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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
COMMISSION FILE NUMBER 1-12551
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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 80112
ENGLEWOOD, CO
(Address of principal executive offices) (Zip Code)
303-790-8023
(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, $0.01 par value per share The New York Stock Exchange
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. / /
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes /X/ No / /
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of March 7, 2003 was $62,275,389.
As of March 7, 2003 the Registrant had 48,343,060 shares of Common
Stock, $0.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part III of this form (Items 11 and 12
and part of Item 10) is incorporated by reference from the Registrant's
Proxy Statement to be filed pursuant to Regulation 14A with respect to the
Registrant's Annual Meeting of Stockholders to be held on or about May 1,
2003.
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TABLE OF CONTENTS
PART I
PAGE
----
Item 1. Business.................................................... 1
The Company................................................. 1
Commercial Printing......................................... 1
Envelope.................................................... 1
Printed Office Products..................................... 1
2001 Strategic Plan......................................... 1
The Printing and Envelope Industries........................ 2
Our Products................................................ 2
Our Services................................................ 2
Marketing, Distribution and Customers....................... 3
Printing and Manufacturing.................................. 4
Materials and Supply Arrangements........................... 5
Patents, Trademarks and Brand Names......................... 5
Competition................................................. 5
Employees................................................... 6
Environmental............................................... 6
Item 2. Properties.................................................. 6
Item 3. Legal Proceedings........................................... 6
Item 4. Submission of Matters to a Vote of Security Holders......... 6
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 7
Item 6. Selected Financial Data..................................... 7
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 7
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 27
Item 8. Financial Statements and Supplementary Data................. 28
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................. 68
PART III
Item 10. Directors and Executive Officers of Registrant.............. 69
Item 11. Executive Compensation...................................... 72
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters................ 73
Item 13. Certain Relationships and Related Transactions.............. 73
Item 14. Controls and Procedures..................................... 73
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.................................................. 74
PART I
ITEM 1. BUSINESS
THE COMPANY
We are one of the largest printers in North America competing primarily
in the commercial printing and envelope market segments. We believe we are
the world's largest manufacturer of envelopes, the leading printer of
envelopes in the U.S. and Canada, the premier high impact color printer
in the U.S., a leading general commercial printer in several major U.S.
markets and a leading supplier of printed office products. We operate
86 printing and manufacturing facilities throughout North America. The
combination of our broad network of facilities and our sales force, which
is among the largest in the industry, has enabled us to build our customer
base to over 80,000.
COMMERCIAL PRINTING
Our commercial printing business generated $764.4 million of sales in
2002. We serve two primary commercial printing markets: (i) high impact
color printing, in which we print a wide range of longer run premium
products for national and regional accounts; and (ii) general commercial
printing, in which we print a wide array of products and offer printing
services to local commercial customers. Our commercial printing business
operates 35 plants throughout the U.S. and one in Canada.
ENVELOPE
Our envelope business generated $760.5 million of sales in 2002. We
serve two primary markets: (i) customized envelopes and packaging products,
including Tyvek(R) mailers used by the U.S. Postal Service, sold directly
to end users or to independent distributors who sell to end users; and
(ii) envelopes and other products sold to wholesalers, paper merchants,
printers, brokerage firms, office product establishments and superstores.
We manufacture envelopes in 26 U.S. plants and 13 Canadian plants.
PRINTED OFFICE PRODUCTS
Our printed office products business generated $203.8 million of sales
in 2002. This business, which operates 11 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.
Refer to Note 14 of our consolidated financial statements included
elsewhere in this report for additional information concerning the
operating and geographic segments.
2001 STRATEGIC PLAN
In May 2001, we completed a comprehensive review of our operations and
adopted a new strategy that focused on our two core businesses--commercial
printing and envelope. In support of this strategy, we sold our Curtis 1000
Inc. printed office products subsidiary in February 2002, our prime label
segment in May 2002 and the file folder division of our envelope segment in
August 2002. We also consolidated three of our commercial printing plants
into one facility and closed 10 of our envelope plants and redeployed the
equipment and other assets at other facilities. We also announced our
intention to sell our PrintXcel printed office products group of
subsidiaries, and to sell the digital graphics division of our commercial
printing business. In June 2002 we discontinued our efforts to sell
PrintXcel because we had not received an offer we considered consistent
with its value. This business is now an integral part of our strategy of
expanding our printed products and services to a larger customer base.
Our new strategy also includes the launch of several initiatives to
significantly improve operations and marketing effectiveness. Both the
commercial printing and envelope businesses have programs in place to
institute best practices, standardize costing and pricing systems
and align equipment and services to better serve our customers and
markets.
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THE PRINTING AND ENVELOPE INDUSTRIES
The printing industry is one of the largest and most fragmented
industries in the United States with total estimated 2002 sales of $167
billion among an estimated 45,963 printing businesses, according to the
Printing Industry of America, Inc. The printing industry includes general
commercial printing, financial printing, printing and publishing of books,
labels, newspapers and periodicals, quick printing and production of
business forms and greeting cards. The Company believes the market in which
we primarily compete has a total estimated sales of $55.4 billion among an
estimated 21,249 printing businesses. The envelope industry is not as
highly fragmented as the printing industry. Envelope printing and
manufacturing combined constitutes a $4.8 billion market in North America
according to the Envelope Manufacturers' Association. Products in the
envelope industry include customized envelopes for direct mail,
transactional envelopes, non-custom envelopes for resale, and specialty
envelopes and filing products. The printed office products industry
constitutes a $15 billion market, with the short-run indirect segment of
the market in which we compete estimated at $3.4 billion.
OUR PRODUCTS
Commercial Printing. We serve two primary commercial printing markets:
(i) high impact color printing, in which we print a wide range of premium
products for national and regional accounts; and (ii) general commercial
printing, in which we print a wide array of products and offer printing
services to local commercial customers. Our printing products include
advertising literature, corporate identity materials, annual reports, car
brochures, calendars, greeting cards, brand marketing materials, catalogs,
maps, CD packaging and direct mail.
Envelope. We serve two primary markets: (i) customized envelopes and
packaging products, including Tyvek(R) mailers used by the U.S. Postal
Service, sold directly to end users or to independent distributors who sell
to end users; and (ii) envelopes and other products sold to wholesalers,
paper merchants, printers, brokerage firms, office product establishments
and superstores. In the customized envelope market, we offer printed
customized conventional envelopes for billing and remittance, direct mail
marketers, catalog orders and other end-users, such as banks, brokerage
firms and credit card companies. In the wholesale envelope market, we
manufacture and print a broad line of custom envelopes that are featured in
national catalogs for the office products market or offered through office
products retailers, including contract stationers.
Printed Office Products. We print a diverse line of custom products
for small and medium-sized businesses including both traditional and
specialty forms for use with desktop PCs and laser printers and pressure
sensitive labels. Our printed office products include business documents,
specialty documents produced through VersaSeal(R), Hi-reply(TM) and
Pro-card(TM) brands and short-run secondary labels which are made of paper
or film affixed with pressure sensitive adhesive and are used for mailing,
messaging, bar coding and other applications. These products are generally
sold through independent value-added resellers of office products.
OUR SERVICES
We offer our customers a wide variety of related services to enhance
the value of our printed products, such as:
Delivery Systems. We offer a flexible "just-in-time" delivery program.
This program allows customers to receive their products just prior to when
they are needed.
Digital Archiving. We allow customers to store digitally rendered
artwork on our file servers. The artwork can then be accessed and retrieved
either at the plant during the prepress stage or from a remote site via
high speed transmission during the design stage.
Direct-to-Plate Technology. We offer digital direct-to-plate
technology, which eliminates the production of film and several manual
functions in the platemaking process. This technology offers a complete
digital workflow, providing a better printed product and faster turnaround
without additional cost.
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E-commerce. We have the capability to offer our customers a full range
of e-commerce services to order printing or other products through their
web page.
Electronic Prepress. We offer a fully automated electronic process
that allows the customer to submit its artwork and other data in digital
format, either on a diskette, high speed transmission line or in hard copy
that can be computer-scanned. We can then manipulate the image, prepare
color separations and edit the design on a computer to create the file from
which the printing plate is made. Electronic prepress greatly reduces the
time and the number of people involved in the production of plates.
Fulfillment. We offer complete fulfillment centers with online order
assembly and barcoding strategically located throughout the United States.
Inventory Management Systems. We offer this service primarily to large
national organizations with centralized purchasing and supply departments
that service multiple locations. We facilitate order processing by giving
customers information on usage by item and/or available supply in our
warehouses and provide for summary billing.
Mail-Well 1-2-1. We offer on-demand digital printing services using
variable imaging and other features to produce personalized marketing
material, direct mail and other forms of targeted customer communications.
Prepress. The traditional design phase typically requires us to
incorporate customer-submitted graphics, photograph the artwork, develop
the file and prepare a plate from which to print.
Printmailwell.com. We offer a full range of robust Internet-based
print procurement and print management solutions via our Printmailwell.com
e-commerce platform, powered by PrintCafe.
Warehousing Services. A customer will often place an order for
significantly more product than it may need at the time. When this occurs,
we offer to store the finished product and drop-ship them on an "as-needed"
basis.
Our goal is to offer the highest standards in meeting our customers'
needs with our primary focus on responding quickly and competitively to
customer demands and requirements. Many of our production facilities are
open 24 hours a day, seven days a week, to allow for timely production of
materials. At certain facilities we also offer a number of unique services
to our customers such as complimentary transportation between the airport
and our offices, in-plant overnight accommodations, on-site meeting rooms
and lounge, travel and hotel arrangements and computers for use by the
customers when on-site.
We believe that the consolidation of the printing industry is being
driven in part by the rapid pace of technological change. Recent advances
in computer-based prepress equipment, such as electronic prepress, allow
for faster and more precise manipulation of images and text prior to
printing. Similarly, recent advances in photo imaging technology have
greatly increased the quality of the final image produced in the printing
process. These advances have increased the capital requirements for
maintaining technologically advanced equipment. We believe that many
smaller local and regional commercial printers will find it increasingly
difficult to obtain adequate financial resources to remain competitive in
the segments of the commercial printing market in which we operate.
MARKETING, DISTRIBUTION AND CUSTOMERS
As a result of the wide array of applications, customer preferences and
order sizes, our marketing efforts vary significantly among markets and by
region. Although our marketing efforts traditionally have been local or
regional, we continue to emphasize a more focused national accounts program
to attract customers whose needs are national or cover multiple regions. We
have national marketing directors in each of our segments working together
to target large national customers.
We maintain one of the largest sales staffs in the industry, with
approximately 450 sales representatives and 20,000 resellers as of December
31, 2002. The vast majority of our commercial printing and envelope
products are sold through sales representatives, the exception being
occasional "house" or company accounts. Our sales representatives work
closely with customers from the initial
3
concept through prepress, proofing and finally the press run. Because
our sales representatives are our primary contacts with our customers,
our goal is to attract, train and retain an experienced, qualified
sales force in each of our businesses. Sales representatives typically
are compensated by commission. Commissions generally depend on such
factors as order size and type, prepress work, reruns or rework and
overall profitability of the job. Printed office products are sold
primarily through catalogs, telemarketing and the Internet to value-
added resellers who distribute our products to end-users. We also
coordinate sales efforts among regions within our operating businesses,
and among the operating businesses themselves, in order to compete for
national account business, enhance the internal dissemination of
successful new product ideas, efficiently allocate our production
equipment, share technical expertise and increase company-wide selling
of specialty products manufactured at selected facilities.
Because of the highly fragmented nature of the general commercial
printing and envelope businesses, and the wide array of customer needs and
preferences, we market most of our general commercial printing and
envelopes locally. Due to the project-oriented nature of these market
segments, sales to particular customers may vary significantly from year to
year depending upon the number and size of their projects. Our customer
supply agreements are typically on an order by order basis or for a
specified period of time. The sales force is supported by a technical
service team that provides customers with highly customized printing
solutions. Most of our printing facilities have customer service
representatives that work with the sales team and the customers to manage
orders efficiently and effectively. In some cases, the customer service
representatives have direct responsibility for accounts.
In commercial printing, our marketing efforts differ between two broad
product areas: high impact color products, such as auto brochures, annual
reports and high-end catalogs, and general commercial work. We market high
impact printing primarily on a regional basis, through sales
representatives working out of sales offices across the United States. In
2001, we implemented our innovative "Go-to" marketing program as part of
our strategic plan. This program utilizes a team approach to customer
service relationships that we believe is unique in the printing industry.
In envelope, we market the majority of our envelopes and packaging
products through sales representatives, who generally work with customers
from the initial product design stage through product delivery to ensure
that finished products meet the customers' applications and marketing
needs. Products not marketed by our own sales representatives are sold
through distributors to better serve selected wholesale markets, geographic
regions without direct sales representation and certain specialty markets.
In printed office products, our products are marketed primarily under
the "PrintXcel" brand through distributors who act as intermediaries
between PrintXcel and the end-users of its products. Printed office
products are sold to five major channels; independent solution providers;
outsource for "direct" solution providers; commercial printers; ad
specialty dealers; and quick printers.
Our customer base totals approximately 80,000. Our customers in the
high impact commercial printing market include Fortune 500 companies,
graphic designers and advertising agencies. Our customers in the general
commercial printing and envelope businesses include national and local
businesses, insurance and finance companies, the U.S. Postal Service and
other government agencies and not-for-profit organizations. None of our
customers accounted for more than 2% of revenue in 2002.
PRINTING AND MANUFACTURING
Our commercial printing business operates 35 printing facilities
throughout the U.S., and one in Canada. These plants combine advanced
prepress technology with high-quality web and sheet-fed color presses and
extensive binding and finishing operations. Many of our commercial printing
facilities operate seven days a week, 24 hours a day to meet customer
printing requirements.
Our envelope business operates 39 printing facilities throughout North
America. Envelopes are produced from either flat sheets or rolls of paper.
The paper is folded into an envelope, which is glued at the seams and on
the flap, and then printed as required. Web machines are typically used for
larger
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runs with multiple colors and numerous features. Die cut machines,
which require a preliminary step to provide die cut envelope blanks from
paper sheets, are used primarily for smaller orders typically including
customized value-added features. The manufacturing process used is
dependent upon the size of a particular order, custom features required,
machine availability and delivery requirements.
In our printed office products segment, we operate 11 facilities in the
United States. In printed office products, we design and print forms and
other customized materials for a wide range of businesses. A majority of
printed office products orders are delivered to us "camera ready," and we
perform prepress and platemaking functions and print on web presses.
MATERIALS AND SUPPLY ARRANGEMENTS
The primary materials used in each of our businesses are paper, ink,
film, offset plates, chemicals and cartons, with paper accounting for the
majority of total material costs. We purchase these materials from a number
of suppliers and have not experienced any significant difficulties in
obtaining the raw materials necessary for our operations. We have
implemented an inventory management system in which a limited number of
paper suppliers supply all of our paper needs. These suppliers are
responsible for delivering paper on a "just-in-time" basis directly to our
facilities. We believe that this system has allowed us to enhance the
flexibility and speed with which we can serve customers, improve pricing on
paper purchases, eliminate a significant amount of paper inventory and
reduce costs by reducing warehousing capacity. We believe that we purchase
our materials and supplies at very competitive prices due to our volume
leverage.
PATENTS, TRADEMARKS AND BRAND NAMES
We market products under a number of trademarks and brand names. We
also hold or have rights to use various patents relating to our envelope
business, which expire at various times through 2012. Our sales do not
materially depend upon any single or group of related patents.
COMPETITION
The commercial printing industry is highly competitive and fragmented.
We compete against a number of large, diversified and financially stronger
printing companies, as well as regional and local commercial printers, many
of which are capable of competing with us in both volume and production
quality. Although we believe customers are price sensitive, we also believe
that customer service and high quality products are important competitive
factors. We believe we provide premium quality and customer service while
maintaining competitive prices through stringent cost control efforts. The
main competitive factors in our markets are customer service, product quality,
reliability, flexibility, technical capabilities and price. We believe we
compete effectively in each of these areas.
In envelope printing, we compete with a few multi-plant and many
single-plant companies that primarily service regional and local markets.
We also face competition from alternative sources of communication and
information transfer such as facsimile machines, electronic mail, the
Internet, interactive video disks, interactive television and electronic
retailing. Although these sources of communication and advertising may
eliminate some domestic envelope sales in the future, we believe that we
will experience continued demand for envelope products due to (i) the
ability of our customers to obtain a relatively low-cost information
delivery vehicle that may be customized with text, color, graphics and
action devices to achieve the desired presentation effect, (ii) the ability
of our direct mail customers to penetrate desired markets as a result of
the widespread delivery of mail to residences and businesses through the
U.S. Postal Service and the Canada Post Corporation and (iii) the ability
of our direct mail customers to include return materials in their
mail-outs. Principal competitive factors in the envelope business are
quality, service and price. Although all three are equally important,
various customers may emphasize one or more over the others. We believe we
compete effectively in each of these areas.
Our closest competitors in the printed office products market are other
document printers with nationwide manufacturing locations and
regional/local printers, which typically sell within a 100 to 300-mile
radius of their plants. To a limited extent we compete with much larger
direct selling forms
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manufacturers. We compete mainly on the breadth of our product offerings
and close customer relationships.
BACKLOG
At December 31, 2002 and 2001, the backlog of customer orders to be
produced or shipped in the next 120 days was approximately $82.6 million
and $84.2 million, respectively.
EMPLOYEES
We employed approximately 10,200 people as of December 31, 2002, and
approximately 2,200 of our employees at the various facilities are
represented by unions affiliated with the AFL-CIO or Affiliated National
Federation of Independent Unions. These employees are governed by
collective bargaining agreements, each of which covers the workers at a
particular facility, expires from time to time and is negotiated
separately. Accordingly, we believe that no single collective bargaining
agreement is material to our operations as a whole.
ENVIRONMENTAL
Our operations are subject to federal, state and local environmental
laws and regulations including those relating to air emissions, waste
generation, handling, management and disposal, and remediation of
contaminated sites. We have implemented environmental programs designed to
ensure that we operate in compliance with the applicable laws and
regulations governing environmental protection. Our policy is that
management at all levels be aware of the environmental impact of operations
and direct such operations in compliance with applicable standards. We
believe that we are in substantial compliance with applicable laws and
regulations relating to environmental protection. We do not anticipate that
material capital expenditures will be required to achieve or maintain
compliance with environmental laws and regulations. However, there can be
no assurance that newly discovered conditions or new or stricter
interpretations of existing laws and regulations will not result in
material expenses.
AVAILABLE INFORMATION
Our Internet address is: www.mailwell.com. We make available free of
charge through our website our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed pursuant to Section 13 (a) or 15 (d) of the Exchange Act as
soon as reasonably practicable after such documents are filed electronically
with the Securities and Exchange Commission. In addition, our earnings
conference calls and presentations to securities analysts are web cast live
via our website.
ITEM 2. PROPERTIES
We occupy 86 printing and manufacturing facilities in the United States
and Canada, of which 36 are owned and 50 are leased. In addition to on-site
storage at these facilities, we store products in 19 warehouses, of which
four are owned, and lease 21 sales offices. We also lease 47,153 square
feet of office space in Englewood, Colorado for our corporate headquarters.
We believe that we have adequate facilities for the conduct of our current
and future operations.
