined resulting in approximately a 1.0%
decline in sales prices as the lower cost was passed through to customers.
COST OF SALES -- Cost of sales expressed as a percent of net sales
decreased to 81.4% in the year ended December 31, 1997, from 82.7% in the prior
year. Paper costs expressed as a percent of sales declined to 30.6% for the year
ended December 31, 1997 as compared to 33.3% for the year ended December 31,
1996. Average paper costs expressed as a percent of sales declined due to
changes in product mix resulting from the acquisitions which are primarily
sheetfed operations in addition to negotiated reductions in paper costs.
9
<PAGE>
OPERATING EXPENSES -- Expressed as a percent of sales, operating expenses
increased to 13.2% for the year ended December 31, 1997 compared to 13.0% for
the prior year. The $6.6 million increase in the year ended December 31, 1997
compared to the prior year is due to acquisitions during the years as operating
expense for GAC declined $0.8 million (4.4%) as compared to the prior year.
YEAR ENDED DECEMBER 31, 1996, COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
NET SALES -- Net sales increased $93.0 million from $47.4 million in the
four months ended December 31, 1995 to $140.4 million for the year ended
December 31, 1996. The majority of the increase is due to the fact that the
1996 figures include an entire year of GAC operations and the 1995 figures
include only four months of operations. Also included in net sales for the year
ended 1996 are sales of $3.3 million related to SP. Year to year, net sales at
GAC decreased 8.1% in 1996 from 1995 (taking into account pre-acquisition
sales), due to a competitive pricing environment. In response to this decline
in sales price, GAC has targeted higher margin markets and is aggressively
allocating sales resources to these markets. Another factor affecting the
decline in sales dollars was the decrease in paper costs. Fluctuations in paper
prices are generally passed on to customers as an integral part of the price of
the product. As paper prices decreased in 1996, as compared to 1995, the sales
prices also decreased.
COST OF SALES -- The cost of sales decreased to 82.7% of sales for the year
ended December 31, 1996 as compared to 83.6% for the four months ended December
31, 1995 indicating operating efficiencies realized. Gross margins decreased as
a percentage of sales to 17.3% in 1996 from 18.9% in 1995 (taking into account
pre-acquisition operations) as a result of the competition in major markets.
Reductions in cost of sales were not large enough to offset the decline in
sales. GAC has lowered gross margins to meet the competition and, as stated
previously, it is concentrating its sales efforts on higher-margin product
markets.
OPERATING EXPENSES -- Operating expenses include selling and administrative
expenses which increased, primarily, due to additional operating expenses as a
result of the acquisition of GAC in August 1995. As a percentage of net sales,
operating expenses declined which demonstrates GAC's ability to reduce these
expenses in a competitive pricing environment. Improvements were made in the
purchasing of supplies, employee headcounts, travel and entertainment expenses
and spoilage.
COMMERCIAL PRINTING
The following table presents financial information with respect to the
Commercial Printing segment. The results include those of the merged businesses
described in Note 2 to the Supplemental Consolidated Financial Statements
(accounted for under the pooling of interests method), except that the results
of IPC Graphics are included with the new Business Communication Printing
segment beginning January 1, 1998.
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31, YEAR ENDED DECEMBER 31,
-------------------------------------- ---------------------------------------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(DOLLARS IN MILLIONS) $ % $ % $ % $ % $ %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales 41.1 100.0 41.4 100.0 $ 176.4 100.0 $ 166.0 100.0 $ 162.1 100.0
Cost of sales 31.1 75.6 32.4 78.4 135.6 76.9 129.1 77.8 125.6 77.5
Operating expenses 7.3 17.8 7.4 17.8 30.1 17.0 27.6 16.6 27.3 16.9
Merger expenses 2.1 5.2 -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income $ 0.6 1.4 $ 1.6 3.8 $ 10.7 6.1 $ 9.3 5.6 $ 9.2 5.6
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
</TABLE>
QUARTER ENDED MARCH 31, 1998 COMPARED TO THE QUARTER ENDED MARCH 31, 1997
NET SALES -- Excluding the $2.6 million of net sales for IPC Graphics
recorded in the first quarter of 1997, first quarter 1998 net sales for the
Commercial Printing segment increased $2.3 million, or nearly 6%. The increase
is attributed to additional revenue generated from Color Art's purchase of
the assets and operations of GRW Printing Co. in the third quarter of 1997,
higher sales generated from the printing of annual reports and sales
generated from the purchase of a competitor's customer list in July 1997.
COST OF SALES -- Cost of sales expressed as a percent of sales decreased
to 75.6% in the first quarter of 1998 from 78.4% in the year-ago quarter.
IPC Graphics accounted for 0.5% of the decrease. Materials cost increased
slightly by .3% of net sales due to nominal increases in paper costs. Labor
costs declined 1.5%, as a percentage of net sales, during the 1998 quarter as
compared with 1997, more than offsetting the increase in materials cost.
Improved productivity during the first quarter of 1998 contributed to the
reduction in labor costs as a percentage of sales.
10
<PAGE>
OPERATING EXPENSES -- Operating expenses include selling and administrative
costs and exclude merger expenses which are separately stated. Excluding the
effect of IPC Graphics, operating expenses decreased, as a percent of sales,
from 17.8% in the first quarter of 1997 to 17.3% in the first quarter of 1998.
Selling expenses, as a percent of sales, remained constant at 10.2% for both
quarters. Consistent administrative expenses on an absolute basis accounted
for the decline as a percentage of net sales as no significant changes in
staff levels were made.
YEAR ENDED DECEMBER 31, 1997, COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
NET SALES -- Net sales for the Commercial Printing segment for the year
ended December 31, 1997 increased $10.4 million (6.3%) compared to the year
ended December 31, 1996. A full year's worth of sales from acquisitions made in
late 1996 in the short-run printing business contributed approximately $6.1
million to the growth in sales. Volumes with existing customers were generally
higher in 1997 over 1996; however, 1997 sales were adversely impacted by
approximately $5.0 million from the loss of the First USA account.
COST OF SALES -- Cost of sales expressed as a percent of net sales
decreased to 76.9% in the year ended December 31, 1997, from 77.8% in the prior
year. Lower paper and ink costs, which were not passed on to the customers,
resulted in a .6% decline in material costs, as a percentage of sales, to 33.4%
in 1997. Additionally, improved labor utilization and lower outside service
costs increased gross profit as a percentage of sales nearly a full 1.0% from
22.2% in 1996 to 23.1% in 1997.
OPERATING EXPENSES -- Expressed as a percent of sales, operating expenses
increased to 17.0% for the year ended December 31, 1997 compared to 16.6% for
the prior year. This increase resulted from development costs for new products
associated with the 1996 acquisitions and the customer list purchased in 1997,
an increase in selling expenses reflecting the addition of five new sales
representatives, and higher profit sharing expenses.
YEAR ENDED DECEMBER 31, 1996, COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
NET SALES -- Net sales increased $3.9 million from $162.1 million for the
year ended December 31, 1995 to $166.0 million for the year ended December 31,
1996. The increase is attributed to the generation of approximately $5.0
million in sales from a new account with First USA and improved penetration of
existing accounts, reduced by the effect of a large, nonrecurring order in 1995
for approximately $2.0 million and tighter pricing due to competition.
COST OF SALES -- The cost of sales increased to 77.8% of sales for the year
ended December 31, 1996 as compared to 77.5% for the year ended December 31,
1995, due primarily to higher outside services from subcontractors for certain
orders due to tight shipping schedules and expansion costs at one facility for
sales commitments that did not materialize. Materials costs were down .5% as a
percentage of net sales.
OPERATING EXPENSES -- Operating expenses as a percentage of net sales
declined from 16.9% in 1995 to 16.6% in 1996 due to lower profit sharing
expenses and lower selling expenses.
CORPORATE EXPENSES
COST OF SALES - Certain equipment of the Company was sold as part of a
sales/leaseback transaction in November 1996 and is accounted for as an
operating lease. The Company classifies the excess of the operating lease
expense over depreciation as a corporate expense in analyzing segment
operations. The increased cost in the year ended December 31, 1997 is a result
of the full year operating lease effect.
OPERATING EXPENSES- Total operating expenses decreased by $0.6 million to
$3.1 million in the first quarter of 1998 compared to $3.7 million in the first
quarter of 1997. Operating expenses for the year ended December 31, 1997
increased $1.5 million compared to the year ended December 31, 1996. The
Company includes amortization of the intangibles recorded in acquisitions in
corporate operating expense in analyzing segment operations. The increase in
amortization expense for the year ended December 31, 1997 was $0.3 million
compared to the prior year. The Company also includes loss on disposal of
assets in corporate operating expense. Loss on disposal of assets was $2.7
million for the year ended December 31, 1997 compared to $2.1 million in 1996.
These losses were the result of equipment disposal and equipment idled due to
replacement, as well as consolidation activities and losses on disposal of
buildings also due to consolidation activities. Other operating expenses for
the year ended December 31, 1997 increased 8.5% to $7.7 million compared to $7.1
million in 1996 primarily due to expanded treasury operations and increased
accruals for performance incentive payments compared to 1996.
11
<PAGE>
INTEREST EXPENSE -- Interest expense increased $1.0 million in the first
quarter of 1998 compared to the first quarter of 1997 primarily as a result of
the issuance in November 1997 of the Convertible Subordinated Notes in the
amount of $152.1 million. The first quarter 1998 interest expense of $1.9
million on the Convertible Subordinated Notes is offset by lower interest
expense on bank borrowings attributable to lower average bank debt balances for
the first quarter of 1998 compared to the year-ago period and lower average
interest rates. The average outstanding bank debt (which includes the debt
outstanding of the Commercial Printing Group) was approximately $118.4 million
in the first quarter of 1998 compared to $170.4 million in the first quarter of
1997. The related average interest rate was 6.68% for the first quarter of 1998
compared to 8.36% for the first quarter of 1997. Immediately after the mergers
with the Commercial Printing Group, approximately $37 million of debt having an
average interest rate of 8.55% was paid-off by the Company.
Interest expense for the year ended December 31, 1997 compared to the prior
year decreased primarily as a result of lower average bank debt balances. The
sale/leaseback transaction and the accounts receivable securitization program
were initiated toward the end of 1996, as well as the restructuring of bank
debt. In addition, in November 1997 the Company issued $152.1 million of
convertible subordinated notes due in 2002 with interest payable at 5% per annum
and used the proceeds to reduce bank debt which had a higher interest rate. The
average interest rates on bank debt (which includes the debt outstanding of the
Commercial Printing Group) for both 1997 and 1996 were approximately 8.0%.
Interest expense for the year ended December 31, 1996 decreased from the prior
year primarily due to the lower average interest rates.
INTEREST EXPENSE - AMORTIZATION OF DEFERRED FINANCING COSTS - In the fourth
quarter of 1997, the Company wrote off deferred financing costs of $6.1 million
relating to bank debt which was repaid in November and accounted for as an
extraordinary item. This event accounts for the decrease in the amortization of
deferred financing costs in the first quarter of 1998 compared to the first
quarter of 1997, as well as the decrease for the year ended December 31, 1997
from 1996. The amortization of deferred financing costs increased in the year
ended December 31, 1996 compared to 1995 due to a full year amortization in 1996
of the deferred financing cost capitalized pursuant to the 1995 acquisitions.
DISCOUNT ON SALE OF ACCOUNTS RECEIVABLE - This amount represents expenses
related to the accounts receivable securitization program, including interest
and associated utilization fees, initiated in November 1996. Under the five
year agreement, the Company can sell, on a revolving basis, an undivided
percentage ownership interest in a designated pool of accounts receivable up to
a maximum of $100.0 million. The average receivables sold under this agreement
in the first quarter of 1998 were $44.3 million compared to $71.0 million in the
first quarter of 1997, accounting for the decrease in expense in the first
quarter of 1998. At December 31, 1997 and 1996, $72.0 million and $71.0 million
had been sold under this agreement at a discount of 0.6% above the prevailing
commercial paper rate plus fees. The full year effect is the primary reason for
the increase in discount expense for the year ended December 31, 1997 compared
to 1996.
OTHER (INCOME) EXPENSE - Other (income) expense includes foreign exchange
(gain) loss, interest income, investment (gain) loss, non-capitalizable
acquisition costs and other. The foreign exchange (gain) loss amounts were
($0.3) million, $0.3 million and $0.2 million for the years ended December 31,
1997, 1996 and 1995, respectively. Interest income earned from the investment of
excess funds in cash equivalents totaled $0.7 million, $0.2 million and $0.2
million for the years ended December 31, 1997, 1996 and 1995, respectively.
Also included in other income in 1997 was a $0.8 million gain from the sale of
stock that had been acquired in a failed acquisition attempt. Finally, in 1997,
the Company recorded an $0.8 million expense related to costs for acquisitions
which were not consummated.
INCOME TAXES -- The effective tax rate for all periods was higher than
the federal statutory rate due to state and provincial income taxes and
certain goodwill amortization and a portion of the employee stock ownership
contribution that are not tax deductible. The effective tax rate also
reflects the impact of merging various Commercial Printing companies that had
elected nontaxable status prior to the merger. See Notes 2 and 9 to the
Supplemental Consolidated Financial Statements. For periods subsequent to
the mergers, the Company expects its effective tax rate to be approximately
43%.
LIQUIDITY AND CAPITAL RESOURCES
HISTORICAL CASH FLOW -- Net cash used in operating activities was $1.0
million for the first quarter of 1998 as compared to $19.9 million provided by
operating activities in the first quarter of 1997. This reduction in cash
12
<PAGE>
flow is attributable to a $14.0 million decrease in accounts receivables sold
under the securitization program as bank debt was restructured and the
Company had less need to sell accounts receivable. Capital expenditures
totaled $14.0 million for the first quarter of 1998 as compared to $6.8
million for the first quarter of 1997. Acquisition costs totaled $140.9
million in the first quarter of 1998 compared to $0.2 million in the first
quarter of 1997.
