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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
COMMISSION FILE NUMBER 1-12551
------------------------
MAIL-WELL, INC.
(Exact name of Registrant as specified in its charter.)
COLORADO 84-1250533
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8310 S. VALLEY HIGHWAY, #400
ENGLEWOOD, CO 80112
(Address of principal executive offices) (Zip Code)
303-790-8023
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
As of November 1, 2002 the Registrant had 48,251,478 shares of Common
Stock, $0.01 par value, outstanding.
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MAIL-WELL, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements........................................ 2
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 25
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 40
PART II - OTHER INFORMATION
Item 4. Controls and Procedures..................................... 41
Item 6. Exhibits and Reports on Form 8-K............................ 41
Signature Page........................................................... 45
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAIL-WELL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
SEPTEMBER 30, 2002
(UNAUDITED) DECEMBER 31, 2001
------------------ -----------------
ASSETS
Current assets
Cash and cash equivalents........................... $ 139,838 $ 894
Accounts receivable, net............................ 228,014 230,770
Inventories, net.................................... 106,137 110,859
Net assets of discontinued operations............... -- 129,568
Net assets held for sale............................ 22,661 52,368
Other current assets................................ 44,692 71,137
---------- ----------
Total current assets............................ 541,342 595,596
Property, plant and equipment, net...................... 387,936 422,278
Goodwill and other intangible assets, net............... 412,037 411,416
Other assets, net....................................... 38,443 46,286
---------- ----------
Total assets............................................ $1,379,758 $1,475,576
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable.................................... $ 155,773 $ 160,040
Accrued compensation and related liabilities........ 48,843 50,757
Other current liabilities........................... 65,393 62,499
Current maturities of long-term debt................ 142,845 303,170
---------- ----------
Total current liabilities....................... 412,854 576,466
Long-term debt.......................................... 773,943 552,051
Deferred income taxes................................... 22,919 88,393
Other long-term liabilities............................. 15,848 16,789
---------- ----------
Total liabilities....................................... 1,225,564 1,233,699
SHAREHOLDERS' EQUITY
Preferred stock, $0.01 par value; 25,000 shares
authorized, no shares issued...................... -- --
Common stock, $0.01 par value; 100,000,000 shares
authorized, 48,225,031 and 48,325,801 shares
issued and outstanding in 2002 and 2001,
respectively...................................... 482 483
Paid-in capital..................................... 213,711 214,138
Retained earnings (deficit)......................... (41,160) 46,623
Deferred compensation............................... (2,484) (3,359)
Accumulated other comprehensive loss................ (16,355) (16,008)
---------- ----------
Total shareholders' equity...................... 154,194 241,877
---------- ----------
Total liabilities and shareholders' equity.............. $1,379,758 $1,475,576
========== ==========
See notes to condensed consolidated financial statements.
2
MAIL-WELL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------- ---------------------------
2002 2001 2002 2001
-------- -------- ---------- ----------
Net sales........................................ $428,720 $465,286 $1,293,169 $1,425,622
Cost of sales.................................... 343,485 373,901 1,041,064 1,129,900
-------- -------- ---------- ----------
Gross profit..................................... 85,235 91,385 252,105 295,722
Other operating expenses:
Selling and administrative expenses.......... 61,273 67,552 198,509 210,447
Amortization of intangibles.................. 526 3,993 1,542 12,449
Impairment loss on assets held for sale...... -- -- 8,871 8,807
Impairment on former discontinued
operation.................................. -- -- 10,407 --
Restructuring, impairments and other
charges.................................... 39,408 5,521 63,208 25,571
-------- -------- ---------- ----------
Operating income (loss).......................... (15,972) 14,319 (30,432) 38,448
Other expense:
Interest expense............................. 18,675 15,579 52,553 49,350
Other expense................................ 1,720 518 2,061 1,502
-------- -------- ---------- ----------
Loss from continuing operations before income
taxes.......................................... (36,367) (1,778) (85,046) (12,404)
Income tax benefit............................... (14,218) (246) (21,346) (1,372)
-------- -------- ---------- ----------
Loss from continuing operations.................. (22,149) (1,532) (63,700) (11,032)
Loss from discontinued operations:
Loss from discontinued operations, net of tax
benefit.................................... -- -- -- (2,982)
Loss on disposal, net of tax benefit......... (5,804) (31) (13,958) (76,452)
-------- -------- ---------- ----------
Loss before extraordinary loss................... (27,953) (1,563) (77,658) (90,466)
Extraordinary loss, net of tax benefit........... -- -- (10,125) --
-------- -------- ---------- ----------
Net loss......................................... $(27,953) $ (1,563) $ (87,783) $ (90,466)
======== ======== ========== ==========
Loss per share--basic and diluted:
Continuing operations........................ $ (0.46) $ (0.03) $ (1.34) $ (0.23)
Discontinued operations...................... (0.13) -- (0.29) (1.67)
Extraordinary loss........................... -- -- (0.21) --
-------- -------- ---------- ----------
Loss per share--basic and diluted............ $ (0.59) $ (0.03) $ (1.84) $ (1.90)
======== ======== ========== ==========
Weighted average shares--basic and diluted....... 47,668 47,657 47,665 47,526
See notes to condensed consolidated financial statements.
3
MAIL-WELL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
NINE MONTHS ENDED
SEPTEMBER 30
--------------------------
2002 2001
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Loss from continuing operations........................... $ (63,700) $ (11,032)
Adjustments to reconcile net loss to cash provided by
operating activities:
Depreciation and amortization........................... 40,439 52,754
Noncash portion of restructuring and impairment
charges................................................ 29,226 12,791
Deferred income tax expense (benefit)................... (13,095) 2,994
Other................................................... 655 1,745
Changes in operating assets and liabilities, excluding the
effects of businesses sold:
Trade and other receivables........................... 5,566 37,711
Inventories........................................... 5,262 12,926
Accounts payable and accrued expenses................. 551 32,967
Other, net............................................ 2,841 (6,138)
---------- ---------
Net cash provided by operating activities............. 7,745 136,718
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition costs......................................... (2,552) (3,838)
Proceeds from divestitures, net........................... 128,649 --
Capital expenditures...................................... (26,943) (24,121)
Proceeds from the sales of assets......................... 6,267 577
---------- ---------
Net cash provided by (used in) investing activities... 105,421 (27,382)
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in accounts receivable securitization............ -- (75,000)
Proceeds from common stock issuance....................... 18 413
Proceeds from long-term debt.............................. 1,006,154 493,404
Repayments of long-term debt.............................. (951,077) (524,026)
Debt issuance costs....................................... (17,402) (4,382)
---------- ---------
Net cash provided by (used in) financing activities... 37,693 (109,591)
CASH FLOWS FROM DISCONTINUED OPERATIONS
Net cash provided by (used in) discontinued operations.... (10,827) 498
Effect of exchange rate changes on cash and cash
equivalents................................................ (1,088) (73)
---------- ---------
Net increase in cash and cash equivalents................... 138,944 170
Cash and cash equivalents at beginning of period............ 894 589
---------- ---------
Cash and cash equivalents at end of period.................. $ 139,838 $ 759
========== =========
See notes to condensed consolidated financial statements.
4
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of
Mail-Well, Inc. and subsidiaries (collectively, the "Company") have been
prepared in accordance with generally accepted accounting principles for
interim financial statements and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three and nine months ended September 30, 2002 are not necessarily
indicative of the results that may be expected for the year ended December
31, 2002. The balance sheet at December 31, 2001 has been derived from the
audited financial statements at that date but does not include all of the
information and footnote disclosures required by generally accepted
accounting principles for complete financial statements.
For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's annual report on Form 10-K
for the year ended December 31, 2001.
During June 2002, the decision was made to discontinue efforts to sell
the PrintXcel business. As such, the statement of operations for the three
and nine months ended September 30, 2001 have been restated to include this
business as part of the continuing operations. PrintXcel, which is the
Company's Printed Office Products operating segment, had previously been
reported in discontinued operations.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.
Statement 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. Statement 141 also
includes guidance on the initial recognition and measurement of goodwill
and other intangible assets arising from business combinations completed
after June 30, 2001. Statement 142 prohibits the amortization of goodwill
and intangible assets with indefinite useful lives. Statement 142 requires
that these assets be reviewed for impairment at least annually. Intangible
assets with finite lives will continue to be amortized over their estimated
useful lives. Additionally, Statement 142 requires that goodwill included
in the carrying value of equity method investments no longer be amortized.
Mail-Well adopted Statement 142 on January 1, 2002. The Company has
completed the first step of the two-step process prescribed in Statement
142 to test goodwill for impairment and has concluded that a portion of the
$213.5 million of goodwill related to our commercial printing business is
impaired. The extent of this impairment will not be known until step two of
the process has been completed. The Company will recognize the amount of
the impairment as a cumulative effect of a change in accounting principle
as of January 1, 2002 when it is determined, but no later than December 31,
2002.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. Statement 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. Mail-Well will
adopt Statement 143 on January 1, 2003. The Company is evaluating the
impact of the adoption of Statement 143 on the consolidated financial
statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which establishes one
accounting model to be used for long-lived assets to be
5
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
disposed of by sale and broadens the presentation of discontinued
operations to include more disposal transactions. Statement 144 supercedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets to Be
Disposed Of and the accounting and reporting provisions of Accounting
Principles Board Opinion No. 30, Reporting the Results of
Operations--Reporting the Effects Of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. Mail-Well adopted Statement 144 as of January 1, 2002 and
there was no impact from the adoption of this statement.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statement No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. This statement provides guidance on the
classification of gains and losses from the extinguishment of debt and on
the accounting for certain specified lease transactions. The Company is
currently evaluating the provisions of the new statement.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, which addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force ("EITF") Issue No.
94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). Generally, SFAS No. 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized as
incurred, whereas EITF Issue No. 94-3 required such a liability to be
recognized at the time that an entity committed to an exit plan. The
company is currently evaluating the provisions of the new rule, which is
effective for exit or disposal activities that are initiated after December
31, 2002.
3. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of acquisition costs over the fair value
of net assets of businesses acquired and prior to the adoption of Statement
142 on January 1, 2002 was amortized on a straight-line basis over 40
years. Other intangible assets primarily arise from the purchase price
allocations of businesses acquired and are based on independent appraisals
or internal estimates and are amortized on a straight-line basis over
appropriate periods.
In accordance with the provisions of SFAS 142, the Company ceased
amortizing goodwill on January 1, 2002. Had SFAS 142 been in effect on
January 1, 2001, the Company would not have recorded goodwill amortization
expense of $3.5 million and $10.5 million for the three and nine months
ended September 30, 2001, respectively. The following table summarizes the
reported net losses for the three and nine months ended September 30, 2002
and September 30, 2001, adjusted to exclude goodwill amortization expense,
and the related tax effect, that would not have been recorded had the
provisions of SFAS 142 been in effect January 1, 2001 (in thousands, except
per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ ------------------------------
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
2002 2001 2002 2001
------------ ------------ ------------ ------------
Reported net loss...................... $(27,953) $(1,563) $(87,783) $(90,466)
Goodwill amortization, net of tax...... -- 3,049 -- 9,160
-------- ------- -------- --------
Adjusted net income (loss)......... $(27,953) $ 1,486 $(87,783) $(81,306)
======== ======= ======== ========
Basic and diluted loss per share--as
reported............................. $ (0.59) $ (0.03) $ (1.84) $ (1.90)
Basic and diluted loss per
share--adjusted...................... $ (0.59) $ 0.03 $ (1.84) $ (1.71)
6
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED)
The following is a summary of other intangible assets, net of related
accumulated amortization (in thousands):
COMMERCIAL
ENVELOPE PRINTING PRINTXCEL TOTAL
-------- ---------- --------- -------
Trademarks and tradenames............... $ 8,204 $ -- $4,673 $12,877
Patents................................. 1,971 -- -- 1,971
Non-compete agreements.................. 916 1,549 -- 2,465
Other................................... 436 925 474 1,835
------- ------ ------ -------
Balance as of September 30, 2002..... $11,527 $2,474 $5,147 $19,148
======= ====== ====== =======
Other intangible assets are all subject to amortization and have
original estimated useful lives as follows: Trademarks--43 years;
Tradenames--35 years; Patents--12 years; Non-compete agreements--5 years;
Other--10-40 years. The estimated amortization expense for each of the
succeeding five years is as follows: $2.2 million, $1.6 million, $0.7
million, $0.6 million and $0.6 million.
4. INVENTORIES
The Company's inventories by major category are as follows (in
thousands):
SEPTEMBER 30 DECEMBER 31
2002 2001
------------ -----------
Raw materials.......................................... $ 31,923 $ 34,011
Work in process........................................ 25,962 22,750
Finished goods......................................... 53,961 58,710
-------- --------
111,846 115,471
Reserves............................................... (5,709) (4,612)
-------- --------
$106,137 $110,859
======== ========
5. COMPREHENSIVE LOSS
A summary of the comprehensive loss is as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ ------------------------------
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net loss............................... $(27,953) $(1,563) $(87,783) $(90,466)
Other comprehensive income (loss):
Currency translation adjustments,
net............................. (4,778) (4,812) (347) (7,137)
Unrealized gain (loss) on
investments, net................ -- 450 -- (486)
-------- ------- -------- --------
Other comprehensive loss............... (4,778) (4,362) (347) (7,623)
-------- ------- -------- --------
Comprehensive loss..................... $(32,731) $(5,925) $(88,130) $(98,089)
======== ======= ======== ========
6. LOSS PER SHARE
Basic loss per share is computed by dividing the net loss by the
weighted average number of common shares outstanding for the period.
Diluted loss per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock. There are no reconciling items between basic
and diluted loss per share.