ITEM 3. 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 the Company. In the case of administrative proceedings related to
environmental matters involving governmental authorities, management does
not believe that any imposition of monetary damages or fines would be
material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the New York Stock Exchange
("NYSE") under the symbol "MWL." At March 7, 2003, there were
approximately 455 shareholders of record and, as of that date, the Company
estimates that there were more than 11,500 beneficial owners holding stock
in nominee or "street" name. The following table sets forth, for the
periods indicated, the range of the high and low sales prices for the
Company's common stock as reported by the NYSE.
HIGH LOW
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2002
First Quarter........................................... $6.28 $4.42
Second Quarter.......................................... $6.80 $5.02
Third Quarter........................................... $5.14 $0.99
Fourth Quarter.......................................... $2.64 $1.03
HIGH LOW
---- ---
2001
First Quarter........................................... $7.30 $4.50
Second Quarter.......................................... $6.22 $4.25
Third Quarter........................................... $5.30 $3.70
Fourth Quarter.......................................... $4.50 $3.67
The Company has not paid a dividend on common stock since its
incorporation and does not anticipate paying dividends in the foreseeable
future because our senior secured credit facility, senior notes and senior
subordinated notes limit the Company's ability to pay common stock
dividends.
ITEM 6. SELECTED FINANCIAL DATA
The summary of historical financial data presented below is derived
from the historical audited financial statements of the Company. The
financial data presented reflect the restatement of all historical data
for discontinued operations. The results of operations acquired in
acquisitions accounted for under the purchase method have been included in
the historical income statement data of the Company from their respective
acquisition dates. Historical income statement data for 1998 has been
restated as appropriate to reflect mergers accounted for as poolings-of-
interests. The data presented below should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the consolidated financial statements and the related notes
included elsewhere herein.
YEAR ENDED DECEMBER 31
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2002 2001 2000 1999 1998
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales.................... $1,728,705 $1,868,768 $2,044,350 $1,699,222 $1,463,097
Income (loss) from continuing
operations................. (63,363) (45,213) 34,746 61,997 25,546
Income (loss) per diluted
share from continuing
operations................. (1.33) (0.95) 0.70 1.16 0.53
Total assets................. 1,107,367 1,476,867 1,683,592 1,310,260 1,127,955
Total long-term debt,
including current
maturities................. 763,899 855,221 922,351 666,397 587,124
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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,
the filing products division of our envelope business and the digital
graphics division of our commercial printing business. In addition to
the planned divestitures, we initiated a restructuring program to
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consolidate manufacturing facilities to improve our competitive position and
implemented other initiatives to significantly improve operations, reduce
costs and increase marketing effectiveness.
In February 2002, we sold Curtis 1000 Inc., the distribution business
included in our printed office products business. 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 our best interest to sell this business and we discontinued our efforts
to do so. This business is now an integral part of our strategy of
expanding our print products and services to a larger customer base. In
August 2002, we sold the filing products division of our envelope business.
We are continuing our efforts to sell certain digital graphics operations
of our commercial printing business.
We have substantially completed the restructuring of Mail-Well that
began in 2001. Mail-Well is now one company focused on producing products
and services that help our customers deliver their messages more
effectively.
We believe we are the world's largest manufacturer of envelopes. We
produce approximately 38 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 one of the largest commercial printers in the United States. We
operate 35 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 printed products for national and regional
customers, including annual reports, car brochures and brand marketing
collateral, and general commercial printing for local and regional
customers.
We are also a leading domestic supplier of customized and stock labels,
mailers and printed business documents to small and mid-size businesses
generally through independent distributors of office products. Our printed
office products business operates 11 manufacturing plants strategically
located throughout the United States. 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 business due to differences in
customer base, distribution channels and production methods.
Paper is our most significant raw material. We purchase approximately
500,000 tons of paper annually for our businesses. Prices of uncoated
papers, which are the principal grades of paper used to manufacture
envelopes, increased 10% in the fourth quarter of 2002. The costs of
uncoated paper had declined approximately 10% during 2001 after a year of
stable prices in 2000. Prices of coated papers, which are used principally
in commercial printing, increased approximately 3% in 2000, decreased
approximately 8% in 2001 and remained flat in 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. Accordingly, since uncoated paper prices increased at the end of
2002, operating margins of our envelope business will be negatively
impacted in 2003 to the extent we are unable to increase the prices of our
envelope products.
Prior to 2001, our growth was primarily due to our acquisition
strategy. We substantially curtailed our acquisitions in 2001 and 2002 in
order to concentrate on implementing our strategic plan. In 2000, we
acquired American Business Products, Inc. and four smaller companies. The
acquisitions have been accounted for as purchase transactions. Recording
acquisitions in this manner impacts comparability of our financial
statements because the results of each of the acquired companies are
included in the consolidated results from the dates acquired. When
appropriate, we have noted the impacts of our acquisitions in the following
discussions of our results.
8
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 and Curtis 1000 businesses as discontinued
operations. Our PrintXcel business had also been reported as a discontinued
operation prior to June 2002. Since this business is no longer held for
sale, the results of PrintXcel have been reclassified to be included in
continuing operations for all periods presented. The summary financial data
set forth in the tables that follow present reported amounts as well as
comparable financial data for New Mail-Well. The financial data presented
for New Mail-Well exclude the results of the prime label, Curtis 1000 and
filing products businesses sold in 2002 as well as the results of our
digital graphics operations held for sale at December 31, 2002. New
Mail-Well results also exclude restructuring, impairments and other charges
reported in the consolidated statements of operations for the years ended
December 31, 2002, 2001 and 2000.
The economic slowdown that began in 2001 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 and the
direct mail segment of our envelope business. In addition, the market for
traditional business forms continues to decline due to the increasing use
of laser printing technology by the end-users of these 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
will continue to control our costs and balance production with the needs of
our customers.
SALES
YEAR ENDED DECEMBER 31 % CHANGE
-------------------------------------------- ---------------
2002 2001 2000 2002 2001
---------- ---------- ---------- ---- ----
(DOLLARS IN THOUSANDS)
Reported......................... $1,728,705 $1,868,768 $2,044,350 (7)% (9)%
New Mail-Well*................... $1,675,713 $1,809,050 $1,975,193 (7)% (8)%
- --------
* Excludes sales of the filing products division of our envelope business
sold during 2002 and sales of certain digital graphics operations of our
commercial printing business held for sale. New Mail-Well's sales
include sales of $3.5 million, $30.2 million and $23.5 million in 2002,
2001 and 2000, respectively, to operations that have been divested which
are expected to continue.
In 2002, sales of New Mail-Well were $133.3 million, or 7%, lower than
in 2001.
* Sales of our envelope business were $61.9 million lower in 2002 than
in 2001 primarily due to lower sales to direct mail customers and
lower selling prices.
* Sales of our commercial printing business were $53.4 million lower in
2002 than in 2001 primarily due to reductions in demand by our
customers for advertising related printed material. Sales of our high
impact printing to our national and regional customers were flat in
2002 while sales of commercial printing to our local customers were
weak.
* Sales of our printed office products were $18.0 million lower in 2002
than in 2001 primarily due to the continuing decline in sales of
traditional business forms.
In 2001, sales of New Mail-Well were $166.1 million, or 8%, lower than
in 2000. Excluding the impact of acquisitions completed during 2000, the
sales decline was $198.5 million, or 10%.
* Sales of our envelope business were $35.6 million lower in 2001 than
in 2000 primarily due to reductions in spending by our customers on
direct mail promotions, lower sales of our high strength specialty
envelopes and lower sales to merchant and office products customers.
* Sales of commercial printing were $147.3 million lower in 2001 than
in 2000 primarily due to reductions in demand for advertising related
printing and lower sales to our technology and telecommunications
customers.
* Sales of our printed office products business were $15.6 million
lower in 2001 than in 2000 as the demand for business forms continued
the decline that began in 2000.
Reported sales in 2002 and 2001 declined from the prior year by similar
percentages and were impacted by the same factors as the sales of New
Mail-Well.
9
RESTRUCTURING, ASSET IMPAIRMENTS 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 and other nonrecurring charges.
This process is ongoing, as our industry and markets change, and we will
continue to take the actions necessary to react to these changes.
2002 ACTIVITY
Restructuring and other charges recorded in 2002 were $74.6 million.
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
expenses........................ $ 884 $ 3,206 $1,404 $ -- $ 5,494
Employee training expenses........ 7,043 -- -- -- 7,043
Project management expenses....... 9,246 -- -- -- 9,246
Asset impairment charges, net..... 9,644 3,259 925 -- 13,828
Other exit costs.................. 4,219 4,691 658 -- 9,568
Reversal of unused accrual........ (500) -- -- -- (500)
------- ------- ------ ------- -------
Total restructuring costs..... 30,536 11,156 2,987 -- 44,679
Other charges..................... 2,038 4,655 161 23,018 29,872
------- ------- ------ ------- -------
Total restructuring, asset
impairments and other
charges..................... $32,574 $15,811 $3,148 $23,018 $74,551
======= ======= ====== ======= =======
ENVELOPE. The consolidation of ten of our envelope manufacturing
facilities is complete. We began this consolidation in 2001 in order to
reduce excess internal capacity and improve utilization of the equipment
and resources at our other envelope plants in the United States and Canada.
The cost incurred during 2002 related to this consolidation were as
follows:
* Employee training expenses of $7.0 million were incurred to train the
new employees that were hired at the plants that absorbed the
production of the plants that were closed. The training programs for
these employees were between three and nine months in duration.
* We incurred project management expenses of $9.2 million which were
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.
* Impairment charges of $9.6 million were 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.
* Other costs of $4.2 million include the expenses incurred to move and
reinstall 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 affected over the course of
this project. As of December 31, 2002, 722 employees had been
separated and we have reduced the accrual by $0.5 million.
As a result of other cost reduction actions, our envelope business
incurred employee separation and related employee expenses of $0.9 million
in connection the elimination of 139 jobs.
COMMERCIAL PRINTING. During 2002, we reduced the size of many of our
commercial printing operations in response to the significant decline in
sales. We incurred $1.9 million in employee separation and related expenses
to cover the elimination of 192 jobs. We also recorded impairment charges
of $1.3 million for equipment taken out of service and other restructuring
costs of $0.7 million
10
for expenses associated with lease commitments and the cost to dismantle,
move and reinstall equipment.
In September 2002, we closed our commercial printing operation in
New York City and began the consolidation of our web printing operation
in Indianapolis, Indiana with our web plants in St. Louis, Missouri and
Baltimore, Maryland. We also moved a web press from our plant in Portland,
Oregon to our plant in St. Louis. We incurred employee separation and
related expenses of $1.3 million to cover the 132 employees affected by
these actions. Impairment charges on equipment taken out of service totaled
$2.0 million. We recorded $4.0 million to cover the expenses associated
with terminating lease commitments and the costs to dismantle, move and
reinstall equipment. We anticipate spending an additional $1.0 million in
2003 to complete the consolidation of our web press operations.
PRINTED OFFICE PRODUCTS. During 2002, we closed two of our traditional
documents plants in response to the decline in the demand for business
forms. The employee separation and related employee expenses covering
64 employees was $0.6 million. As of December 31, 2002, all of these employees
had been separated. Impairment charges related to equipment taken out of
service as a result of these closures totaled $0.6 million. Other
restructuring expenses of $0.7 million were incurred primarily to prepare
the two plant buildings for sale.
As a result of other cost reduction measures, Printed Office Products
has incurred employee separation and related expenses of $0.8 million in
connection with the elimination of 184 jobs and impairments of
$0.3 million.
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 our 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 which cost $4.4 million in 2002.
* 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 value of the equipment subject to the lease was reduced
from $34.9 million to $19.1 million, and we were required to pay the
difference of $15.8 million. In addition, we wrote off deferred
costs of $6.1 million associated with the lease prior to this
refinancing.
* We have recorded an impairment charge of $1.8 million related to the
write-down of idle equipment in our commercial printing business to
net realizable value.
* We have incurred severance payments unrelated to the restructure
plans of $1.1 million.
* We have incurred consulting fees of $0.7 million related to tax
matters that arose as a result of our divestitures.
2001 ACTIVITY
The restructuring and other charges totaled $43.1 million in 2001. The
following table and discussion present the details of these charges:
COMMERCIAL PRINTED OFFICE
ENVELOPE PRINTING PRODUCTS CORPORATE TOTAL
-------- ---------- -------------- --------- -------
(IN THOUSANDS)
Employee separation and
related expenses............ $ 9,042 $ 385 $ 618 $ -- $10,045
Employee training expenses.... 2,628 -- -- -- 2,628
Project management expenses... 5,404 -- -- -- 5,404
Asset impairment charges,
net......................... 8,178 601 (1,300) -- 7,479
Other exit costs.............. 6,510 1,978 691 -- 9,179
Strategic assessment costs.... -- -- -- 2,677 2,677
------- ------ ------- ------ -------
Total restructuring
costs................... 31,762 2,964 9 2,677 37,412
Other charges................. 1,360 1,482 1,231 1,600 5,673
------- ------ ------- ------ -------
Total restructuring, asset
impairments and other
charges................. $33,122 $4,446 $ 1,240 $4,277 $43,085
======= ====== ======= ====== =======
11
ENVELOPE. The separation and related employee costs covered
923 employees that were expected to be affected over the course of the plant
consolidation project described above, of which 359 had been separated as
of December 31, 2001. Other exit costs included lease termination costs of
$1.4 million, equipment moving expenses and building clean-up costs. As of
December 31, 2001, we had completed the closure of three facilities. The
$8.2 million asset impairment charge relates to the write down of equipment
taken out of service as a result of these plant closures.
COMMERCIAL PRINTING. Our commercial printing business closed a plant in
Philadelphia, Pennsylvania and consolidated two other printing operations
in the Philadelphia area. We took these actions to improve our cost
effectiveness and our competitive position in the Philadelphia market. The
costs associated with the consolidation included employee separation and
related expenses covering the elimination of 25 jobs. Other exit costs
included expenses incurred for lease termination costs and costs to move
and reinstall equipment. Equipment taken out of service was written down
$0.6 million to its fair market value.
PRINTED OFFICE PRODUCTS. Our printed office products business
substantially curtailed its operation in Denver, Colorado in 2001. The
employee separation and related expenses of $0.6 million were related to
the elimination of 62 jobs. Other exit costs were the expenses incurred to
dismantle, move and reinstall equipment. Additionally, we reversed an asset
impairment charge of $1.3 million taken in 2000 to write-down a building to
its estimated fair market value. This building was sold for more than its
original carrying value.
CORPORATE. In developing our strategic plan, we engaged outside
advisors to research and evaluate our markets, survey our customers and
assess existing strategies. In addition, we engaged financial advisors
to evaluate options for improving our capital structure. The cost of
these advisors was $2.7 million in 2001.
OTHER CHARGES. Other charges include the following items:
* The outside assistance used in the implementation of initiatives in
our envelope and commercial printing businesses to establish best
practices, standardize our costing and pricing systems, and align
equipment and services to better serve our customers and markets
totaled $2.2 million in 2001.
* We wrote-off $0.7 million of costs incurred by our envelope business
for a human resource information system that was not implemented.
* Printed office products incurred $1.2 million of fees and expenses
associated with the settlement of a lawsuit.
* We wrote-off a $1.6 million investment in a company that was
developing a service, which would enable the management of the
creative process of a printing job online.
2000 ACTIVITY
We began the comprehensive review of our operations at the end of 2000
and identified certain actions that could be taken at that time. The
following table and discussion present the details of restructuring
charges, as well as other charges recorded in 2000:
COMMERCIAL PRINTED OFFICE
ENVELOPE PRINTING PRODUCTS TOTAL
-------- ---------- -------------- -------
(IN THOUSANDS)
Employee separation and related
expenses................................ $ 86 $ 188 $1,261 $ 1,535
Asset impairment charges.................. -- 749 3,299 4,048
Other exit costs.......................... -- 473 1,045 1,518
------ ------ ------ -------
Total restructuring costs............. 86 1,410 5,605 7,101
Other asset impairments................... 1,872 2,036 2,723 6,631
------ ------ ------ -------
Total restructuring, asset impairments
and other charges................... $1,958 $3,446 $8,328 $13,732
====== ====== ====== =======
12
ENVELOPE. Our envelope business closed a resale operation in Vancouver,
Washington. The employee separation and related expenses covered the
elimination of 19 jobs.
COMMERCIAL PRINTING. Our commercial printing business consolidated two
operations in St. Louis into an existing facility and closed its bindery
operation in Mexico. We reduced our total workforce by 165 employees. The
losses recorded as a result of the lease terminations and asset impairments
were primarily related to the closure of the Mexico bindery.
PRINTED OFFICE PRODUCTS. Our printed office products business closed
its business forms plants in Oceanside, California; Sparks, Nevada; and
Houston, Texas. The employee separation and related expenses covering the
elimination of 190 jobs totaled $1.3 million. Other exit costs are
primarily the cost associated with the termination of lease commitments at
these facilities. The loss incurred on the equipment that was sold or
abandoned was $3.3 million.
We incurred asset impairment charges in 2000 totaling $6.6 million that
were unrelated to the restructuring. These assets were taken out of service
and could not be redeployed or sold, and therefore were written off.
We completed a restructuring program initiated in 1998 during 2000.
Charges recorded in 2000 related to that program totaled $0.8 million.
LOSS ON ASSETS HELD FOR SALE
In August 2002, we completed the sale of the filing products division
of our envelope business, which had been held for sale since June 2001. The
loss on assets held for sale recorded in 2002 included a $6.1 million
impairment in connection with this divestiture and $0.3 million related to
the assets of the digital graphics division held for sale at December 31,
2002.
IMPAIRMENT ON OPERATIONS FORMERLY HELD FOR SALE
In 2001, we reduced the carrying amount of the net assets of PrintXcel
by $33.6 million to reflect its expected net realizable value. PrintXcel's
net realizable value was based on estimated sales proceeds, net of expenses
and a tax benefit of $11.5 million that would have resulted from the sale.
This charge has been reported as an impairment on operations formerly held
for sale in the consolidated statement of operations as of December 31,
2001.
Due to our decision in June 2002 not to sell PrintXcel, we reversed the
tax benefit since it 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 $10.4 million has been reported as an impairment on operations formerly
held for sale in the consolidated statement of operations as of December
31, 2002.
In October 2002, we discontinued our efforts to sell a portion of the
digital graphics division of our commercial printing business. The
impairment on operations formerly held for sale in the consolidated
statements of operations as of December 31, 2002 and 2001 includes
$2.5 million and $2.9 million, respectively, related to the digital graphics
operation no longer held for sale.
OPERATING INCOME (LOSS)
YEAR ENDED DECEMBER 31 % CHANGE
------------------------------------- ------------------
2002 2001 2000 2002 2001
-------- ------- -------- ------ -----
(DOLLARS IN THOUSANDS)
Reported
Operating income (loss)......... $(16,456) $14,824 $130,214 (211)% (89)%
Operating margin................ (1)% 1% 6%
New Mail-Well*
Operating income................ $ 78,280 $83,011 $134,983 (6)% (39)%
Operating margin................ 5% 5% 7%
- --------
* Excludes the operating income of the filing products division of our
envelope business sold during 2002 and the operating income of certain
digital graphics operations of our commercial printing business held for
sale. New Mail-Well's operating income also excludes restructuring,
impairment and other charges discussed above.