Net cash flow provided by operating activities was $81.8 million, $152.8
million and $38.9 million for the years ended December 31, 1997, 1996 and 1995,
respectively. Net cash flow from operating activities in 1997 was negatively
impacted by inventory valuation increases due to rising paper prices while 1996
was positively impacted by the sale of accounts receivable. Acquisitions
required cash payments of $82.9 million, $64.3 million and $79.8 million for the
years ended December 31, 1997, 1996 and 1995, respectively. Other investing
activities include capital expenditures which were $36.8 million, $22.0 million
and $25.0 million for the years ended December 31, 1997, 1996 and 1995,
respectively. The capital expenditures were offset by the proceeds of $2.3
million, $35.1 million and $3.8 million from the disposal of assets for the
years ended December 31, 1997, 1996 and 1995, respectively (including $30.0
million in 1996 from the sale/leaseback transaction).
DEBT OBLIGATIONS - In March 1998 the Company closed a new five-year
unsecured line of credit for up to $300.0 million with the Bank of America,
the lead agent for a syndicate of banks, at an interest rate of LIBOR plus a
margin based on the Company's leverage ratio. The effective interest rate at
March 31, 1998, was 5.375% and the available credit under this facility was
$209.8 million. Bank borrowings, including outstanding debt of the Commercial
Printing Group, at March 31, 1998, were $131.9 million compared to $167.2
million at March 31, 1997. The Company repaid approximately $37 million of
debt of the Commercial Printing Group with an average interest rate of 8.55%
immediately after the mergers. In November 1997 the Company issued $152.1
million of convertible subordinated notes due in 2002 with interest payable
at 5% per annum. The notes are convertible at the option of the holder at
any time and are convertible into shares of the Company's common stock at a
conversion price of $19.00 per share. Proceeds were used to pay off
outstanding amounts on the revolving credit facility and the term loan and
these facilities were cancelled. Concurrently Supremex signed an unsecured
demand note with a bank for $60.0 million at an interest rate of LIBOR plus
0.75% per annum. These proceeds were used to pay off Supremex's outstanding
term loan which was also cancelled. The same bank has agreed to lend the
Company up to an additional $40.0 million at the same interest rate and
terms, which was drawn down in connection with the Poser acquisition in
January 1998.
SECURITIES OFFERING - In February 1998 the Company sold 4,864,600 shares
of its Common Stock at a price of $19.625 per share through a group of
underwriters led by Prudential Securities Incorporated. Proceeds from the
sale of stock of $91.2 million were used for general corporate purposes. An
additional $0.8 million in proceeds was received on the exercise of options
in the first quarter of 1998. On November 13, 1997, the Company's shelf
registration statement ("shelf") on Form S-3 was declared effective by the
Securities and Exchange Commission. The shelf permits the Company to issue
up to $300.0 million in debt securities, common stock, preferred stock or
warrants over the two-year period following the effective date. The February
1998 stock offering and the Convertible Subordinated Notes were issued under
the shelf registration statement and, at March 31, 1998, there was
availability to issue another $52 million of securities under the shelf
registration statement.
CAPITAL REQUIREMENTS - The Company estimates that, based on current
utilization of its equipment and expected volume growth at existing businesses
it will spend $35.0 to $40.0 million per year on capital expenditures. In
addition the Company expects to spend and capitalize approximately $7.0 to $9.0
million in 1998 and 1999 to upgrade its existing computer systems. The Company
completed an assessment of all computer systems in 1997 addressing "Year 2000"
among other issues. Management presently believes that with planned
modifications to existing software in process and conversions to new software,
as discussed above, the "Year 2000" issues will be mitigated. The estimated
expense to modify existing software for "Year 2000" is not considered material.
INFLATION - The effects of inflation have not been material to the Company.
However, due to the competitive nature of its business, it may not always be
able to pass on inflationary cost increases in the future.
FOREIGN CURRENCY - The effects of foreign currency exchange have not been
material to the Company to date. With the strengthening U.S. Dollar, the
Company's foreign currency exposure currently relates to its Canadian
operations. The average 1997 Canadian Dollar exchange rate was 0.72 USD while
rates as of July 7, 1998 are in the 0.68 USD range. Net income provided by the
Canadian operations for the year ended December 31, 1997 was USD $9.2 million.
SEASONALITY AND ENVIRONMENT - The effects of seasonality and environmental
matters had no material financial impact on the historical operations of the
Company and are not expected to have a material effect on the Company's
liquidity and capital resources.
13
<PAGE>
RECENT DEVELOPMENTS
ACQUISITIONS -- Acquisitions closed subsequent to March 31, 1998, are as
follows:
On April 8, 1998, the Company acquired substantially all the assets of
Blue Line Envelope ("Blue Line"). Blue Line, located in Montreal, Quebec, is
an envelope manufacturer for office products outlets and stationers in Canada
with annual sales of $6 million.
On April 20, 1998, the Company acquired the stock of South Press, Inc.
("South Press"). South Press is a high quality printer located in Dallas, Texas
with annual sales of $12 million.
On May 5, 1998, the Company acquired the stock of Century Index
Corporation ("Century"). Century is a manufacturer of filing products located
in Anaheim, California, with annual sales of $9 million.
On May 11, 1998, the Company acquired substantially all of the assets of
the International Paper label division ("IP Label"). IP Label located in
Bowling Green, Kentucky, prints labels for consumer products and has annual
sales of $30 million.
On May 28, 1998, the Company acquired the stock of Anderson Lithograph
("Anderson"). Anderson is a leading high impact printer based in Los
Angeles, California with sales of $135 million annually.
On June 1, 1998, the Company acquired the stock of Illinois Envelope,
Inc. ("IE"). IE is an envelope printing company located in Kalamazoo,
Michigan with annual sales of $7 million.
On June 23, 1998, the Company acquired substantially all of the assets
of Gould Packaging, Inc. ("Gould"), a distributor of value-added mailing and
shipping supplies based in Vancouver, WA. Gould had sales in 1997 of
approximately $14 million.
LABOR RELATIONS -- The Company has been negotiating union contracts with
respect to three of its divisions, including GAC's Portland plant, which is
operating under existing agreements unless and until the parties reach a
legal impasse. No new agreement has been reached with respect to any of these
plants. In order to mitigate the effect of a potential work stoppage, the
Company has prepared a contingency plan for each of these locations. 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 late 1998
and, if implemented, does not anticipate the rate increases to negatively impact
mail volume.
14
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Mail-Well, Inc.
We have audited the accompanying supplemental consolidated balance sheets of
Mail-Well, Inc. and Subsidiaries ("Company") as of December 31, 1997 and 1996,
and the related supplemental consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. Our audits also included the financial statement
schedules listed in the Index at Item 7(c). These financial statements and
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits. The
supplemental consolidated financial statements and financial statement schedules
give retroactive effect to the mergers consummated by the Company, which have
been accounted for as poolings of interests as described in Note 2 to the
supplemental consolidated financial statements. We did not audit the financial
statements of Color Art, Inc. and Subsidiaries which represent total assets of
$31,414,000 and $26,470,000 as of December 31, 1997 and 1996; and total
revenues of $76,099,000, $66,023,000, and $63,814,000 for each of the three
years in the period ended December 31, 1997. Those financial statements were
audited by other auditors whose reports have been furnished to us, and our
opinion, insofar as it relates to the amounts included for Color Art, Inc. and
Subsidiaries for such periods, is based solely on the reports of such other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors, the
supplemental consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Mail-Well, Inc. and
Subsidiaries at December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997 in conformity with generally accepted accounting principles. Also, in
our opinion, the financial statement schedules, when considered in relation to
the basic consolidated financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Denver, Colorado
July 10, 1998
15
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Color Art, Inc.
St. Louis, Missouri
We have audited the consolidated balance sheets of Color Art, Inc., an S
Corporation, and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity and cash
flows for the years then ended (which are not included herein). These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Color
Art, Inc. and subsidiaries as of December 31, 1997 and 1996 and the results
of its operations and its cash flows for the years then ended in conformity
with generally accepted accounting principles.
Rubin, Brown, Gornstein & Co. LLP
St. Louis, Missouri
March 6, 1998 (Except for Notes 7
and 13, which are dated May 15,
1998 and May 22, 1998, respectively)
16
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Color Art, Inc.
St. Louis, Missouri
We have audited the consolidated balance sheets of Color Art, Inc.,an S
Corporation, and subsidiaries as of December 31, 1996 and 1995 and the
related consolidated statements of income, stockholders' equity and cash
flows for the years then ended (which are not included herein). These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Color
Art, Inc. and subsidiaries as of December 31, 1996 and 1995 and the results
of its operations and its cash flows for the years then ended in conformity
with generally accepted accounting principles.
Rubin, Brown, Gornstein & Co. LLP
St. Louis, Missouri
March 7, 1997 (Except for Note 7,
which is dated March 24, 1997)
17
<PAGE>
MAIL-WELL, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ------------------------
1998 1997 1996
--------- --------- ---------
(UNAUDITED)
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 12,999 $ 40,911 $ 12,297
Receivables, net 86,759 64,958 59,804
Securitized interest in accounts receivable 42,598 22,319 9,505
Accounts receivable-other 8,425 8,082 8,277
Income tax receivable, net -- 2,225 3,575
Inventories 105,251 86,268 76,552
Deferred income taxes 2,651 2,558 2,440
Other current assets 9,361 7,577 5,154
--------- --------- ---------
Total current assets 268,044 234,898 177,604
PROPERTY, PLANT AND EQUIPMENT, NET 318,337 262,797 219,254
DEFERRED FINANCING COSTS, NET 2,464 1,936 14,541
GOODWILL, NET 221,390 153,927 128,827
OTHER ASSETS, NET 19,472 17,853 11,760
--------- --------- ---------
TOTAL $ 829,707 $ 671,411 $ 551,986
--------- --------- ---------
--------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 74,627 $ 53,641 $ 55,636
Accrued compensation and vacation 33,088 32,729 29,682
Accrued interest 4,198 4,410 4,513
Income taxes payable, net 549 -- --
Other current liabilities 28,875 28,143 27,387
Current portion of long-term debt and capital leases 10,462 10,533 25,161
--------- --------- ---------
Total current liabilities 151,799 129,456 142,379
ACCRUED PENSION COST 1,174 1,174 1,284
CAPITAL LEASES 291 3,128 3,616
LONG-TERM DEBT 364,799 327,229 234,224
DEFERRED INCOME TAXES 29,381 29,299 23,713
OTHER LONG-TERM LIABILITIES 5,723 5,805 3,359
--------- --------- ---------
Total liabilities 553,167 496,091 408,575
--------- --------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 6)
MINORITY INTEREST IN NON VOTING STOCK OF SUBSIDIARY 3,500 3,500 --
--------- --------- ---------
STOCKHOLDERS' 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,
48,185,759 (unaudited), 43,042,959, and 43,644,029 shares
issued at 1998, 1997 and 1996, respectively (including 3,896,544
shares held by ESOP) 482 430 436
Paid-in capital 194,948 102,475 99,287
Retained earnings 81,017 72,541 48,571
Unearned ESOP compensation (2,357) (2,406) (2,896)
Unrealized loss, net of taxes, on securitized interest in accounts receivable (247) (115) (49)
Cumulative foreign currency translation adjustment (730) (1,032) (115)
Pension liability adjustment, net of taxes (73) (73) (110)
Treasury stock-at cost; 1,366,224 shares at 1996 -- -- (1,713)
--------- --------- ---------
Total stockholders' equity 273,040 171,820 143,411
--------- --------- ---------
TOTAL $ 829,707 $ 671,411 $ 551,986
--------- --------- ---------
--------- --------- ---------
</TABLE>
See notes to supplemental consolidated financial statements.
18
<PAGE>
MAIL-WELL, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------------- ----------------------------------------
1998 1997 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
NET SALES $ 318,734 $ 253,440 $1,073,937 $ 944,494 $ 758,903
COST OF SALES
Materials 130,914 103,666 436,052 406,893 347,290
Labor and other 93,703 72,303 310,392 265,007 216,467
Manufacturing 21,855 19,237 76,494 56,003 35,306
Depreciation 6,455 5,080 21,590 21,602 16,215
Waste recovery (3,240) (2,440) (10,316) (8,840) (18,919)
---------- ---------- ---------- ---------- ----------
Total cost of sales 249,687 197,846 834,212 740,665 596,359
---------- ---------- ---------- ---------- ----------
GROSS PROFIT 69,047 55,594 239,725 203,829 162,544
---------- ---------- ---------- ---------- ----------
OTHER OPERATING COSTS
Selling 24,473 19,415 82,255 71,503 56,155
Administrative 19,704 16,155 64,140 56,062 46,389
Amortization 1,802 1,163 4,783 4,347 3,047
(Gain) loss on disposal of assets (478) 860 2,719 1,785 148
---------- ---------- ---------- ---------- ----------
Total other operating costs 45,501 37,593 153,897 133,697 105,739
---------- ---------- ---------- ---------- ----------
OPERATING INCOME 23,546 18,001 85,828 70,132 56,805
OTHER (INCOME) EXPENSE
Interest expense-debt 6,485 5,466 22,328 30,555 30,840
Interest expense-amortization of deferred
financing costs 98 754 2,913 3,588 2,314
Discount on sale of accounts receivable 807 1,023 4,916 726 --
Other (income) expense (603) (486) (2,088) 478 152
---------- ---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 16,759 11,244 57,759 34,785 23,499
PROVISION FOR INCOME TAXES
Current 4,731 2,531 14,271 4,299 6,850
Deferred 2,495 1,861 8,512 9,328 1,268
---------- ---------- ---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM 9,533 6,852 34,976 21,158 15,381
EXTRAORDINARY ITEM, NET OF TAX
BENEFIT OF $3,814 and $1,608 -- -- 6,100 -- 2,412
---------- ---------- ---------- ---------- ----------
NET INCOME $ 9,533 $ 6,852 $ 28,876 $ 21,158 $ 12,969
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
EARNINGS PER BASIC SHARE BEFORE
EXTRAORDINARY ITEM $ 0.22 $ 0.17 $ 0.86 $ 0.53 $ 0.58
EXTRAORDINARY ITEM -- -- (0.15) -- (0.09)
---------- ---------- ---------- ---------- ----------
EARNINGS PER BASIC SHARE $ 0.22 $ 0.17 $ 0.71 $ 0.53 $ 0.49
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
EARNINGS PER DILUTED SHARE BEFORE
EXTRAORDINARY ITEM $ 0.20 $ 0.17 $ 0.82 $ 0.52 $ 0.56
EXTRAORDINARY ITEM -- -- (0.14) -- (0.09)
---------- ---------- ---------- ---------- ----------
EARNINGS PER DILUTED SHARE $ 0.20 $ 0.17 $ 0.68 $ 0.52 $ 0.47
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
WEIGHTED AVERAGE SHARES - BASIC 43,515 39,697 40,575 39,663 26,741
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
WEIGHTED AVERAGE SHARES - DILUTED 53,717 40,558 43,027 40,449 27,580
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
See notes to supplemental consolidated financial statements.