7
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. LOSS PER SHARE (CONTINUED)
During the three and nine months ended September 30, 2002 and 2001,
interest on the Convertible Notes in the amount of $1,214,000 and
$3,641,000, respectively, and shares of 7,319,000 that would be issued upon
assumed conversion of the Convertible Notes were excluded from the
calculation of diluted loss per share due to the antidilutive effect on
loss per share. In addition, the outstanding options to purchase
approximately 6,274,000 shares of common stock in 2002 and 6,880,000 shares
of common stock in 2001 were excluded from the calculation of diluted loss
per share because the effect would be antidilutive.
7. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
SEPTEMBER 30 DECEMBER 31
2002 2001
------------ ------------
Senior Secured Credit Facility:
Tranche A term loan, retired...................... $ -- $ 194,918
Tranche B term loan, retired...................... -- 192,749
Revolving loan facility, retired.................. -- 6,000
Revolving loan facility, due 2005................. 114,660 --
Senior Notes, due 2012................................. 350,000 --
Senior Subordinated Notes, due 2008.................... 300,000 300,000
Convertible Subordinated Notes, due 2002............... 139,063 139,063
Other.................................................. 13,065 22,491
--------- ---------
916,788 855,221
Less current maturities................................ (142,845) (303,170)
--------- ---------
Long-term debt......................................... $ 773,943 $ 552,051
========= =========
Current maturities at September 30, 2002 include the Convertible
Subordinated Notes which have been paid and current maturities from other
debt.
In June 2002, the Company entered into a new three year $300 million
Senior Secured Credit Facility with a syndicate of banks (the "Facility").
The Facility was used to refinance the Company's $800 million Secured
Senior Credit Facility. Under the Facility, loans may be made and letters
of credit issued on a revolving basis in each case subject to availability
and subject to a borrowing base. On September 30, 2002, the Company had
outstanding loans of $114.7 million and had $114.8 million of availability.
Loans made under the Facility bear interest at a base rate or LIBOR, plus a
margin (the interest rate at September 30, 2002 was 6.0%). The Company is
required to meet a fixed charge coverage ratio and a minimum tangible net
worth. The Facility is secured by substantially all of the domestic assets
of the Company.
In March 2002, the Company issued $350 million of 9 5/8% Senior Notes
due 2012 ("Senior Notes"). Interest is payable semi-annually. The Company
may redeem the Senior Notes, in whole or in part, on or after March 15,
2007, at redemption prices from 100% to 104.813%, plus accrued and unpaid
interest. In addition, before March 2005, the Company can redeem up to 35%
of the Senior Notes at 109.625% of the principal amount thereof, plus
accrued and unpaid interest, with the net cash proceeds from certain common
stock offerings.
8
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. LONG-TERM DEBT (CONTINUED)
Deferred financing costs of $16.9 million incurred in connection with
the $800 million Secured Senior Credit Facility refinanced in June 2002
were written off during the nine months ended September 30, 2002. The
write-off is reported net of tax as an extraordinary loss in the condensed
consolidated statements of operations.
As of September 30, 2002, the Company was in compliance with all of the
covenants of its various debt agreements.
8. RESTRUCTURING AND OTHER CHARGES
The Company has responded to the impact of the current economic
environment on its businesses by continuing to evaluate its operations for
improvement opportunities. Because of the significant decline in sales
experienced over the last two years, actions to consolidate facilities,
rationalize and realign capacity, and otherwise reduce costs have been
implemented. These actions have resulted in significant restructuring
charges and other nonrecurring charges.
Restructuring and other charges recorded during the third quarter of
2002 and the nine months ended September 30, 2002 were $39.4 million and
$63.2 million, respectively. The following table and discussion present the
details of these charges.
PRINTED
COMMERCIAL OFFICE
ENVELOPE PRINTING PRODUCTS CORPORATE TOTAL
-------- ---------- -------- --------- -------
(IN THOUSANDS)
Employee separation and related
employee expenses............... $ 238 $ 3,152 $ 786 $ -- $ 4,176
Employee training expenses........ 6,101 -- -- -- 6,101
Asset impairment charges, net..... 8,101 2,114 240 -- 10,455
Project management expenses....... 8,072 -- -- -- 8,072
Other exit costs.................. 3,885 1,978 274 -- 6,137
Reversal of unused accrual........ (500) -- -- -- (500)
------- ------- ------ ------- -------
Total restructuring costs..... 25,897 7,244 1,300 -- 34,441
Other charges..................... 2,038 3,854 50 22,825 28,767
------- ------- ------ ------- -------
Total restructuring and other
charges..................... $27,935 $11,098 $1,350 $22,825 $63,208
======= ======= ====== ======= =======
ENVELOPE. The consolidation of ten of the envelope manufacturing
facilities is almost complete. The Envelope segment began this
consolidation in 2001 in order to reduce excess internal capacity and
improve utilization of equipment and resources at its other envelope plants
in the United States and Canada. The costs incurred during the nine months
ended September 30, 2002 related to this consolidation were as follows:
* Employee training expenses of $6.1 million have been incurred to
train the new employees that were hired at the plants absorbing the
production of the plants being closed. The training programs for
these employees are between three and nine months in duration.
* Impairment charges of $8.1 million have been recorded for property
and equipment taken out of service or sold as a result of the plant
consolidations, net of $5.9 million received from the sales of those
assets.
9
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. RESTRUCTURING AND OTHER CHARGES (CONTINUED)
* Project management expenses of $8.1 million are primarily consulting
fees and related expenses incurred to assist management in managing
the consolidation project. Consultants were used to assist in such
tasks as capacity planning, workflow planning, production scheduling
and change management.
* Other exit costs of $3.9 million include the expenses incurred to
dismantle and move equipment, and the cost incurred to restore
buildings to the condition required by lease agreements or to prepare
them for sale.
* In 2001, separation and related employee costs were accrued to cover
the 920 employees expected to be terminated over the course of this
project. As of September 30, 2002, 720 employees had been separated
and the accrual has been adjusted by $0.5 million.
As a result of other cost reduction actions, the Envelope segment
incurred severance expenses of $0.2 million in connection the elimination
of 125 jobs.
COMMERCIAL PRINTING. In September 2002, the Company announced the
closure of a printing facility in New York City. In connection with this
closure, Commercial Printing recorded $1.0 million to cover the employee
separation and related expenses for 80 employees and $0.1 million of
equipment lease payments. In addition, an impairment charge of $2.1 million
was recorded for equipment taken out of service or sold.
Commercial Printing also plans to consolidate its web printing
operations. Employee separation and related expenses for 49 employees
affected by this plan totaled $0.3 million. Other exit costs, primarily
outstanding lease obligations, of $1.6 million were also recorded.
Significant right sizing of printing operations in Seattle, Washington
and Philadelphia, Pennsylvania have been completed. These actions were
taken because of significant decline in sales at both of these locations.
Employee separation and related expenses of $0.6 million for 49 employees
were incurred as a result of these actions. Other exit costs of $0.3
million have also been recorded.
Commercial Printing has reduced the size of many of its other
operations in response to the significant decline in sales. Severance and
related employee expenses of $1.3 million were recorded as a result of the
elimination of 158 jobs year-to-date.
PRINTED OFFICE PRODUCTS. In April 2002, the Printed Office Products
closed a traditional documents plant and consolidated its production.
Severance incurred as a result of this plant closure was $0.1 million
covering 19 employees. Expenses were also incurred to prepare the building
for sale and to write assets down to fair market value.
As a result of other cost reduction measures, Printed Office Products
has incurred severance of $0.4 million in connection with the elimination
of 184 jobs.
OTHER CHARGES. Other charges include the following items:
* In 2001, several programs to significantly improve operations and
marketing effectiveness were implemented. These programs included the
implementation of best practices, the standardization of costing and
pricing systems in the envelope and commercial printing segments and
the alignment of equipment and services to better serve our customers
and markets. Outside assistance in the implementation of these
programs was $4.7 million.
10
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. RESTRUCTURING AND OTHER CHARGES (CONTINUED)
* In June 2002, in connection with the refinancing of the bank credit
facility, the Company was required to refinance an operating lease
stemming from a sale/leaseback arrangement executed in 1997 and
amended in 2000. The fair market value of the equipment subject to
the lease had declined from $34.9 million to $19.1 million, and the
Company was required to pay the difference of $15.8 million. This
payment was expensed in the third quarter of 2002. In addition,
deferred costs of $6.1 million that were associated with the lease
prior to this refinancing were written-off.
* An impairment charge of $1.0 million was recorded to write-down idle
equipment in the Commercial Printing segment to net realizable value.
* Severance payments unrelated to the restructure plans totaled $0.7
million.
* Consulting fees of $0.6 million related to tax matters that arose as
a result of the divestitures were incurred.
A summary of the activity charged to the 2001 restructuring liability
during the nine months ended September 30, 2002 was as follows (in
thousands):
PRINTED
COMMERCIAL OFFICE
ENVELOPE PRINTING PRODUCTS TOTAL
-------- ---------- -------- -------
Balance, December 31, 2001................ $10,126 $ 604 $ 629 $11,359
Payments for severance................ (4,792) (13) (179) (4,984)
Payments for lease termination
costs................................ (293) (110) (118) (521)
Payments for other exit costs......... (1,579) (201) (332) (2,112)
Reversal of unused portion............ (500) -- -- (500)
------- ----- ----- -------
Balance, September 30, 2002............... $ 2,962 $ 280 $ -- $ 3,242
======= ===== ===== =======
A summary of the activity charged to the 2002 restructuring liability
during the three months ended September 30, 2002 was as follows (in
thousands):
COMMERCIAL
PRINTING
----------
Beginning balance................... $4,106
Payments for severance.......... (240)
------
Balance, September 30, 2002......... $3,866
======
9. DISCONTINUED OPERATIONS
In June 2001, the Company announced plans to sell its prime Label and
Printed Office Products operating segments. The Printed Office Products
segment was comprised of two separate businesses, Curtis 1000 Inc. and
PrintXcel. The prime Label and Printed Office Products segments were
segregated from continuing operations and reported as discontinued
operations for all periods presented through March 31, 2002. On February 22,
2002, the Company sold the stock of Curtis 1000 Inc. for $40.0 million,
including the assumption of debt. On May 21, 2002, the Company sold the
prime Label operating segment for $75.0 million. In June 2002, the Company
decided that it would not sell PrintXcel. Accordingly, PrintXcel has been
reclassified to continuing operations for all periods presented.
11
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
9. DISCONTINUED OPERATIONS (CONTINUED)
The reported loss on the disposition of the prime Label segment and
Curtis 1000 Inc. as of September 30, 2002 includes adjustments to the net
realizable value of these operations based on actual proceeds received,
costs associated with the dispositions, the earnings or losses from the
operations through the date of disposition, an allocation of interest
expense through the date of disposition and the related income tax expense.
Interest expense was allocated to the operating results included in the
calculation of the loss on disposal of discontinued operations based upon
the relative net assets of the prime Label operating segment and Curtis 1000
Inc. This allocation of interest expense totaled $5.6 million for the nine
months ended September 30, 2002 and $3.6 million and $11.5 million for the
three and nine months ended September 30, 2001, respectively. A tax benefit
allocated to the loss on disposal of discontinued operations based on their
operating results through the date of disposal totaled $1.2 million for the
nine months ended September 30, 2002. Taxes allocated to the loss on
disposal of discontinued operations based on their accrued and actual
operating results from June 2001 to the disposal date for the three and nine
months ended September 30, 2001 was a tax expense of $0.4 million and a tax
benefit of $1.1 million, respectively.
Operating results of the discontinued operations are summarized as
follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------- -----------------------
2002 2001 2002 2001
------- ------- -------- --------
Net sales:
Label..................................... $ -- $56,044 $ 84,758 $169,189
Curtis 1000 Inc. ......................... -- 41,180 22,787 128,230
------- ------- -------- --------
$ -- $97,224 $107,545 $297,419
======= ======= ======== ========
Income (loss) from operations:
Label..................................... $ -- $ -- $ -- $ (1,028)
Curtis 1000 Inc. ......................... -- -- -- (3,589)
------- ------- -------- --------
-- -- -- (4,617)
Income tax expense (benefit).............. -- -- -- (1,635)
------- ------- -------- --------
$ -- $ -- $ -- $ (2,982)
Loss on disposal of discontinued operations:
Label..................................... $(1,572) $ -- $(12,035) $(59,725)
Curtis 1000 Inc. ......................... (146) -- (1,125) (17,990)
------- ------- -------- --------
(1,718) -- (13,160) (77,715)
Income tax expense (benefit) on loss on
disposal................................ 4,086 31 (798) (1,263)
------- ------- -------- --------
Loss on disposal, net................. $(5,804) $ (31) $(13,958) $(76,452)
======= ======= ======== ========
12
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
9. DISCONTINUED OPERATIONS (CONTINUED)
The assets and liabilities of discontinued operations, which have been
reflected as net assets of discontinued operations in the December 31, 2001
condensed consolidated balance sheet, are summarized as follows (in
thousands):
DECEMBER 31
2001
-----------
Label segment:
Current assets.......................................... $ 46,285
Long-term assets........................................ 97,109
--------
Total assets........................................ 143,394
Current liabilities..................................... 40,085
Long-term liabilities................................... 3,909
--------
Total liabilities................................... 43,994
--------
Net assets of the Label segment............................. 99,400
Curtis 1000 Inc.:
Current assets.......................................... 24,840
Long-term assets........................................ 37,103
--------
Total assets........................................ 61,943
Current liabilities..................................... 18,657
Long-term liabilities................................... 13,118
--------
Total liabilities................................... 31,775
--------
Net assets of Curtis 1000 Inc............................... 30,168
--------
Net assets of discontinued operations............... $129,568
========
Assets primarily consist of accounts receivable, inventories, property
and equipment and deferred income taxes. Liabilities primarily consist of
accounts payable, accrued expenses, deferred income taxes and other
long-term liabilities. The net assets of discontinued operations presented
in the condensed consolidated balance sheet reflect the write-down of the
assets of these operations to estimated net realizable value, the accrual
of obligations associated with the divestitures and the accrual of
estimated losses to the expected date of disposal.