13
In 2002, New Mail-Well's operating income declined $4.7 million, or 6%,
compared to 2001. This decline was due primarily to the following:
* Gross profit declined $28.7 million during 2002. The impact of lower
sales and lower margins was partially offset by savings in fixed
manufacturing overhead of $36.5 million realized from our
restructuring and other cost control initiatives.
* Savings realized from reductions in selling and administrative
expenses totaled $5.6 million for the year.
* Amortization expense was $13.8 million lower in 2002 than in 2001 due
to the adoption of Statement of Financial Accounting Standards
("SFAS") No. 142, Goodwill and Other Intangible Assets, on January 1,
2002, which eliminated the amortization of goodwill.
The reported operating loss for 2002 was $16.5 million and reflects
charges not included in the operating income of New Mail-Well. These
charges were as follows:
* Restructuring, asset impairments and other charges of $74.6 million.
* The impairment charge of $10.4 million recorded when PrintXcel was
reinstated as a continuing operation.
* The impairment charge of $6.1 million recorded as a result of the
sale of our filing products business.
* In connection with our decision to discontinue efforts to sell one of
our digital graphics operations, an impairment charge of $2.5 million
was recorded. An impairment charge of $0.3 million was recorded on
the digital graphics operations that remain held for sale.
In 2001, New Mail-Well's operating income declined $52.0 million, or
39%, compared to 2000. Excluding earnings of approximately $3.9 million
contributed by acquisitions completed in 2000, the decline was 41%. The
reduction in operating income was primarily due to approximately $61.0
million of contribution lost on the decline in sales and $5.0 million due
to lower margins. Offsetting these declines were reductions in fixed
manufacturing overhead and administrative expenses, which totaled
approximately $11.0 million during 2001.
Reported operating income in 2001 was $14.8 million and reflects
restructuring, asset impairments and other charges of $43.1 million and an
impairment charge of $36.5 million on operations formerly held for sale.
Reported operating income in 2000 reflects restructuring, asset impairments
and other charges of $14.5 million.
INTEREST EXPENSE
YEAR ENDED DECEMBER 31 % CHANGE
------------------------------------- -----------------
2002 2001 2000 2002 2001
------- -------- -------- ----- -----
(DOLLARS IN THOUSANDS)
Total interest expense............... $76,031 $ 78,891 $ 92,138 (4)% (14)%
Less: Allocated to discontinued
operations......................... (5,570) (15,577) (19,141)
------- -------- --------
Reported interest expense............ $70,461 $ 63,314 $ 72,997 (11)% (13)%
======= ======== ========
New Mail-Well........................ $72,992 $ 69,057 $ 76,610 (6)% (10)%
======= ======== ========
In 2002, interest before allocations to discontinued operations
decreased 4% due to lower average outstanding debt despite a higher
weighted average interest rate. Our average outstanding debt during 2002
was $872.8 million compared to $978.6 million in 2001. Our weighted average
interest rate was 8.59% in 2002 compared to 7.06% 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, the proceeds of
which were used to repay bank debt which accrued interest at a lower
variable rate and our 5% convertible notes.
14
In 2001, total interest expense declined 14% due to lower average debt
balances and lower average interest rates. Our average outstanding debt
during 2001 was $978.6 million compared to $1,095.1 million in 2000. Our
weighted average interest rate was 7.06% in 2001 compared to 8.22% in 2000.
Reported interest excludes the 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, Curtis
1000 and filing products businesses and the estimated net proceeds of the
digital graphics operations held for sale had been received on January 1,
2000.
INCOME TAXES
YEAR ENDED DECEMBER 31
------------------------------------
2002 2001 2000
-------- ------- -------
(DOLLARS IN THOUSANDS)
Reported
Provision (benefit) for income taxes................ $(25,308) $(5,200) $21,624
Effective tax rate.................................. 28.5% 10.3% 38.4%
New Mail-Well
Provision for income taxes.......................... $ 1,526 $ 6,312 $21,633
Effective tax rate.................................. 42.8% 52.9% 37.7%
New Mail-Well's effective tax rate for 2002 decreased by
10.1 percentage points due to the elimination of the net impact of both
nondeductible goodwill amortization and nontaxable interest income
on the effective rate.
New Mail-Well's effective tax rate for 2001 increased by
15.2 percentage points due to the impact of nondeductible goodwill
amortization on the effective rate.
The reported effective tax rates for 2002 and 2001 reflect the tax
impacts of the permanent differences related to impairment charges.
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE AND INCOME (LOSS)
PER SHARE--DILUTED
YEAR ENDED DECEMBER 31 % CHANGE
------------------------------------- ------------------
2002 2001 2000 2002 2001
-------- -------- ------- ----- ------
(DOLLARS IN THOUSANDS)
Income (loss) from continuing
operations before extraordinary
items and cumulative effect of a
change in accounting principle
Reported........................ $(63,363) $(45,213) $34,746 (40)% (230)%
New Mail-Well*.................. $ 2,045 $ 5,622 $35,748 (64)% (84)%
Income (loss) from continuing
operations per share before
extraordinary items and cumulative
effect of a change in accounting
principle--diluted
Reported........................ $ (1.33) $ (0.95) $ 0.70 (40)% (236)%
New Mail-Well*.................. $ 0.04 $ 0.12 $ 0.72 (67)% (83)%
- --------
* Excludes the income of the filing products division of our envelope
business sold during 2002 and the income of the digital graphics
operations of our commercial printing business held for sale. New
Mail-Well's income also excludes restructuring, impairment and other
charges discussed above.
In 2002 and 2001, New Mail-Well's income from continuing operations
declined 64% and 84%, respectively. In both years the decline was the
result of lower sales and lower margins partially offset by lower fixed
manufacturing overhead and lower selling and administrative expenses.
Interest
15
expense, which was higher in 2002 than in 2001, was lower in 2001
than in 2000. New Mail-Well's income from continuing operations also
benefited from lower amortization expense in 2002.
Reported income (loss) from continuing operations in 2002, 2001 and
2000 reflect restructuring, impairment and other charges of $93.8 million,
$79.6 million and $14.5 million, respectively, discussed above.
LOSS FROM DISCONTINUED OPERATIONS
The loss from discontinued operations for 2002 was $16.9 million, or
$0.35 per share. The loss on discontinued operations reflects the proceeds
received from our divestitures of Curtis 1000 and our prime label business,
net of related selling expenses and tax benefits. Adjustments of this loss
may occur if expenses are different than those estimated or if there are
revisions to the tax impact of the sales.
The loss from discontinued operations for 2001 was $91.0 million, or
$1.91 per share and included the following:
* A write-down of our prime label business and Curtis 1000 to net
realizable value in the amount of $88.0 million, net of a tax benefit
of $35.4 million, based on estimated sales proceeds; and
* The actual and forecasted results of our prime label business and
Curtis 1000 from the date of the announcement through the expected
date of disposal, including an allocation of interest expense and
income taxes.
The loss from discontinued operations of $8.6, or $0.17 per share,
million in 2000 reflects the results of our prime label business and Curtis
1000 after the allocation of interest expense and income taxes.
EXTRAORDINARY LOSS
Results for the year ended December 31, 2002 include an extraordinary
charge of $10.1 million, or $0.21 per share. This represents the write-off
of deferred financing fees related to our bank credit facility that was
refinanced in June 2002.
IMPAIRMENT OF GOODWILL
The Company adopted SFAS No. 142 on January 1, 2002, which required an
impairment test of the goodwill recorded for each of our operating segments
as of that date. Our testing indicated an impairment of the goodwill
recorded by our commercial printing business. This impairment was due to
the significant decline in the performance of our commercial printing
business in 2001 and the impact of that decline on expected future cash
flows. The fair value of our commercial printing business was estimated by
discounting the expected future cash flows and the use of market multiples.
Using the estimated fair value of the business and the application of the
other provisions of SFAS No. 142, we determined that $111.7 million of
commercial printing's goodwill was impaired. This transitional impairment
loss was reported as a cumulative effect of a change in accounting
principle in the consolidated statement of operations as of December 31,
2002.
NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE--DILUTED
YEAR ENDED DECEMBER 31 % CHANGE
--------------------------------------- ------------------
2002 2001 2000 2002 2001
--------- --------- ------- ----- ------
(DOLLARS IN THOUSANDS)
Net income (loss)
Reported...................... $(202,104) $(136,217) $27,618 (48)% (593)%
New Mail-Well*................ $ 2,045 $ 5,622 $35,748 (64)% (84)%
Net income (loss) per
share--diluted
Reported...................... $ (4.24) $ (2.86) $ 0.56 (48)% (611)%
New Mail-Well*................ $ 0.04 $ 0.12 $ 0.72 (67)% (83)%
- --------
* Excludes the net income of the filing products division of our envelope
business sold during 2002 and the net income of the digital graphics
operations of our commercial printing business held for sale. New
Mail-Well's net income also excludes restructuring, impairments and
other charges, the extraordinary items, and the change in accounting
principle discussed above.
16
New Mail-Well's net income and net income per share exclude results
of discontinued operations and assets held for sale, restructuring,
impairments and other charges, extraordinary items, and the charge related
to the goodwill impairment reported as a change in accounting principle.
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 was sold in August 2002 and
restructuring and other charges ("New Envelope").
YEAR ENDED DECEMBER 31 % CHANGE
-------------------------------------- -----------------
2002 2001 2000 2002 2001
-------- -------- -------- ----- -----
(DOLLARS IN THOUSANDS)
Net sales
Reported....................... $760,487 $835,534 $861,803 (9)% (3)%
New Envelope*.................. $719,214 $781,127 $800,821 (8)% (2)%
Operating income
Reported....................... $ 45,302 $ 54,168 $ 90,202 (16)% (40)%
New Envelope*.................. $ 75,110 $ 79,248 $ 84,980 (5)% (7)%
- --------
* Excludes sales and operating income of the filing products division
that has been sold. New Envelope sales include sales of $1.1 million,
$20.0 million and $15.5 million in 2002, 2001 and 2000, respectively, to
operations that have been divested and are expected to continue.
Sales of New Envelope were $61.9 million, or 8% lower, in 2002 than in
2001. The sales decline was due to the following:
* The average selling price of our envelope products fell 2% in 2002
due to competitive pressures on the prices of many of our products
and lower sales of higher value added products. As a result, revenue
declined approximately $16.7 million.
* Sales of our consumer direct envelopes were down approximately
$25.3 million due primarily to reductions in spending by our customers
on direct mail promotions.
* Sales to the resale segment of the market were down approximately
$9.8 million. Our merchant and office products customers lowered
inventory in the first half of 2002, which impacted our volume. In
addition, we ceased production of certain low margin products, which
we sold into the resale segment of the market during 2001.
* Sales of our high strength specialty envelopes declined $4.7 million
in 2002 due to lower demand for these products.
* In February 2002, we exited the domestic photo envelope market. Sales
of these envelopes were $5.4 million in 2001.
In 2001, sales of New Envelope were $19.7 million, or 2%, lower than in
2000. Excluding the impact of acquisitions completed in 2000, sales were
approximately $35.6 million, or 4.0%, lower than in 2000. The sales decline
was due to the following:
* Sales of our consumer direct envelopes declined approximately
$18.3 million due primarily to reductions by our customers in spending
on direct mail promotions.
* Sales of our high strength specialty envelopes were $12.6 million
lower in 2001 due to reduced demand from the U.S. Postal Service.
* Our merchant and office products customers began to reduce
inventories in 2001 in response to the weak economy, which
contributed to a $4.7 million decline in sales into the resale
segment of the market.
The operating income of New Envelope was $4.1 million, or 5%, lower in
2002 than in 2001. The decline in operating income was primarily due to
lower sales and lower prices in 2002. Contribution lost due to the decline
in sales and lower prices was approximately $21.7 million. The savings
realized
17
from our consolidation program and other cost reduction initiatives
offset $17.6 million of the lost contribution. Reductions in fixed
manufacturing overhead totaled $15.9 million, and reductions in
administrative expenses totaled $1.7 million.
In 2001, operating income of New Envelope was $5.7 million, or 7%,
lower than in 2000. Excluding the earnings of companies acquired in 2000,
the decline was $7.8 million, or 9%. Contribution declined approximately
$16.7 million due to lower sales and inefficient manufacturing performance
at several of the plants involved in the consolidation program. Reductions
in fixed manufacturing overhead and administrative expenses realized from
plant consolidations totaled $8.9 million.
We believe the significant operational restructuring, which began in
2001 and was completed in 2002, will enable our envelope business to
compete effectively under the market conditions expected in 2003. Since
paper prices increased at the end of 2002 and competitive pressures on
pricing are likely to continue, 2003 is expected to be another challenging
year. We anticipate realizing additional benefits from the plant
consolidations that were completed in 2002 as well as other cost
improvement programs initiated during 2002. Our focus in 2003 will be on
improving customer service, product quality and manufacturing efficiencies.
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 its operations that are held for sale and
restructuring and other charges ("New Commercial Printing").
YEAR ENDED DECEMBER 31 % CHANGE
-------------------------------------- ------------------
2002 2001 2000 2002 2001
-------- -------- -------- ------ -----
(DOLLARS IN THOUSANDS)
Net sales
Reported...................... $764,404 $817,937 $961,780 (7)% (15)%
New Commercial Printing*...... $751,354 $804,719 $944,855 (7)% (15)%
Operating income (loss)
Reported...................... $(16,255) $ 14,763 $ 54,758 (210)% (73)%
New Commercial Printing*...... $ (1,082) $ 18,096 $ 56,541 (106)% (68)%
- --------
* Excludes sales and operating income of the digital graphics division
operations held for sale. New Commercial Printing sales include sales of
$1 million, $3 million and $0.5 million in 2002, 2001 and 2000,
respectively, to operations that have been divested and are expected to
continue.
In 2002, sales of New Commercial Printing declined $53.4 million, or
7%, compared to sales in 2001. Due to strong sales in the fourth quarter of
2002, sales of our high impact printing business for national and regional
customers were comparable to such sales in 2001. Excluding sales of
$11.9 million of a company acquired in 2002, sales of our local commercial
printing business were $65.3 million lower in 2002 than in 2001. The
following factors contributed to the sales decline in our local business in
2002:
* Approximately 50% of our commercial printing sales are related to
advertising. Many of our customers have significantly reduced
promotional spending in response to the economic slowdown and this
has had a significant impact on the sales volume at all of our printing
operations serving local markets.
* Sales in the Philadelphia market were $24.0 million lower in 2002
than in 2001. This decline was due in part to the 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. In October 2001,
we consolidated two plants serving this market, and many of our
customers did not move their printing to our new facility.
* Sales at our plant in Indianapolis declined $13.8 million during
2002. In our efforts to improve the profitability of this plant, we
lost some of our low margin business. In addition, demand for
18
long run web business at this plant was weak. We are in the process of
moving the web presses in Indianapolis to our web plants in St. Louis
and Baltimore.
* Sales of our plant in New York City declined $5.6 million, or 32%, in
2002. We ceased production at this plant in September 2002.
In 2001, sales of New Commercial Printing declined $140.1 million, or
15%, compared to sales in 2000. The economic slowdown, which began to
affect the printing industry in the fourth quarter of 2000, had a
significant impact on all of our printing operations during 2001. Overall
demand for commercial printing, especially advertising related printing,
was weak in 2001. In addition, sales to our technology and
telecommunications customers, which were strong in 2000, were down
approximately $30.0 million in 2001. The impact of the sales decline on our
national and local businesses was as follows:
* Sales of our high impact national business were $77.9 million, or
25%, lower in 2001 than in 2000.
* Sales of our local commercial printing business were $62.2 million,
or 10%, lower in 2001 than in 2000.
Operating income of New Commercial Printing declined $19.2 million in
2002 compared to 2001. This significant decline in profitability was due to
lower sales and lower margins. New Commercial Printing lost contribution of
$21.3 million due to the decline in sales. Cost reduction initiatives
reduced fixed manufacturing overhead and administrative expenses by
approximately $14.3 million in 2002. However, competitive pricing pressures
and inefficient manufacturing performance at several plants negated most of
these savings.
In 2001, operating income of New Commercial Printing declined $38.4
million, or 68%, compared to 2000. The decline was primarily related to the
significant sales decline in 2001 and increased competition, which reduced
contribution by more than $40.0 million. Administrative expenses were
reduced $3.3 million.
We do not expect market conditions for commercial printing to improve
significantly in 2003. Sales in the second half of 2002 were improved over
the first half, and we are hopeful that this trend will continue into 2003.
Over the last two years we have initiated programs to improve customer
service, strengthen customer relationships, reduce costs and improve
business processes. We expect to realize the benefits of these initiatives
in 2003.
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
excluding restructuring and other charges ("New Printed Office Products").
YEAR ENDED DECEMBER 31 % CHANGE
-------------------------------------- ------------------
2002 2001 2000 2002 2001
-------- -------- -------- ---- -------
Net sales
Reported....................... $203,814 $215,297 $220,767 (5)% (3)%
New Printed Office Products*... $205,145 $223,204 $229,517 (8)% (3)%
Operating income
Reported....................... $ 16,838 $ 18,127 $ 16,306 (7)% 11%
New Printed Office Products.... $ 19,987 $ 19,367 $ 24,634 3% (21)%
- --------
* Sales of New Printed Office Products include sales of $1.3 million,
$7.9 million and $8.8 million in 2002, 2001 and 2000, respectively, to
operations that have been sold and are expected to continue.
In 2002, sales of New Printed Office Products declined $18.0 million,
or 8%, compared to sales in 2001. An explanation of the sales decline was
as follows:
* Sales of traditional business forms were $12.2 million lower in 2002
than in 2001. Demand for business forms has been declining for
several years as businesses have acquired laser-printing
19
capabilities. Also, the consolidation of two traditional document
plants in 2002 affected revenues in 2002 since we were not able to
retain all of the sales associated with the plants that were closed.
* Sales of label products were $4.6 million lower in 2002 than 2001 due
primarily to a decline in sales to quick printers and lower sales of
labels with patriotic themes, which were unusually high in the fourth
quarter of 2001.
In 2001, sales of New Printed Office Products declined $6.3 million, or
3%, compared to sales in 2000. Excluding the sales of a company acquired in
early 2000, the decline was $15.6 million. The decline in sales of
traditional business forms was $15.9 million in 2001. Growth in sales of
our specialty mailer products of $5.7 million offset lower sales of label
products.
Operating income of New Printed Office Products increased $0.6 million,
or 3%, in 2002 compared to 2001 despite the decline in sales. The
contribution lost as a result of the sales decline was approximately
$3.4 million, which was more than offset by $4.0 million in reductions
in fixed manufacturing overhead and administrative expenses.
Operating income of New Printed Office Products was $5.3 million lower
in 2001 compared to 2000. The decline was $7.1 million excluding the impact
of the acquisition completed in 2000 and was the result of the contribution
lost on lower sales and lower margins in 2001. Reductions in overhead
expenses in 2001 totaled $1.8 million.
In 2003, we expect continued erosion in demand for traditional business
forms. However, we expect to stabilize sales in 2003, by increasing sales
of our specialty mailer products and several new label product initiatives.