19
<PAGE>
MAIL-WELL, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------------- ----------------------------------------
1998 1997 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATIONS
Net income $ 9,533 $ 6,852 $ 28,876 $ 21,158 $ 12,969
Adjustments to reconcile net income to
cash provided by (used in) operations:
Depreciation 6,455 5,080 21,590 21,602 16,215
Amortization 1,900 1,917 7,696 7,935 5,361
Accretion of original issue discount -- -- -- -- 1,650
Extraordinary loss on repurchase of
deferred coupon notes - pre-tax -- -- -- -- 4,020
Extraordinary loss on early retirement
of debt - pre-tax -- -- 9,914 -- --
Deferred tax provision 2,495 1,861 8,512 9,328 1,268
ESOP compensation expense 719 68 2,614 1,973 1,612
(Gain) loss on disposal of assets (478) 860 2,719 1,785 148
Other (104) (7) 38 533 193
Changes in operating assets and liabilities,
net of effects of acquired businesses:
Receivables, including securitized interest
in accounts receivable (33,891) 10,480 (1,637) 72,715 (5,261)
Inventories (4,954) (3,348) 47 22,800 4,912
Accounts payable 4,863 69 (5,340) 188 (6,991)
Accrued interest (212) (1,638) (103) (320) 730
Current income taxes 36 228 (1,268) 1,123 (1,841)
Other working capital 13,336 (2,681) 5,896 1,346 2,745
Other assets and other long-term liabilities (679) 177 2,277 (9,378) 1,185
------- -------- ------- ------- -------
Net cash provided by (used in)
operating activities (981) 19,918 81,831 152,788 38,915
------- -------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition costs, net of cash acquired (140,927) (189) (82,874) (64,316) (79,818)
Capital expenditures (14,011) (6,838) (36,838) (22,039) (24,977)
Proceeds from sale of assets 400 155 2,333 35,104 3,754
Purchase of marketable securities -- -- (516) -- (62,750)
Sale of marketable securities 100 -- --- 250 62,558
------- -------- ------- ------- -------
Net cash used in investing activities (154,438) (6,872) (117,895) (51,001) (101,233)
------- -------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash overdrafts 43 (1,473) (236) 4,025 4,138
Net proceeds from common stock issuance 92,005 115 1,202 294 68,847
Proceeds from issuance of convertible
subordinated notes, net of issuance costs -- -- 147,436 -- --
Proceeds from long-term debt 97,388 8,750 139,616 323,963 252,036
Repayments of long-term debt and capital leases (61,392) (15,206) (219,125) (416,206) (233,998)
Debt issuance costs -- -- -- (1,800) (5,571)
Repurchase of deferred coupon notes -- -- -- - (19,712)
Repurchase of stock by pooled entities (402) (1,069) (1,093) (109) (494)
Dividends and distributions by pooled entities (837) (1,469) (4,161) (1,753) (2,229)
------- -------- ------- ------- -------
Net cash provided by (used in)
financing activities 126,805 (10,352) 63,639 (91,586) 63,017
------- -------- ------- ------- -------
</TABLE>
See notes to supplemental consolidated financial statements.
20
<PAGE>
MAIL-WELL, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------------- ------------------------------------------
1998 1997 1997 1996 1995
---------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
EFFECT OF EXCHANGE RATE
CHANGES ON CASH 702 (314) 1,039 (282) 6
-------- --------- -------- -------- --------
NET CHANGE IN CASH AND
CASH EQUIVALENTS (27,912) 2,379 28,614 9,919 705
BALANCE AT BEGINNING OF PERIOD 40,911 12,297 12,297 2,378 1,673
-------- --------- -------- -------- --------
BALANCE AT END OF PERIOD $ 12,999 $ 14,676 $ 40,911 $ 12,297 $ 2,378
-------- --------- -------- -------- --------
-------- --------- -------- -------- --------
Supplemental disclosure of cash paid for:
Interest $ 9,662 $ 10,061 $ 22,818 $ 28,886 $ 28,027
Income taxes 3,829 4,454 15,090 7,194 8,130
Stock issued for acquisitions -- -- 6,018 -- --
</TABLE>
See notes to supplemental consolidated financial statements.
21
<PAGE>
MAIL-WELL, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNEARNED TOTAL
COMMON PAID-IN RETAINED ESOP STOCKHOLDERS'
STOCK CAPITAL EARNINGS COMPENSATION OTHER EQUITY
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994, AS
PREVIOUSLY REPORTED $ 184 $ 22,439 $ 2,743 $ (1,713) $ 23,653
Adjustment for poolings of interests 47 1,430 18,648 20,125
------ ---------- -------- -------- --------
BALANCE AT DECEMBER 31, 1994, AS RESTATED 231 23,869 21,391 (1,713) 43,778
Issuance of common stock:
In initial public offering 150 69,850 70,000
Other 16 4,239 4,255
Costs incurred from issuance of stock (5,823) (5,823)
Spin-off of division by pooled entity (2,965) (2,965)
Repurchase of stock by pooled entities (1) (493) (494)
Transfer of ESOP accounts 38 5,171 $ (3,674) 1,535
Exercise of stock options 2 413 415
Change in unearned ESOP 645 144 789
Translation adjustments (20) (20)
Pension liability adjustment (211) (211)
Distributions by pooled entities (2,229) (2,229)
Net income 12,969 12,969
------ ---------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1995 436 97,871 29,166 (3,530) (1,944) 121,999
Issuance of common stock 254 254
Exercise of stock options 40 40
Change in unearned ESOP 1,231 634 1,865
Translation adjustments (95) (95)
Pension liability adjustment 101 101
Unrealized loss on investments (49) (49)
Repurchase of stock by pooled entities (109) (109)
Distributions by pooled entities (1,753) (1,753)
Net income 21,158 21,158
------ ---------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1996 436 99,287 48,571 (2,896) (1,987) 143,411
Issuance of common stock 7 2,713 2,720
Exercise of stock options 2 199 201
Retirement of treasury stock (14) (1,699) 1,713 -
Change in unearned ESOP 2,322 490 2,812
Translation adjustments (917) (917)
Pension liability adjustment 37 37
Unrealized loss on investments (66) (66)
Distributions by pooled entities (4,161) (4,161)
Repurchase of stock by pooled entities
and other (1) (347) (745) (1,093)
Net income 28,876 28,876
------ ---------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1997 430 102,475 72,541 (2,406) (1,220) 171,820
Issuance of common stock 50 95,423 95,473
Costs incurred from issuance of stock (4,268) (4,268)
Exercise of stock options 2 798 800
Change in unearned ESOP 702 49 751
Translation adjustments 302 302
Unrealized loss on investments (132) (132)
Distributions by pooled entities (837) (837)
Repurchase of stock by pooled entities (182) (220) (402)
Net income 9,533 9,533
------ ---------- --------- --------- --------- ---------
BALANCE AT MARCH 31, 1998 (UNAUDITED) $ 482 $ 194,948 $ 81,017 $ (2,357) $ (1,050) $ 273,040
------ ---------- --------- --------- --------- ---------
------ ---------- --------- --------- --------- ---------
</TABLE>
See notes to supplemental consolidated financial statements.
22
<PAGE>
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
I. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - Mail-Well, Inc. and subsidiaries (collectively
referred to as 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").
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, a wholly-owned
subsidiary of Mail-Well, Inc. conducts most of the business of Mail-Well,
Inc. Mail-Well I Corporation, together with its subsidiaries, is the owner
of the Company's operating assets and the borrower of the debt (exclusive
of the Convertible Subordinated Notes). These financial statements include
the accounts of the Company. All significant intercompany accounts and
transactions have been eliminated.
INTERIM FINANCIAL INFORMATION - The supplemental 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 results for interim
periods are not necessarily indicative of results to be expected for the
Company's fiscal year ending December 31, 1998. The Company believes
that the supplemental interim financial information contained herein is
representative of its financial position, its results of operations and
its cash flows for the three months ended March 31, 1998 and 1997,
taking into consideration the mergers discussed in Note 2.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents includes cash on
hand, demand deposits, and short-term investments with original maturities
of three months or less. The Company's domestic banking system provides
for the daily replenishment of major bank accounts for check clearing
requirements. Accordingly, outstanding checks that have not yet been paid
by the banks at year end are reflected in accounts payable in the
consolidated balance sheets.
SECURITIZED INTEREST IN ACCOUNTS RECEIVABLE - The securitized interest in
accounts receivable represents a retained interest in the accounts
receivable sold and is recorded at fair market value.
INVENTORIES - Inventories are valued at the lower of first-in, first-out
("FIFO") cost or market and include the cost of materials, labor and
manufacturing overhead.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are recorded
at cost. Replacements of major units of property are capitalized and the
replaced properties are retired. Replacements of minor units of property
and repair and maintenance costs are charged to expense as incurred.
Depreciation for financial reporting purposes is calculated using the
straight-line method based on the estimated useful lives of the respective
assets, as follows:
<TABLE>
<CAPTION>
<S> <C>
Land improvements 25 years
Buildings and building improvements 15-45 years
Leasehold improvements 15 years
Machinery and equipment 15 years
Furniture and fixtures 3-10 years
Automobiles and trucks 5 years
Computers and software 3-5 years
</TABLE>
Depreciation for tax purposes is calculated using accelerated methods. Upon
retirement or disposition of assets, cost and accumulated depreciation are
removed from the related accounts and any gain or loss is included in
income.
23
<PAGE>
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INTANGIBLE ASSETS - In connection with the issuance of both bank debt and
public debt as well as in connection with acquisitions, the Company
recorded certain intangible assets. The following schedule summarizes the
amortization periods and amortization expense recorded in connection with
the intangible assets (in thousands):
<TABLE>
<CAPTION>
USEFUL
Amortization of: LIFE 1997 1996 1995
<S> <C> <C> <C> <C>
Deferred Financing Costs 5-6 years $ 2,913 $ 3,588 $ 2,314
Goodwill 40 years 3,778 2,915 1,591
Non-Competition Agreement 3 years 332 1,000 1,000
Covenant Not to Compete 5 years 157 153 145
Acquisition Costs and Other 5-21 years 516 279 311
-------- -------- ---------
Total $ 7,696 $ 7935 $ 5,361
-------- -------- ---------
-------- -------- ---------
</TABLE>
IMPAIRMENT OF LONG-LIVED ASSETS - Long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability is
based on future net cash flows from the use of the asset. The Company
recorded no adjustment for impairment of long-lived assets in 1995. In
1997 and 1996, respectively, the Company wrote off certain assets with a
net book value of $1,200,000 and $1,014,000 which is included in the
consolidated statements of operations in the loss on disposal of assets.
The assets written off were operating assets which were no longer being
utilized in production.
STOCK SPLITS - In June 1997, the Company effected a 3:2 stock split of its
common stock, and in May 1998, the Company declared a 2:1 stock split of
its common stock effective June 10, 1998. All common stock, paid-in
capital and earnings per share information has been retroactively
restated to reflect these splits.
OTHER COMPREHENSIVE INCOME-- Effective January 1, 1998, the Company adopted
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income." Accordingly, components of other comprehensive
income (loss) are as follows:
<TABLE>
<CAPTION>
CURRENT
BALANCE JANUARY 1 PERIOD CHANGE BALANCE MARCH 31,
(IN THOUSANDS) 1998 1997 1998 1997 1998 1997
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cumulative foreign currency
translation adjustment $(1,032) $ (115) $ 302 $(140) $ (730) $(255)
Pension liability adjustment,
net of taxes (73) (110) 0 0 (73) (110)
Unrealized loss, net of taxes, on
securitized interest in accounts
receivable (115) (49) (132) 0 (247) (49)
------- ------- ------- ------ ------- ------
Accumulated other comprehensive
income (loss) $(1,220) $ (274) 170 (140) $(1,050) $(414)
------- ------- ------- ------
------- ------- ------- ------
Net income 9,533 6,852
------- ------
Comprehensive income $ 9,703 $6,712
------- ------
------- ------
</TABLE>
24
<PAGE>
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EARNINGS PER SHARE - In 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" ("SFAS 128"). 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.
The Company has adopted SFAS 128 resulting in the restatement of earnings
per share for all prior periods. The unallocated shares issued under the
Employee Stock Ownership Plan are excluded from both the basic and diluted
earnings per share calculations.