In connection with the proposed divestiture of the Company's PrintXcel
business in 2001, the Company reduced the carrying amounts of the net
assets of PrintXcel by $45.0 million to the expected net realizable value
based on estimated proceeds, net of costs associated with its planned
disposition. As a result of the Company's decision not to sell PrintXcel,
it reversed a tax benefit in the amount of $11.5 million that would not be
realized and $1.1 million of expenses related to the sale that had been
accrued but not incurred. The net amount of these adjustments has been
reported as "Impairment on former discontinued operation" in the condensed
consolidated statements of operations.
10. ASSETS HELD FOR SALE
The Company's divestiture plans also include the sale of the digital
graphics division of the Commercial Print segment and the filing products
division of the Envelope segment.
In August 2002, the Company sold the filing products division for $36.7
million. The impairment of $6.1 million incurred as a result of this
divestiture was recorded as of June 30, 2002. The sale of our digital
graphics division is expected prior to December 31, 2002.
13
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
10. ASSETS HELD FOR SALE (CONTINUED)
The following table presents the sales and operating income for the
digital graphics division of the Commercial Printing segment held for sale
and the filing products division of the Envelope segment through August
2002, the date of its sale, for the three and nine months ended September
30, 2002 and 2001 (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------- ---------------------
2002 2001 2002 2001
------- ------- ------- -------
Sales...................................... $13,814 $26,208 $65,481 $83,543
Operating income........................... $ 420 $ 2,361 $ 3,428 $ 7,971
Net assets held for sale at September 30, 2002 include assets of $25.6
million of the digital graphics division net of related liabilities of $2.9
million. At December 31, 2001, net assets held for sale included the assets
of both the digital graphics division and the filing products division
which totaled $25.6 million net of related liabilities of $13.3 million.
The digital graphics division of Commercial Printing was written down to
fair market value during 2001 based on sales proceeds anticipated at the
time. The Company has recorded an additional impairment charge of $2.8
million based on the sales proceeds currently anticipated.
11. SEGMENT INFORMATION
The Company operates in three principal operating segments. The
Commercial Printing operating segment specializes in printing annual
reports, brand marketing collateral, catalogs, brochures, maps and
guidebooks, calendars, financial communications and CD packaging. The
Envelope operating segment manufactures customized and stock envelopes for
billing and remittance, direct mail advertising and catalog orders. The
Envelope segment is also a producer of specialty packaging products and a
manufacturer of stock products for the resale market. The Printed Office
Products operating segment produces customized and stock labels, mailers,
and printed business documents to small and mid-size businesses generally
through distributors of office products.
14
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
11. SEGMENT INFORMATION (CONTINUED)
The following tables present certain operating segment information for
the three and nine months ended September 30, 2002 and 2001 as follows (in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------- ---------------------------
2002 2001 2002 2001
-------- -------- ---------- ----------
Net sales:
Commercial Printing.................. $194,659 $208,136 $ 559,141 $ 626,886
Envelope............................. 183,352 203,780 579,495 636,142
Printed Office Products.............. 50,709 53,370 154,533 162,594
-------- -------- ---------- ----------
Total................................ $428,720 $465,286 $1,293,169 $1,425,622
======== ======== ========== ==========
Operating income (loss)(a):
Commercial Printing.................. $ 3,541 $ 3,791 $ (5,155) $ 16,462
Envelope............................. 19,019 18,855 57,993 63,487
Printed Office Products.............. 5,204 3,625 15,026 15,168
Corporate............................ (4,328) (6,431) (15,810) (22,291)
Impairments, restructuring and other
charges............................ (39,408) (5,521) (82,486) (34,378)
-------- -------- ---------- ----------
Total................................ $(15,972) $ 14,319 $ (30,432) $ 38,448
======== ======== ========== ==========
SEPTEMBER 30 DECEMBER 31
2002 2001
------------ -----------
Identifiable assets(b):
Commercial Printing................................. $ 614,667 $ 622,173
Envelope............................................ 506,333 537,747
Printed Office Products............................. 140,297 144,334
Corporate........................................... 95,800 (10,614)
---------- ----------
Total............................................... 1,357,097 1,293,640
Net assets of discontinued operations............... -- 129,568
Net assets held for sale............................ 22,661 52,368
---------- ----------
Total............................................... $1,379,758 $1,475,576
========== ==========
- ---------------
(a) Operating income is net of all costs and expenses directly related to the operating segment involved.
Corporate expenses include corporate general and administrative expenses, lease expense, amortization
expense of other intangible assets and goodwill (in 2001), gains or losses on disposal of assets and
other miscellaneous expenses.
(b) Identifiable assets are accumulated by facility within each operating segment. Certain operating assets,
which are under lease, are reported as operating segment assets for evaluation purposes. The net book
value of these assets has been eliminated by contra assets included with corporate assets in order to
reconcile identifiable assets with the total assets of the Company. Corporate assets consist primarily
of cash and cash equivalents, other receivables, other assets and deferred tax assets.
Intercompany sales for the three and nine months ended September 30,
2002 were $1.7 million and $10.9 million, respectively. Intercompany sales
for the three and nine months ended September 30, 2001 were $8.6 million
and $32.8 million, respectively. These amounts, which are eliminated in
consolidation, are excluded from reported net sales.
15
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
In March 2002, Mail-Well I Corporation ("Issuer" or "MWI"), the
Company's wholly owned subsidiary, and the only direct subsidiary of the
Company, issued $350 million aggregate principal amount of 9 5/8% Senior
Notes ("Senior Notes") due in 2012. The Senior Notes are guaranteed by all
of the U.S. subsidiaries (the "Guarantor Subsidiaries") of MWI, all of
which are wholly owned, and by Mail-Well, Inc. ("Parent Guarantor"). The
guarantees are joint and several, full, complete and unconditional. There
are no material restrictions on the ability of the Guarantor Subsidiaries
to transfer funds to MWI in the form of cash dividends, loans or advances,
other than ordinary legal restrictions under corporate law, fraudulent
transfer and bankruptcy laws.
In December 1998, MWI issued $300 million aggregate principal amount of
8 3/4% Senior Subordinated Notes ("Senior Subordinated Notes") due in 2008.
The Senior Subordinated Notes are guaranteed by Guarantor Subsidiaries and
by the Parent Guarantor. The guarantees are joint and several, full,
complete and unconditional. There are no material restrictions on the
ability of the Guarantor Subsidiaries to transfer funds to MWI in the form
of cash dividends, loans or advances, other than ordinary legal
restrictions under corporate law, fraudulent transfer and bankruptcy laws.
The following condensed consolidating financial information illustrates
the composition of the Parent Guarantor, Issuer, Guarantor Subsidiaries and
non-guarantor subsidiaries. The Issuer, the Guarantor Subsidiaries and the
non-guarantor subsidiaries comprise all of the direct and indirect
subsidiaries of the Parent Guarantor. Curtis 1000 Inc. was, until it was
divested in the first quarter of 2002, a subsidiary of the Issuer and a
guarantor of the Senior Subordinated Notes. Curtis 1000 Inc. was not at any
time a guarantor of the Senior Notes. In order to provide a coherent
presentation in the following condensed consolidating financial
information, and because Curtis 1000 Inc. has been divested and is not a
guarantor of the Senior Subordinated Notes or the Senior Notes, Curtis 1000
Inc.'s financial information is included in the non-guarantor information
for all periods presented. Management has determined that separate complete
financial statements would not provide additional material information that
would be useful in assessing the financial composition of the Guarantor
Subsidiaries.
Investments in subsidiaries are accounted for under the equity method,
wherein the investor company's share of earnings and income taxes
applicable to the assumed distribution of such earnings are included in net
income. In addition, investments increase in the amount of permanent
contributions to subsidiaries and decrease in the amount of distributions
from subsidiaries. The elimination entries remove the equity method
investment in subsidiaries and the equity in earnings of subsidiaries,
intercompany payables and receivables and other transactions between
subsidiaries.
16
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF FINANCIAL POSITION
September 30, 2002
(unaudited)
(in thousands)
COMBINED COMBINED
PARENT GUARANTOR NONGUARANTOR
GUARANTOR ISSUER SUBSIDIARIES SUBSIDIARIES ELIM. CONSOLIDATED
--------- ---------- ------------ ------------ ----------- ------------
Current assets:
Cash and cash
equivalents.............. $ -- $ 137,875 $ 1,224 $ 739 $ -- $ 139,838
Accounts receivable,
net...................... -- 54,479 150,051 23,484 -- 228,014
Inventories, net.......... -- 45,828 46,664 13,645 -- 106,137
Net assets held for
sale..................... -- -- 22,661 -- -- 22,661
Note receivable from
Issuer................... 147,436 -- -- -- (147,436) --
Other current assets...... -- 31,008 11,155 2,529 -- 44,692
-------- ---------- -------- -------- ----------- ----------
Total current assets.... 147,436 269,190 231,755 40,397 (147,436) 541,342
Investment in
subsidiaries............... 152,666 234,051 211,518 -- (598,235) --
Property, plant and
equipment, net............. -- 125,552 211,134 51,250 -- 387,936
Goodwill and other
intangible assets, net..... -- 84,715 276,074 51,248 -- 412,037
Note receivable from
subsidiaries............... -- 603,100 -- -- (603,100) --
Other assets, net........... 208 34,737 3,498 -- -- 38,443
-------- ---------- -------- -------- ----------- ----------
Total assets................ $300,310 $1,351,345 $933,979 $142,895 $(1,348,771) $1,379,758
======== ========== ======== ======== =========== ==========
Current liabilities:
Accounts payable.......... $ -- $ 48,403 $ 97,112 $ 10,258 $ -- $ 155,773
Other current
liabilities.............. 6,354 57,829 40,768 9,285 -- 114,236
Intercompany payable
(receivable)............. 699 188,407 122,195 (99,783) (211,518) --
Note payable to Parent.... -- 147,436 -- -- (147,436) --
Current portion of
long-term debt........... 139,063 1,645 1,992 145 -- 142,845
-------- ---------- -------- -------- ----------- ----------
Total current
liabilities............ 146,116 443,720 262,067 (80,095) (358,954) 412,854
Long-term debt.............. -- 767,778 6,165 -- -- 773,943
Note payable to Issuer...... -- -- 603,100 -- (603,100) --
Deferred income taxes....... -- (25,037) 37,035 10,921 -- 22,919
Other long-term
liabilities................ -- 12,218 3,079 551 -- 15,848
-------- ---------- -------- -------- ----------- ----------
Total liabilities....... 146,116 1,198,679 911,446 (68,623) (962,054) 1,225,564
Shareholders' equity........ 154,194 152,666 22,533 211,518 (386,717) 154,194
-------- ---------- -------- -------- ----------- ----------
Total liabilities and
shareholders' equity....... $300,310 $1,351,345 $933,979 $142,895 $(1,348,771) $1,379,758
======== ========== ======== ======== =========== ==========
17
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF FINANCIAL POSITION
December 31, 2001
(in thousands)
COMBINED COMBINED
PARENT GUARANTOR NONGUARANTOR
GUARANTOR ISSUER SUBSIDIARIES SUBSIDIARIES ELIM. CONSOLIDATED
--------- ---------- ------------ ------------ ----------- ------------
Current assets:
Cash and cash
equivalents.............. $ -- $ (1,589) $ 1,698 $ 785 $ -- $ 894
Accounts receivable,
net...................... -- 60,039 146,353 24,378 -- 230,770
Inventories, net.......... -- 51,032 47,634 12,193 -- 110,859
Net assets of discontinued
operations............... -- -- 60,070 69,498 -- 129,568
Net assets held for
sale..................... -- 25,852 26,516 -- -- 52,368
Note receivable from
Issuer................... 147,436 -- -- -- (147,436) --
Other current assets...... 295 41,988 26,113 2,741 -- 71,137
-------- ---------- -------- -------- ----------- ----------
Total current assets.... 147,731 177,322 308,384 109,595 (147,436) 595,596
Investment in
subsidiaries............... 240,954 233,432 157,794 -- (632,180) --
Property, plant and
equipment, net............. -- 151,735 216,975 53,568 -- 422,278
Goodwill and other
intangible assets, net..... -- 96,585 269,097 45,734 -- 411,416
Note receivable from
subsidiaries............... -- 749,400 -- -- (749,400) --
Other assets, net........... 1,023 29,925 31,227 2,992 (18,881) 46,286
-------- ---------- -------- -------- ----------- ----------
Total assets................ $389,708 $1,438,399 $983,477 $211,889 $(1,547,897) $1,475,576
======== ========== ======== ======== =========== ==========
Current liabilities:
Accounts payable.......... $ -- $ 63,491 $ 88,056 $ 8,493 $ -- $ 160,040
Other current
liabilities.............. 4,291 71,611 23,450 13,904 -- 113,256
Intercompany payable
(receivable)............. 4,477 190,395 (167,446) (27,426) -- --
Note payable to Parent.... -- 147,436 -- -- (147,436) --
Current portion of
long-term debt........... 139,063 161,850 2,085 172 -- 303,170
-------- ---------- -------- -------- ----------- ----------
Total current
liabilities............ 147,831 634,783 (53,855) (4,857) (147,436) 576,466