We also expect to fully realize the benefits of the two plant
consolidations, which were completed in 2002.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, our debt had been reduced $91.3 million to
$763.9 million from the balance of $855.2 million at December 31, 2001.
We generated $23.0 million of cash flow from operations compared to
$170.9 million in 2001 and $153.2 million in 2000. The decrease in operating
cash flow was due to the greater loss in 2002 and a smaller cash flow
benefit from the reductions made in working capital in 2002 compared to 2001.
Reductions in working capital, which consist of current assets exclusive of
cash and cash equivalents and net assets of discontinued operations, less
current liabilities, exclusive of the current portion of long-term debt,
increased cash flow from operations by $3.8 million in 2002, $93.1 million
in 2001 and $39.6 million in 2000. A portion of the decrease in working
capital has been the result of the Company's practice of extending payments
to its suppliers, with their agreement, to better balance the days payable
outstanding with the days sales outstanding. The Company's standard
payment terms have been increased to 45 days. The impact of this practice
on the amounts due to our suppliers over the last two quarters of 2002 has
been less than $25.0 million.
Capital expenditures, excluding acquisitions, were $30.9 million in
2002, $32.7 million in 2001 and $67.1 million in 2000. We anticipate
capital expenditures of approximately $40.0 million in 2003.
In 2002 and 2001, acquisition spending was reduced significantly to
$2.6 million and $3.8 million, respectively. In 2002, we purchased the
in-house printing and fulfillment operations of American Express Company.
In 2001, we purchased a small printing and fulfillment operation in
Denver, Colorado. In 2000, we obtained a new senior secured credit
facility to fund the acquisition of American Business Products, Inc. for
$331.0 million in cash plus $7.5 million of assumed debt. We sold the
extrusion coating and laminating operation of American Business Products
in September 2000 for after-tax cash proceeds of approximately $110.6
million. Other acquisitions in 2000 included three commercial printing
companies and an envelope company. The cash paid for these four companies
totaled $53.2 million.
During 2002, we completed a significant restructure 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, $134.0 million of our revolving credit facility, and
$9.2 million of
20
other debt. The remaining $2.0 million of net proceeds from the offering
were used for other working capital needs.
Also in March 2002, we applied $20.5 million of net proceeds received
from the sale of Curtis 1000 to the repayment of our bank term debt. In
May 2002, we applied $67.0 million of net proceeds received from the sale of
our prime label business to the repayment of our bank term debt.
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 our assets.
In August 2002, we applied the net 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. On November 1, 2002, we
redeemed the $139.1 million of convertible subordinated notes due on that
date.
The following table summarizes our cash payment obligations as of
December 31, 2002 by year:
TOTAL CASH
LONG-TERM DEBT OPERATING LEASES OBLIGATIONS
-------------- ---------------- -----------
2003....................... $ 2,961 $ 33,054 $ 36,015
2004....................... 1,228 27,074 28,302
2005....................... 102,879 23,817 126,696
2006....................... 787 19,245 20,032
2007....................... 842 14,469 15,311
Thereafter................. 655,202 12,608 667,810
-------- -------- --------
Total...................... $763,899 $130,267 $894,166
======== ======== ========
At December 31, 2002, we had outstanding letters of credit of
approximately $24.5 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.
Our credit ratings as of December 31, 2002 were as follows:
SENIOR SENIOR SENIOR
SECURED UNSECURED SUBORDINATED
RATING AGENCY DEBT DEBT DEBT LAST UPDATE
- ------------- ------- --------- ------------ -----------
Standard & Poor's..... BB- BB- B July-02
Moody's............... B1 B1 B3 February-02
The terms of our existing debt do not have any rating triggers, and we
do not believe that our current ratings will impact our ability to raise
additional capital.
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 senior credit facility.
At December 31, 2002, we had $128.1 million of unused credit available
under this credit facility.
SEASONALITY AND ENVIRONMENT
Our commercial printing business experiences seasonal variations. Our
revenues from annual reports are generally concentrated from February
through April. Revenues associated with holiday catalogs and automobile
brochures tend to be concentrated from July through October, and calendars
from May to September. As a result of these seasonal variations, we are at
or near capacity in some facilities at certain times during these periods.
Several consumer direct market segments served by our envelope business
and certain segments of the direct mail market, experience seasonality,
with a higher percentage of the volume of products sold
21
to these markets occurring during the fourth quarter of the year. This
seasonality is due to the increase in sales to the direct mail market
due to holiday purchases. Seasonality is offset by the diversity of our
other products and markets, which are not materially affected by seasonal
conditions.
Environmental matters have not had a material financial impact on our
historical operations and are not expected to have a material impact in the
future.
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.
In 2002, upon adoption of SFAS No. 142 we recorded a $111.7 million
impairment of the goodwill recorded by our commercial printing business as
a change in accounting principle. Our estimate of this impairment was based
on discounting the future cash flows of this business and comparisons to
market multiples of other similar companies. In preparing projected future
cash flows, we used our judgment in projecting the profitability of this
business, its growth in future years, the capital spending required, the
working capital requirements and the selection of a discount rate. In our
comparisons to market multiples of other similar companies, we used our
judgment in the selection of the companies used in the analysis.
We will reevaluate the carrying value of our goodwill as of December 1
of each year, or earlier, if there are indications of impairment. Our
evaluation as of December 1, 2002 indicated no additional impairment over
what was recorded upon the adoption of SFAS No. 142 on January 1, 2002.
In 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 provided to us by our
financial advisors. Our internal valuations of this business support its
current 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 assets 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. We believe our businesses will generate sufficient cash flow to
more than recover the investments we have made in property, plant and
equipment and other intangibles recorded as a result of our acquisitions.
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-insurance claims.
The determination of our tax provision is complex due to operations in
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
SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143
addresses financial accounting and
22
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. Mail-Well
will adopt SFAS No. 143 as of January 1, 2003. The Company does not
expect the impact of the adoption of SFAS No. 143 to have a material
impact on the consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. Among other provisions, SFAS No. 145 rescinds SFAS
No. 4, Reporting Gains and Losses from Extinguishment of Debt. Accordingly,
gains or losses from extinguishment of debt shall not be reported as
extraordinary items unless the extinguishment qualifies as an extraordinary
item under the criteria of Accounting Principles Board ("APB") 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. Gains or losses from extinguishment of
debt that do not meet the criteria of APB No. 30 should be reclassified to
income from continuing operations in all prior periods presented. The
Company will adopt the provisions of SFAS No. 145 as of January 1, 2003 and
will reclassify extraordinary items from all prior periods into income from
continuing operations upon adoption.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 provides guidance
related to accounting for costs associated with disposal activities covered
by SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets
or with exit or restructuring activities previously covered by 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). SFAS No. 146
supercedes EITF Issue No. 94-3 in its entirety. SFAS No. 146 requires that
costs related to exiting an activity or to a restructuring not be
recognized until the liability is incurred. SFAS No. 146 will be applied
prospectively to exit or disposal activities that are initiated after
December 31, 2002.
In November 2002, the FASB issued Interpretation 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN 45"). FIN 45 requires a
guarantor to recognize, at the inception of a guarantee, a liability for
the fair value of the obligation undertaken in issuing the guarantee.
FIN 45 also expands the disclosures required to be made by a guarantor
about its obligations under certain guarantees that it has issued. Initial
recognition and measurement provisions of FIN 45 are applicable on a
prospective basis to guarantees issued or modified. The adoption of the
fair value provisions of this interpretation are not expected to have any
impact on the financial statements of the Company. The disclosure requirements
are effective immediately and are provided for in Note 7 to the consolidated
financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation--Transition and Disclosure. SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. SFAS
No. 148 also requires that disclosures of the pro forma effect of using the
fair value method of accounting for stock-based employee compensation be
displayed more prominently and in a tabular format. Additionally, SFAS
No. 148 requires disclosure of the pro forma effect in interim financial
statements. The transition and disclosure requirements of SFAS No. 148 are
effective for 2003. The Company does not currently plan to transition to a
fair value method of accounting for stock-based employee compensation.
AVAILABLE INFORMATION
Our Internet address is: www.mailwell.com. We make available free of
charge through our website our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed pursuant to Section 13(a) or 15(d) of the Exchange Act as
soon as reasonably practicable after such documents are filed
electronically with the Securities Exchange Commission. In addition, our
earnings conference calls and presentations to securities analysts are web
cast live via our website.
23
FORWARD LOOKING INFORMATION
Certain statements in this report, and in particular, statements found
in Management's Discussion and Analysis of Financial Condition and Results
of Operations, constitute forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Generally, the words
"believe," "expect," "intend," "estimate," "anticipate," "project," "will"
and similar expressions identify forward-looking statements, which
generally are not historical in nature. All statements which address
operating performance, events or developments that we expect or anticipate
will occur in the future are forward-looking statements. Such statements
reflect our current views of Mail-Well with respect to future events and
are subject to risks and uncertainties. Actual results may differ
materially from those expressed or implied in these statements. As and when
made, we believe that these forward-looking statements are reasonable.
However, caution should be taken not to place undue reliance on any such
forward-looking statements since such statements speak only as of the date
when made. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
In addition to those described elsewhere in this report the following
are some of the factors that could cause our actual results to differ
materially from the expected results described in or underlying our
forward-looking statements:
* We reported losses for 2002 and 2001 primarily as a result of
expenses related to our restructuring initiatives and the economic
slowdown. The slowdown in the economy has significantly impacted our
sales. Reductions by our customers in spending on printed advertising
material and direct mail promotions impacted sales of commercial
printing and envelopes. In addition, sales of traditional business
forms by our printed office products business have declined. Our
ability to return to profitability depends in part on our customers'
recovery from this slowdown and the realization of the benefits of
our restructuring and other cost reduction initiatives.
* We formed our company through the acquisition of over 50 separate
businesses. Until 2001 our business philosophy was generally to
continue to operate these businesses as separate businesses operating
autonomously in their historic markets. In 2001, we adopted our
existing strategy described in this report which focuses on the
integration of our businesses and operational improvements through
the sale of non-core assets, consolidation of facilities and sharing
of best practices. Part of our strategy for growing market share
includes market focused regionalization within our segments and
training our sales force to offer our full array of products and
services to existing and prospective customers. This strategy is
designed to capitalize upon the depth and breadth of our products
and geographical footprint especially with large regional and
national buyers of printed products. To be successful with this
part of our strategy certain of our customers will need to change the
way they buy printed products as one stop shopping has not been
traditionally available except through resellers. In addition, our
sales people will need to be intensely trained and change the way
they focus on new customer opportunities because in the past they
generally only sold the products offered at the location out of which
they work. We believe that this one stop shopping, total company
strategy will be accepted by customers as a way to streamline the
procurement process and thereby reduce procurement costs. However,
this strategy is generally untested and therefore there is no
assurance that it will be successful.
* In the past, we have grown rapidly through acquisitions. Although we
believe that our experience in making acquisitions is an important
asset, the terms of our senior credit facility limit the acquisitions
that we may currently pursue. To the extent that we pursue
acquisitions, we cannot be certain that we will be able to identify
and acquire other businesses on favorable terms or that, if we are
able to acquire businesses on favorable terms, we will be able to
successfully integrate the acquired businesses into our current
business or profitably manage them.
* The industries in which we compete are generally characterized by
individual orders from customers or short-term contracts. Most of our
customers are not contractually obligated to purchase products or
services from us. Most customer orders are for specific jobs, and
repeat business largely depends on our customers' satisfaction with
the work we do. Although our
24
business does not depend on any one customer or group of customers,
we cannot be sure that any particular customer will continue to do
business with us for any period of time. In addition, the timing
of particular jobs or types of jobs at particular times of year may
cause significant fluctuations in the operating results of our various
printing operations in any given quarter. We depend to some extent on
sales to certain industries such as the advertising and automotive
industries. We estimate that approximately 50% of our commercial
printing sales are related to advertising. To the extent these
industries experience downturns, as is currently the case in
advertising, the results of our operations are adversely affected.
* The printing industry in which we compete, including the printed
office products industry, is extremely fragmented and highly
competitive. In the market, we compete against a number of large,
diversified and financially stronger printing companies, as well as
regional and local commercial printers, many of which are capable of
competing with us on volume, price and production quality. In the
envelope market, we compete primarily with a few multi-plant and many
single-plant companies servicing regional and local markets. There
currently is excess capacity in the markets in which we compete,
which could result in excessive price competition. We are constantly
seeking ways to reduce our costs and become more efficient
competitors. However, we cannot be certain that these efforts will be
successful or that our competitors will not be more successful in
their similar efforts to reduce costs and become more efficient. If
we fail to reduce costs and increase productivity, we may face
decreased profit margins in markets where we encounter price
competition, which in turn could reduce our cash flow and
profitability.
* Most envelopes used in the United States and Canada are sent through
the mail and as a result, postal rates can significantly affect
envelope usage. Historically, increases in postal rates, relative to
changes in the cost of alternative delivery means and/or advertising
media, have resulted in temporary reductions in the growth rate of
mail sent, including direct mail, which is a significant portion of
our envelope volume. We cannot be sure that direct mail marketers
will not reduce their volume as a result of any increases. Because
rate increases in the U.S. and Canada are outside our control, we can
provide no assurance that any increases in U.S. and/or Canadian
postal rates will not have a negative effect on the level of mail
sent, or the volume of envelopes purchased, in either or both
countries. In such event, we would expect to experience a decrease
in cash flow and profitability or financial position. Factors other
than postal rates that detrimentally affect the volume of mail sent
through the U.S. and Canadian postal systems may also negatively
affect our business. If the threats of mass bio-terrorism in the U.S.
mail system persist, or if there is a perception of a lack of safety
in the U.S. or Canadian postal systems, we cannot be sure that direct
mail marketers will not reduce their volume as a result of any such
persisting threats or insecurity, or that such decreases in demand
will not have a negative effect on the level of mail sent or the
volume of envelopes purchased.
* As of December 31, 2002, we had approximately 10,200 full-time
employees, of whom approximately 2,000 were members of various local
labor unions. If our unionized employees were to engage in a
concerted strike or other work stoppage, or if other employees were
to become unionized, we could experience a disruption of operations,
higher labor costs or both. A lengthy strike could result in a
material decrease in our cash flow or profitability.
* Paper costs represent a significant portion of our cost of materials.
Changes in paper pricing generally do no affect the operating margins
of our commercial printing and printed office products businesses
because we historically have been able to pass on paper price
increases and increased proceeds from waste paper sales. Paper
pricing does, however, impact the operating margins of our envelope
business because we generally are not able to increase our prices as
quickly as paper prices increase. We cannot be certain that we will
be able to continue to pass on future increases in the cost of paper.
Moreover, rising paper costs and their consequent impact on our
pricing could lead to a decrease in our volume of units sold.
Although we have been successful in negotiating favorable pricing
terms with paper vendors, we cannot be certain we will be successful
in negotiating favorable pricing terms in the future. This may result
in decreased sales volumes as well as decreased cash flow and
profitability. Due to the significance of paper in the manufacture of
most of our products, we depend on the availability of paper.
25
During periods of tight paper supply, many paper producers allocate
shipments of paper based on the historical purchase levels of
customers. As a result of our large volume paper purchases from
several paper producers, we generally have not experienced difficulty
in obtaining adequate quantities of paper, although we have
occasionally experienced minor delays in delivery. Although we
believe that our attractiveness to vendors as a large volume paper
purchaser will continue to enable us to receive adequate supplies of
paper in the future, unforeseen developments in world paper markets
coupled with shortages of raw paper could result in a decrease in
supply, which in turn would cause a decrease in the volume of
products we could produce and sell and a corresponding decrease in
cash flow and profitability.
* Our business is highly dependent upon the demand for envelopes sent
through the mail. Such demand comes from utility companies, banks and
other financial institutions, among others. Our printing business
also depends upon demand for printed advertising and business forms,
among others. Customers increasingly use the Internet and other
electronic media to purchase goods and services, and for other
purposes such as paying utility and credit card bills. Advertisers
use the Internet and other electronic media for targeted campaigns
directed at specific electronic user groups. Large and small
businesses use electronic media to conduct business, send invoices
and collect bills. As a result, we expect the demand for envelopes
and other printed materials for these purposes to decline. Although
we expect countervailing trends, such as the growth of targeted
direct mail campaigns based upon mailing lists generated by
electronic purchases, to cause overall demand for envelopes and other
printed materials to continue to grow at rates comparable to recent
historical levels, we cannot be certain that the acceleration of the
trend towards electronic media such as the Internet and other
alternative media will not cause a decrease in the demand for our
products.
* Our operations are subject to federal, state, local and foreign
environmental laws and regulations, including those relating to air
emissions, wastewater discharge, waste generation, handling,
management and disposal, and remediation of contaminated sites. In
addition, some of the sellers from which we have bought businesses in
the past have been designated as potentially responsible parties
under the federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended, or CERCLA, or similar
legislation in Canada, with respect to off-site disposal of
hazardous waste at two sites. CERCLA imposes strict, and in certain
circumstances joint and several, liability for response costs.
Liability may also include damages to natural resources. We believe
that we have minimal exposure as a result of such designations,
either because indemnities obtained in the course of acquisitions or
because of the de minimis nature of the claims, or both. We also
believe that our current operations are in substantial compliance
with applicable environmental laws and regulations. We cannot be
certain, however, that available indemnities will be adequate to
cover all costs or that currently unknown conditions or matters, new
laws and regulations, or stricter interpretations of existing laws
and regulations will not have a material adverse effect on our
business or operations in the future.
* Our success will continue to depend to a significant extent on our
executive officers and other key management personnel. We cannot be
certain that we will be able to retain our executive officers and key
personnel or attract additional qualified management in the future.
In addition, the success of any acquisitions we may pursue may
depend, in part, on our ability to retain management personnel of the
acquired companies. We do not carry key-person insurance on any of
our managerial personnel.
* Recently enacted and proposed changes in the laws and regulations
affecting public companies, including the provisions of the
Sarbanes-Oxley Act of 2002 and rules proposed by the SEC and the New
York Stock Exchange could cause us to incur increased costs as we
evaluate the implications of new rules and respond to new
requirements. The new rules could make it more difficult for us to
obtain certain types of insurance, including directors and officer
liability insurance, and we may be forced to accept reduced policy
limits and coverage or incur substantially higher costs to obtain the
same or similar coverage. The impact of these events could also make
it more difficult for us to attract and retain qualified persons to
serve on the Company's board of directors, or as executive officers.
We are presently evaluating and
26
monitoring developments with respect to these new and proposed rules,
and we cannot predict or estimate the amount of the additional costs
we may incur or the timing of such costs.
The foregoing list of important factors is not exclusive. A further
description of these and other risks and uncertainties may be found in our
subsequent filings with the SEC which can be found on our website discussed
above.
ITEM 7A. 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 did
we hedge interest rate exposure through the use of swaps and options or
foreign exchange exposure through the use of forward contracts as of
December 31, 2002. However, the Board of Directors have given management
authority to engage in interest rate swaps and we are currently considering
this option.
Exposure to market risk from changes in interest rates relates
primarily to our variable rate debt obligations. The interest on this debt
is the London Interbank Offered Rate ("LIBOR") plus a margin. At December
31, 2002 and 2001, we had variable rate debt outstanding of $103.8 million.