<TABLE>
<CAPTION>
INCOME SHARES PER-SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- -----------
<S> <C> <C> <C>
FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
EARNINGS PER BASIC SHARE
Income available to common stockholders $ 9,533 43,515 $ 0.22
--------
--------
EFFECT OF DILUTIVE SECURITIES
Stock options -- 1,954
Convertible Subordinated Notes 1,083 8,003
Other -- 245
-------- --------
EARNINGS PER DILUTED SHARE
Income available to common stockholders
including assumed conversions $ 10,616 53,717 $ 0.20
-------- -------- --------
-------- -------- --------
FOR THE THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
EARNINGS PER BASIC SHARE
Income available to common stockholders $ 6,852 39,697 $ 0.17
--------
--------
EFFECT OF DILUTIVE SECURITIES
Stock options -- 813
Other -- 48
-------- --------
EARNINGS PER DILUTED SHARE
Income available to common stockholders
including assumed conversions $ 6,852 40,558 $ 0.17
-------- -------- --------
-------- -------- --------
FOR THE YEAR ENDED DECEMBER 31, 1997
EARNINGS PER BASIC SHARE
Income available to common stockholders $ 34,976 40,575 $ 0.86
--------
--------
EFFECT OF DILUTIVE SECURITIES
Stock options -- 1,508
Convertible Subordinated Notes 476 834
Other -- 110
--------- --------
EARNINGS PER DILUTED SHARE
Income available to common stockholders
including assumed conversions $ 35,452 43,027 $ 0.82
-------- -------- --------
-------- -------- --------
25
<PAGE>
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<CAPTION>
INCOME SHARES PER-SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- -----------
<S> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1996
EARNINGS PER BASIC SHARE
Income available to common stockholders $ 21,158 39,663 $ 0.53
--------
--------
EFFECT OF DILUTIVE SECURITIES
Stock options -- 507
Other -- 279
-------- --------
EARNINGS PER DILUTED SHARE
Income available to common stockholders
including assumed conversions $ 21,158 40,449 $ 0.52
-------- -------- --------
-------- -------- --------
FOR THE YEAR ENDED DECEMBER 31, 1995
EARNINGS PER BASIC SHARE
Income available to common stockholders $ 15,381 26,741 $ 0.58
--------
--------
EFFECT OF DILUTIVE SECURITIES
Stock options -- 275
Other -- 564
-------- --------
EARNINGS PER DILUTED SHARE
Income available to common stockholders
including assumed conversions $ 15,381 27,580 $ 0.56
-------- --------- --------
-------- --------- --------
</TABLE>
FOREIGN CURRENCY TRANSLATION - The financial statements include the results
of Canadian operations which are translated from Canadian dollars, their
functional currency, into U.S. dollars. The balance sheet is translated at
the year end rate of exchange. Results of operations are translated at
average rates prevailing during the year. The effects of translation at
the balance sheet date are accumulated as the cumulative foreign currency
translation adjustment in stockholders' equity.
ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
RECLASSIFICATION - Certain amounts in the 1995 and 1996 financial
statements have been reclassified to conform to the 1997 presentation.
26
<PAGE>
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. MERGERS WITH COMMERCIAL PRINTING COMPANIES
Effective May 30, 1998, the Company completed its mergers with seven
commercial printing companies through the exchange of common stock, which
had a market value of $21.965 per share, as shown in the table below:
<TABLE>
<CAPTION>
SHARES OF MAIL-WELL
OPERATING COMPANY NAME COMMON STOCK EXCHANGED
<S> <C>
Color Art, Inc. ("Color Art") 2,351,951 shares
Accu-Color, Inc. ("Accu-Color") 622,391
Industrial Printing Company ("Industrial Printing") 570,161
IPC Graphics, Inc. ("IPC Graphics") 325,973
United Lithograph, Inc. ("United Lithograph") 519,568
French Bray, Inc. ("French Bray") 538,040
Clarke Printing, Co. ("Clarke Printing") 437,984
</TABLE>
The supplemental consolidated financial statements give retroactive
effect to the mergers, which have been accounted for using the pooling
of interests method and, as a result, the financial position, results of
operations and cash flows are presented as if the combining companies
had been consolidated for all periods presented. As required by
generally accepted accounting principles, the supplemental consolidated
financial statements will become the historical financial statements
upon issuance of the financial statements for the period that includes
the date of the mergers. The supplemental consolidated statements of
changes in stockholders' equity reflect the accounts of the Company as
if the additional common stock had been issued during all periods
presented. The supplemental consolidated financial statements, including
the notes thereto, should be read in conjunction with the historical
consolidated financial statements of the Company included in the
Company's 1997 Annual Report on Form 10-K.
Color Art is a commercial printer with offices located in St. Louis and
Osage Beach, Missouri, and also the operator of a short-run printing and
graphics company through its subsidiary Graphic Links, LLC. Accu-Color,
located in St. Louis, Missouri, is primarily a supplier of color separation
and other graphic arts services to the printing and advertising industries.
Industrial Printing is located in Toledo, Ohio and is engaged in the
printing and selling of advertising pieces and labels, and general
commercial printing. IPC Graphics prints and sells advertising pieces,
mailers and business forms from its facilities in Toledo, Ohio.
United Lithograph provides commercial printing services to individuals and
businesses located in the New England region from its offices in
Somerville, Massachusetts. French Bray, located in Glen Burnie, Maryland,
provides commercial, high quality, multi-color printing in the Mid-Atlantic
region. Clarke Printing designs, manufactures and sells printed materials
throughout Texas and Mexico.
The companies listed above are hereafter collectively referred to as the
Commercial Printing Group.
Each of the mergers was negotiated and consummated as separate
transactions and the separate mergers were not contigent upon each other.
Except for French Bray and Clarke Printing, all of the above entities
had elected Subchapter S corporation treatment for U.S. federal
income tax purposes and, accordingly, did not pay U.S. federal income
taxes. Subsequent to May 30, 1998, these companies will be included in
Mail-Well's consolidated U.S. federal income tax return. In connection
with the mergers, the Company also issued common stock to acquire
the net assets (including the assumption of the debt associated with such
assets) of certain related real estate ventures owned by shareholders of
the commercial printing companies. The shares of the Company's common
stock exchanged for real estate assets are included with the shares
exchanged for the respective operating company in the table above. The
results of operations and financial conditions of the real estate assets
are reflected in the restated consolidated financial statements with
significant intercompany transactions and balances eliminated.
Each of the above transactions has been accounted for individually as a
pooling of interests and, accordingly, the supplemental consolidated
financial statements for the periods subsequent to February 24, 1994
(inception) have been restated to include the accounts of the Commercial
Printing Group. Prior to the mergers, Industrial Printing's and IPC
Graphics' fiscal year ended on September 30, United Lithograph's fiscal
year ended on June 30 and French Bray's fiscal year ended on July 31.
Accordingly, the accompanying financial statements include those financial
statements of entities with different fiscal years restated on a calendar
year basis. Additionally, the accompanying supplemental consolidated
financial statements reflect certain minor adjustments to conform the
accounting policies of the Commercial Printing Group with the Company's.
There were no intercompany transactions between the Company and the
Commercial Printing Group, although there were intercompany transactions
among certain entities comprising the Commercial Printing Group which were
not significant and have been eliminated in the supplemental consolidated
financial statements.
27
<PAGE>
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In connection with the mergers, transaction costs incurred by the
Commercial Printing Group of approximately $2.2 million were expensed
during the first quarter of 1998 and included in administrative expenses.
Up to an additional $0.8 million of merger related costs on behalf of
the Company (which are required to be expensed in poolings) are expected
to be recorded in the second quarter of 1998. These costs consist
primarily of investment banking, legal and accounting fees.
Net sales, income before extraordinary items and net income of the separate
companies for the periods preceding the mergers were as follows:
<TABLE>
<CAPTION>
UNAUDITED
INCOME (LOSS) UNAUDITED PRO FORMA
BEFORE NET PRO FORMA DILUTED
NET EXTRAORDINARY INCOME NET INCOME EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) SALES ITEMS (LOSS) (LOSS) (1) PER SHARE
<S> <C> <C> <C> <C> <C>
QUARTER ENDED MARCH 31, 1998 (UNAUDITED)(2)
Mail-Well, Inc. as previously reported $ 274,705 $ 9,510 $ 9,510 $ 9,510
Color Art 18,199 (173) (173) (481)
Accu-Color 3,036 215 215 47
Industrial Printing 5,690 219 219 63
IPC Graphics 2,960 45 45 (19)
United Lithograph 5,532 (91) (91) (170)
French Bray 5,756 (258) (258) (258)
Clarke Printing 2,856 66 66 66
----------- ---------- ---------- ----------- -----------
Combined $ 318,734 $ 9,533 $ 9,533 $ 8,758 $ 0.18
----------- ---------- ---------- ----------- -----------
----------- ---------- ---------- ----------- -----------
YEAR ENDED DECEMBER 31, 1997
Mail-Well, Inc. as previously reported $ 897,560 $ 28,276 $ 22,176 $ 22,176
Color Art 76,099 3,218 3,218 1,930
Accu-Color 14,409 1,550 1,550 930
Industrial Printing 19,499 769 769 461
IPC Graphics 10,429 405 405 243
United Lithograph 21,232 502 502 301
French Bray 23,353 (178) (178) (178)
Clarke Printing 11,356 434 434 434
----------- ---------- ---------- ----------- -----------
Combined $1,073,937 $ 34,976 $ 28,876 $ 26,297 $ 0.62
----------- ---------- ---------- ----------- -----------
----------- ---------- ---------- ----------- -----------
YEAR ENDED DECEMBER 31, 1996
Mail-Well, Inc. as previously reported $ 778,524 $ 16,927 $ 16,927 $ 16,927
Color Art 66,023 1,970 1,970 1,182
Accu-Color 15,572 629 629 377
Industrial Printing 24,642 540 540 324
IPC Graphics (3) 2,262 30 30 18
United Lithograph 20,012 420 420 252
French Bray 28,046 454 454 454
Clarke Printing 9,413 188 188 188
----------- ---------- ---------- ----------- -----------
Combined $ 944,494 $ 21,158 $ 21,158 $ 19,722 $ 0.49
----------- ---------- ---------- ----------- -----------
----------- ---------- ---------- ----------- -----------
YEAR ENDED DECEMBER 31, 1995
Mail-Well, Inc. as previously reported $ 596,803 $ 10,373 $ 7,961 $ 7,961
Color Art 63,814 1,945 1,945 1,167
Accu-Color 16,315 1,431 1,431 858
Industrial Printing 26,002 880 880 528
IPC Graphics (3) -- -- -- --
United Lithograph 19,796 149 149 89
French Bray 26,603 329 329 329
Clarke Printing 9,570 274 274 274
----------- ---------- ---------- ----------- -----------
Combined $ 758,903 $ 15,381 $ 12,969 $ 11,206 $ 0.41
----------- ---------- ---------- ----------- -----------
----------- ---------- ---------- ----------- -----------
</TABLE>
28
<PAGE>
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) Unaudited pro forma net income reflects adjustments to net income to
record an estimated provision for income taxes for each period
presented assuming Color Art, Accu-Color, Industrial Printing, IPC
Graphics and United Lithograph were tax paying entities.
(2) Income (loss) amounts include aggregate merger expenses of the
Commercial Printing Group totalling $2.2 million in the first quarter
of 1998.
(3) IPC Graphics was spun-off from Industrial Printing on October 1, 1996.
The results of IPC Graphics prior to October 1, 1996 are included in
the results of Industrial Printing, and the spin-off transaction has
been eliminated in the Company's consolidated financial statements.
3. ACQUISITIONS
In June 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.
In July 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 73,062 shares of common stock in connection
with this acquisition.
In July 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 subsidiary of the Company issued
220,472 shares of non-voting common stock. These shares are redeemable by
the holder during the period from January 1, 1999 to February 1, 2000 for
$3,500,000. Alternatively, the holder may convert these shares into an
equal number of shares of the Company's common stock. This interest in the
non-voting common stock of the subsidiary has been recorded as a minority
interest in the consolidated balance sheet.
In September 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.
In October 1997, the Company acquired substantially all of the assets of
Intertec Mailing Services ("Intertec"), a division of Intertec Publishing
Corporation. Intertec, located in Nashville, Tennessee, is a direct mail
service company with annual sales approximating $7 million.
In December 1997, the Company acquired substantially all of the assets of
the Cambridge, Maryland plant of Western Graphics Communications
("Cambridge"), a subsidiary of Golden Books Publishing, Inc. Cambridge is a
commercial printer with annual sales approximating $33 million.
On January 6, 1998, the Company acquired the stock of Poser Business
Forms, Inc., ("Poser"). Poser is the second largest U.S. printer of custom
business communications documents for the distributor market and has annual
sales of $90 million. Poser, headquartered in Fairhope, Alabama, has a
nation-wide network of 14 plants producing four-color process printing,
labels, envelopes, loose-leaf products, laser cut-sheets and business
forms. Poser also has two high-growth trademarked products, VersaSeal, a
self-mailing system, and Security Guard, a line of documents with special
security protection. This acquisition launches the Company in a new highly
fragmented, growing operating segment.
On March 3, 1998, the Company acquired substantially all of the assets of
Rono Graphic Communications Co. and Hicks-Chatten Engraving Company
("Rono"). Rono is a printer specializing in high-quality posters, annual
reports, advertising and point-of-purchase displays with $12 million in
annual sales located in Portland, Oregon.
29
<PAGE>
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On March 10, 1998, the Company acquired substantially all of the assets of
the Lawson Mardon Packaging USA, Inc. label division subsequently renamed
Mail-Well Label ("MW Label"). MW Label is the second largest supplier of
glue-applied labels in North America, providing premium and conventional
labels, in-mold labels, postcards and graphic services to the food,
beverage and consumer household products markets. Headquartered in Toronto,
Ontario, with plants in Montreal, Quebec; Leamington, Ontario; Baltimore,
Maryland; and Sparks, Nevada, MW Label has annual sales of $81 million.
This acquisition also launches the Company in a new highly fragmented
segment of the printing industry.
On March 27, 1998, the Company acquired the stock of Denver Forms Company
("Denver Forms"). Denver Forms is a business communications documents and
specialty printing manufacturer based in Denver, Colorado with annual sales
of $12 million.
On March 27, 1998, the Company acquired the stock of the National Graphics
Company ("Natl Graphics"). Natl Graphics is a forms distributor based in
Denver, Colorado with annual sales of $8 million.