Long-term debt.............. -- 523,247 19,708 9,096 -- 552,051
Note payable to Issuer...... -- -- 749,400 -- (749,400) --
Deferred income taxes....... -- 28,287 48,882 11,224 -- 88,393
Other long-term
liabilities................ -- 24,655 10,466 549 (18,881) 16,789
-------- ---------- -------- -------- ----------- ----------
Total liabilities....... 147,831 1,210,972 774,601 16,012 (915,717) 1,233,699
Shareholders' equity........ 241,877 227,427 208,876 195,877 (632,180) 241,877
-------- ---------- -------- -------- ----------- ----------
Total liabilities and
shareholders' equity....... $389,708 $1,438,399 $983,477 $211,889 $(1,547,897) $1,475,576
======== ========== ======== ======== =========== ==========
18
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
Quarter Ended September 30, 2002
(Unaudited)
(in thousands)
COMBINED COMBINED
PARENT GUARANTOR NONGUARANTOR
GUARANTOR ISSUER SUBSIDIARIES SUBSIDIARIES ELIM. CONSOLIDATED
--------- -------- ------------ ------------ -------- ------------
Net sales....................... $ -- $124,827 $260,236 $43,657 $ -- $428,720
Cost of sales................... -- 100,445 211,615 31,425 -- 343,485
-------- -------- -------- ------- -------- --------
Gross profit.................... -- 24,382 48,621 12,232 -- 85,235
Other operating expenses........ 76 16,698 40,712 4,313 -- 61,799
Restructuring and other
charges........................ -- 31,077 7,773 558 -- 39,408
-------- -------- -------- ------- -------- --------
Operating income (loss)......... (76) (23,393) 136 7,361 -- (15,972)
Other expense (income):
Interest expense (income)..... 1,740 19,469 15,990 (26) (18,498) 18,675
Other expense (income)........ (1,977) (15,108) (9,528) 9,835 18,498 1,720
-------- -------- -------- ------- -------- --------
Income (loss) before income
taxes and equity in
undistributed earnings of
subsidiaries................... 161 (27,754) (6,326) (2,448) -- (36,367)
Provision (benefit) for income
taxes.......................... -- (7,773) (5,488) (957) -- (14,218)
-------- -------- -------- ------- -------- --------
Income (loss) before equity in
undistributed earnings of
subsidiaries................... 161 (19,981) (838) (1,491) -- (22,149)
Equity in undistributed earnings
of subsidiaries................ (28,114) (7,814) (4,337) -- 40,265 --
-------- -------- -------- ------- -------- --------
Income (loss) before
discontinued operations........ (27,953) (27,795) (5,175) (1,491) 40,265 (22,149)
Loss on disposal, net of tax
benefit........................ -- -- (5,450) (354) -- (5,804)
-------- -------- -------- ------- -------- --------
Net income (loss)............... $(27,953) $(27,795) $(10,625) $(1,845) $ 40,265 $(27,953)
======== ======== ======== ======= ======== ========
19
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
Quarter Ended September 30, 2001
(Unaudited)
(in thousands)
COMBINED COMBINED
PARENT GUARANTOR NONGUARANTOR
GUARANTOR ISSUER SUBSIDIARIES SUBSIDIARIES ELIM. CONSOLIDATED
--------- -------- ------------ ------------ -------- ------------
Net sales....................... $ -- $145,119 $277,685 $42,482 $ -- $465,286
Cost of sales................... -- 119,763 223,593 30,545 -- 373,901
------- -------- -------- ------- -------- --------
Gross profit.................... -- 25,356 54,092 11,937 -- 91,385
Other operating expenses........ 92 20,694 46,449 4,310 -- 71,545
Restructuring and other
charges........................ -- 5,384 137 -- -- 5,521
------- -------- -------- ------- -------- --------
Operating income (loss)......... (92) (722) 7,506 7,627 -- 14,319
Other expense (income):
Interest expense.............. 1,738 19,305 14,449 67 (19,980) 15,579
Other expense (income)........ (1,976) (17,502) 25 (9) 19,980 518
------- -------- -------- ------- -------- --------
Income (loss) before income
taxes and equity in
undistributed earnings of
subsidiaries................... 146 (2,525) (6,968) 7,569 -- (1,778)
Provision (benefit) for income
taxes.......................... -- (972) (2,278) 3,004 -- (246)
------- -------- -------- ------- -------- --------
Income (loss) before equity in
undistributed earnings of
subsidiaries................... 146 (1,553) (4,690) 4,565 -- (1,532)
Equity in undistributed earnings
of subsidiaries................ (1,710) (1,856) 5,109 -- (1,543) --
------- -------- -------- ------- -------- --------
Income before discontinued
operations..................... (1,564) (3,409) 419 4,565 (1,543) (1,532)
Loss on disposal, net of tax
benefit........................ -- -- (31) -- -- (31)
------- -------- -------- ------- -------- --------
Net income (loss)............... $(1,564) $ (3,409) $ 388 $ 4,565 $ (1,543) $ (1,563)
======= ======== ======== ======= ======== ========
20
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
Nine Months Ended September 30, 2002
(Unaudited)
(in thousands)
COMBINED COMBINED
PARENT GUARANTOR NONGUARANTOR
GUARANTOR ISSUER SUBSIDIARIES SUBSIDIARIES ELIM. CONSOLIDATED
--------- -------- ------------ ------------ -------- ------------
Net sales....................... $ -- $403,207 $759,643 $130,319 $ -- $1,293,169
Cost of sales................... -- 327,422 620,472 93,170 -- 1,041,064
-------- -------- -------- -------- -------- ----------
Gross profit.................... -- 75,785 139,171 37,149 -- 252,105
Other operating expenses........ 110 57,250 129,380 13,311 -- 200,051
Restructuring and other
charges........................ -- 51,797 9,835 1,576 -- 63,208
Impairment charges.............. -- 6,061 13,217 -- -- 19,278
-------- -------- -------- -------- -------- ----------
Operating income (loss)......... (110) (39,323) (13,261) 22,262 -- (30,432)
Other expense (income):
Interest expense (income)..... 5,216 57,355 44,392 (48) (54,362) 52,553
Other expense (income)........ (5,931) (46,796) (9,329) 9,755 54,362 2,061
-------- -------- -------- -------- -------- ----------
Income (loss) before income
taxes and equity in
undistributed earnings of
subsidiaries................... 605 (49,882) (48,324) 12,555 -- (85,046)
Provision (benefit) for income
taxes.......................... -- (17,337) (7,160) 3,151 -- (21,346)
-------- -------- -------- -------- -------- ----------
Income (loss) before equity in
undistributed earnings of
subsidiaries................... 605 (32,545) (41,164) 9,404 -- (63,700)
Equity in undistributed earnings
of subsidiaries................ (88,388) (44,508) 6,472 -- 126,424 --
-------- -------- -------- -------- -------- ----------
Income (loss) before
discontinued operations and
extraordinary items............ (87,783) (77,053) (34,692) 9,404 126,424 (63,700)
Loss on disposal, net of tax
benefit........................ -- -- (13,603) (355) -- (13,958)
Extraordinary loss, net of tax
benefit........................ -- (10,125) -- -- -- (10,125)
-------- -------- -------- -------- -------- ----------
Net income (loss)............... $(87,783) $(87,178) $(48,295) $ 9,049 $126,424 $ (87,783)
======== ======== ======== ======== ======== ==========
21
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
Nine Months Ended September 30, 2001
(Unaudited)
(in thousands)
COMBINED COMBINED
PARENT GUARANTOR NONGUARANTOR
GUARANTOR ISSUER SUBSIDIARIES SUBSIDIARIES ELIM. CONSOLIDATED
--------- -------- ------------ ------------ --------- ------------
Net sales...................... $ -- $450,372 $841,455 $133,795 $ -- $1,425,622
Cost of sales.................. -- 364,029 668,501 97,370 -- 1,129,900
-------- -------- -------- -------- --------- ----------
Gross profit................... -- 86,343 172,954 36,425 -- 295,722
Other operating expenses....... 275 65,614 143,184 13,823 -- 222,896
Restructuring and other
charges....................... -- 21,260 4,464 (153) -- 25,571
Impairment loss on assets held
for sale...................... -- -- 8,807 -- -- 8,807
-------- -------- -------- -------- --------- ----------
Operating income (loss)........ (275) (531) 16,499 22,755 38,448
Other expense (income):
Interest expense............. 5,215 57,992 42,675 3,408 (59,940) 49,350
Other expense (income)....... (5,930) (52,852) 344 -- 59,940 1,502
-------- -------- -------- -------- --------- ----------
Income (loss) before income
taxes and equity in
undistributed earnings of
subsidiaries.................. 440 (5,671) (26,520) 19,347 -- (12,404)
Provision (benefit) for income
taxes......................... -- (2,183) (6,610) 7,421 -- (1,372)
-------- -------- -------- -------- --------- ----------
Income (loss) before equity in
undistributed earnings of
subsidiaries.................. 440 (3,488) (19,910) 11,926 -- (11,032)
Equity in undistributed
earnings of subsidiaries...... (90,906) (90,466) 26,856 -- 154,516 --
-------- -------- -------- -------- --------- ----------
Income (loss) before
discontinued operations....... (90,466) (93,954) 6,946 11,926 154,516 (11,032)
Loss from discontinued
operations, net of tax........ -- -- (47,506) (28,946) -- (76,452)
Loss on disposal, net of tax
benefit....................... -- -- 1,661 (4,643) -- (2,982)
-------- -------- -------- -------- --------- ----------
Net income (loss).............. $(90,466) $(93,954) $(38,899) $(21,663) $ 154,516 $ (90,466)
======== ======== ======== ======== ========= ==========
22
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
September 30, 2002
(Unaudited)
(in thousands)
COMBINED COMBINED
PARENT GUARANTOR NONGUARANTOR
GUARANTOR ISSUER SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
--------- ---------- ------------ ------------ ------------
Cash flows from operating activities..... $(18) $ (40,470) $ 35,696 $12,537 $ 7,745
Cash flows from investing activities:
Acquisition costs...................... -- (2,552) -- -- (2,552)
Capital expenditures................... -- (2,762) (22,116) (2,065) (26,943)
Proceeds from divestitures, net........ -- 128,649 -- -- 128,649
Proceeds from the sale of assets....... -- 5,940 327 -- 6,267
---- ---------- -------- ------- ----------
Net cash provided by (used in)
investing activities.................. -- 129,275 (21,789) (2,065) 105,421
Cash flows from financing activities:
Proceeds from common stock issuance.... 18 -- -- -- 18
Proceeds from long-term debt........... -- 1,006,154 -- -- 1,006,154
Repayments of long-term debt........... -- (939,683) (1,962) (9,432) (951,077)
Debt issuance costs.................... -- (17,402) -- -- (17,402)
---- ---------- -------- ------- ----------
Net cash provided by (used in)
financing activities.................. 18 49,069 (1,962) (9,432) 37,693
Effect of exchange rate changes on
cash.................................... -- -- -- (1,088) (1,088)
Net cash used in discontinued
operations.............................. -- -- (10,522) (305) (10,827)
---- ---------- -------- ------- ----------
Net change in cash and cash
equivalents............................. -- 137,874 1,423 (353) 138,944
Balance at beginning of year............. -- -- (198) 1,092 894
---- ---------- -------- ------- ----------
Balance at end of year................... $ -- $ 137,874 $ 1,225 $ 739 $ 139,838
==== ========== ======== ======= ==========
23
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
September 30, 2001
(Unaudited)
(in thousands)
COMBINED COMBINED
PARENT GUARANTOR NONGUARANTOR
GUARANTOR ISSUER SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
--------- --------- ------------ ------------ ------------
Cash flows from operating activities..... $(443) $ 63,051 $ 71,192 $ 2,918 $ 136,718
Cash flows from investing activities:
Acquisition costs...................... -- (3,838) -- -- (3,838)
Capital expenditures................... -- (10,840) (11,957) (1,324) (24,121)
Proceeds from sale of assets........... -- -- 577 -- 577
----- --------- -------- -------- ---------
Net cash provided by (used in)
investing activities.................. -- (14,678) (11,380) (1,324) (27,382)
Cash flows from financing activities:
Changes due to accounts receivable
securitization, net................... -- -- -- (75,000) (75,000)
Proceeds from common stock issuance.... 413 -- -- -- 413
Proceeds from long-term debt........... -- 487,013 -- 6,391 493,404
Repayments of long-term debt........... -- (514,944) (1,673) (7,409) (524,026)
Debt issuance costs.................... -- (4,382) -- -- (4,382)
----- --------- -------- -------- ---------
Net cash provided by financing
activities............................ 413 (32,313) (1,673) (76,018) (109,591)
Effect of exchange rate changes on
cash.................................... -- -- (13) (60) (73)
Cash flows from discontinued
operations.............................. -- -- (267) 765 498
----- --------- -------- -------- ---------
Net change in cash and cash
equivalents............................. (30) 16,060 57,859 (73,719) 170
Balance at beginning of year............. 30 30 717 (188) 589
----- --------- -------- -------- ---------
Balance at end of year................... $ -- $ 16,090 $ 58,576 $(73,907) $ 759
===== ========= ======== ======== =========
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
CORPORATE OVERVIEW
In 2001, we adopted a strategy to focus on our two primary
businesses--envelopes and commercial printing--and announced plans to
divest our prime label and printed office products businesses and certain
operations not strategic to our envelope and commercial printing
businesses. In addition to the planned divestitures, we initiated a
restructuring program and several other initiatives to improve our
competitive position, improve our operating efficiencies, reduce costs and
increase marketing effectiveness.
In February 2002, we sold Curtis 1000 Inc., a business included in our
printed office products business, and in May 2002, we sold our prime label
business. As of June 2002, we had not received an offer for PrintXcel, also
part of our printed office products business, that we considered consistent
with its value. Because PrintXcel generates reliable cash flow and a
satisfactory return on assets, we concluded that it was not in the best
interest of the Company to sell the business at the offer price and we
discontinued our efforts to do so. This business will now be an integral
part of our strategy to expand our print products and services to a larger
customer base and bundle our various products and services to our
customers.
On August 8, 2002, we sold the filing products division of our envelope
business. We are continuing our efforts to sell the digital graphics
division of our commercial printing business.