A 1% increase in LIBOR on the maximum amount of debt subject to variable
interest rates, which is $301.8 million, would increase our interest
expense by $3.0 million and reduce our 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.
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
The Shareholders and Board of Directors
Mail-Well, Inc.
We have audited the accompanying consolidated balance sheets of
Mail-Well, Inc. and subsidiaries as of December 31, 2002 and 2001, and
the related consolidated statements of operations, changes in shareholders'
equity and cash flows for each of the three years in the period ended
December 31, 2002. Our audits also included the financial statement schedule
for each of the three years in the period ended December 31, 2002 listed in
the Index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Mail-Well, Inc. and subsidiaries at December 31, 2002 and 2001,
and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
As discussed in Note 2 to the consolidated financial statements,
effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets.
ERNST & YOUNG LLP
Denver, Colorado
February 5, 2003
28
MAIL-WELL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
DECEMBER 31
---------------------------
2002 2001
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................... $ 2,650 $ 894
Accounts receivable, net................................ 219,924 233,045
Inventories, net........................................ 103,533 111,648
Net assets of discontinued operations................... -- 129,568
Net assets held for sale................................ 4,492 32,613
Other current assets.................................... 45,762 71,281
---------- ----------
TOTAL CURRENT ASSETS................................ 376,361 579,049
Property, plant and equipment, net.......................... 379,624 428,564
Goodwill, net............................................... 290,361 399,901
Other intangible assets, net................................ 18,586 20,822
Other assets, net........................................... 42,435 48,531
---------- ----------
TOTAL ASSETS............................................ $1,107,367 $1,476,867
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................ $ 151,930 $ 160,659
Accrued compensation and related liabilities............ 53,292 51,407
Other current liabilities............................... 67,848 62,520
Current maturities of long-term debt.................... 2,961 303,170
---------- ----------
TOTAL CURRENT LIABILITIES........................... 276,031 577,756
Long-term debt.............................................. 760,938 552,051
Deferred income taxes....................................... 10,336 88,393
Other liabilities........................................... 17,294 16,790
---------- ----------
TOTAL LIABILITIES....................................... 1,064,599 1,234,990
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value; 25,000 shares
authorized, none issued............................... -- --
Common stock, $0.01 par value; 100,000,000 shares
authorized, 48,337,031 and 48,325,801 shares issued
and outstanding as of December 31, 2002 and 2001,
respectively.......................................... 483 483
Paid-in capital......................................... 213,826 214,138
Retained earnings (deficit)............................. (155,481) 46,623
Deferred compensation................................... (2,471) (3,359)
Accumulated other comprehensive loss.................... (13,589) (16,008)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY.......................... 42,768 241,877
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $1,107,367 $1,476,867
========== ==========
See notes to consolidated financial statements.
29
MAIL-WELL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except earnings per share amounts)
YEAR ENDED DECEMBER 31
--------------------------------------------
2002 2001 2000
---------- ---------- ----------
Net sales.......................................... $1,728,705 $1,868,768 $2,044,350
Cost of sales...................................... 1,385,361 1,481,135 1,599,613
---------- ---------- ----------
Gross profit....................................... 343,344 387,633 444,737
Operating expenses:
Selling, general and administrative............ 263,734 277,004 283,983
Amortization of intangibles.................... 2,237 16,197 16,052
Impairment loss on assets held for sale........ 6,436 -- --
Impairment on operations formerly held for
sale......................................... 12,842 36,523 --
Restructuring, asset impairments and other
charges...................................... 74,551 43,085 14,488
---------- ---------- ----------
Operating income (loss)............................ (16,456) 14,824 130,214
Other expense:
Interest expense............................... 70,461 63,314 72,997
Other.......................................... 1,754 1,923 847
---------- ---------- ----------
Income (loss) from continuing operations before
income taxes, extraordinary items and cumulative
effect of a change in accounting principle....... (88,671) (50,413) 56,370
Provision (benefit) for income taxes............... (25,308) (5,200) 21,624
---------- ---------- ----------
Income (loss) from continuing operations before
extraordinary items and cumulative effect of a
change in accounting principle................... (63,363) (45,213) 34,746
Loss from discontinued operations.................. -- (2,982) (8,575)
Loss on disposal of discontinued operations........ (16,868) (88,022) --
Extraordinary items................................ (10,125) -- 1,447
Cumulative effect of a change in accounting
principle........................................ (111,748) -- --
---------- ---------- ----------
Net income (loss).................................. $ (202,104) $ (136,217) $ 27,618
========== ========== ==========
Earnings (loss) per share--basic:
Continuing operations.......................... $ (1.33) $ (0.95) $ 0.71
Discontinued operations........................ (0.35) (1.91) (0.17)
Extraordinary items............................ (0.21) -- 0.03
Cumulative effect of a change in accounting
principle.................................... (2.35) -- --
---------- ---------- ----------
Earnings (loss) per share--basic............... $ (4.24) $ (2.86) $ 0.57
========== ========== ==========
Earnings (loss) per share--diluted:
Continuing operations.......................... $ (1.33) $ (0.95) $ 0.70
Discontinued operations........................ (0.35) (1.91) (0.17)
Extraordinary items............................ (0.21) -- 0.03
Cumulative effect of a change in accounting
principle.................................... (2.35) -- --
---------- ---------- ----------
Earnings (loss) per share--diluted............. $ (4.24) $ (2.86) $ 0.56
========== ========== ==========
Weighted average shares--basic................. 47,665 47,562 48,789
Weighted average shares--diluted............... 47,665 47,562 56,678
See notes to consolidated financial statements.
30
MAIL-WELL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEAR ENDED DECEMBER 31
---------------------------------------------
2002 2001 2000
----------- --------- -----------
Cash flows from operating activities:
Income (loss) from continuing operations.................. $ (63,363) $ (45,213) $ 34,746
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by operating
activities:
Depreciation......................................... 47,818 47,199 48,379
Amortization......................................... 7,635 22,203 20,763
Noncash portion of restructuring, impairment and
other charges..................................... 42,282 47,596 4,048
Loss on assets held for sale......................... 6,436 -- --
Deferred income taxes................................ (21,388) 5,063 9,006
Loss (gain) on disposal of assets.................... 346 1,241 (703)
Other noncash charges, net........................... 91 958 902
Changes in operating assets and liabilities, excluding the
effects of acquired businesses:
Accounts receivables................................. 12,756 57,135 (11,184)
Inventories.......................................... 8,906 20,160 1,269
Accounts payable and accrued compensation............ (11,036) 24,942 21,794
Income taxes payable................................. 4,193 (5,824) 27,343
Other working capital changes........................ (7,130) (3,359) (489)
Other, net........................................... (4,575) (1,166) (2,702)
----------- --------- -----------
Net cash provided by operating activities.......... 22,971 170,935 153,172
Cash flows from investing activities:
Acquisitions, net of cash acquired.................... (2,610) (3,838) (226,669)
Capital expenditures.................................. (30,896) (32,742) (67,063)
Proceeds from divestitures, net....................... 122,330 -- 110,646
Proceeds from sales of property, plant and
equipment........................................... 11,995 3,782 31,137
Purchase of investment................................ -- (100) (1,500)
----------- --------- -----------
Net cash provided by (used in) investing
activities........................................ 100,819 (32,898) (153,449)
Cash flows from financing activities:
Decrease in accounts receivable financing facility.... -- (75,000) (73,500)
Proceeds from exercise of stock options............... 18 413 335
Proceeds from issuance of long-term debt.............. 1,635,102 634,404 1,131,069
Repayments of long-term debt.......................... (1,726,718) (699,522) (879,765)
Capitalized loan fees................................. (18,624) (4,439) (15,002)
Repurchases of common stock........................... -- -- (10,000)
Redemption of a nonvoting common stock of a
subsidiary.......................................... -- -- (3,508)
----------- --------- -----------
Net cash provided by (used in) financing
activities........................................ (110,222) (144,144) 149,629
Effect of exchange rate changes on cash and cash
equivalents................................................ (985) (73) (10)
Cash flows from discontinued operations..................... (10,827) 6,612 (149,052)
----------- --------- -----------
Net increase in cash and cash equivalents........... 1,756 432 290
Cash and cash equivalents at beginning of year.............. 894 462 172
----------- --------- -----------
Cash and cash equivalents at end of year.................... $ 2,650 $ 894 $ 462
=========== ========= ===========
See notes to consolidated financial statements.
31
MAIL-WELL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
ACCUMULATED
RETAINED OTHER TOTAL
COMMON PAID-IN EARNINGS DEFERRED COMPREHENSIVE SHAREHOLDERS'
STOCK CAPITAL (DEFICIT) COMPENSATION INCOME (LOSS) EQUITY
------ -------- --------- ------------ ------------- -------------
BALANCE AT DECEMBER 31, 1999.................. $492 $219,795 $ 155,222 $ -- $ (199) $ 375,310
Comprehensive income (loss):
Net income.................................. 27,618 27,618
Other comprehensive loss:
Pension liability adjustment, net of tax
benefit of $72........................... (115) (115)
Currency translation adjustment........... (6,555) (6,555)
Unrealized loss on investments, net of tax
benefit of $412.......................... (659) (659)
---------
Other comprehensive loss................ (7,329)
---------
Total comprehensive income............ 20,289
Exercise of stock options..................... 1 334 335
Purchase and retirement of common stock....... (18) (9,982) (10,000)
Other......................................... (1) (80) (81)
---- -------- --------- ------- -------- ---------
BALANCE AT DECEMBER 31, 2000.................. 474 210,067 182,840 -- (7,528) 385,853
Comprehensive income (loss):
Net loss.................................... (136,217) (136,217)
Other comprehensive income (loss):
Pension liability adjustment, net of tax
benefit of $581.......................... (928) (928)
Currency translation adjustment........... (8,467) (8,467)
Unrealized loss on investments, net of tax
of $119.................................. 915 915
---------
Other comprehensive loss................ (8,480)
---------
Total comprehensive loss.............. (144,697)
Exercise of stock options..................... 2 411 413
Issuance of restricted shares................. 7 3,679 (3,686) --
Amortization of deferred compensation......... 327 327
Other......................................... (19) (19)
---- -------- --------- ------- -------- ---------
BALANCE AT DECEMBER 31, 2001.................. 483 214,138 46,623 (3,359) (16,008) 241,877
Comprehensive income (loss):
Net loss...................................... (202,104) (202,104)
Other comprehensive income (loss):
Pension liability adjustment, net of tax
benefit of $744............................ (1,190) (1,190)
Currency translation adjustment............. 3,609 3,609
---------
Other comprehensive income................ 2,419
---------
Total comprehensive loss................ (199,685)
Cancellation of restricted shares............. (1) (451) 452 --
Issuance of restricted shares................. 1 121 (122) --
Exercise of stock options..................... 18 18
Amortization of deferred compensation......... 558 558
---- -------- --------- ------- -------- ---------
BALANCE AT DECEMBER 31, 2002.................. $483 $213,826 $(155,481) $(2,471) $(13,589) $ 42,768
==== ======== ========= ======= ======== =========
See notes to consolidated financial statements.
32
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Mail-Well, Inc. and subsidiaries (collectively, the "Company") prints
and manufactures envelopes in the United States and Canada and is a leading
commercial printer in the United States. The Company is also a printer of
custom documents for the distributor market. The Company, headquartered in
Englewood, Colorado, is organized under Colorado law, and its common stock
is traded on the New York Stock Exchange under the symbol "MWL".
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of
Mail-Well, Inc. and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated and all amounts
and disclosures have been restated to reflect only the Company's continuing
operations.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Estimates are used for, but not limited to,
establishing the allowance for doubtful accounts, inventory valuation
reserves, depreciation and amortization, tax assets and liabilities and
other contingencies. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue is recognized at the time product is shipped or title passes
pursuant to the terms of the agreement with the customer, the amount due
from the customer is fixed, and collectibility of the related receivable is
reasonably assured.
SHIPPING AND HANDLING COSTS
Shipping and handling costs are included in cost of sales in the
consolidated statements of operations. Shipping and handling costs billed
to customers are recognized in net sales.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on deposit and investments with
original maturities of three-months or less. Cash and cash equivalents are
stated at cost, which approximates fair value.
ACCOUNTS RECEIVABLE
The Company maintains an allowance for doubtful accounts based upon the
expected collectibility of accounts receivable. Allowances for doubtful
accounts of $4.7 million and $5.4 million have been applied as reductions
of accounts receivable at December 31, 2002 and 2001, respectively.
INVENTORIES
Inventory values include all costs directly associated with
manufacturing products: materials, labor and manufacturing overhead. These
values are presented at the lower of cost or market, with cost determined
on a first-in, first-out basis.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. When assets are
retired or otherwise disposed of, the related costs and accumulated
depreciation are removed from the accounts and any resulting gain or loss
is reflected in operations. Expenditures for repairs and maintenance are
charged to expense as incurred, and expenditures that increase the
capacity, efficiency or useful lives of existing assets are capitalized.
33
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
For financial reporting purposes, depreciation is calculated using the
straight-line method based on the estimated useful lives of 15 to 45 years
for buildings and improvements, 10 to 15 years for machinery and equipment
and three to 10 years for furniture and fixtures. For tax purposes,
depreciation is computed using accelerated methods.
COMPUTER SOFTWARE
The Company develops and purchases software for internal use. Software
development costs incurred during the application development stage are
capitalized. Once the software has been installed and tested and is ready
for use, additional costs incurred in connection with the software are
expensed as incurred. Capitalized computer software costs are amortized
over the estimated useful life of the software, usually between three and
five years. Computer software costs included in property, plant and
equipment net of depreciation were $7.5 million and $8.8 million at
December 31, 2002 and 2001, respectively.
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 of Financial Accounting Standards ("SFAS") No. 142, Goodwill and
Other Intangible Assets 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.
DEBT ISSUANCE COSTS
Direct expenses such as legal, accounting and underwriting fees
incurred to issue debt, are reported in the consolidated balance sheets as
other assets. These deferred financing fees, which were $18.9 million and
$33.6 million at December 31, 2002 and 2001, respectively, net of
accumulated amortization, are amortized over the term of the related debt
as interest expense. The amounts amortized for the years ended December 31,
2002, 2001 and 2000 were $5.4 million, $6.0 million and $4.7 million,
respectively.
LONG-LIVED ASSETS
Long-lived assets, except for goodwill and indefinite life intangible
assets, are evaluated for impairment on the basis of undiscounted cash
flows whenever events or changes in circumstances indicate that the
carrying value of the assets may not be recoverable, as measured by
comparing their net book value to the estimated future undiscounted cash
flows generated by their use. Impaired assets are written down to their
estimated fair market value. Assets to be disposed of are reported at the
lower of the carrying value or the fair market value less costs to sell.
Beginning January 1, 2002, goodwill and indefinite life intangible assets
were evaluated for impairment under the provisions of SFAS No. 142 (see
Note 2).
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of subsidiaries operating outside the United
States with a functional currency other than the U.S. dollar are translated
at current exchange rates. Income and expense items are translated at the
average rates for the year. The effects of translation are included as a
component of other comprehensive income. Foreign currency transaction gains
and losses are recorded in income when realized.
34
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
Stock options and other stock-based compensation awards are accounted
for using the intrinsic value method prescribed by Accounting Principles
Board Opinion ("APB") No. 25, Accounting for Stock Issued to Employees.
This method requires compensation expense to be recognized for the excess
of the quoted market price of the stock at the grant date or the
measurement date over the amount an employee must pay to acquire the stock.
The following table illustrates the pro forma effect of net income
(loss) and earning (loss) per share if we had applied the fair value
recognition provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, for the years ended December 31, 2002, 2001 and 2000 (in
thousands, except per share data):
2002 2001 2000
--------- --------- -------
Net income (loss):
As reported..................................... $(202,104) $(136,217) $27,618
Pro forma....................................... $(205,747) $(140,587) $24,253
Earnings (loss) per share--basic:
As reported..................................... $ (4.24) $ (2.86) $ 0.57
Pro forma....................................... $ (4.32) $ (2.96) $ 0.50
Earnings (loss) per share--diluted:
As reported..................................... $ (4.24) $ (2.86) $ 0.56
Pro forma....................................... $ (4.32) $ (2.96) $ 0.52
The effect on 2002, 2001 and 2000 pro forma net income (loss),
earnings (loss) per share--basic and earnings (loss) per share--diluted of
expensing the estimated fair value of stock options is not necessarily
representative of the effect on reported earnings for future years due to
the vesting period of the stock options and the potential for issuance of
additional stock options in future years. See Note 10 for the assumptions
used to compute the pro forma amounts.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 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 SFAS No. 143 as of January 1, 2003.
The Company does not expect the impact of the adoption of SFAS No. 143 to
have a material impact on the consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. Among other provisions, SFAS No. 145 rescinds SFAS
No. 4, Reporting Gains and Losses from Extinguishment of Debt. Accordingly,
gains or losses from extinguishment of debt shall not be reported as
extraordinary items unless the extinguishment qualifies as an extraordinary
item under the criteria of APB 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. Gains or losses from extinguishment of debt that do not meet
the criteria of APB No. 30 should be reclassified to income from continuing
operations in all prior periods presented. The Company will adopt the
provisions of SFAS No. 145 in fiscal year 2003 and will reclassify
extraordinary items from all prior periods into income from continuing
operations upon adoption.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 provides guidance
related to accounting for costs associated with
35
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
disposal activities covered by SFAS No. 144 or with exit or restructuring
activities previously covered by 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). SFAS No. 146 supercedes EITF Issue No. 94-3 in its
entirety. SFAS No. 146 requires that costs related to exiting an activity
or to a restructuring not be recognized until the liability is incurred.
SFAS No. 146 will be applied prospectively to exit or disposal activities
that are initiated after December 31, 2002.
In November 2002, the FASB issued Interpretation 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN 45"). FIN 45 requires a
guarantor to recognize, at the inception of a guarantee, a liability for
the fair value of the obligation undertaken in issuing the guarantee. FIN
45 also expands the disclosures required to be made by a guarantor about
its obligations under certain guarantees that it has issued. Initial
recognition and measurement provisions of FIN 45 are applicable on a
prospective basis to guarantees issued or modified. The adoption of the
fair value provisions of this interpretation are not expected to have any
impact on the financial statements of the Company. The disclosure
requirements are effective immediately and are provided for in Note 7 to
the consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148. SFAS No. 148,
Accounting for Stock-Based Compensation--Transition and Disclosure,
provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee
compensation. SFAS No. 148 also requires that disclosures of the pro forma
effect of using the fair value method of accounting for stock-based
employee compensation be displayed more prominently and in a tabular
format. Additionally, SFAS No. 148 requires disclosure of the pro forma
effect in interim financial statements. The transition requirements of SFAS
No. 148 are effective for the Company's fiscal year 2003. The Company
currently does not plan to transition to a fair value method of accounting
for stock-based employee compensation.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
2. GOODWILL AND OTHER INTANGIBLE ASSETS
The Company adopted SFAS No. 142 on January 1, 2002. Under SFAS
No. 142, goodwill and intangible assets that have indefinite useful lives are
no longer required to be amortized. Goodwill and intangible assets that
have indefinite useful lives, however, must be tested annually for
impairment.