On March 27, 1998, the Company acquired substantially all of the assets of
EPX DENVER ("EPX"). EPX is a business communications documents and
specialty printing manufacturer based in Denver, Colorado with annual sales
of $4 million.
On April 8, 1998, the Company acquired substantially all of the assets of
Blue Line Envelope ("Blue Line"). Blue Line, located in Montreal, Quebec,
is an envelope manufacturer for office products outlets and stationers in
Canada with annual sales of $6 million.
On April 21, 1998, the Company acquired the stock of South Press, Inc.
("South Press"). South Press is a high quality printer located in Dallas,
Texas with annual sales of $12 million.
On May 5, 1998, the Company acquired the stock of Century Index Corporation
("Century"). Century is a manufacturer of filing products located in
Anaheim, California, with annual sales of $8 million.
On May 11, 1998, the Company acquired substantially all of the assets of
the International Paper label division ("IP Label"). IP Label, located in
Bowling Green, Kentucky, prints labels for consumer products and has annual
sales of $30 million.
On May 28, 1998, the Company acquired the stock of Anderson Lithograph
("Anderson"). Anderson is a leading high impact printer based in Los
Angeles, California with sales of $135 million annually.
On June 1, 1998, the Company acquired the stock of Illinois Envelope,
Inc. ("IE"). IE is an envelope printing company located in Kalamazoo,
Michigan with annual sales of $7 million.
On June 23, 1998, the Company acquired substantially all of the assets of
Gould Packaging, Inc. ("Gould"), a distributor of value-added mailing and
shipping supplies based in Vancouver, WA. Gould had sales in 1997 of
approximately $14 million.
The presentation below summarizes the purchase price including all
adjustments made through December 31, 1997. 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 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.
<TABLE>
<CAPTION>
CASH
AND TOTAL
(IN MILLIONS) TYPE OF MONTH STOCK DEBT PURCHASE GOODWILL
PURCHASE ACQUIRED PAID ASSUMED PRICE RECORDED
<S> <C> <C> <C> <C> <C> <C>
1995 ACQUISITIONS
Supremex Stock July $65.5 $ 0.0 $ 65.5 $ 33.6
Graphic Arts Center (GAC) Stock August 82.6 0.0 82.6 37.6
1996 ACQUISITIONS
Quality Park Products (QPP) Assets April 27.6 0.7 28.3 3.4
Pac National Group (PNG) Assets November 20.2 0.0 20.2 6.4
Shepard Poorman (SP) Stock December 18.9 0.8 19.7 7.9
</TABLE>
30
<PAGE>
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
CASH
AND TOTAL
(IN MILLIONS) TYPE OF MONTH STOCK DEBT PURCHASE GOODWILL
PURCHASE ACQUIRED PAID ASSUMED PRICE RECORDED
<S> <C> <C> <C> <C> <C> <C>
1997 ACQUISITIONS
Six acquisitions, as a group Assets (3) June, July, $ 86.4 $ 0.6 $ 87.0 $ 32.7
Stock (3) September,
October and
December
</TABLE>
The following table presents the unaudited pro forma results of operations
as if the Supremex, GAC, QPP, PNG and SP acquisitions and the initial
public offering had occurred on January 1, 1995, and as if the six 1997
acquisitions had occurred on January 1, 1996. The summary pro forma results
are based on assumptions and are not necessarily indicative of the actual
results which would have occurred had these acquisitions occurred on
January 1 of the year preceding the acquisition date, or of the future
results of operations of the Company.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(IN MILLIONS, EXCEPT PER SHARE) 1997 1996 1995
<S> <C> <C> <C>
Net sales $1,161.8 $ 1,193.6 $ 1,106.2
Income before extraordinary item 35.0 17.9 15.9
Extraordinary item (6.1) - (2.4)
Net income 28.9 17.9 13.5
Earnings per basic share:
Income before extraordinary item $ 0.86 $ 0.45 $ 0.60
Extraordinary item (0.15) - (0.09)
Net income 0.71 $ 0.45 $ 0.51
Earnings per diluted share:
Income before extraordinary item $ 0.82 $ 0.44 $ 0.58
Extraordinary item (0.14) - (0.09)
Net income $ 0.68 $ 0.44 $ 0.49
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
(IN THOUSANDS) 1998 1997 1996
(UNAUDITED)
<S> <C> <C> <C>
INVENTORIES:
Raw materials $ 43,592 $ 34,656 $ 30,116
Work in process 15,047 12,428 10,804
Finished goods 49,995 42,132 38,299
--------- --------- ---------
108,634 89,216 79,219
Reserve for obsolescence, loss and other (3,383) (2,948) (2,667)
--------- --------- ---------
Total $ 105,251 $ 86,268 $ 76,552
--------- --------- ---------
--------- --------- ---------
</TABLE>
31
<PAGE>
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997 1996
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C>
PROPERTY, PLANT AND EQUIPMENT:
Land and land improvements $ 17,126 $ 14,667 $ 13,949
Buildings and building improvements 77,609 65,313 57,087
Leasehold improvements 10,966 8,254 6,574
Machinery and equipment 264,580 229,214 188,256
Furniture and fixtures 7,065 7,747 6,132
Automobiles and trucks 1,611 1,565 1,297
Computers and software 17,525 17,141 12,321
Construction in progress 19,784 10,435 6,576
--------- --------- ---------
416,266 354,336 292,192
Less accumulated depreciation (97,929) (91,539) (72,938)
--------- --------- ---------
Total $ 318,337 $ 262,797 $ 219,254
--------- --------- ---------
--------- --------- ---------
RESERVES:
Allowance for doubtful accounts receivable $ (3,938) $ (3,795) $ (3,734)
Accumulated amortization:
Deferred financing costs (2,098) (2,000) (6,852)
Goodwill (10,398) (9,030) (5,442)
Other intangibles included in other assets (9,718) (4,386) (3,625)
</TABLE>
5. LONG-TERM DEBT
Long term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
INTEREST RATE AT MARCH 31, DECEMBER 31,
MARCH 31, 1998 1998 1997 1996
(UNAUDITED)
<S> <C> <C> <C> <C>
Bank Borrowings:
Unsecured line of credit,
due March 31, 2003
Mail-Well I Corporation $ -- $ -- $ --
Supremex 5.4% 90,238 -- --
Revolving Credit Facility - Supremex -- -- 768
Term Loans, due March 31, 2003
Mail-Well I Corporation -- -- 70,000
Supremex -- -- 65,000
Demand Note - Supremex -- 55,393 --
Senior Subordinated Notes, due 2004 10.5% 85,000 85,000 85,000
Convertible Subordinated Notes, due 2002 5.0% 152,050 152,050 --
Other 47,475 44,709 37,626
--------- --------- ---------
374,763 337,152 258,394
Less current maturities (9,964) (9,923) (24,170)
--------- --------- ---------
Long term debt $ 364,799 $ 327,229 $ 234,224
--------- --------- ---------
--------- --------- ---------
</TABLE>
Other long-term debt is comprised primarily of term debt with banks of the
Commercial Printing Group with interest rates ranging from 7.5% to 12.5% at
March 31, 1998. Immediately subsequent to the mergers described in Note 2,
the Company repaid approximately $37 million of debt of the Commercial
Printing Group.
32
<PAGE>
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On March 18,1998, the Company closed a new bank facility totaling $300
million with Bank of America, the lead agent for its syndicate of banks.
The new bank facility consists of a five-year unsecured line of credit.
Proceeds from the unsecured line of credit were used to repay the Demand
Note outstanding at December 31, 1997. Outstanding letters of credit on
the Company's previous credit facility were $4.9 million at December 31,
1997.
In November 1997, the Company issued $152,050,000 of Convertible
Subordinated Notes (the "Notes") due in 2002 with interest payable at 5%
per annum. The Notes constitute unsecured subordinated obligations of the
Company. The Notes are convertible at the option of the holder into shares
of the Company's common stock, par value $0.01 per share, at a conversion
price of $19.00 per share at anytime prior to November 1, 2002. In
addition, each holder of the Notes has the right to require the Company to
repurchase the Notes at a purchase price equal to 101% of the principal
amount, plus accrued and unpaid interest thereon, upon the occurrence of
certain events constituting a change of control of the Company.
The Company used the proceeds from the Notes to pay off outstanding amounts
on the Revolving Credit Facility and the Mail-Well Term Loan (the
"Facilities"). The Facilities were cancelled at the same time.
Concurrently, Supremex signed an unsecured Demand Note with a bank for up
to $60.0 million at an interest rate of LIBOR plus 0.75% per annum. The
proceeds from the Demand Note were used to pay off Supremex's outstanding
Term Loan; the Term Loan was also cancelled. The same bank agreed to lend
the Company and Supremex up to an additional $40.0 million at LIBOR plus
0.75% per annum under a similar unsecured demand note arrangement which was
drawn to pay for an acquisition which closed in the first week of fiscal
year 1998.
The indenture to the Senior Subordinated Notes contains certain
restrictive covenants that, among other things and with certain
exceptions, limit the ability of the Company to incur additional
indebtedness, prepay subordinated debt, transfer assets outside of the
Company, pay dividends or repurchase shares of common stock. In addition
to these restrictions, the Company is required to satisfy certain
financial covenants. Interest rate cap agreements were used to reduce the
potential impact of increases in the rates on floating-rate long-term
debt. At December 31, 1996, the Company was party to two interest rate
cap agreements. No interest rate cap agreements were in place at
December 31, 1997. Agreements for a notional value of $20.0 million
provided an effective LIBOR interest rate cap of 8.5% and were cancelled
in December 1997; agreements for a notional value of $35.0 million
provided an effective LIBOR interest rate cap of 9.0% and were cancelled
in December 1997. The agreements entitled the Company to receive from
counterparties the amounts, if any, by which the Company's interest
payments exceeded the interest rate caps.
In 1996, the Company entered into foreign currency swap contracts with a
third party to offset exposure to Canadian exchange rate fluctuations on
its U.S. dollar denominated term loans. The foreign currency swap
contracts were cancelled in November 1997.
In 1997, the Company wrote off deferred financing costs of $6,100,000 (net
of $3,814,000 of taxes) capitalized in connection with the bank debt which
was repaid in November 1997. The write-off is shown as an extraordinary
item in the statement of operations. In 1995, the Company repurchased all
outstanding Deferred Coupon Notes at a total cost of $19,712,000. The
Deferred Coupon Notes had a yield to maturity of 12.89% and were due
February 15, 2006. In connection with this debt extinguishment the Company
recognized an extraordinary loss of $2,412,000, net of taxes of $1,608,000.
The aggregate annual maturities for all long-term debt during the fiscal
years subsequent to December 31, 1997 are (in thousands):
<TABLE>
<S> <C>
1998 $ 9,923
1999 7,829
2000 5,492
2001 3,560
2002 157,538
2003 and thereafter 152,810
----------
$ 337,152
----------
----------
</TABLE>
33
<PAGE>
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES
In November 1996, the Company entered into a five-year agreement whereby it
can sell, on a revolving basis, an undivided percentage ownership interest
in a designated pool of accounts receivable up to a maximum of $100.0
million. At December 31, 1997 and 1996, $72.0 million and $71.0 million,
respectively, had been sold (without recourse) under this agreement and the
sale was reflected as a reduction of accounts receivable in the Company's
consolidated balance sheets. The Company has retained a securitized
interest in the accounts receivable of $22.3 million and $9.5 million at
December 31, 1997 and 1996, respectively. The receivables were sold at a
discount of 0.60% above the prevailing commercial paper rate plus certain
other fees. The discount expense of $4.9 million and $0.7 million on the
receivables sold has been recorded in the Company's statements of
operations for the years ended December 31, 1997 and 1996, respectively.
In November 1996, the Company refinanced certain equipment under a
sale/leaseback arrangement. The equipment was sold for $30.0 million. The
transaction was accounted for as a sale whereby the equipment was removed
from the Company's financial statements. There was no significant gain or
loss on the sale of the equipment. The equipment was then leased by the
Company and was being accounted for as an operating lease where the lease
payments were based upon LIBOR plus 2.0%. The total lease expense recorded
in 1997 and 1996 was $4.3 million and $0.4 million, respectively. In 1997,
the Company reacquired the equipment from the original lessor and sold and
leased back such equipment from a new buyer-lessor. The purchase price
from the old buyer-lessor and selling price to the new buyer-lessor
approximated its then fair market value ($27.6 million). The new leaseback
is classified as an operating lease and lease payments are based on LIBOR
plus 0.75%. At the end of the five year lease term, the Company may either
(i) purchase the equipment for $16.0 million, (ii) sell the equipment on
behalf of the lessor for a selling price of no less than $13.2 million or
(iii) return the equipment to the lessor. If the Company elects to return
the equipment to the lessor at the end of the lease term, the Company has
guaranteed a residual value of $13.2 million for the benefit of the lessor.
The Company leases various office, warehouse and manufacturing facilities
under operating leases. Minimum annual lease commitments at December 31,
1997 were as follows (in thousands):
<TABLE>
<S> <C>
1998 $ 17,893
1999 17,895
2000 16,304
2001 14,620
2002 13,032
2003 and thereafter 13,211
---------
Total $ 92,955
---------
---------
</TABLE>
Lease expense for the years ended December 31, 1997, 1996 and 1995 was
$17,301,000, $6,890,000 and $5,081,000, respectively.
Property, plant and equipment under capital lease totals $5,640,000 and
$5,660,000 at December 31, 1997 and 1996, respectively. Related
accumulated depreciation is $2,297,000 and $1,661,000 at December 31, 1997
and 1996, respectively. Capital lease obligations as of December 31, 1997
are as follows (in thousands):
<TABLE>
<S> <C>
Capital lease obligations $ 5,898
Less: interest (2,160)
--------
Total principal obligations 3,738
Less: current maturities (610)
--------
Long-term capital lease obligations $ 3,128
--------
--------
</TABLE>
34
<PAGE>
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Total capital lease obligations during the fiscal years subsequent to
December 31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
1998 $ 1,010
1999 687
2000 457
2001 403
2002 398
2003 and thereafter 2,943
--------
Total $ 5,898
--------
--------
</TABLE>
The Company is involved in various lawsuits incidental to its businesses.