Mail-Well is the world's largest manufacturer of envelopes. We produce
more than 40 billion envelopes annually in our 39 envelope manufacturing
facilities located throughout the United States and Canada. Approximately
84% of these envelopes are customized specifically for our customers for
use in billing and remittance, direct mail advertising and specialty
packaging. The remaining 16% are stock envelopes sold into the resale
market.
We are also one of the largest commercial printers in the United
States. We operate 29 printing plants located strategically throughout the
United States and one in Canada. We specialize in high impact printing, in
which we print a wide range of premium products for national customers,
including advertising literature, corporate identity materials, annual
reports, car brochures, calendars, greeting cards, brand marketing
collateral, catalogs, maps, CD packaging and direct mail. We also produce
general commercial printing for local and regional customers.
In addition, we operate a printed office products business. This
business, which operates 12 manufacturing facilities throughout the United
States, is a leading supplier of customized and stock labels, mailers and
printed business documents to small and mid-size businesses generally
through independent distributors of office products. The labels produced
and sold by our printed office products division do not compete with those
produced and sold by the now-divested prime label segment due to
differences in customer base, distribution channels and production methods.
Paper is our most significant raw material. We purchase approximately
494,000 tons of paper annually for our businesses. Prices of uncoated
papers, which are the principal grades of paper used to manufacture
envelopes, were relatively stable in the first half of 2002. In October
2002, the price of uncoated paper increased 10%. Prices of coated papers,
which are used principally in commercial printing, remained flat in the
first half of 2002. Historical changes in paper pricing generally have not
affected the operating results of our commercial printing business because
we have been able to pass on paper price increases to our customers. Paper
pricing has, however, impacted the operating margins of our envelope
business. When paper prices are rising, operating margins on our envelope
products tend to be lower because we generally are not able to increase our
prices as quickly as paper prices increase.
25
CONSOLIDATED RESULTS OF OPERATIONS
The financial statements for all periods presented have been restated
as required by generally accepted accounting principles to report the
results of our prime label business and Curtis 1000 Inc. as discontinued
operations. Prior to our decision in June 2002 to discontinue our efforts
to sell our PrintXcel business, it had also been reported as a discontinued
operation. Since this business is no longer held for sale, the results of
PrintXcel are now included in continuing operations. The summary financial
data set forth in the tables that follow present reported amounts as well
as comparable financial data for New Mail-Well. New Mail-Well excludes the
results of the discontinued operations, the results of the filing products
division of our envelope business that has been sold and the results of the
digital graphics division of our commercial printing business that is held
for sale. In addition, New Mail-Well's results exclude restructuring,
impairments and other charges reported in the condensed consolidated
statements of operations for the three and nine months ended September 30,
2002 and 2001.
The economic slowdown which began in 2001 has continued to adversely
affect the sales and margins of our businesses in 2002, especially the
portion of our commercial printing business related to print advertising,
the direct mail segment of our envelope business, and the traditional
documents market of printed office products. We do not expect significant
increases in sales and margins until the markets we serve, especially
advertising and direct mail, recover. In the meantime, we have continued to
take the actions necessary to maintain or improve our margins and thus
mitigate as much as possible the impact of lower sales on our businesses.
SALES
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
----------------------- ---------------------------
2002 2001 2002 2001
-------- -------- ---------- ----------
(DOLLARS IN THOUSANDS)
Reported............................... $428,720 $465,286 $1,293,169 $1,425,622
New Mail-Well*......................... $414,905 $445,344 $1,232,385 $1,366,251
- ---------------
* Excludes sales of the filing products division of envelope and the
digital graphics division of commercial printing and includes sales to
discontinued operations that are expected to continue. Sales to
discontinued operations prior to their divestiture, were $3.4 million
for the nine months ended September 30, 2002 and $6.3 million and $24.2
million for the three and nine months ended September 30, 2001.
New Mail-Well's sales in the third quarter of 2002 were $30.4 million,
or 6.8%, below sales during the third quarter of 2001. For the nine months
ended September 30, 2002, sales were $133.9 million, or 9.8%, below the
comparable period in 2001.
* Sales of our national printing business have been approximately 7%
below 2001 throughout 2002. Sales of our local commercial printing
business, which were 13% below sales in 2001, showed improvement in
the third quarter in certain markets.
* Sales of our envelope business, which were 9.2% below sales in 2001,
improved slightly in the third quarter. The decline in sales of our
envelope business was due primarily to lower sales to direct mail
customers.
* Sales of our printed office products business were 7.8% below 2001 due
primarily to lower sales of traditional business documents.
Reported sales during the third quarter of 2002 and for the nine months
ended September 30, 2002 declined about the same as sales of New Mail-Well
and were affected by similar market dynamics.
26
RESTRUCTURING AND OTHER CHARGES
We have responded to the impact of the current economic environment on
our businesses by continuing to evaluate our operations for improvement
opportunities. Because of the significant decline in sales experienced over
the last two years, we have taken actions to consolidate facilities,
rationalize and realign capacity, and otherwise reduce costs. These actions
have resulted in significant restructuring charges and other nonrecurring
charges. This process is ongoing, as our industry and markets change, and
we will continue to take the actions necessary to address these changes.
Restructuring and other charges recorded during the third quarter of
2002 and the nine months ended September 30, 2002 were $39.4 million and
$63.2 million, respectively. The following table and discussion present the
details of these charges.
PRINTED
COMMERCIAL OFFICE
ENVELOPE PRINTING PRODUCTS CORPORATE TOTAL
-------- ---------- -------- --------- -------
(IN THOUSANDS)
Employee separation and related
employee expenses............... $ 238 $ 3,152 $ 786 $ -- $ 4,176
Employee training expenses........ 6,101 -- -- -- 6,101
Asset impairment charges, net..... 8,101 2,114 240 -- 10,455
Project management expenses....... 8,072 -- -- -- 8,072
Other exit costs.................. 3,885 1,978 274 -- 6,137
Reversal of unused accrual........ (500) -- -- -- (500)
------- ------- ------ ------- -------
Total restructuring costs..... 25,897 7,244 1,300 -- 34,441
Other charges..................... 2,038 3,854 50 22,825 28,767
------- ------- ------ ------- -------
Total restructuring and other
charges..................... $27,935 $11,098 $1,350 $22,825 $63,208
======= ======= ====== ======= =======
ENVELOPE. The consolidation of ten of our envelope manufacturing
facilities is almost complete. We began this consolidation in 2001 in order
to reduce excess internal capacity and improve utilization of equipment and
resources at our other envelope plants in the United States and Canada. The
cost incurred during the nine months ended September 30, 2002 related to
this consolidation were as follows:
* Employee training expenses of $6.1 million have been incurred to
train the new employees that were hired at the plants absorbing the
production of the plants being closed. The training programs for
these employees are between three and nine months in duration.
* Impairment charges of $8.1 million have been recorded for property
and equipment taken out of service or sold as a result of the plant
consolidations, net of $5.9 million received from the sales of those
assets.
* Project management expenses of $8.1 million are primarily consulting
fees and related expenses incurred to assist management in managing
the consolidation project. Consultants were used to assist in such
tasks as capacity planning, workflow planning, production scheduling
and change management.
* Other exit costs of $3.9 million include the expenses incurred to
dismantle and move equipment, and the cost incurred to restore
buildings to the condition required by lease agreements or to prepare
them for sale.
* In 2001, we accrued separation and related employee costs to cover
the 920 employees we expected would be terminated over the course of
this project. As of September 30, 2002, 720 employees had been
separated and we have reduced the accrual by $0.5 million.
27
We estimate that we will incur $7.5 million of additional expenses
related to the plant consolidations in the fourth quarter of which $4.0
million will be non-cash.
As a result of other cost reduction actions, our envelope business
incurred severance expenses of $0.2 million in connection the elimination
of 125 jobs.
COMMERCIAL PRINTING. In September 2002, we announced the closure of our
printing facility in New York City. In connection with this closure, we
recorded $1.0 million to cover the employee separation and related expenses
for 80 employees and $0.1 million of equipment lease payments. In addition,
we recorded an impairment charge of $2.1 million on equipment taken out of
service or sold. We anticipate additional charges of $3.0 million in the
fourth quarter when the closure of this facility is completed.
We also announced plans to consolidate web printing operations. This
consolidation will result in lower fixed costs and improve manufacturing
efficiency and equipment utilization. Employee separation and related
expenses for 49 employees recorded in connection with these plans totaled
$0.3 million. We also recorded other exit costs of $1.6 million which were
primarily outstanding lease obligations. Additional costs to complete this
consolidation is expected to total $3.6 million of which $0.9 million will
be non-cash.
During the third quarter of 2002, we completed right sizing our
printing operations in Seattle, Washington and Philadelphia, Pennsylvania.
These actions were taken because of the significant decline in sales at
both of these locations. In taking these actions, we incurred employee
separation and related expenses of $0.6 million for 49 employees and $0.3
million of other exit costs. We do not anticipate any further cash
restructuring expenditures at these two locations.
Our commercial printing business has reduced the size of many of its
other operations in response to the significant decline in sales. We have
incurred employee separation and related expenses of $1.3 million as a
result of the elimination of 158 jobs year-to-date.
PRINTED OFFICE PRODUCTS. In April 2002, we closed our traditional
documents plant in Denver, Colorado. A portion of production of this plant
was transferred to other facilities. We continue to maintain a sales
office and production capability in the Denver market. Employee separation
and related expenses incurred as a result of this plant closure was $0.1
million covering 19 employees. Expenses were also incurred to prepare the
building for sale and to write assets down to fair market value.
As a result of other cost reduction measures, Printed Office Products
has incurred employee separation and related expenses of $0.4 million in
connection with the elimination of 184 jobs.
OTHER CHARGES. Other charges include the following items:
* In 2001, we initiated several programs to significantly improve
operations and marketing effectiveness. These programs included the
implementation of best practices, the standardization of costing and
pricing systems in the envelope and commercial printing businesses
and the alignment of equipment and services to better serve our
customers and markets. We used outside assistance in the
implementation of these programs the cost of which was $4.7 million.
* In connection with the refinancing of our bank credit facility in
June 2002, we were required to refinance an operating lease stemming
from a sale/leaseback arrangement executed in 1997 and amended in
2000. The fair market value of the equipment subject to the lease had
declined from $34.9 million to $19.1 million, and we were required to
pay the difference of $15.8 million. We expensed this payment in the
third quarter of 2002. In addition, we wrote off deferred costs of
$6.1 million associated with the original sale/leaseback arrangement.
* We have recorded an impairment charge of $1.0 million related to the
write-down of idle equipment in our commercial printing business to
net realizable value.
28
* We have incurred employee separation and related expenses unrelated
to the restructure plans of $0.7 million.
* We have incurred consulting fees of $0.6 million related to tax
matters that arose as a result of the divestitures.
OPERATING INCOME (LOSS)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
---------------------- ----------------------
2002 2001 2002 2001
-------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Reported
Operating income (loss).................. $(15,972) $14,319 $(30,432) $38,448
Operating margin......................... (3.7)% 3.1% (2.4)% 2.7%
New Mail-Well
Operating income*........................ $ 22,539 $16,690 $ 51,101 $63,259
Operating margin......................... 5.4% 3.8% 4.1% 4.6%
- ---------------
* Excludes operating income of the filing products division of envelope
and the digital graphics division of commercial printing and impairment,
restructuring and other charges.
New Mail-Well's operating income increased $5.8 million, or 35%, in the
third quarter of 2002 compared to the third quarter of 2001. The
improvement in operating income was due to the following:
* Gross profit in the third quarter of 2002 was $81.5 million compared
to $84.1 million in the third quarter of 2001. As a percentage of
sales, gross profit increased 0.8%. The $10.6 million of contribution
lost due to lower sales was partially offset by improved margins and
lower fixed manufacturing costs. Reductions in fixed manufacturing
costs are the results of our consolidation program and other cost
reduction initiatives and were approximately $5.8 million in the
third quarter of 2002.
* Selling expenses were approximately $0.9 million lower in the third
quarter of 2002 than in the third quarter of 2001 due to lower sales
commissions on lower sales.
* Administrative expenses were $4.4 million lower in the third quarter
of 2002 due primarily to the consolidations and other cost reduction
initiatives including the reversal of $1.9 million of profit sharing
benefits accrued during the first half of the year.
* Amortization expense was $3.5 million lower in the third quarter of
2002 due to the adoption of Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets, on January
1, 2002, which eliminated the amortization of goodwill.
The reported loss of $16.0 million in the third quarter includes
restructuring, impairment and other charges of $17.5 million and a charge
of $21.9 million incurred in connection with the refinancing of the
operating lease agreement described above.
New Mail-Well's operating income for the nine months ended September
30, 2002 declined $12.2 million, or 19.2%, compared to the nine months
ended September 30, 2001. The decline was due to the following:
* Gross profit was $239.6 million as of September 30, 2002 compared to
$272.0 million as of September 30, 2001. The contribution lost due to
lower sales was approximately $46.8 million. Lower margins reduced
gross profit by approximately $7.0 million. Gross profit as a percent
of sales declined 0.5% despite reductions in fixed costs of
approximately $21.4 million.
29
* Selling expenses have been reduced approximately $4.1 million as a
result of lower commissions on lower sales.
* Administrative expenses have been reduced approximately $6.1 million
due to plant consolidations and other cost reduction initiatives.
* Amortization expense was down $10.5 million due to the implementation
of SFAS 142.
The reported operating loss for the nine months ended September 30,
2002 was $30.4 million and reflects charges not included in the operating
income of New Mail-Well. These charges were as follows:
* Restructuring and other charges incurred as of September 30, 2002
total $41.3 million.
* As mentioned above, we incurred a $21.9 million charge in connection
with an operating lease refinanced in the third quarter.