In the year of its adoption, SFAS No. 142 required a transitional
goodwill impairment evaluation, which was a two-step process. The first
step was to determine whether there was an indication that goodwill was
impaired on January 1, 2002. SFAS No. 142 required a separate impairment
evaluation of each of the Company's reporting units, which the Company
determined to be the same as its operating segments. To perform the first
step, the fair value of each reporting unit was estimated by discounting
the expected future cash flows and using market multiples of comparable
companies. The fair value of each reporting unit was compared to its
carrying value, including goodwill. This first step evaluation indicated an
impairment of the goodwill recorded by Commercial Printing and no
impairment of the goodwill recorded by Envelope and Printed Office
Products.
Since the first step indicated an impairment of Commercial Printing's
goodwill, SFAS No. 142 required a second step to determine the amount of
the impairment. The amount of the impairment was determined by comparing
the implied fair value of Commercial Printing's goodwill to its carrying
value. The implied fair value of the goodwill was determined by allocating
the fair value of
36
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED)
Commercial Printing to its assets and liabilities as if Commercial Printing
had been acquired and the fair value was the purchase price. The excess
"purchase price" over the amounts assigned to the assets and liabilities
was the implied value of goodwill. The carrying amount of Commercial
Printing's goodwill exceeded the implied value by $111.7 million, which has
been recorded as a cumulative effect of a change in accounting principle in
the consolidated statement of operations as of December 31, 2002. The
impairment loss on the goodwill recorded by Commercial Printing was due to
the significant decline in its performance in 2001 and the impact of that
decline on expected future cash flows. The Company performed its impairment
test on each of its reporting units again in December 2002 and concluded
that there were no further indications of impairment.
The following table summarizes the Company's net income (loss) from
continuing operations before extraordinary items and cumulative effect of a
change in accounting principle and earnings (loss) per share had the
provisions of SFAS No. 142 been in effect on January 1, 2000 (in thousands,
except per share amounts):
DECEMBER 31
-------------------------------------
2002 2001 2000
-------- -------- -------
Reported income (loss) from continuing operations before
extraordinary items and cumulative effect of a change
in accounting principle................................ $(63,363) $(45,213) $34,746
Goodwill amortization, net of tax of $1.9 million in 2001
and 2000............................................... -- 12,923 12,408
-------- -------- -------
Adjusted net income (loss)........................... $(63,363) $(32,290) $47,154
======== ======== =======
Diluted earnings (loss) per share--as reported........... $ (1.33) $ (0.95) $ 0.70
Diluted earnings (loss) per share--adjusted.............. $ (1.33) $ (0.68) $ 0.92
The following table summarizes the Company's net income (loss) and
earnings (loss) per share had the provisions of SFAS No. 142 been in effect
on January 1, 2000 (in thousands, except per share amounts):
DECEMBER 31
---------------------------------------
2002 2001 2000
--------- --------- -------
Reported net income (loss)............................. $(202,104) $(136,217) $27,618
Goodwill amortization, net of tax of $1.9 million in
2001 and 2000........................................ -- 12,923 12,408
--------- --------- -------
Adjusted net income (loss)......................... $(202,104) $(123,294) $40,026
========= ========= =======
Diluted earnings (loss) per share--as reported......... $ (4.24) $ (2.86) $ 0.56
Diluted earnings (loss) per share--adjusted............ $ (4.24) $ (2.59) $ 0.79
The following is a summary of other intangible assets (in thousands):
DECEMBER 31, 2002
---------------------------------------------
ACCUMULATED
LIFE (YEARS) GROSS AMOUNT AMORTIZATION NET
------------ ------------ ------------ -------
Trademarks and tradenames......... 35-43 $13,778 $ 987 $12,791
Patents........................... 12 2,408 479 1,929
Non-compete agreements............ 5 7,562 5,533 2,029
Other............................. 18-40 2,301 464 1,837
------- ------ -------
Total.......................... $26,049 $7,463 $18,586
======= ====== =======
37
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED)
DECEMBER 31, 2001
---------------------------------------------
ACCUMULATED
LIFE (YEARS) GROSS AMOUNT AMORTIZATION NET
------------ ------------ ------------ -------
Trademarks and tradenames......... 35-43 $13,778 $ 642 $13,136
Patents........................... 12 2,408 312 2,096
Non-compete agreements............ 5 8,394 4,832 3,562
Other............................. 18-40 2,612 584 2,028
------- ------ -------
Total.......................... $27,192 $6,370 $20,822
======= ====== =======
The estimated amortization expense for each of the succeeding five
years is as follows: $2.2 million, $1.2 million, $0.7 million, $0.6 million
and $0.6 million.
The changes in the carrying amount of goodwill for the years ended
December 31, 2002 and 2001 were as follows (in thousands):
PRINTED
COMMERCIAL OFFICE
ENVELOPE PRINTING PRODUCTS TOTAL
-------- ---------- -------- ---------
Balance as of January 1, 2001............. $134,909 $ 231,138 $101,634 $ 467,681
Amortization expense.................... (4,363) (6,118) (3,378) (13,859)
Goodwill acquired during the year....... 1,759 2,066 1,377 5,202
Impairment on operations formerly held
for sale............................. -- (2,712) (41,065) (43,777)
Transferred to assets held for sale..... (11,571) (369) -- (11,940)
Other, primarily foreign currency
translation.......................... (2,857) (536) (13) (3,406)
-------- --------- -------- ---------
Balance as of December 31, 2001........... $117,877 $ 223,469 $ 58,555 $ 399,901
Goodwill acquired during the year....... -- 1,750 -- 1,750
Impairment losses....................... -- (111,748) -- (111,748)
Impairment on operations formerly held
for sale.............................. -- (2,435) -- (2,435)
Other, primarily foreign currency
translation........................... 1,361 1,749 (217) 2,893
-------- --------- -------- ---------
Balance as of December 31, 2002........... $119,238 $ 112,785 $ 58,338 $ 290,361
======== ========= ======== =========
3. ACQUISITIONS
The acquisitions described below have been accounted for as purchases;
accordingly, the assets and liabilities of the acquired companies have been
recorded at their estimated fair values with the excess of the purchase
price over the estimated fair values recorded as goodwill. The consolidated
financial statements reflect the operations of the acquired businesses,
from their respective acquisition dates.
2002 ACQUISITIONS
In August 2002, the Company acquired the in-house printing and
fulfillment operations of American Express Company, located in Minneapolis,
Minnesota, for $1.3 million. Sales and operating income included in the
2002 results were $11.9 million and $1.8 million, respectively. Goodwill
recorded as a result of this acquisition was $0.8 million.
2001 ACQUISITIONS
In January 2001, the Company acquired Communigraphics, Inc., a
commercial printing and fulfillment operation in Denver, Colorado for
$3.8 million. Goodwill recorded as a result of this acquisition was
$1.6 million.
38
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS (CONTINUED)
2000 ACQUISITIONS
ACQUISITION OF AMERICAN BUSINESS PRODUCTS, INC. In February 2000, the
Company acquired American Business Products, Inc. ("ABP") in a cash tender
offer, in which the total value of the transaction, including the
assumption of debt, was approximately $338.5 million. Goodwill recorded as
a result of this acquisition was $154.6 million. In September 2000, the
Company sold Jen-Coat, the extrusion and coating laminating business unit
of ABP, for $110.6 million. In February 2002, the Company sold Curtis 1000,
another business unit acquired in the ABP acquisition for $40.0 million
including the assumption of debt. Jen-Coat and Curtis 1000 have been
included within discontinued operations. Two other ABP business units,
International Envelope and Discount Labels, have been included in
continuing operations. International Envelope, which is an operation in the
Envelope segment, was allocated $75.9 million of the ABP purchase price
including goodwill of $39.1 million. Discount Labels, which is an operation
in the Printed Office Products segment, was allocated purchase price of
$59.5 million including goodwill of $42.2 million.
ACQUISITIONS IN THE COMMERCIAL PRINTING SEGMENT. In January 2000, the
Company acquired the assets and assumed certain liabilities of Braceland
Brothers, Inc., located in Philadelphia, Pennsylvania; Atlanta, Georgia;
and Steubenville, Ohio, for $13.7 million. The Philadelphia location has
been closed. Goodwill recorded as a result of this acquisition was $3.1
million.
In May 2000, the Company purchased the stock of Craftsmen Litho, Inc.,
located in Waterbury, Connecticut, for $9.3 million. Goodwill recorded as a
result of this acquisition was $5.5 million.
In June 2000, the Company purchased the stock of Strathmore Press,
Inc., located in Cherry Hill, New Jersey, for $9.3 million. This company
has been consolidated with another operation in the Philadelphia area.
Goodwill recorded as a result of this acquisition was $4.9 million.
OTHER ACQUISITIONS IN THE ENVELOPE SEGMENT. In July 2000, the Company
purchased the stock of CML Industries Ltd., a supplier of envelopes and
converted paper products located in Ontario and Quebec, Canada, for
$20.9 million. Goodwill recorded as a result of this acquisition was
$12.1 million.
4. DISCONTINUED OPERATIONS
In June 2001, the Company announced plans to sell its Label and Printed
Office Products operating segments. The Printed Office Products segment was
comprised of two separate businesses, Curtis 1000 and PrintXcel. The Label
and Printed Office Products segments were segregated from continuing
operations and reported as discontinued operations for all periods
presented through June 30, 2002. On February 22, 2002, the Company sold the
stock of Curtis 1000 for $40.0 million, including the assumption of debt.
On May 21, 2002, the Company sold the 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.
The loss on disposal of discontinued operations for the year ended
December 31, 2001 of $88.0 million included adjustments to record the Label
segment and Curtis 1000 at net realizable value. These adjustments were
based on estimated sales proceeds, estimates of the expenses associated
with the sales of the two businesses and the estimated losses of each
business through the expected date of disposition. Management based its
estimates of the sales proceeds on data provided by its financial advisors
and indications of value received from prospective buyers.
The additional loss of $16.9 million on disposal of discontinued
operations recorded for the year ended December 31, 2002 was based on
actual proceeds which were less than expected, actual expenses which were
greater than originally estimated and the tax benefit of the losses was
less than originally estimated. In addition, the cumulative translation
adjustment which related to the investment
39
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. DISCONTINUED OPERATIONS (CONTINUED)
in the foreign operations of the Label segment in the amount of
$2.8 million was charged to the loss on disposal of discontinued operations
as a result of the sale of these foreign subsidiaries.
In September 2000, the Company sold Jen-Coat, the extrusion coating and
laminating business segment of ABP. The operating results of this business
unit were recorded as discontinued operations for the year ended
December 31, 2000.
Interest expense was allocated to the operating results and included in
the calculation of the loss on disposal of discontinued operations based
upon the relative net assets of Label, Curtis 1000 and Jen Coat. This
allocation of interest expense totaled $5.6 million, $15.6 million and
$19.1 million for the years ended December 31, 2002, 2001 and 2000,
respectively. Tax benefits allocated to discontinued operations based upon
their operating results were $1.6 million, $1.7 million and $3.6 million
for the years ended December 31, 2002, 2001 and 2000, respectively.
Operating results of the discontinued operations for the years ended
December 31, 2002, 2001 and 2000 are summarized as follows (in thousands):
YEAR ENDED DECEMBER 31
---------------------------------------
2002 2001 2000
-------- --------- --------
Net sales:
Label............................................. $ 84,758 $ 219,182 $223,994
Curtis 1000....................................... 22,788 171,148 156,871
Jen-Coat.......................................... -- -- 56,036
-------- --------- --------
$107,546 $ 390,330 $436,901
======== ========= ========
Income (loss) from operations:
Label.............................................. $ -- $ (1,028) $(15,005)
Curtis 1000........................................ -- (3,588) 1,774
Jen-Coat........................................... -- -- 1,721
-------- --------- --------
-- (4,616) (11,510)
Income tax benefit................................. -- 1,634 2,935
-------- --------- --------
$ -- $ (2,982) $ (8,575)
======== ========= ========
Loss on disposal of discontinued operations:
Label.............................................. $(16,299) $ (87,062) $ --
Curtis 1000........................................ (1,028) (36,395) --
-------- --------- --------
(17,327) (123,457) --
Income tax benefit................................. 459 35,435 --
-------- --------- --------
$(16,868) $ (88,022) $ --
======== ========= ========
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 $33.6 million to the expected net realizable value
based on estimated proceeds, net of expenses associated with its sale and a
tax benefit of $11.5 million that would have resulted from the sale. As a
result of the Company's decision in June 2002 not to sell PrintXcel, it
reversed the tax benefit since it would not be realized and $1.1 million of
expenses related to the sale that had been accrued but not incurred. The
$33.6 million charge in 2001 and the $10.4 million charge in 2002 have been
included in "Impairment on operations formerly held for sale" in the
consolidated statements of operations.
40
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ASSETS HELD FOR SALE
The Company sold the filing products division of the Envelope segment
in August 2002 and anticipates selling certain operations of the digital
graphics division of the Commercial Printing segment. The following table
presents the sales and operating income of these operations for the years
ended December 31, 2002, 2001 and 2000 (in thousands):
DECEMBER 31
-----------------------------------
2002 2001 2000
------- ------- -------
Sales................................................ $56,445 $89,950 $92,333
Operating income..................................... $ 3,304 $ 8,238 $ 9,700
The assets of operations held for sale at December 31, 2002 and 2001
totaled $5.9 million and $44.6 million and are reported net of $1.4 million
and $12.0 million of related liabilities, respectively, as "Net assets held
for sale" in the accompanying consolidated balance sheets.
In 2001, the digital graphics division was written down $2.9 million
to its estimated fair market value based on sales proceeds anticipated at
the time. In 2002, the Company recorded another impairment charge of
$2.8 million based on a change in the estimated sales proceeds. Subsequent
to this write-down, management discontinued its efforts to sell one of the
operations of the digital graphics division. The $2.9 million impairment
charge recorded in 2001 has been included in impairment on operations
formerly held for sale in the consolidating statements of operations.
In 2002, the impairment on operations formerly held for sale includes
$2.5 million of the $2.8 million impairment charge recorded in 2002. The
remaining $0.3 million of the write-down was recorded as an impairment of
the operations held for sale. The net assets held for sale at December 31,
2002 are recorded at estimated net realizable value.
A $6.1 million impairment charge was recorded in 2002 as a result of
the sale of the filing products division.
6. SUPPLEMENTAL BALANCE SHEET INFORMATION
INVENTORIES
The Company's inventories by major category are as follows (in
thousands):
DECEMBER 31
-----------------------
2002 2001
-------- --------
Raw materials.......................................... $ 32,515 $ 34,483
Work in process........................................ 25,832 23,121
Finished goods......................................... 50,854 58,680
-------- --------
109,201 116,284
Reserves................................................ (5,668) (4,636)
-------- --------
$103,533 $111,648
======== ========
41
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. SUPPLEMENTAL BALANCE SHEET INFORMATION (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
The Company's investment in property, plant and equipment consists of
the following (in thousands):
DECEMBER 31
-------------------------
2002 2001
--------- ---------
Land and land improvements............................. $ 19,529 $ 21,365
Buildings and improvements............................. 105,646 117,888
Machinery and equipment................................ 463,896 472,121
Furniture and fixtures................................. 15,178 14,411
Construction in progress............................... 5,510 9,701
--------- ---------
609,759 635,486
Accumulated depreciation................................ (230,135) (206,922)
--------- ---------
$ 379,624 $ 428,564
========= =========
ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss consisted of the following (in
thousands):
YEAR ENDED
DECEMBER 31
-------------------------------------
2002 2001 2000
-------- -------- -------
Currency translation adjustment...................... $(11,325) $(14,934) $(6,467)
Pension liability adjustment......................... (2,264) (1,074) (146)
Unrealized loss on investments....................... -- -- (915)
-------- -------- -------
$(13,589) $(16,008) $(7,528)
======== ======== =======
7. LONG-TERM DEBT
At December 31, 2002 and 2001, long-term debt consisted of the
following (in thousands):
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................. 101,932 --
Senior Notes, due 2012................................. 350,000 --
Senior Subordinated Notes, due 2008.................... 300,000 300,000
Convertible Subordinated Notes, due 2002............... -- 139,063
Other.................................................. 11,967 22,491
-------- ---------
763,899 855,221
Less current maturities................................. (2,961) (303,170)
-------- ---------
Long-term debt.......................................... $760,938 $ 552,051
======== =========
Current maturities at December 31, 2002 primarily consist of scheduled
payments on capital leases. Current maturities at December 31, 2001
included the Convertible Notes which have been
42
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT (CONTINUED)
retired and also included the portion of bank borrowings that were expected
to be repaid from the proceeds from planned divestitures pursuant to the
terms of the Senior Secured Credit Facility, net of amounts that would
become available as a result of such repayments under the revolving loan
facility.
In June 2002, the Company entered into a new three year $300,000,000
Senior Secured Credit Facility with a consortium of banks due in 2005 (the
"Credit Facility"). The Credit Facility was used to refinance the Company's
$800,000,000 Senior Secured Credit Facility. Under the Credit 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. At December
31, 2002, the Company had outstanding loans and letters of credit of
$126.4 million and had $128.1 million of availability. Loans made under the
Credit Facility bear interest at a base rate or LIBOR, plus a margin. The
interest rate at December 31, 2002 was 4.89%. The Credit Facility is secured
by substantially all of the assets of the Company.
In March 2002, the Company issued $350,000,000 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 may 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 equity
offerings.
In February 2000, the Company entered into an $800,000,000 Senior
Secured Credit Facility which originally consisted of a $300 million
Tranche A term loan, a $250 million Tranche B term loan and a $250 million
revolving loan facility. This Senior Secured Credit Facility was refinanced
in June 2002.
Deferred financing costs of $16.9 million incurred in connection with
the Senior Secured Credit Facility were written off as a result of the
refinancing in June 2002. The write-off is reported net of tax as an
extraordinary loss in the consolidated statement of operations for the year
ended December 31, 2002.
In February 2000, the Company wrote off deferred financing costs of
$0.6 million capitalized in connection with the bank borrowings, which were
repaid in February 2000. The charge is reported net of tax as an
extraordinary item in the consolidated statement of operations for the year
ended December 31, 2000.
In December 1998, the Company issued $300,000,000 of 8.75% Senior
Subordinated Notes (the "Senior Subordinated Notes"), which are due
December 2008. Interest is payable semi-annually. The Company may redeem
the Senior Subordinated Notes, in whole or in part, on or after December
15, 2003, at redemption prices which range from 100% to 104.375%, plus
accrued and unpaid interest.
In November 2002, the Company redeemed the outstanding 5% Convertible
Subordinated Notes due November 1, 2002 (the "Convertible Notes"). In
March 2000, the Company repurchased $13.0 million of the outstanding Convertible
Notes at a discount and recorded a gain of $3.0 million, which was reported
net of tax as an extraordinary item in the consolidated statement of
operations for the year ended December 31, 2000.
Other long-term debt is primarily term debt with banks with interest
rates which range from 1.6% to 10.5% and also includes capital lease
obligations.
43
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT (CONTINUED)
The aggregate annual maturities for long-term debt at December 31, 2002
are as follows (in thousands):
2003................................. $ 2,961
2004................................. 1,228
2005................................. 102,879
2006................................. 787
2007................................. 842
Thereafter........................... 655,202
--------
$763,899
========
Cash paid for interest (including interest allocated to discontinued
operations) on long-term debt was $63.0 million, $71.5 million and
$89.9 million for the years ended December 31, 2002, 2001 and 2000,
respectively.