In management's opinion, an adverse determination against the Company
relating to these suits would not be material to the consolidated financial
statements. In the case of administrative proceedings related to
environmental matters involving governmental authorities, management does
not believe that any imposition of monetary sanctions would be material.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following is a comparison of the fair value and carrying value at
December 31, 1997 and 1996 of the Company's financial instruments (in
thousands):
<TABLE>
<CAPTION>
1997 1996
FAIR CARRYING FAIR CARRYING
VALUE VALUE VALUE VALUE
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 40,911 $ 40,911 $ 12,297 $ 12,297
Receivables (trade) 64,958 64,958 59,804 59,804
Investment in accounts receivable
securitization 22,319 22,319 9,505 9,505
Foreign currency swap contracts - - 161 161
Financial liabilities
Revolving credit loans - - 768 768
Term loans - - 135,000 135,000
Demand note 55,393 55,393 - -
Capital leases 3,738 3,738 4,607 4,607
Senior subordinated notes 91,163 85,000 84,575 85,000
Convertible subordinated notes 185,501 152,050 - -
</TABLE>
CASH AND CASH EQUIVALENTS AND RECEIVABLES - The carrying value of cash and
cash equivalents and receivables approximates fair value due to the short
term maturities of these investments.
INVESTMENT IN ACCOUNTS RECEIVABLE SECURITIZATION - The fair value of the
investment in accounts receivable securitization is based on discounting
expected cash flows at rates currently available to the Company for
instruments with similar risks and maturities.
LONG-TERM DEBT - The fair value of the Company's long term debt to banks is
based on quoted interest rates for borrowings of similar quality and terms.
The fair value of the senior subordinated notes and the convertible
subordinated notes is based upon quoted market prices. The fair value of
capital leases is based on lease arrangements with similar terms. The
fair value of other long-term debt excluded from the table above
(consisting primarily of term debt of the pooled Commercial Printing Group
businesses) was estimated using the incremental borrowing rate for each
company for debt of the same remaining maturities. The fair values
approximated the carrying amounts of $44,709,000 and $37,626,000 as of
December 31, 1997 and 1996, respectively.
35
<PAGE>
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOREIGN CURRENCY SWAP CONTRACTS - Fair values reflect the estimated amounts
that the Company would receive or pay to terminate the contracts at the
reporting date based on quoted market prices of comparable contracts.
CONCENTRATIONS OF CREDIT RISK - Financial instruments which potentially
subject the Company to significant concentrations of credit risk consist
primarily of accounts receivable. Concentrations of credit risk with
respect to accounts receivable are limited due to the large number of
entities comprising the Company's customer base and their dispersion across
many different industries and geographic areas. As of December 31, 1997
and 1996, the Company had no significant concentrations of credit risk as
the largest customer's receivable balance was less than 2.1% and 5.1% of
total receivables, respectively.
8. STOCKHOLDERS' EQUITY AND STOCK OPTION PLAN
INITIAL PUBLIC OFFERING - On September 21, 1995, the Company completed an
initial public offering of 15,000,000 shares of common stock at $4.67 per
share. The net proceeds of the offering, after underwriting commissions and
expenses, were approximately $64.4 million; the net proceeds were used to
repay bank indebtedness and repurchase the remaining Deferred Coupon Notes.
SECURITIES OFFERING - On November 13, 1997, the Company's shelf
registration statement ("shelf") on Form S-3 was declared effective by the
Securities and Exchange Commission. The shelf permits the Company to issue
up to $300.0 million in debt securities, common stock, preferred stock or
warrants over the two-year period following the effective date.
On February 11, 1998, the Company completed the sale of 6,000,000 shares of
its common stock at a price of $19.625 per share through a group of
underwriters led by Prudential Securities Incorporated. Of these shares,
4,864,600 were sold by the Company and 1,135,400 were sold by a group of
shareholders. Proceeds from the sale of common stock by the Company of
$91.2 million, net of underwriting discounts and commissions, were used for
general corporate purposes. The February 1998 stock offering and the
Convertible Subordinated Notes were issued under the shelf registration
statement and, at March 31, 1998, there was availability to issue another
$52 million of securities under the shelf registration statement.
AUTHORIZED CAPITAL STOCK - At the Company's annual meeting on April 29,
1998, the shareholders approved an amendment to the Articles of
Incorporation to increase the number of shares of common stock authorized
for issuance to a total of 100,000,000 shares.
PREFERRED STOCK - The Company has authorized 25,000 shares of $0.01 par
value preferred stock. No shares have been issued at March 31, 1998,
December 31, 1997 or 1996.
STOCK OPTION PLAN - During 1994, the board of directors approved the
adoption of the 1994 Stock Option Plan (the "1994 Plan") which provided for
the grant of options to purchase up to 1,065,750 shares of Company common
stock to directors and key employees selected by the compensation committee
of the board of directors. During 1995, the board of directors increased
the number of options under the stock option plan by 852,600 to 1,918,350.
Stock options which are cancelled may be reissued. At December 31, 1997,
77,092 stock options are eligible to be issued under this plan. The stock
options granted in 1995 and 439,500 of the stock options granted in 1996
vest over a four year period and expire over a maximum period of ten years
from the grant date. During 1995, the board of directors approved the
adoption of the 1996 Directors Stock Option Plan and 42,000 stock options
were granted in 1996 to directors of the Company. These stock options are
exercisable six months after the date of grant and expire ten years from
the grant date or upon termination of directorship.
During 1997, 513,000 stock options were granted under the 1994 Plan of
which 498,000 stock options vest over a five year period and expire over a
maximum period of ten years from the grant date. The remaining 15,000
stock options vest over a four year period and expire over a maximum period
of ten years from the grant date. Also during 1997, 36,000 stock options
were granted under the 1996 Directors Stock Option Plan to directors of the
Company. These stock options are exercisable six months after the date of
grant and expire ten years from the grant date or upon termination of
directorship.
36
<PAGE>
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During 1997, the board of directors approved the adoption of the 1997
Non-Qualified Stock Option Plan (the "1997 Plan") which provided for the
grant of options to key employees and affiliates selected by the
compensation committee to purchase up to 1,950,000 shares of Company common
stock. During 1997, 1,110,402 stock options were granted under the 1997
Plan of which 1,096,002 stock options vest over a five year period and
expire over a maximum period of ten years from the grant date. The
remaining 14,400 stock options were granted to Company directors. These
stock options are exercisable six months after the date of grant and expire
ten years from the grant date or upon termination of directorship.
Also in 1997, the board of directors approved the adoption of the Allied
Acquisition Non-Qualified Stock Option Plan (the "Allied Plan") which
provided for the grant of options to key employees of Allied to purchase of
up to 124,800 shares of Company common stock. During 1997, 124,800 stock
options were granted under the Allied Plan. These options vest over a four
year period and expire over a maximum period of ten years from the grant
date.
On February 4, 1998, the Company's Board of Directors adopted a
non-qualified stock option plan (the "1998 Plan") for key employees and
directors authorizing future grants of stock options to purchase up to
1,000,000 shares of the Company's common stock. The 1998 Plan will be
administered by the Compensation Committee of the Board, and key employees
and directors of the Company and its affiliates may receive options as
determined by the committee in its discretion. The exercise price of
options granted under the 1998 Plan shall not be less than 100% of the fair
market value of the Company's common stock on the date of the grant.
On the grant date, all options had an exercise price equal to or greater
than the fair market value of the Company's common stock. The following is
a summary of the Company's stock option activity:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
EXERCISE CONTRACTUAL EXERCISE
OPTIONS PRICE LIFE PRICE
<S> <C> <C> <C> <C>
1995
Granted 1,001,558 $1.32 - $2.58 $1.53
Exercise (160,926) $2.58 $2.58
Canceled or forfeited (7,674) $1.32 $1.32
---------
Outstanding, December 31, 1995 832,958 $1.32 - $1.43 8.8 years $1.33
1996
Granted 481,500 $3.01 - $3.74 $3.67
Exercised (30,258) $1.32 $1.32
Canceled or forfeited (7,674) $1.32 $1.32
---------
Outstanding, December 31, 1996 1,276,526 $1.32 - $3.74 9.2 years $2.21
1997
Granted 1,784,202 $6.17 - $13.69 $7.29
Exercised (144,986) $1.32 - $3.74 $1.42
Canceled or forfeited (88,272) $1.32 - $3.74 $1.49
---------
Outstanding, December 31, 1997 2,827,470 $1.32 - $13.69 8.9 years $5.48
---------
---------
Vested and exercisable at December 31, 1996 219,974 $1.32 - $3.74 $1.65
---------
---------
Vested and exercisable at December 31, 1997 424,896 $1.32 - $9.50 $3.05
---------
---------
</TABLE>
37
<PAGE>
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED WEIGHTED
OUTSTANDING AT AVERAGE AVERAGE OPTIONS VESTED
RANGE OF DECEMBER 31, REMAINING EXERCISE AT DECEMBER 31, WEIGHTED AVERAGE
EXERCISE PRICES; 1997; LIFE; PRICE; 1997; EXERCISE PRICE
<S> <C> <C> <C> <C> <C>
$ 1.32 - $ 3.74 1,043,268 7.9 years $ 2.38 374,496 $ 2.19
$ 6.17 - $ 7.00 1,575,000 9.2 years $ 6.64 - -
$ 9.11 - $10.50 75,402 9.4 years $ 9.57 50,400 $ 9.50
$ 13.54 - $13.69 133,800 9.5 years $ 13.68 - -
--------- -------
$ 1.32 - $13.69 2,827,470 8.9 years $ 5.48 424,896 $ 3.05
--------- -------
--------- -------
</TABLE>
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related Interpretations in accounting for its employee stock
option plans. Accordingly, no compensation cost has been recognized.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") was issued and, if fully adopted by
the Company, would change the method for recognition of cost. Under SFAS
123, compensation expense is based upon the fair value of each option at
the date of grant using an option-pricing model that takes into account as
of the grant date the exercise price and expected life of the option, the
current price of the underlying stock and its expected volatility, expected
dividends on the stock and the risk-free interest rate for the expected
term of the option. Had compensation expense been determined based on the
guidance in SFAS 123, the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below. The weighted
average fair values of options granted in 1997, 1996 and 1995 were $3.83,
$1.72 and $0.58, respectively.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions used
for grants:
<TABLE>
<CAPTION>
DIVIDEND EXPECTED RISK FREE EXPECTED
YIELD VOLATILITY INTEREST RATE LIFE
<S> <C> <C> <C> <C>
March 1, 1995 Options 0% 33% 7.2% 5 and 6 years
May 8, 1996 Options 0% 38% 6.2% 4 years
October 1, 1996 Options 0% 44% 6.7% 5 and 6 years
1997 Options 0% 54% 5.4% 5 years
</TABLE>
38
<PAGE>
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
The following table presents the pro forma effect of applying SFAS 123:
1997 1996 1995
----------------------- ----------------------- -----------------------
(IN THOUSANDS, EXCEPT AS PRO AS PRO AS PRO
PER SHARE AMOUNTS) REPORTED FORMA REPORTED FORMA REPORTED FORMA
<S> <C> <C> <C> <C> <C> <C>
Income before
extraordinary item $ 34,976 $ 33,852 $ 21,158 $ 20,956 $ 15,381 $ 15,317
Extraordinary item 6,100 6,100 - - 2,412 2,412
Net income 28,876 27,752 21,158 20,956 12,969 12,905
Income per basic share
before extraordinary item $ 0.86 $ 0.83 $ 0.53 $ 0.53 $ 0.58 $ 0.57
Net income per basic share $ 0.71 $ 0.68 $ 0.53 $ 0.53 $ 0.49 $ 0.48
Income per diluted share
before extraordinary item $ 0.82 $ 0.80 $ 0.52 $ 0.52 $ 0.56 $ 0.56
Net income per diluted share $ 0.68 $ 0.66 $ 0.52 $ 0.52 $ 0.47 $ 0.47
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. Additional awards in future years are
anticipated.
9. INCOME TAXES
Taxes are based on income before income taxes and extraordinary item for
the years ended December 31, as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996 1995
<S> <C> <C> <C>
Domestic $ 42,677 $ 26,448 $ 20,319
Foreign 15,082 8,337 3,180
--------- --------- ---------
$ 57,759 $ 34,785 $ 23,499
--------- --------- ---------
--------- --------- ---------
</TABLE>
The provision (benefit) for income taxes consists of the following for the
years ended December 31:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996 1995
<S> <C> <C> <C>
Current:
Federal $ 9,539 $ 2,029 $ 4,915
Foreign 3,335 2,138 1,563
State 1,397 132 372
-------- -------- --------
$ 14,271 $ 4,299 $ 6,850
-------- -------- --------
-------- -------- --------
Deferred:
Federal $ 5,298 $ 6,968 $ 904
Foreign 2,651 1,475 (207)
State 563 885 571
-------- -------- --------
$ 8,512 $ 9,328 $ 1,268
-------- -------- --------
-------- -------- --------
</TABLE>
39
<PAGE>
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Components of the Company's deferred tax assets and liabilities at
December 31 are as follows:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
<S> <C> <C>
Deferred tax assets:
Alternative minimum tax credit carryforwards $ 5,541 $ 5,751
Net operating loss carryforwards 1,032 4,377
Compensation related accruals 3,588 231
Intangibles 3,386 3,501
Miscellaneous accruals and reserves 1,853 3,524
Accounts receivable and inventories 2,198 1,456
Land basis differences 620 625
State tax credits 95 -
Pension liability adjustment 55 79
Valuation allowance (288) (1,038)
------ ------
Total deferred tax assets 18,080 18,506
------ ------
Deferred tax liabilities:
Property, plant and equipment 40,466 34,629
Deferred financing costs 41 1,542
Intangibles 3,825 3,022
Prepaids and inventories 489 586
------ ------
Total deferred tax liabilities 44,821 39,779
------ ------
Deferred tax liability, net $26,741 $ 21,273
------- -------
------- -------
</TABLE>
The change in the valuation allowance from the prior year is due to an AMT
carryforward purchased from SP for which the Company has removed the
valuation allowance.