* In the second quarter, we recorded an additional impairment charge on
PrintXcel of $10.4 million. This charge was primarily the reversal of
a tax benefit recorded when PrintXcel's assets were written down to
net realizable value.
* We recorded an impairment charge of $6.1 million in the second
quarter as a result of the sale of our filing products business.
* We wrote down our digital graphics business $2.8 million in the
second quarter based on the sales proceeds currently anticipated on
the sale of this business.
INTEREST EXPENSE
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
--------------------- ---------------------
2002 2001 2002 2001
------- ------- ------- -------
(IN THOUSANDS)
Total interest expense........................ $18,675 $19,222 $58,123 $60,888
Less: Allocation to discontinued operations... -- 3,643 5,570 11,538
------- ------- ------- -------
Reported interest expense..................... $18,675 $15,579 $52,553 $49,350
======= ======= ======= =======
New Mail-Well................................. $18,260 $16,181 $53,751 $50,818
======= ======= ======= =======
In the third quarter of 2002, interest before allocations to
discontinued operations decreased 2.8% due to lower average outstanding
debt despite higher weighted average interest rates. Our average
outstanding debt during the third quarter of 2002 was $856.1 million
compared to $960.8 million in the third quarter of 2001. Our weighted
average interest rate was 8.23% in the third quarter of 2002 compared to
7.20% in 2001. The increase in the weighted average interest rate was due
primarily to the issuance of $350 million of 9 5/8% senior notes on March
13, 2002. Since a significant portion of the proceeds of the senior notes
was used to repay bank debt, which accrued interest at a lower variable
rate, our weighted average interest rate will continue to be higher than
the prior year.
For the nine months ended September 30, 2002, interest expense before
allocations to discontinued operations was lower than the comparable period
in 2001. Interest in 2002 reflects our average outstanding debt of $915.4
million in 2002 compared to $986.9 million in 2001 and our weighted average
interest rate of 7.71% in 2002 compared to 7.52% in 2001.
Reported interest excludes an allocation of interest expense to
discontinued operations based on the net assets of those operations
relative to the net assets of the Company.
Interest expense for New Mail-Well was calculated on a pro-forma basis
as if the actual net proceeds from the sales of our prime label business,
Curtis 1000 Inc. and our filing products division and the estimated net
proceeds from the sale of the digital graphics division had been received
on January 1, 2001. Interest expense determined on this basis was greater
than reported interest expense
30
for all periods presented except the third quarter of 2002. New Mail-Well's
interest expense is lower in the third quarter than reported interest
expense because there is no allocation of interest to assets held for sale
under GAAP.
INCOME TAXES
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
-------------------- ----------------------
2002 2001 2002 2001
-------- ----- -------- -------
(DOLLARS IN THOUSANDS)
Reported
Provision (benefit) for income taxes....... $(14,218) $(246) $(21,346) $(1,372)
Effective tax rate......................... 39% 14% 25% 11%
New Mail-Well
Provision (benefit) for income taxes....... $ 1,109 $(114) $ (1,965) $ 5,265
Effective tax rate......................... 42% 48% 42% 48%
New Mail-Well's effective tax rate for 2002 is estimated to be 42%, six
percentage points lower than in 2001. The effective tax rate in 2001
reflected the impact of nondeductible goodwill amortization.
The reported effective tax rates for 2002 and 2001 reflect the tax
impact of permanent differences that arise as a result of impairment
charges recorded as of September 30, 2002 and in 2001.
INCOME (LOSS) FROM CONTINUING OPERATIONS AND INCOME (LOSS) PER
SHARE--ASSUMING DILUTION
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
---------------------- -----------------------
2002 2001 2002 2001
-------- ------- -------- --------
(DOLLARS IN THOUSANDS)
Income (loss) from continuing operations
Reported................................ $(22,149) $(1,532) $(63,700) $(11,032)
New Mail-Well........................... $ 1,553 $ (122) $ (2,693) $ 5,600
Income (loss) from continuing operations per
share
Reported................................ $ (0.46) $ (0.03) $ (1.34) $ (0.23)
New Mail-Well........................... $ 0.03 $ -- $ (0.06) $ 0.11
New Mail-Well's income from continuing operations improved in the third
quarter of 2002 from the loss presented for the third quarter of 2001 due
to improved margins, lower fixed costs and lower amortization expense,
which more than offset the impact of lower sales and higher interest
expense. New Mail-Well's loss for the nine months ended September 30, 2002
compared to income during the comparable period of 2001 was due to the
impact of significantly lower sales and higher interest expense, which
could not be offset by savings in fixed costs and lower amortization
expense.
Our reported loss from continuing operations for the third quarter of
2002 includes restructuring and other charges of $39.4 million. In the
third quarter of 2001, restructuring and other charges were $5.5 million.
The reported loss from continuing operations as of September 30, 2002
includes impairment, restructuring and other charges of $82.5 million
compared to $34.7 million of such charges in the same period of 2001.
LOSS FROM DISCONTINUED OPERATIONS
In the third quarter of 2002, we recorded an additional loss of $5.8
million, or $0.13 per share, from discontinued operations. This additional
loss was primarily due to tax adjustments on the sale of
31
the prime label business and the accrual of additional expenses related to
the sales of both the prime label business and Curtis 1000 Inc.
The loss from discontinued operations for the nine months ended
September 30, 2002 was $14.0 million, or $0.29 per share. The loss on
discontinued operations reflects proceeds received from our divestiture of
the prime label business that were less than proceeds estimated at December
31, 2001 and additional expenses and taxes related to the sale of the prime
label business and Curtis 1000 Inc. Additional adjustments to this loss may
occur as post-closing obligations are settled and final tax revisions are
made.
EXTRAORDINARY LOSS
Results for the nine months ended September 30, 2002 include an
extraordinary charge of $10.1 million, or $0.21 per share. This represents
the write-off of the remaining deferred financing fees related to our bank
credit facility that was refinanced during the second quarter.
NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE--ASSUMING DILUTION
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
---------------------- -----------------------
2002 2001 2002 2001
-------- ------- -------- --------
(DOLLARS IN THOUSANDS)
Net income (loss)
Reported................................ $(27,953) $(1,563) $(87,783) $(90,466)
New Mail-Well........................... $ 1,553 $ (122) $ (2,693) $ 5,600
Net income (loss) per share
Reported................................ $ (0.59) $ (0.03) $ (1.84) $ (1.90)
New Mail-Well........................... $ 0.03 $ -- $ (0.06) $ 0.11
The net losses reported for the third quarter and for the nine months
ended September 30, 2002 were due to the losses from continuing operations,
the impairment charges, restructuring and other charges, the loss on
discontinued operations and the extraordinary loss.
BUSINESS SEGMENTS
ENVELOPE
The following table presents the reported sales and operating income of
our envelope business, as well as sales and operating income excluding the
results of the filing products division that has been sold and
restructuring and other charges recorded during the three and nine months
ended September 30, 2002 and 2001 ("New Envelope").
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
----------------------- -----------------------
2002 2001 2002 2001
-------- -------- -------- --------
(IN THOUSANDS)
Net sales
Reported.............................. $183,352 $203,780 $579,495 $636,142
New Envelope*......................... $177,021 $190,343 $540,087 $594,648
Operating income
Reported.............................. $ 10,644 $ 16,380 $ 29,999 $ 45,427
New Envelope*......................... $ 18,842 $ 16,848 $ 55,227 $ 57,456
- ---------------
* Excludes sales and operating income of the filing products division that
has been sold and restructuring and other charges. Sales include sales
to discontinued operations that are expected to continue. Sales to
discontinued operations prior to their divestiture were $2.9 million for
the nine months ended September 30, 2002 and $4.1 million and $15.5
million for the three and nine months ended September 30, 2001.
32
Sales of New Envelope were $13.3 million, or 7.0%, lower in the third
quarter of 2002 compared to the third quarter of 2001. The sales decline
was due primarily to the following:
* Revenues declined by approximately $4.0 million due to competitive
pressures on prices of certain of our products and lower sales of
higher value added products to direct marketing customers.
* Sales to our direct mail customers were down approximately $4.4
million in the quarter from the prior year due to reductions in
spending on direct mail promotions. We did replace some of this
business with additional sales of our transactional bill and
remittance envelopes.
* Sales of products to our merchant and office products customers were
approximately $1.2 million lower in the quarter from the prior year
primarily due to a decision to cease production of certain low margin
products.
* Sales of our high strength specialty envelopes were down $2.0 million
in the quarter from the prior year due to an overall decrease in
demand for these envelopes.
* In February 2002, we exited our domestic photo envelope business.
Sales of this business were $1.7 million in the third quarter of
2001.
New Envelope's operating income improved $2.0 million, or 11.8%, in the
third quarter compared to the third quarter of 2001. We have consolidated
ten of our manufacturing facilities over the last twelve months. The
efficiencies realized from these consolidations generally enabled us to
maintain our contribution margins in the third quarter despite lower
pricing and lower sales of high value added products. In addition,
reductions in fixed manufacturing costs realized from the consolidation
more than offset the impact of lower sales resulting in an increase in
gross profit of $0.3 million. Selling, general and administrative expenses
were approximately $1.2 million less in the quarter as a result of the
consolidations and $0.5 million as a result of the reversal of profit
sharing benefits that had been accrued earlier in the year.
Sales of New Envelope have declined $54.6 million, or 9.2%, during the
nine months ended September 30, 2002 compared to the same period of 2001.
The sales decline was due primarily to the following:
* Revenue was approximately $16.9 million lower in 2002 due to lower
pricing dictated by the market and lower sales of higher value added
products to direct marketing customers.
* Sales to our direct mail customers were approximately $10.4 million
lower than in 2001.
* Sales of our specialty envelopes were $8.7 million lower than in
2001.
* The office product and photo business exited during 2002 had sales of
approximately $8.7 million in 2001.
* Sales to our merchant and office products customers were $7.7 million
lower due primarily to customers lowering inventories during the
first half of the year.
* Sales in Canada are down approximately $2.2 million from the prior
year due to competition and the slowdown in the economy.
Operating income of New Envelope declined $2.2 million, or 3.8%, during
the nine months ended September 30, 2002 compared to the same period of
2001. Productivity problems during the early stages of our plant
consolidations combined with lower pricing and lower sales of higher value
added products caused margins to be approximately $3.2 million lower in the
first nine months of 2002 than in 2001. This margin decline occurred
primarily in the first six months of the year. Savings in fixed
manufacturing costs realized from the plant consolidations were $16.3
million, but were not sufficient to offset the $17.8 million of
contribution lost on lower sales. Selling, general and administrative
expenses were $2.5 million less as a result of the plant consolidations and
other cost control measures.
33
COMMERCIAL PRINTING
The following table presents the reported sales and operating income of
our commercial printing business, as well as sales and operating income
excluding the results of the digital graphics division that is held for
sale and restructuring and other charges recorded during the three and nine
months ended September 30, 2002 and 2001 ("New Commercial Printing").
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
----------------------- -----------------------
2002 2001 2002 2001
-------- -------- -------- --------
(IN THOUSANDS)
Net sales
Reported.............................. $194,659 $208,136 $559,141 $626,886
New Commercial Printing*.............. $187,175 $200,199 $536,549 $602,608
Operating income (loss)
Reported.............................. $ (6,342) $ 3,775 $(17,494) $ 14,648
New Commercial Printing*.............. $ 3,252 $ 3,127 $ (5,918) $ 13,602
- ---------------
* Excludes sales and operating income of the digital graphics division
held for sale and restructuring and other charges for the three and nine
months ended September 30, 2002. Sales include sales to discontinued
operations that are expected to continue. Sales to discontinued
operations prior to their divestiture were $0.6 million for the nine
months ended September 30, 2002 and $0.4 million and $2.3 million for
the three and nine months ended September 30, 2001.
Sales of New Commercial Printing were $13.0 million, or 6.5%, lower in
the third quarter of 2002 than in the third quarter of 2001. The sales
decline was due primarily to the following:
* Sales of high impact printing for our national and regional customers
were approximately $4.9 million lower in the quarter than in the
third quarter of 2001. Sales of car brochures were $11.6 million
lower in the third quarter than in 2002; however, increased sales to
a major retailer offset much of this decline.
* Sales in the Philadelphia market were approximately $6.7 million
lower in the quarter than in the third quarter of 2001. In October
2001, we consolidated two plants serving this market, and many of our
customers did not move their printing to our new facility.
Additionally, in the third quarter of 2001 we had approximately $1.9
million of business with a customer that did not repeat in 2002.
* Sales of our plant in Indianapolis were $3.7 million lower in the
quarter than in the third quarter of 2001 because of the loss of two
accounts and lower sales to one of our publishing customers.
Despite significantly lower sales in the third quarter of 2002,
operating income was $3.3 million, which was slightly higher than the $3.1
million earned in the third quarter of 2001. Contribution lost due to lower
sales was approximately $4.4 million and was partially offset by an
improvement in contribution margin. As a result of our initiatives to
improve manufacturing efficiencies and lower costs, contribution on sales
in the quarter increased $0.9 million. Selling expenses were $1.1 million
lower in the quarter due primarily to lower commissions as a result of
lower sales. General and administrative expenses were $1.9 million lower
due to initiatives taken to reduce administrative headcount and other costs
and the reversal of profit sharing benefits and bonuses of $1.1 million
accrued during the first half of 2002.
Sales of New Commercial Printing were $66.1 million, or 11.0%, lower
during the nine months ended September 30, 2002 than in the comparable
period of 2001. The decline in sales was due primarily to the following:
* Sales of high impact printing were $12.5 million, or 6.8%, lower
during the nine months ended September 30, 2002 than in comparable
period of 2001. Our national business has been most
34
affected by reduced promotional spending by our customers. In their
efforts to reduce costs, customers have reduced page counts of annual
reports, car brochures and catalogs. They have also reduced the
complexity of their printing by reducing the use of special papers,
inks and finishes. In addition, we have printed fewer magazine inserts
for the automotive industry this year than in 2001.