The estimated fair value of the Company's Credit Facility, Senior
Notes, Senior Subordinated Notes and other long-term debt based on current
rates available to the Company for debt of the same remaining maturity was
$610.0 million and $795.8 million at December 31, 2002 and 2001,
respectively.
The Credit Facility, Senior Notes and Senior Subordinated Notes contain
certain restrictive covenants that, among other things and with certain
exceptions, limit the ability of the Company to incur additional
indebtedness or issue capital stock, prepay subordinated debt, transfer
assets outside of the Company, pay dividends or repurchase shares of common
stock. In addition to these restrictions, the Company is required to
maintain certain levels of net worth and fixed charge coverage. As of
December 31, 2002, the Company was in compliance with all of these
covenants.
The Senior Notes and the Senior Subordinated Notes are guaranteed by
Mail-Well, Inc. and its U.S. subsidiaries (the "Guarantor Subsidiaries")
all of which are wholly owned. 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 the issuing
subsidiary in the form of cash dividends, loans or advances, other than
ordinary legal restrictions under corporate law, fraudulent transfer and
bankruptcy laws.
8. INCOME TAXES
Income (loss) from continuing operations for the years ended
December 31, 2002, 2001 and 2000 was (in thousands):
2002 2001 2000
--------- -------- -------
Domestic............................................ $(119,946) $(78,472) $33,629
Foreign............................................. 31,275 28,059 22,741
--------- -------- -------
Income (loss) from continuing operations before
income taxes...................................... $ (88,671) $(50,413) $56,370
========= ======== =======
44
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
The provision for income taxes on income from continuing operations for
the years ended December 31, 2002, 2001 and 2000 consisted of the following
(in thousands):
2002 2001 2000
-------- -------- -------
Current tax provision (benefit):
Federal.......................................... $(12,747) $(18,052) $ 3,816
Foreign.......................................... 10,050 9,594 8,421
State............................................ (1,273) (1,805) 381
-------- -------- -------
(3,970) (10,263) 12,618
Deferred provision (benefit):
Federal.......................................... (19,830) 4,245 7,023
Foreign.......................................... 475 393 1,281
State............................................ (1,983) 425 702
-------- -------- -------
(21,338) 5,063 9,006
-------- -------- -------
Provision (benefit) for income taxes................. $(25,308) $ (5,200) $21,624
======== ======== =======
A reconciliation of the federal statutory tax rate to the Company's
effective income tax rate is summarized below:
2002 2001 2000
------- ------ -----
Federal statutory tax rate.............................. 35.0% 35.0% 35.0%
State tax, net of federal benefit....................... 4.5 3.5 3.5
Nondeductible goodwill amortization..................... -- -- 6.2
Nontaxable investment benefit........................... -- 4.3 (3.8)
Impairment on divestitures.............................. (10.5) (32.8) --
Change in valuation allowance........................... (1.1) -- --
Other................................................... 0.6 0.3 (2.5)
----- ----- ----
Effective income tax rate............................... 28.5% 10.3% 38.4%
===== ===== ====
45
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
Deferred taxes are recorded to give recognition to temporary
differences between the tax basis of assets or liabilities and their
reported amounts in the financial statements. The tax effects of these
temporary differences are recorded as deferred tax assets or deferred tax
liabilities. Deferred tax assets generally represent items that can be used
as a tax deduction or credit in future years. Deferred tax liabilities
generally represent items that have been deducted for tax purposes, but
have not yet been recorded in the consolidated statements of operations.
Valuation allowances are recorded to reduce deferred tax assets when it is
more likely than not that a tax benefit will not be realized. The tax
effects of temporary differences that give rise to significant portions of
the deferred tax assets and deferred tax liabilities at December 31, 2002
and 2001 are presented below (in thousands):
2002 2001
--------- ---------
Deferred tax assets:
Alternative minimum tax credit carryforwards........ $ 4,608 $ 5,563
Net operating loss carryforwards.................... 69,736 7,738
Capital loss........................................ 15,977 --
Compensation and benefit related accruals........... 17,870 16,844
Restructuring accruals.............................. 179 10,517
Accounts receivable................................. 1,704 1,976
Other............................................... 3,648 1,154
Valuation allowance................................. (570) (1,215)
--------- ---------
Total deferred tax assets............................... 113,152 42,577
Deferred tax liabilities:
Property, plant and equipment....................... (84,516) (97,499)
Goodwill and other intangibles...................... (20,491) (5,207)
Other............................................... (7,536) (3,015)
--------- ---------
Total deferred tax liabilities.......................... (112,543) (105,721)
--------- ---------
Net deferred tax asset (liability)...................... $ 609 $ (63,144)
========= =========
The net deferred income tax asset (liability) at December 31, 2002 and
2001 includes the following components (in thousands):
2002 2001
-------- --------
Current deferred tax asset.............................. $ 10,945 $ 25,249
Non-current deferred tax liability...................... (10,336) (88,393)
-------- --------
Total............................................... $ 609 $(63,144)
======== ========
The deferred tax asset at December 31, 2002 includes a $40.4 million
capital loss carryforward which is available to reduce future capital
gains. These capital losses will expire in 2007. Net operating losses of
$162.3 million are being carried forward and are available to reduce future
taxable income. These net operating losses will expire in 2021. The Company
also has tax credit carryforwards of $4.6 million at December 31, 2002,
which may be carried forward indefinitely.
Cash payments for income taxes (including the amounts allocated to
discontinued operations) were $6.0 million, $2.4 million and $8.8 million
in 2002, 2001 and 2000, respectively.
46
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. RESTRUCTURING, ASSET IMPAIRMENTS 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 and
other nonrecurring charges.
2002 ACTIVITY
Restructuring and other charges recorded during the year ended
December 31, 2002 were $74.6 million. The following table and discussion
present the details of these charges (in thousands):
PRINTED
COMMERCIAL OFFICE
ENVELOPE PRINTING PRODUCTS CORPORATE TOTAL
-------- ---------- -------- --------- -------
Employee separation and related
expenses........................ $ 884 $ 3,206 $1,404 $ -- $ 5,494
Employee training expenses........ 7,043 -- -- -- 7,043
Project management expenses....... 9,246 -- -- -- 9,246
Asset impairment charges, net..... 9,644 3,259 925 -- 13,828
Other exit costs.................. 4,219 4,691 658 -- 9,568
Reversal of unused accrual........ (500) -- -- -- (500)
------- ------- ------ ------- -------
Total restructuring costs..... 30,536 11,156 2,987 -- 44,679
Other charges..................... 2,038 4,655 161 23,018 29,872
------- ------- ------ ------- -------
Total restructuring, asset
impairments and other
charges..................... $32,574 $15,811 $3,148 $23,018 $74,551
======= ======= ====== ======= =======
ENVELOPE. The consolidation of ten of the envelope manufacturing
facilities is 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 plants in the United States and
Canada. The costs incurred during the year ended December 31, 2002 related
to this consolidation were as follows:
* Employee training expenses of $7.0 million were incurred to train the
new employees that were hired at the plants that absorbed the
production of the plants that were closed. The training programs for
these employees were between three and nine months in duration.
* Project management expenses of $9.2 million which were 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.
* Impairment charges of $9.6 million were 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.
* Other costs of $4.2 million include the expenses incurred to move and
reinstall 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 estimated to be affected over the course of this
project. As of December 31, 2002, 722 employees had been separated
and the accrual has been adjusted by $0.5 million.
47
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. RESTRUCTURING, ASSET IMPAIRMENTS AND OTHER CHARGES (CONTINUED)
As a result of other cost reduction actions, the Envelope segment
incurred employee separation and related expenses of $0.9 million in
connection the elimination of 139 jobs.
COMMERCIAL PRINTING. During 2002, Commercial Printing reduced the size
of many of its operations in response to the significant decline in sales.
Employee separation and related expenses to cover the elimination of 192
jobs totaled $1.9 million. Impairment charges of $1.3 million were incurred
for equipment taken out of service. Other restructuring costs of
$0.7 million include expenses associated with lease commitments and the
cost to dismantle, move and reinstall equipment.
In September 2002, Commercial Printing closed its operation in
New York City and began the consolidation of its web printing operation
in Indianapolis, Indiana with its web plants in St. Louis, Missouri and
Baltimore, Maryland. A web press was also moved from Portland, Oregon to
the plant in St. Louis. Employee separation and related expenses to cover
the elimination of 132 jobs totaled $1.3 million. Impairment charges on
equipment taken out of service totaled $2.0 million. Other restructure
costs of $4.0 million are the expenses associated with terminating lease
commitments and the costs to dismantle, move and reinstall equipment.
PRINTED OFFICE PRODUCTS. During 2002, Printed Office Products closed
two of its traditional documents plants in response to the decline in the
demand for business forms. The employee separation and related employee
expenses covering 64 employees was $0.6 million. As of December 31, 2002,
all of these employees had been separated. Impairment charges related to
equipment taken out of service as a result of these closures totaled
$0.6 million. Other restructuring expenses of $0.7 million were incurred
primarily to prepare the two plant buildings for sale.
As a result of other cost reduction measures, Printed Office Products
has incurred employee separation and related expenses of $0.8 million in
connection with the elimination of 184 jobs and asset impairments of
$0.3 million.
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 Envelope and Commercial Printing and the alignment
of equipment and services to better serve customers and markets.
Outside assistance was used in the implementation of these programs
the cost of which was $4.4 million in 2002.
* In connection with the refinancing of the bank credit facility in
June 2002, an operating lease stemming from a sale/leaseback
arrangement executed in 1997 and amended in 2000 had to be
refinanced. The value of the equipment subject to the lease was
reduced from $34.9 million to $19.1 million, requiring a payment of
the difference of $15.8 million. In addition, deferred costs of
$6.1 million associated with the lease prior to this refinancing were
written off.
* An impairment charge of $1.8 million was recorded to write-down idle
equipment in Commercial Printing to net realizable value.
* Severance payments of $1.1 million unrelated to the restructure plans
were incurred.
* Consulting fees of $0.7 million related to tax matters that arose as
a result of the divestitures were incurred.
48
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. RESTRUCTURING, ASSET IMPAIRMENTS AND OTHER CHARGES (CONTINUED)
A summary of the activity charged to the 2002 restructuring liability
during the year ended December 31, 2002 was as follows (in thousands):
PRINTED
COMMERCIAL OFFICE
PRINTING PRODUCTS TOTAL
---------- -------- -------
Initial accrual..................................... $ 4,106 $1,019 $ 5,125
Additions to the accrual........................ 2,466 -- 2,466
Payments for severance.......................... (2,581) (353) (2,934)
Payments for lease termination and property exit
costs......................................... -- (3) (3)
Payments for other exit costs................... (1) (10) (11)
------- ------ -------
Balance, December 31, 2002.......................... $ 3,990 $ 653 $ 4,643
======= ====== =======
2001 ACTIVITY
The restructuring and other charges totaled $43.1 million in 2001. The
following table and discussion present the details of these charges (in
thousands):
COMMERCIAL PRINTED OFFICE
ENVELOPE PRINTING PRODUCTS CORPORATE TOTAL
-------- ---------- -------------- --------- -------
Employee separation and
related expenses............ $ 9,042 $ 385 $ 618 $ -- $10,045
Employee training expenses.... 2,628 -- -- -- 2,628
Project management expenses... 5,404 -- -- -- 5,404
Asset impairment charges,
net......................... 8,178 601 (1,300) -- 7,479
Other exit costs.............. 6,510 1,978 691 -- 9,179
Strategic assessment costs.... -- -- -- 2,677 2,677
------- ------ ------- ------ -------
Total restructuring
costs................... 31,762 2,964 9 2,677 37,412
Other charges................. 1,360 1,482 1,231 1,600 5,673
------- ------ ------- ------ -------
Total restructuring, asset
impairments and other
charges................. $33,122 $4,446 $ 1,240 $4,277 $43,085
======= ====== ======= ====== =======
ENVELOPE. The employee separation and related expenses costs cover
923 employees expected to be affected over the course of the plant
consolidation project described above, of which 359 had been separated as
of December 31, 2001. Other exit costs included lease termination costs of
$1.4 million and equipment moving expenses and building clean-up costs. As
of December 31, 2001, the closure of three facilities had been completed.
The $8.2 million asset impairment charge relates to the write down of
equipment taken out of service as a result of these plant closures.
COMMERCIAL PRINTING. Commercial Printing closed a plant and
consolidated two other printing operations in the Philadelphia area.
These actions were completed to improve the cost effectiveness of these
operations and their competitive position in the Philadelphia market. The
costs associated with the consolidation included employee separation and
related expenses covering the elimination of 25 jobs. Other exit costs
include lease termination costs and expenses incurred to move and reinstall
equipment. Equipment taken out of service was written down $0.6 million to
its fair market value.
PRINTED OFFICE PRODUCTS. Printed Office Products substantially
curtailed its operation in Denver, Colorado in 2001. The employee
separation and related expenses of $0.6 million were related to the
elimination of 62 jobs. Other exit costs were the expenses incurred to
dismantle, move and reinstall equipment. Additionally, an asset impairment
charge of $1.3 million taken in 2000 to write-down a
49
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. RESTRUCTURING, ASSET IMPAIRMENTS AND OTHER CHARGES (CONTINUED)
building to its estimated fair market value was reversed. This building was
sold for more than its original carrying value.
CORPORATE. In developing the strategic plan, outside advisors were
engaged to research and evaluate the Company's markets, survey its
customers and assess existing strategies. In addition, financial advisors
were engaged to evaluate options for improving the Company's capital
structure. The cost of these advisors was $2.7 million in 2001.
OTHER CHARGES. Other charges include the following items:
* The outside assistance used in the implementation of initiatives in
Envelope and Commercial Printing to implement best practices,
standardize costing and pricing systems, and align equipment and
services to better serve customers and markets totaled $2.2 million
in 2001.
* Cost of $0.7 million incurred by Envelope for a human resource
information system that was not implemented was written-off.
* Printed Office Products incurred $1.2 million of fees and expenses
associated with the settlement of a lawsuit.
* A $1.6 million investment in a company that was developing a service,
which would enable the management of the creative process of a
printing job online, was written-off.
A summary of the activity charged to the 2001 restructuring liability
during the year ended December 31, 2002 was as follows (in thousands):
PRINTED
COMMERCIAL OFFICE
ENVELOPE PRINTING PRODUCTS TOTAL
-------- ---------- -------- -------
Balance, December 31, 2001................ $10,126 $ 604 $ 70 $10,800
Additions to the accrual.................. -- 169 -- 169
Payments for severance.................... (5,026) -- -- (5,026)
Payments for lease termination and
property exit costs..................... (2,082) (324) (70) (2,476)
Reversal of unused portion................ (500) -- -- (500)
------- ----- ----- -------
Balance, December 31, 2002................ $ 2,518 $ 449 $ -- $ 2,967
======= ===== ===== =======
2000 ACTIVITY
The Company began the comprehensive review of its operations at the end
of 2000 and identified certain actions that could be taken at that time.
The following table and discussion present the details of restructuring
charges and other charges recorded in 2000 (in thousands):
COMMERCIAL PRINTED OFFICE
ENVELOPE PRINTING PRODUCTS TOTAL
-------- ---------- -------------- -------
Employee separation and related
expenses................................ $ 86 $ 188 $1,261 $ 1,535
Asset impairment charges.................. -- 749 3,299 4,048
Other exit costs.......................... -- 473 1,045 1,518
------ ------ ------ -------
Total restructuring costs............. 86 1,410 5,605 7,101
Other asset impairments................... 1,872 2,036 2,723 6,631
------ ------ ------ -------
Total restructuring, asset impairments
and other charges................... $1,958 $3,446 $8,328 $13,732
====== ====== ====== =======
50
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. RESTRUCTURING, ASSET IMPAIRMENTS AND OTHER CHARGES (CONTINUED)
ENVELOPE. Envelope closed a resale operation in Vancouver, Washington.
The employee separation and related expenses covered the elimination of
19 jobs.
COMMERCIAL PRINTING. Commercial Printing consolidated two operations in
St. Louis into an existing facility and closed its bindery operation in
Mexico. The employee separation and related expenses covered the
elimination of 165 jobs. The losses recorded as a result of the lease
terminations and asset impairments were primarily related to the closure
of the Mexico bindery.
PRINTED OFFICE PRODUCTS. Printed Office Products closed its business
forms plants in Oceanside, California; Sparks, Nevada; and Houston, Texas.
The employee separation and related expenses covered the elimination of
190 jobs. The cost associated with the termination of lease commitments at
these facilities was expensed as was the loss incurred on the equipment
that was sold or abandoned.
The Company also incurred asset impairment charges in 2000 totaling
$6.6 million that were unrelated to the restructuring. These assets were
taken out of service and could not be redeployed or sold, and therefore
were written off.
The restructuring program initiated in 1998 was completed during 2000.
Charges recorded in 2000 related to that program totaled $0.8 million.
A summary of the activity charged to the 2000 restructuring liability
during the year ended December 31, 2001 was as follows (in thousands):
PRINTED
COMMERCIAL OFFICE
ENVELOPE PRINTING PRODUCTS TOTAL
-------- ---------- -------- -------
Balance, December 31, 2000................ $ 86 $1,485 $1,742 $ 3,313
Payments for severance................ (86) (461) (639) (1,186)
Payments for lease termination and
property exit costs................. -- (452) (705) (1,157)
Payments for other exit costs......... -- (572) (398) (970)
---- ------ ------ -------
Balance, December 31, 2001................ $ -- $ -- $ -- $ --
==== ====== ====== =======
10. STOCK OPTION PLANS
In May 2001, the Company adopted a Long-Term Equity Incentive Plan (the
"Incentive Plan"), which replaced all prior stock option plans (the "Option
Plans"). Stock options which were available for grant under the Option
Plans were transferred to the Incentive Plan and the Option Plans have been
frozen. The Incentive Plan allows the compensation committee of the Board
of Directors to grant stock options, stock appreciation rights, restricted
common stock, performance awards and any other stock-based awards to
officers, directors and employees of the Company. Under the Incentive Plan,
the Board issued 82,000 Performance-Based Restricted Shares ("PARS") and
255,250 stock options in 2002 and 669,000 PARS and 3,113,420 stock options
in 2001. The Company has 1,809,449 stock options available for issuance.
Stock options generally vest over four to six years and expire 10 years
from the date granted. Options are granted at a price equal to the fair
market value of the Company's common stock on the date of grant. The PARS
issued in 2002 vest fifty percent in 2007 and the other fifty percent in
2008. The PARS issued in 2001 vest fifty percent in 2006 and the other
fifty percent in 2007. The Incentive Plan provides for an acceleration of
the vesting of both the stock options and the PARS
51
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTION PLANS (CONTINUED)
if the Company's stock price closes at certain levels for 20 consecutive
trading days as set forth in the following schedule:
STOCK PRICE AT WHICH
VESTING OCCURS
AMOUNT OF ACCELERATED VESTING OPTIONS PARS
----------------------------- ------- ------
First one-third.......................... $ 7.50 $ 8.00
Second one-third......................... $10.00 $11.00
Final one-third.......................... $12.50 $14.00
When PARS were issued in 2002 and 2001, the Company recorded deferred
compensation of $0.1 million and $3.7 million, respectively, as a charge to
shareholders' equity based upon the fair market value on the date of grant.