The difference between the statutory federal income tax rate and the
Company's effective income tax rate is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996 1995
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 34.0% 34.0%
State income tax, net of federal benefit 3.4 3.3 3.8
Goodwill amortization 1.5 1.8 0.5
Employee stock ownership plan 1.2 1.3 1.6
Effect of pooled entities electing nontaxable
status prior to the mergers (2.8) (1.5) (4.7)
Other 1.1 0.3 (0.7)
---- ---- ----
Effective income tax rate 39.4% 39.2% 34.5%
---- ---- ----
---- ---- ----
</TABLE>
At December 31, 1997, the following net federal operating loss and tax
credit carryforwards are available. The Company is limited in the amounts
of net operating loss carryforwards which may be used in any one year.
<TABLE>
<CAPTION>
OPERATING EXPIRATION TAX
(in thousands) LOSSES DATES CREDITS
<S> <C> <C> <C>
Consolidated Company $ - $ 3,462
Acquired from Pavey - 155
Acquired from GAC 2,663 2005 - 2009 1,203
Acquired from SP - 721
-------- --------
Total $ 2,663 $ 5,541
-------- --------
-------- --------
</TABLE>
40
<PAGE>
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. BENEFIT PLANS
U.S. PENSION PLANS - The Company sponsors three noncontributory defined
benefit pension plans under collective bargaining agreements with unions
representing certain employees in the U.S. The Company also has
obligations under a noncontributory defined benefit plan, which was
curtailed in 1994. The continuing plans provide for benefits based on
either a percentage of pay or a dollar multiplier, and years of credited
service. Pension costs are funded so as to meet minimum funding
requirements under the Employee Retirement Income Security Act of 1974.
Pension assets are invested primarily in bank common trust funds.
Accumulated plan benefits for all plans exceed plan assets. The following
table summarizes the funded status of the plans and the related amounts
that are recognized in the consolidated balance sheets.
<TABLE>
<CAPTION>
DECEMBER 31,
(in thousands) 1997 1996
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $ 5,392 $ 4,306
Nonvested benefit obligation 806 617
-------- --------
Accumulated benefit obligation 6,198 4,923
Effect of projected future compensation levels 373 267
-------- --------
Projected benefit obligation for services
rendered to date 6,571 5,190
Less plan assets at fair value 5,633 4,382
-------- --------
Projected benefit obligation in excess of plan assets 938 808
Unrecognized prior service costs (306) (161)
Unrecognized net gain 226 3
Additional minimum liability 316 222
-------- --------
Accrued pension cost $ 1,174 $ 872
-------- --------
-------- --------
</TABLE>
The provisions of Statement of Financial Accounting Standards No. 87,
"Employers' Accounting for Pensions," require the recognition of an
additional minimum liability for each defined benefit plan for which the
accumulated benefit obligation exceeds plan assets. This amount has been
recorded as a long-term liability with an offsetting intangible asset.
Because the asset recognized may not exceed the amount of unrecognized
prior service cost and transition obligation on an individual plan basis,
the balance, net of tax benefits, is reported as a separate reduction of
stockholders' equity.
<TABLE>
<CAPTION>
DECEMBER 31,
(in thousands) 1997 1996
<S> <C> <C>
Minimum liability adjustment $ 316 $ 222
Intangible asset 187 33
-------- --------
129 189
Tax benefit 56 79
-------- --------
Pension liability adjustment to stockholders'
equity $ 73 $ 110
-------- --------
-------- --------
</TABLE>
41
<PAGE>
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net pension expense for the plans included the following components:
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
<S> <C> <C> <C>
Service cost $ 884 $ 792 $ 700
Interest cost on projected benefit
obligation 380 312 281
Actual return on plan assets (802) (557) (426)
Net amortization and deferral 494 359 305
------ ------ ------
Net periodic pension cost $ 956 $ 906 $ 860
------ ------ ------
------ ------ ------
</TABLE>
The significant assumptions used as of December 31 in computing the net
pension expense and funded status information shown above are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Weighted average discount rate 7.25% 7.0% 7.0%
Expected long-term rate of return on assets 8.75% 8.5% 8.5%
Rate of compensation increase 4.0% 4.0% 4.0%
</TABLE>
Certain other U.S. employees covered by union agreements are included in
multi-employer pension plans to which the Company makes contributions in
accordance with the contractual union agreements. Such contributions are
made on a monthly basis in accordance with the requirements of the plans
and the actuarial computations and assumptions of the administrators of the
plans. Contributions to such multi-employer plans were $1,877,000,
$989,000 and $385,000 for 1997, 1996 and 1995, respectively. Benefits and
net asset data for these multi-employer pension plans for union employees
are not available.
CANADIAN PENSION PLANS - Supremex maintains four defined benefit pension
plans covering certain salaried and hourly employees who have bargained for
such benefits. During 1997, Supremex terminated one defined benefit plan.
The 1996 amounts reflect the termination of the plan. Supremex's policy is
to contribute annually at least the minimum amount required by law.
Pension funds are invested primarily in mutual funds. The net assets
available for benefits are $31,481,000 and $32,632,000 at December 31, 1997
and 1996, respectively. The actuarial present value of accumulated
benefits related to the plans at December 31, 1997 and 1996 was $23,277,000
and $24,162,000, respectively. Included in the consolidated balance sheets
at December 31, 1997 and 1996 are pension liabilities for the plans of
$1,315,000 and $412,000, respectively.
Net pension expense for the Supremex defined benefit pension plans included
the following:
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
<S> <C> <C> <C>
Service cost $ 416 $ 321 $ 141
Interest cost on projected benefit
obligation 1,467 867 334
Actual return on plan assets (2,476) (1,014) (377)
Net amortization and deferral (463) (93) (7)
--------- ------- ------
Net periodic pension cost (income) $ (1,056) $ 81 $ 91
--------- ------- ------
--------- ------- ------
</TABLE>
42
<PAGE>
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The significant assumptions used as of December 31, 1997, 1996 and 1995 in
computing net periodic pension expense and funded status information shown
above are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Weighted average discount rate 7.5% 8.5% 8.5%
Expected long term rate of return on assets 9.0% 8.5% 8.5%
Rate of compensation increase: 5.0% 5.0%
1997 - 1999 2.0%
Thereafter 3.5%
</TABLE>
EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP") - In 1994, the Company established
an ESOP for certain U.S. employees. The ESOP borrowed monies from the
Company to purchase 3,896,544 shares of Company common stock. These shares
are held in trust and are issued to employees' accounts in the ESOP as the
loan is repaid. The loan obligation of the ESOP is considered an unearned
employee benefit expense and, as such, is recorded as a reduction of the
Company's stockholders' equity. The Company's contributions to the ESOP
are used to repay the loan principal and interest. Both the loan
obligation and the unearned benefit expense are reduced by the amount of
loan principal repayments made by the ESOP. Amounts charged to expense are
based on the average market value of shares allocated to participants and
were $2,614,000, $1,973,000 and $1,612,000 for the years ended December 31,
1997, 1996 and 1995, respectively.
At December 31, 1997 and 1996 the ESOP held the following shares of common
stock:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Shares allocated to participant accounts 2,019,312 1,236,348
Shares committed to be allocated to participant
accounts in connection with current year
contribution 219,446 782,964
Unallocated shares held for future years
contributions 1,657,786 1,877,232
--------- ---------
Total 3,896,544 3,896,544
--------- ---------
--------- ---------
</TABLE>
The fair market value of the unallocated shares of common stock held for
future contributions was $31,394,000 and $11,477,000 at December 31, 1997
and 1996, respectively.
401(k) PLANS - The Company has several employee savings plans which are
designed to qualify under Section 401(k) of the Internal Revenue Code. All
U.S. salaried and non-union hourly employees who meet the eligibility
requirements are covered under one of these plans. In addition, U.S.
employees covered by union agreements where these benefits have been
collectively bargained are also covered by one of these plans. Each of the
plans allows eligible employees to make salary reduction contributions.
The provisions of certain plans include mandatory or discretionary
contributions by the Company. Amounts charged to expense in connection
with Company contributions were $3,159,000, $2,765,000 and $2,718,000 for
the years ended December 31, 1997, 1996 and 1995, respectively.
INCENTIVE COMPENSATION - The Company has established Incentive Compensation
Plans covering full time employees and executive officers of certain
subsidiaries. The amount of incentive compensation is based on the
consolidated results of the Company and on the results and performance
measures of various subsidiaries. Compensation expense under these plans
was $927,000, $1,268,000 and $1,312,000 for the years ended December 31,
1997, 1996 and 1995, respectively. Prior to the mergers, certain
businesses of the Commercial Printing Group maintained profit sharing
plans. Aggregate compensation expense under these plans was $1,009,000,
$1,064,000 and $1,165,000 for the years ended December 31, 1997, 1996 and
1995, respectively.
43
<PAGE>
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SEGMENT INFORMATION
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Operating segments are components of
an enterprise about which separate financial information is available that
is evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and in assessing performance. Generally,
financial information is required to be reported on the basis that it is
used internally for evaluating segment performance and deciding how to
allocate resources to segments. The Company adopted SFAS 131 for the year
ended December 31, 1997. The 1996 and 1995 information has been restated
to conform to the 1997 presentation. Additionally, segment information for
all periods has been restated to reflect the mergers of the Commercial
Printing Group as discussed in Note 2.
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 or income taxes by segment in assessing performance. Operating
segments of the Company are defined primarily by product line and consist
of Envelope Printing, High Impact Color Printing, Commercial Printing,
Business Communication Printing and Label Printing. The latter two segments
were added via acquisitions in the first quarter of 1998. The Canadian
Envelope and United States Envelope segments print and manufacture
envelopes designed to customer specifications. The High Impact Color
Printing segment specializes in printing advertising literature, high-end
catalogs, annual reports, calendars and computer instruction books. The
separately managed Commercial Printing segment provides a broad range of
printing and graphic arts services primarily to the advertising industry.
Intersegment sales from 1995 through the first quarter of 1998 were
insignificant. Segment information as of and for the three months ended
March 31, 1998 and 1997, and as of and for the years ended December 31,
1997, 1996 and 1995 are presented below:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
------------------------- ----------------------------------------
(IN THOUSANDS) 1998 1997 1997 1996 1995
----------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES:
Envelope Printing:
United States $ 172,202 $ 139,700 $ 594,238 $ 551,225 $ 510,660
Canada 28,197 31,616 115,293 86,928 38,759
High Impact Color Printing 48,684 40,716 188,029 140,371 47,384
Commercial Printing (a) 41,069 41,408 176,377 165,970 162,100
Business Communication Printing (a) 24,557 -- -- -- --
Label Printing 4,025 -- -- -- --
Corporate -- -- -- -- --
--------- --------- ---------- --------- ---------
Total $ 318,734 $ 253,440 $1,073,937 $ 944,494 $ 758,903
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
OPERATING INCOME (LOSS):
Envelope Printing:
United States $ 17,361 $ 14,644 $ 62,329 $ 54,656 $ 50,995
Canada 4,495 4,269 19,883 13,784 5,797
High Impact Color Printing 2,548 1,849 10,108 6,071 993
Commercial Printing (a) 602(b) 1,575 10,697 9,270 9,211
Business Communication Printing (a) 1,701(b) -- -- -- --
Label Printing 263 -- -- -- --
Corporate (3,424) (4,336) (17,189) (13,649) (10,191)
--------- --------- ---------- --------- ---------
Total $ 23,546 $ 18,001 $ 85,828 $ 70,132 $ 56,805
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
</TABLE>
44
<PAGE>
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
------------------------- ----------------------------------------
(IN THOUSANDS) 1998 1997 1997 1996 1995
----------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
IDENTIFIABLE ASSETS:
Envelope Printing:
United States $ 466,497 $ 449,430 $ 300,216 $ 254,788
Canada 131,814 95,202 98,777 75,503
High Impact Color Printing 151,971 142,008 126,936 115,336
Commercial Printing (a) 80,900 85,210 81,120 82,129
Business Communication Printing (a) 87,631 -- -- --
Label Printing 70,242 -- -- --
Corporate (c) (159,348) (100,439) (55,063) 54,809
--------- ---------- --------- ---------
Total $ 829,707 $ 671,411 $ 551,986 $ 582,565
--------- ---------- --------- ---------
--------- ---------- --------- ---------
DEPRECIATION AND AMORTIZATION:
Envelope Printing:
United States $ 3,127 $ 2,381 $ 8,948 $ 8,931 $ 7,980
Canada 550 579 2,301 1,663 679
High Impact Color Printing 1,748 1,524 3,282 4,310 1,182
Commercial Printing 1,904 1,771 7,337 6,873 6,564
Business Communication Printing 245 -- -- -- --
Label Printing 161 -- -- -- --
Corporate 522 (12) 4,505 4,172 2,857
--------- --------- ---------- --------- ---------
Total $ 8,257 $ 6,243 $ 26,373 $ 25,949 $ 19,262
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
CAPITAL EXPENDITURES:
Envelope Printing:
United States $ 20,020 $ 11,431 $ 11,969
Canada 2,243 1,711 426
High Impact Color Printing 2,436 5,600 521
Commercial Printing 12,139 3,297 11,211
Business Communication Printing -- -- --
Label Printing -- -- --
Corporate -- -- 850
---------- --------- ---------
Total $ 36,838 $ 22,039 $ 24,977
---------- --------- ---------
---------- --------- ---------
</TABLE>
(a) Effective January 1, 1998, with the 1998 acquisition of Poser, the
results of IPC Graphics were included in the Business Communication
Printing segment. As of and for the year ended December 31, 1997, IPC
Graphics had net sales of $10,429,000, operating income of $532,000 and
identifiable assets of $5,437,000.