* Sales in the Philadelphia market were $23.0 million lower during the
nine months ended September 30, 2002 than in comparable period of
2001. This decline was due in part to our closure of a plant in
Philadelphia in April 2001. Much of the work produced by this plant
was marginal work, which could not be produced profitably at any of
our other facilities in the Mid-Atlantic area. Sales were also lower
as a result of the consolidation of two other facilities in the
Philadelphia area in October 2001, because many of our customers did
not move their work to the new facility.
* Sales of our plant in Indianapolis were $8.5 million lower during the
nine months ended September 30, 2002 than in the comparable period of
2001. In our efforts to improve the profitability of this plant we
have lost some of our low margin business. In addition, the demand
for long run web business at this plant has been weak all year.
* Sales at our other operations serving local markets were $22.1
million lower during the nine months ended September 30, 2002 than
in comparable period of 2001. Our customers in these markets have
reduced promotional spending in response to the slow economy. In
2002, sales of printed material for direct mail promotions and sales
to customers in telecommunications and technology industries are off
significantly from levels in 2001.
New Commercial Printing had operating losses of $5.9 million during the
nine months ended September 30, 2002, a decline of $19.5 million from the
comparable period of 2001. The contribution lost on the decline in sales
was $22.8 million. Lower margins reduced profits by another $7.1 million.
Selling expenses are $3.3 million lower in 2002 due to the reduced
commissions expense as a result of lower sales. Administrative costs are
$2.1 million lower than they were in 2001 due to reduced headcount and
control over other expenses.
PRINTED OFFICE PRODUCTS
The following table presents the reported sales and operating income of
our printed office products business, as well as sales and operating income
of "New Printed Office Products", which excludes restructuring and other
charges recorded during the three and nine months ended September 30, 2002
and 2001.
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
--------------------- -----------------------
2002 2001 2002 2001
------- ------- -------- --------
(IN THOUSANDS)
Net sales
Reported................................ $50,709 $53,370 $154,533 $162,594
New Printed Office Products*............ $50,709 $54,802 $155,749 $168,995
Operating income
Reported................................ $ 4,901 $ 3,503 $ 13,676 $ 13,903
New Printed Office Products*............ $ 5,204 $ 3,625 $ 15,026 $ 15,168
- ---------------
* Sales of New Printed Office Products include sales to discontinued
operations that are expected to continue. Operating income excludes
restructuring and other charges. Sales to discontinued operations prior
to their divestiture were $1.2 million for the nine months ended
September 30, 2002 and $1.5 million and $7.2 million for the three and
nine months ended September 30, 2001.
35
Sales of New Printed Office Products were $4.1 million, or 7.5%, lower
in the third quarter of 2002 compared to the third quarter of 2001. The
sales decline was due primarily to the following:
* Sales of traditional business forms were $3.1 million lower in the
third quarter compared to the third quarter of 2001. Demand for these
products continues to decline due to the increased use of laser
printing technology by businesses and migration from multi printed
forms to single printed forms.
* Sales of our label products in the third quarter of 2002 were below
the third quarter of 2001 due to significant sales in September 2001
of labels with patriotic themes. Otherwise, sales of labels were
relatively flat in the quarter.
Despite lower sales, operating income of New Printed Office Products
increased $1.6 million, or 43.6%, in the third quarter of 2002 compared to
the third quarter of 2001. In April 2002, we completed the consolidation of
one of our traditional documents plants. As a result, margins of our
traditional documents business improved sufficiently to offset the impact
of the lower sales. Margins in our label business also improved as a result
of the implementation of an electronic workflow system throughout this
business. Overall, improved margins offset the impact of lost sales by $0.6
million. In addition, the plant closure and other cost reduction measures
lowered fixed costs by $1.0 million in the third quarter of 2002 compared
to the third quarter of 2001. Lower fixed costs include the reversal of
$0.3 million of profit sharing benefits accrued during the first half of
the year.
Sales of New Printed Office Products have declined $13.2 million, or
7.8%, during the nine months ended September 30, 2002 compared to the same
period of 2001. The decline can be explained as follows:
* Sales of traditional business forms were $10.0 million lower during
the nine months ended September 30, 2002 than in comparable period of
2001. This decline was due to technology changes discussed above and
exiting multiple traditional business form markets through
consolidations.
* Sales of our label products were $3.2 million lower during the nine
months ended September 30, 2002 than in comparable period of 2001.
Most of this decline occurred in the first half of 2002 and included
the loss of two large customers.
Despite the loss in sales, operating income of New Printed Office
Products as of September 30, 2002 was only slightly lower than the
comparable period of 2001. As a result of the plant closure and production
efficiency improvements made in 2002, margins have improved in our
traditional and specialty documents businesses and in our label business.
However, these improvements were not sufficient to offset the impact of
lower sales. Contribution is down $2.0 million as of September 30, 2002
compared to the same period of 2001. To mitigate this lost contribution, we
have reduce fixed costs by $1.9 million in 2002 as a result of the plant
closure and other cost saving measures.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 2002, we restructured a significant
portion of our outstanding debt. In March 2002, we sold $350 million of
9 5/8% senior notes due 2012. We used the net proceeds from this offering
to repay $197.0 million of our bank term debt and $9.2 million of other
debt. The remaining proceeds of this offering have been invested to provide
the liquidity needed for the repayment of our convertible debt in November
2002.
In March 2002, we applied $20.5 million of the proceeds received from
the sale of Curtis 1000 Inc. to the repayment of our bank term debt. In May
2002, we applied $67.0 million of the proceeds received from the sale of our
prime label business to the repayment of our bank term debt. In August 2002,
we applied proceeds of $31.5 million received from the sale of the filing
products division of our envelope business to the reduction of our revolving
loan balance.
36
In June 2002, we entered into a three year $300 million senior secured
credit facility with a syndicate of banks. The purpose of this new facility
was to enable the refinancing of our existing bank term debt and secure
financing for ongoing working capital needs and other general corporate
purposes. Loans made under this facility are issued on a revolving basis
and are subject to availability and a borrowing base. Loans bear interest
at a base rate or LIBOR, plus a margin, and are secured by substantially
all of the Company's domestic assets.
Cash flow from continuing operations for the nine months ended
September 30, 2002 was $7.7 million compared to $136.7 million in the
comparable period of 2001. Capital expenditures totaled $26.9 million as of
September 30, 2002 compared to $24.1 million as of September 30, 2001. In
August 2002, we purchased a short-run printing and fulfillment operation
for $1.6 million, and in the first quarter of 2002, we made a $1.0 million
contractual payment on an acquisition that was consummated in the first
quarter of 2001 for $3.8 million.
The following table summarizes our cash obligations as of September 30,
2002:
PAYMENTS DUE BY YEAR
------------------------------------------------------------------------------
YEAR 1 YEARS 2 AND 3 YEARS 4 AND 5 THEREAFTER TOTAL
-------- ------------- ------------- ---------- ----------
(IN THOUSANDS)
Long-term debt................. $141,646 $116,886 $ 1,637 $656,619 $ 916,788
Operating leases............... 35,080 57,626 42,628 32,066 167,400
-------- -------- ------- -------- ----------
Total cash obligations......... $176,726 $174,512 $44,265 $688,685 $1,084,188
======== ======== ======= ======== ==========
Current maturities of our long-term debt include $139.1 million of
convertible notes, which matured and were paid in November 1, 2002.
Operating leases include an operating lease that originated in 1997 as
a sale/leaseback arrangement. This lease was refinanced in August 2002. In
connection with this refinancing, we were required to make a payment of
$15.8 million.
At September 30, 2002, we had outstanding letters of credit of
approximately $15.9 million related to performance and payment guarantees.
In addition, we have issued letters of credit of $2.3 million as credit
enhancements in conjunction with other debt. Based on our experience with
these arrangements, we do not believe that any obligations that may arise
will be significant.
We expect to be able to fund our operations, capital expenditures and
debt and other contractual commitments within the next year from internally
generated cash flow and funds available under our new $300 million senior
secured credit facility. At September 30, 2002, we had $114.8 million of
unused credit available under this credit facility.
CRITICAL ACCOUNTING POLICIES AND JUDGMENTS
In preparing our financial statements, we are required 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. We evaluate our estimates and
judgments on an ongoing basis, including those related to bad debts,
inventory valuations, property, plant and equipment, intangible assets,
income taxes, restructuring costs, and contingencies and litigation. We
base our estimates and judgments on historical experience and on various
other factors that we believe to be reasonable under the circumstances.
Actual results may differ from these estimates.
During the quarter ended June 30, 2002, the decision was made to
reinstate the PrintXcel business as an operating asset. Under generally
accepted accounting principles, when a business that was held for sale is
reinstated as a continuing operation, it is to be recorded at the lower of
its carrying value or fair market value. In 2001, we reduced the carrying
value of the net assets of this business to its net realizable value. We
based our determination of the net realizable value of this business on the
advice
37
provided to us by our financial advisors. Our internal valuations of this
business continue to support its carrying value, which approximates its
fair market value.
Assets held for sale have been recorded at net realizable value. The
net realizable value of the digital graphics division of our commercial
printing business held for sale is based on a letter of intent received
from a prospective buyer. We do not expect the actual proceeds to be
significantly different from our estimates; however, until the sale is
completed, the possibility exists that the actual proceeds could be
materially different from our estimate.
We exercise judgment in evaluating our long-lived assets for
impairment. Except for our commercial printing business, we believe our
businesses will generate sufficient cash flow to more than recover the
investments we have made in property, plant and equipment, as well as the
goodwill and other intangibles recorded as a result of our acquisitions. In
connection with the implementation of SFAS 142 discussed below, we are in
the process of quantifying the impairment in our commercial printing
business.
We are self insured for the majority of our workers' compensation costs
and group health insurance costs. We rely on claims experience and the
advice of consulting actuaries and administrators in determining an
adequate liability for self-insured claims.
The determination of our tax provision is complex due to operations in
several tax jurisdictions outside the United States. In addition,
realization of certain deferred tax assets is dependent upon our ability to
generate future taxable income and future capital gains.
NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.
Statement 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. Statement 141 also
includes guidance on the initial recognition and measurement of goodwill
and other intangible assets arising from business combinations completed
after June 30, 2001. Statement 142 prohibits the amortization of goodwill
and intangible assets with indefinite useful lives. Statement 142 requires
that these assets be reviewed for impairment at least annually. Intangible
assets with finite lives will continue to be amortized over their estimated
useful lives. Additionally, Statement 142 requires that goodwill included
in the carrying value of equity method investments no longer be amortized.
We adopted Statement 142 on January 1, 2002. We have completed the first
step of the two-step process prescribed in Statement 142 to test goodwill
for impairment and have concluded that a portion of the $213.5 million of
goodwill related to our commercial printing business is impaired. We will
not know the extent of this impairment until we have completed step two of
the process, which we have begun. We will recognize the amount of the
impairment as a cumulative effect of a change in accounting principle as of
January 1, 2002, when it is determined, but no later than December 31, 2002.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. Statement 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. Mail-Well will
adopt Statement 143 on January 1, 2003. We are evaluating the impact of the
adoption of Statement 143 on the consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which establishes one
accounting model to be used for long-lived assets to be disposed of by sale
and broadens the presentation of discontinued operations to include more
disposal transactions. Statement 144 supercedes SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets to Be Disposed Of and the accounting and
reporting provisions of ABP Opinion No. 30, Reporting the Results of
Operations--Reporting the Effects Of Disposal of a Segment of a Business,
and
38
Extraordinary, Unusual and Infrequently Occurring Events and Transactions.
Mail-Well adopted Statement 144 as of January 1, 2002 and there was no
impact from the adoption of this statement.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statement No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. This statement provides guidance on the
classification of gains and losses from the extinguishment of debt and on
the accounting for certain specified lease transactions. The Company is
currently evaluating the provisions of the new statement.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, which addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force ("EITF") Issue No.
94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). Generally, SFAS No. 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized as
incurred, whereas EITF Issue No. 94-3 required such a liability to be
recognized at the time that an entity committed to an exit plan. The
company is currently evaluating the provisions of the new rule, which is
effective for exit or disposal activities that are initiated that are after
December 31, 2002.
LEGAL PROCEEDINGS
From time to time we may be involved in claims or lawsuits that arise
in the ordinary course of business. Accruals for claims or lawsuits have
been provided for to the extent that losses are deemed probable and
estimable. Although the ultimate outcome of these claims or lawsuits cannot
be ascertained, on the basis of present information and advice received
from counsel, it is our opinion that the disposition or ultimate
determination of such claims or lawsuits will not have a material adverse
effect on us.
FORWARD-LOOKING INFORMATION
This report, including "Management's Discussion and Analysis of
Financial Condition and Results of Operations," may contain various
"forward-looking statements," within the meaning of Section 21E of the
Securities Exchange Act of 1934, that are based on management's belief and
assumptions, as well as information currently available to management.
Although we believe that the expectations reflected in any such
forward-looking statements are reasonable, we can give no assurance that
such expectations will prove to be correct. Any such statements are subject
to certain risks, uncertainties and assumptions. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions
prove incorrect, our actual financial results, performance or condition may
vary materially from those expected. Some of the key factors that may have
a direct bearing on our actual financial results, performance or condition
are as follows:
* Paper and other raw material costs
* The degree and nature of competition
* The ability to execute restructuring plans and achieve productivity
and cost savings goals
* Postage rates and other changes in the direct-mail industry
* Interest rates and foreign currency exchange rates
* Ability to obtain additional or alternative financing
* General economic conditions
* General labor conditions
* Others as described in our most recent annual report on form 10-K
under the heading "Risk Factors"
39
In view of such uncertainties, investors are cautioned not to place
undue reliance on these forward-looking statements. We do not assume any
obligation to update these forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks such as changes in interest and foreign
currency exchange rates, which may adversely affect results of operations
and financial position. Risks from interest and foreign currency exchange
rate fluctuations are managed through normal operating and financing
activities. We do not utilize derivatives for speculative purposes, nor do
we hedge interest rate exposure through the use of swaps and options or
foreign exchange exposure through the use of forward contracts.