(b) Operating income (loss) includes first quarter 1998 merger expenses of
$114,000 in the Business Communication Printing segment for IPC Graphics
and $2,117,000 for the Commercial Printing segment.
(c) Corporate identifiable assets include inter-company balances and
adjustments for the accounts receivable securitization and certain
operating leases. This is done to reflect the return on assets
employed within each segment on a consistent basis.
The operating losses for Corporate may be further explained as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
(IN THOUSANDS) 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Corporate expenses $ 7,707 $ 7,136 $ 7,334
Operating lease expenses 2,253 196 --
Amortization 4,505 4,172 2,857
Loss on disposal of assets 2,724 2,145 --
-------- -------- --------
Corporate operating loss $ 17,189 $ 13,649 $ 10,191
-------- -------- --------
-------- -------- --------
</TABLE>
45
<PAGE>
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SUMMARY QUARTERLY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS) (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERS ENDED
1997 12/31/97 9/30/97 6/30/97 3/31/97
<S> <C> <C> <C> <C>
Net sales $ 291,229 $ 278,794 $ 250,474 $ 253,440
Gross profit 66,363 60,778 56,990 55,594
Income before extraordinary item 10,429 8,820 8,875 6,852
Extraordinary item (6,100) - - -
Net income 4,329 8,820 8,875 6,852
Earnings per basic share:
Income per share before
extraordinary item $ 0.26 $ 0.22 $ 0.22 $ 0.17
Extraordinary item per share (0.15) - - -
Net income per share $ 0.11 $ 0.22 $ 0.22 $ 0.17
Earnings per diluted share:
Income per share before
extraordinary item $ 0.23 $ 0.21 $ 0.21 $ 0.17
Extraordinary item per share (0.13) - - -
Net income per share $ 0.10 $ 0.21 $ 0.21 $ 0.17
<CAPTION>
QUARTERS ENDED
1996 12/31/96 9/30/96 6/30/96 3/31/96
<S> <C> <C> <C> <C>
Net sales $ 242,666 $ 242,702 $ 223,841 $ 235,285
Gross profit 55,701 53,688 47,882 46,558
Net income 7,064 6,466 4,370 3,258
Net income per basic share $ 0.18 $ 0.16 $ 0.11 $ 0.08
Net income per diluted share $ 0.17 $ 0.16 $ 0.11 $ 0.08
</TABLE>
46
<PAGE>
(c) FINANCIAL STATEMENT SCHEDULES AND EXHIBITS:
MAIL-WELL, INC. (PARENT-ONLY SUPPLEMENTAL FINANCIAL STATEMENTS) SCHEDULE I
CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS DECEMBER 31,
1997 1996
<S> <C> <C>
CURRENT ASSETS
Cash $ 256 $ 45
Other current assets 129 172
--------- ---------
Total current assets 385 217
INVESTMENT IN SUBSIDIARY 319,603 141,191
INTANGIBLE ASSETS (net of accumulated amortization
of $150 and $53) 4,772 256
OTHER ASSETS 155 129
--------- ---------
TOTAL $ 324,915 $ 144,793
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Payable to subsidiary $ 542 $ 1,381
Other 634 -
--------- ---------
Total current liabilities 1,176 1,381
DEFERRED INCOME TAXES - 1
CONVERTIBLE SUBORDINATED NOTES 152,050 -
--------- ---------
Total liabilities 153,226 1,382
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY 171,689 143,411
--------- ---------
TOTAL $324,915 $144,793
--------- ---------
--------- ---------
</TABLE>
See notes to condensed financial statements.
47
<PAGE>
MAIL-WELL, INC. (PARENT-ONLY SUPPLEMENTAL FINANCIAL STATEMENTS) SCHEDULE I
CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1997 1996 1995
<S> <C> <C> <C>
OTHER OPERATING COSTS
Administrative $ 172 $ 109 $ 64
Amortization 97 19 19
------- ------- -------
Total other operating costs 269 128 83
------- ------- -------
OPERATING LOSS (269) (128) (83)
OTHER (INCOME) EXPENSE
Interest expense-debt 634 - 1,650
Interest expense-amortization of deferred
financing costs - - 53
Other (income) expense (4) (1) -
------- ------- -------
LOSS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM (899) (127) (1,786)
PROVISION FOR (BENEFIT FROM) INCOME TAXES
Current - - 11
Deferred - 1 (554)
------- ------- -------
LOSS BEFORE EQUITY IN
UNDISTRIBUTED EARNINGS OF SUBSIDIARY
AND EXTRAORDINARY ITEM (899) (128) (1,243)
Equity in undistributed earnings of
subsidiary 29,775 21,286 16,624
------- ------- -------
INCOME BEFORE EXTRAORDINARY ITEM 28,876 21,158 15,381
EXTRAORDINARY ITEM, NET OF TAX
BENEFIT OF $1,608 - - 2,412
------- ------- -------
NET INCOME $28,876 $21,158 $12,969
------- ------- -------
------- ------- -------
</TABLE>
See notes to condensed financial statements.
48
<PAGE>
MAIL-WELL, INC. (PARENT-ONLY SUPPLEMENTAL FINANCIAL STATEMENTS) SCHEDULE I
CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATIONS
Net income $ 28,876 $ 21,158 $ 12,969
Adjustments to reconcile net income to
cash provided by operations:
Equity in undistributed earnings of
subsidiary (29,775) (21,286) (16,624)
Amortization 97 19 72
Accretion of original issue discount - - 1,650
Loss on repurchase of deferred coupon
notes - pre-tax - - 4,020
Deferred tax provision (benefit) - 1 (554)
Changes in operating assets and
liabilities, net of effects of
acquired businesses:
Other working capital 676 223 (3,822)
Other assets (26) (129) -
-------- -------- --------
Net cash used in operating
activities (152) (14) (2,289)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in subsidiaries (147,184) 0 (46,161)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from common stock issuance 201 40 68,181
Proceeds from issuance of convertible
subordinated notes 147,346 - -
Repurchase of deferred coupon notes - - (19,712)
-------- -------- --------
Net cash provided by financing
activities 147,547 40 48,469
-------- -------- --------
INCREASE IN CASH 211 26 19
BALANCE AT BEGINNING OF PERIOD 45 19 0
-------- -------- --------
BALANCE AT END OF PERIOD $ 256 $ 45 $ 19
-------- -------- --------
-------- -------- --------
Stock issued for acquisitions $ 1,000 $ - $ -
</TABLE>
See notes to condensed financial statements.
49
<PAGE>
MAIL-WELL, INC. (PARENT-ONLY SUPPLEMENTAL FINANCIAL STATEMENTS) SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The financial statements of Mail-Well, Inc.
(the "Company") reflect the investment in Mail-Well I Corporation ("M-W
Corp."), a wholly-owned subsidiary, using the equity method.
INCOME TAXES - The provision (benefit) for income taxes is based on income
recognized for financial statement purposes. Deferred income taxes are
recognized for the effects of temporary differences between such income and
that recognized for income tax purposes. The Company files a consolidated
U.S. income tax return with M-W Corp.
2. CONSOLIDATED FINANCIAL STATEMENTS
Reference is made to the Supplemental Consolidated Financial Statements
and related Notes of Mail-Well, Inc. and Subsidiaries included elsewhere
herein for additional information.
3. MERGER
Effective May 30, 1998, the Company completed its mergers with several
commercial printing businesses. Reference is made to Note 2 to the
Supplemental Consolidated Financial Statements. Pursuant to the merger
agreements, each of the Commercial Printing Group businesses was merged
with a subsidiary of the Company in exchange for shares of the Company's
common stock. Each of the mergers has been accounted for under the pooling
of interests method and, accordingly, these parent-only financial
statements have been restated to include the investment in the merged
businesses.
4. DEBT AND GUARANTEES
Information on the debt of the Company is disclosed in Note 4 to the
Supplemental Notes to Consolidated Financial Statements of Mail-Well, Inc.
and Subsidiaries included elsewhere herein. The Company has guaranteed
all debt of M-W Corp. ($145.5 million outstanding at December 31, 1997,
including current maturities) and certain other obligations arising in
the ordinary course of business. The aggregate amounts of M-W Corp.'s
debt maturities for the five years following 1997 are: 1998 - $305,000;
1999 - $277,000; 2000 - $260,000; 2001 - $274,000; 2002 - $294,000; and
$144,088,000 thereafter.
5. DIVIDENDS RECEIVED
No dividends have been received from M-W Corp. since the Company's
inception. M-W Corp.'s ability to declare dividends to the Company is
restricted by the terms of its bank credit agreements and the indenture
relating to M-W Corp.'s Senior Subordinated Notes.
6. EXTRAORDINARY ITEM
In 1995, the Company repurchased all of its outstanding Deferred Coupon
Notes at a total cost of $19,712,000. In connection with this debt
extinguishment, the Company recognized an extraordinary loss of $2,412,000,
net of taxes of $1,608,000.
* * * * *
50
<PAGE>
MAIL-WELL, INC. AND SUBSIDIARIES SCHEDULE II
SUPPLEMENTAL VALUATION AND QUALIFYING ACCOUNTS (1)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1997 1996 1995
<S> <C> <C> <C>
Balance at beginning of period $ 3,734 $ 2,671 $ 2,227
Charged to costs and expenses 1,454 2,590 1,203
Charged to other accounts (2) 909 (3) 1,236 (4) 801 (5)
Deductions (6) (2,302) (2,763) (1,560)
-------- -------- --------
Balance at end of period $ 3,795 $ 3,734 $ 2,671
-------- -------- --------
-------- -------- --------
</TABLE>
(1) Schedule has been restated to reflect the mergers of the Commercial
Printing Group companies (see Note 2 to the supplemental consolidated
financial statements included elsewhere herein) accounted for under
the pooling of interests method.
(2) Recoveries of accounts previously written off.
(3) Includes the beginning balances ($643) of the allowance for doubtful
accounts for the companies acquired in 1997.
(4) Includes the beginning balances ($801) of the allowance for doubtful
accounts for Quality Park Products, Inc., Pac National Group. and Shepard
Poorman Communications Corporation.
(5) Includes the beginning balances ($718) of the allowance for doubtful
accounts for Supremex, Inc. and Graphic Arts Center, Inc.
(6) Accounts written off.
51
<PAGE>
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
President,
Chief Operating Officer
Date: July 15, 1998
52
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.'s
333-35561, 333-36337 and 333-53679 of Mail-Well, Inc. on Forms S-3 and
Registration Statement No. 333-26743 of Mail-Well, Inc. on Form S-8 of our
report dated July 10, 1998 appearing in this Amendment No. 1 to the Current
Report on Form 8-K/A of Mail-Well, Inc. dated May 30, 1998.
DELOITTE & TOUCHE LLP
Denver, Colorado
July 13, 1998
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.'s
333-35561, 333-36337 and 333-53679 of Mail-Well, Inc. on Forms S-3 and
Registration Statement No. 333-26743 of Mail-Well, Inc. on Form S-8 of our
reports dated March 6, 1998 (except for Notes 7 and 13, which are dated May
15, 1998 and May 22, 1998, respectively) and March 7, 1997 (except for Note
7, which is dated March 24, 1997) relating to the financial statements of
Color Art, Inc. and Subsidiaries (not presented separately herein) appearing
in this Amendment No. 1 to the Current Report on Form 8-K/A of Mail-Well,
Inc. dated May 30, 1998.
Rubin, Brown, Gornstein & Co. LLP
St. Louis, MO
July 10, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> 3-MOS 3-MOS YEAR YEAR
YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997 DEC-31-1997 DEC-31-1996
DEC-31-1995
<PERIOD-START> JAN-01-1998 JAN-01-1997 JAN-01-1997 JAN-01-1996
JAN-31-1995
<PERIOD-END> MAR-31-1998 MAR-31-1997 DEC-31-1997 DEC-31-1996
DEC-31-1995
<CASH> 12,999 14,676 40,911 12,297
2,378
<SECURITIES> 42,598 0 22,319 9,505
0
<RECEIVABLES> 95,184 67,175 73,040 68,081
125,447
<ALLOWANCES> 0 0 0 0
0
<INVENTORY> 105,251 79,898 86,268 76,552
76,625
<CURRENT-ASSETS> 268,044 174,269 234,898 177,604
213,643
<PP&E> 416,266 273,401 354,336 292,192
289,372
<DEPRECIATION> (97,929) (52,666) (91,539) (72,938)
(45,741)
<TOTAL-ASSETS> 829,707 550,632 671,411 551,986
582,567
<CURRENT-LIABILITIES> 151,799 138,018 129,456 142,379
112,338
<BONDS> 0 0 0 0
0
0 0 0 0
0
0 0 0 0
0
<COMMON> 482 307 430 436
436
<OTHER-SE> 272,558 147,587 171,390 142,975
121,563
<TOTAL-LIABILITY-AND-EQUITY> 829,707 550,632 671,411 551,986
582,567
<SALES> 318,734 253,440 1,073,937 944,494
758,903
<TOTAL-REVENUES> 318,734 253,440 1,073,937 944,494
758,903
<CGS> 249,687 197,846 834,212 740,665
596,359
<TOTAL-COSTS> 295,188 235,439 988,109 874,362
702,098
<OTHER-EXPENSES> 204 537 2,828 1,204
152
<LOSS-PROVISION> 0 0 0 0
0
<INTEREST-EXPENSE> 6,583 6,220 25,241 34,143
33,154
<INCOME-PRETAX> 16,759 11,244 57,759 34,785
23,499
<INCOME-TAX> 7,226 4,392 22,783 13,627
8,118
<INCOME-CONTINUING> 9,533 6,852 34,976 21,158
15,381
<DISCONTINUED> 0 0 0 0
0
<EXTRAORDINARY> 0 0 6,100 0
2,412
<CHANGES> 0 0 0 0
0
<NET-INCOME> 9,533 6,852 28,876 21,158
12,969
<EPS-PRIMARY> 0.22 0.17 0.71 0.53
0.49
<EPS-DILUTED> 0.20 0.17 0.68 0.52
0.47
</TABLE>