Exposure to market risk from changes in interest rates relates
primarily to our variable rate debt obligations. The interest on this debt
is based on a base rate or LIBOR, plus a margin. At September 30, 2002, we
had outstanding variable rate debt outstanding of $116.9 million. A 1%
increase in the base rate (which is tied to the prime rate) or LIBOR on the
maximum amount of available variable rate debt, which is $302.2 million,
would increase our annual interest expense by $3.0 million and reduce
annual net income by approximately $1.9 million.
We have operations in Canada, and thus are exposed to market risk for
changes in foreign currency exchange rates of the Canadian dollar.
40
PART II. OTHER INFORMATION
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our chief executive
officer and our chief financial officer, after evaluating the effectiveness
of our "disclosure controls and procedures" (as defined in the Securities
Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of a date (the
"Evaluation Date") within 90 days before the filing date of this quarterly
report, have concluded that as of the Evaluation Date, our disclosure
controls and procedures were adequate and designed to ensure that material
information relating to us and our consolidated subsidiaries would be made
known to them by others within those entities.
CHANGES IN INTERNAL CONTROLS. There were no significant changes in our
internal controls or procedures or, to our knowledge, in other factors that
could significantly affect our disclosure controls and procedures
subsequent to the Evaluation Date.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBIT
NO. DESCRIPTION
- ------- -----------
3.1 Certificate of Incorporation of Mail-Well
Corporation--incorporated by reference from Mail-Well I
Corporation's Form S-4 filed March 15, 1999 (Reg. No.
333-74409).
3.2 Certificate of Amendment of Certificate of Incorporation of
Mail-Well Corporation--incorporated by reference from
Mail-Well I Corporation's Form S-4 filed March 15, 1999
(Reg. No. 333-74409).
3.3 Certificate of Correction Filed to Correct Certain Error in
the Certificate of Amendment of Mail-Well I Corporation
Filed in the Office of the Secretary of State of Delaware on
September 11, 1995--incorporated by reference from Mail-Well
I Corporation's Form S-4 filed March 15, 1999 (Reg. No.
333-74409).
3.4 Certificate of Change of Registered Agent and Registered
Office--incorporated by reference from Mail-Well I
Corporation's Form S-4 filed March 15, 1999 (Reg. No.
333-74409).
3.5 Bylaws of Mail-Well I Corporation--incorporated by reference
from Mail-Well I Corporation's Form S-4 filed March 15, 1999
(Reg. No. 333-74409).
4.1 Form of Indenture between Mail-Well, Inc. and The Bank of
New York, as Trustee, dated November 1997, relating to
Mail-Well, Inc.'s $152,050,000 aggregate principal amount of
5% Convertible Subordinated Notes due 2002--incorporated by
reference from Exhibit 4.2 to Mail-Well, Inc.'s Amendment
No. 2 to Form S-3 dated November 10, 1997 (Reg. No. 333-
36337).
4.2 Form of Supplemental Indenture between Mail-Well, Inc. and
The Bank of New York, as Trustee, dated November 1997,
relating to Mail-Well, Inc.'s $152,050,000 aggregate
principal amount of 5% Convertible Subordinated Notes due
2002 and Form of Convertible Note--incorporated by reference
from Exhibit 4.5 to Mail-Well, Inc.'s Amendment No. 2 to
Form S-3 dated November 10, 1997 (Reg. No. 333-36337).
4.3 Indenture dated as of December 16, 1998 between Mail-Well I
Corporation and State Street Bank and Trust Company, as
Trustee, relating to Mail-Well I Corporation's $300,000,000
aggregate principal amount of 8 3/4% Senior Subordinated
Notes due 2008--incorporated by reference from Exhibit 4.4
to Mail-Well, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1998, File No. 1-12551.
41
EXHIBIT
NO. DESCRIPTION
- ------- -----------
4.4 Form of Senior Subordinated Note--incorporated by reference
from Exhibit 4.5 to Mail-Well, Inc.'s Annual Report on Form
10-K for the year ended December 31, 1998, File No. 1-12551.
4.6 Indenture dated as of March 13, 2002 between Mail-Well I
Corporation and State Street Bank and Trust Company, as Trustee
relating to Mail-Well I Corporation's $350,000,000 aggregate
principal amount of 9 5/8% Senior Notes due 2012--incorporated
by reference to Exhibit 10.30 to Mail-Well, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended March 31, 2002.
4.7 Form of Senior Note and Guarantee relating to Mail-Well I
Corporation's $350,000,000 aggregate principal amount 9 5/8%
due 2012--incorporated by reference to Exhibit 10.31 to
Mail-Well, Inc.'s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2002.
10.1 Form of Indemnity Agreement between Mail-Well, Inc. and each of
its officers and directors--incorporated by reference from
Exhibit 10.17 of Mail-Well, Inc.'s Registration Statement on
Form S-1 dated March 25, 1994.
10.2 Form of Indemnity Agreement between Mail-Well I Corporation and
each of its officers and directors--incorporated by reference
from Exhibit 10.18 of Mail-Well, Inc.'s Registration Statement
on Form S-1 dated March 25, 1994.
10.3 Form of M-W Corp. Employee Stock Ownership Plan effective as of
February 23, 1994 and related Employee Stock Ownership Plan
Trust Agreement--incorporated by reference from Exhibit 10.19
of Mail-Well, Inc.'s Registration Statement on Form S-1 dated
March 25, 1994.
10.4 Form of M-W Corp. 401(k) Savings Retirement Plan--incorporated
by reference from Exhibit 10.20 of Mail-Well, Inc.'s
Registration Statement on Form S-1 dated March 25, 1994.
10.5 Mail-Well, Inc. 1994 Stock Option Plan, as amended on May 7,
1997--incorporated by reference from Exhibit 10.56 of
Mail-Well, Inc.'s Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997.
10.6 Form of Mail-Well, Inc. Incentive Stock Option Agreement--
incorporated by reference from Exhibit 10.22 of Mail-Well,
Inc.'s Registration Statement on Form S-1 dated March 25, 1994.
10.7 Form of Mail-Well, Inc. Nonqualified Stock Option Agreement--
incorporated by reference from Exhibit 10.23 of Mail-Well,
Inc.'s Registration Statement on Form S-1 dated March 25, 1994.
10.8 Mail-Well, Inc. 1997 Non-Qualified Stock Option Plan--
incorporated by reference from Exhibit 10.54 of Mail-Well,
Inc.'s Form 10-Q for the quarter ended March 31, 1997.
10.9 1997 Non-Qualified Stock Option Agreement--incorporated by
reference from Exhibit 10.54 of Mail-Well, Inc.'s Form 10-Q for
the quarter ended March 31, 1997.
10.10 Mail-Well, Inc. 1998 Incentive Stock Option Plan--incorporated
by reference from Exhibit 10.58 to the Company's Quarterly
report on Form 10-Q for the quarter ended March 31, 1998.
10.11 Mail-Well, Inc. 1998 Incentive Stock Option Plan Incentive
Stock Option Agreement-- incorporated by reference from Exhibit
10.59 to the Company's Quarterly report on Form 10-Q for the
quarter ended March 31, 1998.
10.12 Merger Agreement and Plan of Merger by and among American
Business Products, Inc., Mail-Well, Inc., and Sherman
Acquisition Corporation dated January 13, 2000--incorporated by
reference from the Annual Report on Form 10-K for Mail-Well,
Inc.
42
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.13 Change of Control Agreement dated November 15, 1999, between
the Company and Paul V. Reilly--incorporated by reference from
the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
10.14 Change of Control Agreement dated November 15, 1999, between
the Company and Robert Meyer--incorporated by reference from
the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
10.15 Mail-Well, Inc. 2001 Long-Term Equity Incentive Plan--
incorporated by reference from the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2001.
10.16 Form of Non-Qualified Stock Option Agreement under 2001
Long-Term Equity Incentive Plan--incorporated by reference from
the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2001.
10.17 Form of Incentive Stock Option Agreement under 2001 Long-Term
Equity Incentive Plan--incorporated by reference from the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2001.
10.18 Form of Restricted Stock Award Agreement under 2001 Long-Term
Equity Incentive Plan--incorporated by reference from the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2001.
10.19 Purchase Agreement dated March 8, 2002, between Mail-Well I
Corporation, and Credit Suisse First Boston, UBS Warburg LLC,
Banc of America Securities LLC, U.S. Bancorp Piper Jaffray
Inc., First Union Securities, Inc., and Scotia Capital (USA)
Inc., as Initial Purchasers, relating to Mail-Well I
Corporation's $350,000,000 aggregate principal amount of 9 5/8%
Senior Notes due 2012--incorporated by reference to Exhibit
10.30 to Mail-Well I Corporation's Registration statement on
Form S-4 filed June 11, 2002.
10.20 Registration Rights Agreement dated March 13, 2002, between
Mail-Well I Corporation, and Credit Suisse First Boston, UBS
Warburg LLC, Banc of America Securities LLC, U.S. Bancorp Piper
Jaffray Inc., First Union Securities, Inc., and Scotia Capital
(USA) Inc., as Initial Purchasers, relating to Mail-Well I
Corporation's $350,000,000 aggregate principal amount of 9 5/8%
Senior Notes due 2012--incorporated by reference to Exhibit
10.32 to Mail-Well, Inc.'s Quarterly Report on Form 10-Q for
the quarter ended March 31, 2002.
10.21 Stock Purchase Agreement, dated May 6, 2002, among MWL
Acquisition Corp., Mail-Well I Corporation and Mail-Well,
Inc.--incorporated by reference to Exhibit 10.32 to Mail-Well I
Corporation's Registration Statement on Form S-4 filed June 11,
2002.
10.22 Amendment No. 1 to Stock Purchase Agreement, dated May 21,
2002, among MWL Acquisition Corp., Mail-Well I Corporation and
Mail-Well, Inc.--incorporated by reference to Exhibit 10.33 to
Mail-Well I Corporation's Registration statement on Form S-4
filed June 11, 2002--incorporated by reference to Exhibit 10.27
of Mail-Well, Inc.'s Form 10-Q for the quarter ended June 30,
2002.
10.23 Amended and Restated Credit Agreement dated June 27, 2002,
among the Company, Mail-Well I Corporation, the domestic
subsidiaries of Mail-Well I Corporation named in the agreement,
the financial institutions from time to time parties thereto,
and Bank of America, N.A., as administrative
agent--incorporated by reference to Exhibit 10.27 of Mail-Well,
Inc.'s Form 10-Q for the quarter ended June 30, 2002.
43
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.24 Amended and Restated Security Agreement dated June 27, 2002,
among the Company, Mail-Well I Corporation, the domestic
subsidiaries of Mail-Well I Corporation named in the agreement,
and Bank of America, N.A., as agent--incorporated by reference
to Exhibit 10.28 of Mail-Well, Inc.'s Form 10-Q for the quarter
ended June 30, 2002.
10.25 Amendment No. 1 to Amended and Restated Credit Agreement, dated
September 27, 2002 among Mail-Well, Inc., Mail-Well I
Corporation, certain subsidiaries of Mail-Well I, the lenders
under the Amended and Restated Credit Agreement, and Bank of
America, N.A., as administrative agent for the
lenders--incorporated by reference to Exhibit 10.36 of Mail-
Well I Corporation's Amendment No. 2 to Registration Statement
on Form S-4 filed October 8, 2002.
10.26* Second Amended and Restated Equipment Lease dated as of August
6, 2002 between Wells Fargo Bank Northwest, National
Association, as trustee under MW 1997-1 Trust, and Mail-Well I
Corporation.
10.27* Second Amended and Restated Guaranty Agreement dated as of
August 6, 2002, among Mail-Well I Corporation as Lessee,
certain of its subsidiaries and Mail-Well, Inc. as Guarantors,
Fleet Capital Corporation as Agent, and the Trust Certificate
Purchasers named therein.
10.28* Second Amended and Restated Participation Agreement dated as of
August 6, 2002, among Mail-Well I Corporation as Lessee, Fleet
Capital Corporation as Arranger and Agent, and the Trust
Certificate Purchasers named therein.
10.29* Amendment Agreement No. 1 dated as of September 25, 2002, among
Mail-Well I Corporation as Lessee, certain of its subsidiaries
and Mail-Well, Inc. as Guarantors, Fleet Capital Corporation as
Agent, and the Trust Certificate Purchasers named therein.
- ---------------
* Filed herewith.
(B) REPORTS ON FORM 8-K
1. Current Report on Form 8-K filed July 9, 2002, disclosing other events.
2. Current Report on Form 8-K filed July 19, 2002, disclosing other events.
3. Current Report on Form 8-K filed July 19, 2002, disclosing other events.
4. Current Report on Form 8-K filed August 14, 2002, making certain
disclosures under Regulation FD.
5. Current Report on Form 8-K filed September 10, 2002, making certain
disclosures under Regulation FD.
44
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)
Date: November 4, 2002 By: /s/ PAUL V. REILLY
------------------------------
Paul V. Reilly
Chief Executive Officer
Date: November 4, 2002 By: /s/ MICHEL P. SALBAING
------------------------------
Michel P. Salbaing
Chief Financial Officer
45
I, Paul V. Reilly, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Mail-Well, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 4, 2002
/s/ PAUL V. REILLY
---------------------------------------
Chief Executive Officer
46
I, Michel P. Salbaing, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Mail-Well, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 4, 2002
/s/ MICHEL P. SALBAING
--------------------------------------
Chief Financial Officer
47