This deferred compensation is being recognized as compensation expense
ratably over the vesting period of the PARS. The Company recorded
compensation expense in the amount of $0.6 million and $0.3 million for the
years ended December 31, 2002 and 2001, respectively.
The following table summarizes the activity and terms of outstanding
options at December 31, 2002, 2001 and 2000:
2002 2001 2000
----------------------- ----------------------- -----------------------
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- -------- --------- --------
Options outstanding at beginning
of year........................ 6,128,637 $7.08 3,670,867 $8.75 2,598,119 $8.76
Granted.......................... 255,250 4.63 3,265,036 5.45 1,362,659 8.65
Exercised........................ (11,230) 1.63 (201,922) 2.05 (61,856) 4.99
Expired/cancelled................ (930,655) 6.85 (605,344) 9.83 (228,055) 9.04
--------- ----- --------- ----- --------- -----
Options outstanding at end of
year........................... 5,442,002 $6.96 6,128,637 $7.08 3,670,867 $8.75
========= ===== ========= ===== ========= =====
Options exercisable at end of
year........................... 2,458,607 $8.01 1,679,137 $8.60 1,289,717 $7.48
========= ===== ========= ===== ========= =====
Summary information about the Company's stock options outstanding at
December 31, 2002 is as follows:
WEIGHTED WEIGHTED WEIGHTED
OUTSTANDING AT AVERAGE AVERAGE EXERCISABLE AT AVERAGE
DECEMBER 31, REMAINING LIFE EXERCISE DECEMBER 31, EXERCISE
RANGE OF EXERCISE PRICES 2002 (IN YEARS) PRICE 2002 PRICE
- ---------------------------- -------------- -------------- -------- -------------- --------
$ 1.32-$1.42................ 69,181 2.2 $ 1.33 69,181 $ 1.33
$ 2.19-$4.37................ 365,505 5.8 $ 3.74 176,505 $ 3.76
$ 4.38-$6.56................ 3,067,749 3.8 $ 5.46 751,233 $ 5.43
$ 6.57-$8.74................ 901,065 5.3 $ 7.67 664,472 $ 7.39
$ 8.75-$10.93............... 237,200 6.8 $ 9.71 150,667 $ 9.73
$10.94-$13.10............... 513,800 5.2 $12.29 394,647 $12.23
$13.20-$15.30............... 269,502 4.6 $13.80 233,902 $13.77
$21.86...................... 18,000 5.3 $21.86 18,000 $21.86
--------- --- ------ --------- ------
$ 1.32-$21.86............... 5,442,002 4.5 $ 6.96 2,458,607 $ 8.01
========= === ====== ========= ======
52
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTION PLANS (CONTINUED)
As permitted by SFAS No. 123, the Company accounts for its stock-based
compensation under APB No. 25; however, the Company has computed for pro
forma disclosure purposes the value of all options granted during 2002,
2001 and 2000 using the Black-Scholes option pricing model as prescribed by
SFAS No. 123 and using the following average assumptions:
2002 2001 2000
------- --------- ---------
Risk-free interest rate....................... 3.0% 3.5% 5.8%
Expected dividend yield....................... 0% 0% 0%
Expected option lives......................... 5 years 4-6 years 4-6 years
Expected volatility........................... 71% 65% 64%
The weighted average fair value of options granted in 2002, 2001 and
2000 was $1.16, $3.22 and $4.68, respectively, per option.
Refer to Note 1 for the pro forma effect of expensing the estimated
fair value of stock options on net income and earnings per share for 2002,
2001 and 2000.
11. RETIREMENT PLANS
SAVINGS PLAN
The Company sponsors a defined contribution plan to provide
substantially all U.S. salaried and certain hourly employees an opportunity
to accumulate personal funds for their retirement. As determined by the
provisions of the plan, the Company matches a certain percentage of each
employee's voluntary contribution. The plan also provides for a
discretionary contribution by the Company to the plan for all eligible
employees. All contributions made by the Company are made in cash and
allocated to the funds selected by the employee. Company contributions to
the plan were approximately $6.5 million, $10.5 million and $6.9 million
for the years ending in December 31, 2002, 2001 and 2000, respectively, and
no discretionary contribution was made in 2002 or 2000. The plan held
2,960,200 shares of the Company's common stock at December 31, 2002.
PENSION PLANS
The Company maintains pension plans for certain of its employees in the
U.S. and Canada under collective bargaining agreements with unions
representing these employees. The Company expects to continue to fund these
plans based on governmental requirements, amounts deductible for income tax
purposes and as needed to ensure that plan assets are sufficient to satisfy
plan liabilities. As of December 31, 2002, plan assets consist primarily of
government bonds, corporate bonds, equity and fixed income funds.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS
As a result of the acquisition of ABP, the Company assumed
responsibility for the ABP supplemental executive retirement plans ("SERP")
which provide benefits to certain former directors and executives of ABP.
For accounting purposes, these plans are unfunded; however, ABP had
purchased annuities to cover the benefits for certain participants. In
2001, the Company accelerated the benefit payments to all participants for
whom there was no annuity.
53
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. RETIREMENT PLANS (CONTINUED)
The following table sets forth the financial status of the pension
plans and the SERP and the amounts recognized in the Company's consolidated
balance sheets at December 31, 2002 and 2001 (in thousands):
PENSION PLANS SERP
-------------------- ---------------------
2002 2001 2002 2001
------- ------- ------- --------
Change in benefit obligation:
Benefit obligation at beginning of year........ $31,549 $29,613 $ 9,042 $ 17,844
Service cost................................... 1,541 1,424 -- --
Interest cost.................................. 2,250 2,137 998 853
Actuarial gains and loss....................... 1,307 1,418 -- --
Foreign currency exchange rate changes......... 316 (1,056) -- --
Benefits paid.................................. (2,153) (1,987) (989) (9,655)
------- ------- ------- --------
Benefit obligation at end of year............ 34,810 31,549 9,051 9,042
------- ------- ------- --------
Change in plan assets:
Fair value of plan assets at beginning of
year......................................... 32,715 34,662 -- --
Foreign currency exchange rate changes......... 475 (1,197) -- --
Actual return on plan assets................... (1,420) (286) -- --
Employer contributions......................... 1,793 1,744 -- --
Benefits paid.................................. (2,375) (2,208) -- --
------- ------- ------- --------
Fair value of plan assets at end of year..... 31,188 32,715 -- --
------- ------- ------- --------
Funded status.................................... (3,623) 1,166 (9,051) (9,042)
Unrecognized actuarial loss...................... 13,526 7,260 -- --
Unrecognized prior service cost.................. 230 249 -- --
Unrecognized transition asset.................... (4,293) (4,021) -- --
------- ------- ------- --------
Net amount recognized............................ $ 5,840 $ 4,654 $(9,051) $ (9,042)
======= ======= ======= ========
Amounts recognized in the consolidated balance
sheets:
Prepaid benefit cost......................... $ 4,471 $ 4,283 $ -- $ --
Accrued benefit liability.................... (2,378) (1,450) (9,051) (9,042)
Intangible asset............................. 67 75 -- --
Deferred tax asset........................... 1,416 672 -- --
Accumulated other comprehensive loss......... 2,264 1,074 -- --
------- ------- ------- --------
Net amount recognized............................ $ 5,840 $ 4,654 $(9,051) $ (9,042)
======= ======= ======= ========
The components of the net periodic pension cost for the pension plans
and the SERP were as follows (in thousands):
2002 2001 2000
------- ------- -------
Service cost........................................... $ 1,185 $ 1,075 $ 2,000
Interest cost on projected benefit obligation.......... 3,248 2,991 2,789
Expected return on plan assets......................... (3,148) (3,017) (2,963)
Net amortization and deferral.......................... (399) (396) (400)
Recognized actuarial loss.............................. 179 36 31
Curtailment loss....................................... 1 129 38
------- ------- -------
Net periodic pension expense............................ $ 1,066 $ 818 $ 1,495
======= ======= =======
The assumptions used in computing the net pension cost and the funded
status were as follows:
2002 2001 2000
---- ---- ----
Weighted average discount rate...... 6.75% 7.25% 7.50%
Expected long-term rate of return
on assets......................... 8.75% 8.75-9% 8.75-9%
Rate of compensation increase....... 3-4% 2-4% 2-4%
54
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. RETIREMENT PLANS (CONTINUED)
The aggregate accumulated benefit obligation and aggregate fair value
of plan assets for pension plans with accumulated benefit obligations in
excess of plan assets were $34.8 million and $31.2 million, respectively,
as of December 31, 2002. The aggregate accumulated benefit obligation and
aggregate fair value of plan assets for pension plans with accumulated
benefit obligations in excess of plan assets were $9.0 million and
$7.6 million, respectively, as of December 31, 2001.
Certain other U.S. employees are included in multi-employer pension
plans to which the Company makes contributions in accordance with the
contractual union agreements. Such contributions are made on a monthly
basis in accordance with the requirements of the plans and the actuarial
computations and assumptions of the administrators of the plans.
Contributions to multi-employer plans were $3.1 million, $2.9 million,
and $2.6 million for 2002, 2001 and 2000, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN
The Company maintains an Employee Stock Ownership Plan, which was
frozen in December 2000. The Company has not made contributions to this
plan since 1998. At December 31, 2002, the Employee Stock Ownership Plan
held 640,968 shares of the Company's common stock, all of which have been
allocated to participant accounts.
12. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases buildings and equipment under operating lease
agreements expiring at various dates through 2011. Certain leases include
renewal and purchase options. At December 31, 2002, future minimum annual
payments under non-cancelable lease agreements with original terms in
excess of one year are as follows (in thousands):
2003................................. 33,054
2004................................. 27,074
2005................................. 23,817
2006................................. 19,245
2007................................. 14,469
Thereafter........................... 12,608
--------
Total............................ $130,267
========
Aggregate future minimum rentals to be received under noncancelable
subleases as of December 31, 2002 are approximately $2.0 million.
Rent expense for the years ended December 31, 2002, 2001 and 2000 was
$40.5 million, $39.9 million and $36.1 million, respectively.
CONCENTRATIONS OF CREDIT RISK
The Company has limited concentrations of credit risk with respect to
financial instruments. Temporary cash investments and other investments are
placed with high credit quality institutions, and concentrations within
accounts receivable are limited due to the Company's customer base and its
dispersion across different industries and geographic areas.
LITIGATION
The Company is party to various legal actions that are ordinary and
incidental to its business. While the outcome of legal actions cannot be
predicted with certainty, management believes the outcome of these various
proceedings will not have a material adverse effect on the Company's
consolidated financial condition or results of operations.
55
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. EARNINGS PER SHARE
Basic earnings per share exclude dilution and are computed by dividing
net income (loss) by the weighted average number of common shares
outstanding for the period. Diluted earnings (loss) per share reflect the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock. A
reconciliation of the amounts included in the computation of basic earnings
(loss) per share and diluted earnings (loss) per share is as follows (in
thousands, except per share amounts):
DECEMBER 31
-------------------------------------
2002 2001 2000
-------- -------- -------
Numerator:
Numerator for basic earnings (loss) per share--income
(loss) from continuing operations...................... $(63,363) $(45,213) $34,746
Interest on Convertible Notes............................ -- -- 4,951
-------- -------- -------
Numerator for diluted earnings (loss) per share--income
(loss) from continuing operations after assumed
conversions............................................ $(63,363) $(45,213) $39,697
======== ======== =======
Denominator:
Denominator for basic earnings (loss) per share--weighted
average shares......................................... 47,665 47,562 48,789
Effects of dilutive securities:
Conversion of Convertible Notes...................... -- -- 7,461
Stock options........................................ -- -- 404
Other................................................ -- -- 24
-------- -------- -------
Denominator for diluted earnings (loss) per
share--adjusted weighted average shares and assumed
conversions............................................ 47,665 47,562 56,678
======== ======== =======
Earnings (loss) for continuing operations per share:
Basic................................................ $ (1.33) $ (0.95) $ 0.71
======== ======== =======
Diluted.............................................. $ (1.33) $ (0.95) $ 0.70
======== ======== =======
During the years ended December 31, 2002 and 2001, interest, net of
tax, on the Convertible Notes in the amount of $4.9 million 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 2002, 2001 and 2000,
outstanding options to purchase 5,357,000, 5,625,000 and 3,266,000 common
shares, respectively, were excluded from the calculation of diluted
earnings per share because the effect would be antidilutive. In addition,
669,000 PARS were excluded from the calculation of diluted earnings per
share in 2002 and 2001 because the effect would be antidilutive.
14. SEGMENT INFORMATION
The Company operates in three principal operating segments. The
Commercial Printing operating segment specializes in printing annual
reports, car brochures, brand marketing collateral, catalogs, maps and
guidebooks, calendars and financial communications. The Envelope operating
segment manufactures customized and stock envelopes for billing and
remittance and direct mail advertising. 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 which are sold to small and mid-size businesses generally through
distributors of office products. Intercompany sales for 2002, 2001 and 2000
were $13.7 million, $41.9 million and $32.3 million, respectively. These
amounts are eliminated in consolidation and excluded from reported net
sales.
56
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. SEGMENT INFORMATION (CONTINUED)
The following tables present certain business segment information for
the years ended December 31, 2002, 2001 and 2000 (in thousands):
YEAR ENDED DECEMBER 31
--------------------------------------------
2002 2001 2000
---------- ---------- ----------
Net sales:
Commercial Printing........................ $ 764,404 $ 817,937 $ 961,780
Envelope................................... 760,487 835,534 861,803
Printed Office Products.................... 203,814 215,297 220,767
---------- ---------- ----------
Total...................................... $1,728,705 $1,868,768 $2,044,350
========== ========== ==========
Operating income (loss)(a):
Commercial Printing........................ $ (16,255) $ 14,763 $ 54,758
Envelope................................... 45,302 54,168 90,202
Printed Office Products.................... 16,838 18,127 16,306
Corporate(b)............................... (62,341) (72,234) (31,052)
---------- ---------- ----------
Total...................................... $ (16,456) $ 14,824 $ 130,214
========== ========== ==========
Restructuring, asset impairments and other
charges:
Commercial Printing........................ $ 15,811 $ 4,446 $ 3,658
Envelope................................... 32,574 33,122 2,502
Printed Office Products.................... 3,148 1,240 8,328
Corporate.................................. 23,018 4,277 --
---------- ---------- ----------
Total...................................... $ 74,551 $ 43,085 $ 14,488
========== ========== ==========
Significant other noncash charges(c):
Commercial Printing........................ $ 6,138 $ 601 $ 2,785
Envelope................................... 16,878 8,875 1,872
Printed Office Products.................... 925 -- 6,022
Corporate.................................. 24,777 36,523 --
---------- ---------- ----------
Total...................................... $ 48,718 $ 45,999 $ 10,679
========== ========== ==========
Depreciation and amortization(d):
Commercial Printing........................ $ 26,098 $ 22,895 $ 27,153
Envelope................................... 15,351 19,756 20,633
Printed Office Products.................... 6,092 6,234 5,513
Corporate.................................. 2,514 14,511 18,047
---------- ---------- ----------
Total...................................... $ 50,055 $ 63,396 $ 71,346
========== ========== ==========
Capital expenditures:
Commercial Printing........................ $ 15,158 $ 13,613 $ 34,902
Envelope................................... 9,330 12,078 20,955
Printed Office Products.................... 6,129 5,943 9,291
Corporate.................................. 279 1,108 1,915
---------- ---------- ----------
Total...................................... $ 30,896 $ 32,742 $ 67,063
========== ========== ==========
57
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. SEGMENT INFORMATION (CONTINUED)
DECEMBER 31
---------------------------
2002 2001
---------- ----------
Identifiable assets(e):
Commercial Printing............................... $ 509,634 $ 643,219
Envelope.......................................... 495,006 537,747
Printed Office Products........................... 135,818 144,334
Corporate......................................... (37,583) (10,614)
---------- ----------
$1,102,875 $1,314,686
Net assets of discontinued operations............... -- 129,568
Net assets held for sale............................ 4,492 32,613
---------- ----------
Total............................................... $1,107,367 $1,476,867
========== ==========
- --------
(a) Operating income (loss) is net of all costs and expenses directly
related to the segment involved. Corporate expenses include corporate
general and administrative expenses, lease expense, amortization
expense of goodwill and other intangible assets, gains or losses on
disposal of assets, expenses related to a refinancing of an operating
lease in 2002 and other miscellaneous expenses.
(b) Includes impairment losses on assets held for sale of $6.1 million
related to Envelope segment and $0.3 million related to Commercial
Printing segment in 2002. Includes impairments on operations formerly
held for sale of $10.4 million and $36.5 million related to the
Printed Office Products segment in 2002 and 2001, respectively. It
also includes an impairment charge of $2.5 million on operations
formerly held for sale related to the Commercial Printing segment in
2002.
(c) Represents the noncash portion of restructuring and other asset
impairment charges.
(d) Amortization expense of goodwill and other intangible assets and
adjustments to depreciation for assets held for sale in 2002 and 2001
are included in corporate.
(e) Identifiable assets are accumulated by facility within each business
segment. Certain operating assets, which are under lease, are reported
as business 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.
Geographic information at December 31, 2002 and 2001 and for the years
ended December 31, 2002, 2001 and 2000, is presented below (in thousands):
2002 2001 2000
---------- ---------- ----------
Net sales:
U.S........................................ $1,561,859 $1,691,837 $1,871,231
Canada..................................... 166,846 176,931 172,922
Other foreign.............................. -- -- 197
---------- ---------- ----------
Total...................................... $1,728,705 $1,868,768 $2,044,350
========== ========== ==========
Identifiable assets:
U.S........................................ $ 964,310 $1,151,864
Canada..................................... 138,565 162,822
---------- ----------
Total...................................... $1,102,875 $1,314,686
========== ==========
58
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth certain quarterly financial data for the
periods indicated (in thousands, except per share amounts):
FIRST SECOND THIRD FOURTH
QUARTER(a) QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
2002
Net sales................................... $ 443,482 $420,967 $428,720 $435,536
Gross profit................................ 88,029 78,841 85,235 91,239
Income (loss) from continuing operations.... $ (11,303) $(30,250) $(22,149) $ 339
Discontinued operations..................... (7,999) (153) (5,804) (2,912)
Extraordinary items......................... (4,763) (5,362) -- --
Cumulative effect of change in accounting
principle................................. (111,748) -- -- --
--------- -------- -------- --------
Net loss.................................... $(135,813) $(35,765) $(27,953) $ (2,573)
========= ======== ======== ========
Loss per share--basic and diluted
Income (loss) from continuing
operations............................ $ (0.24) $ (0.63) $ (0.46) $ 0.01
Discontinued operations................. (0.17) -- (0.13) (0.06)
Extraordinary items..................... (0.09) (0.12) -- --
Cumulative effect of change in accounting
principle................................. (2.35) -- -- --
--------- -------- -------- --------
Net loss per share--basic and diluted... $ (2.85) $ (0.75) $ (0.59) $ (0.05)
========= ======== ======== ========
FIRST SECOND THIRD FOURTH
QUARTER(a) QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
2001
Net sales................................... $ 488,776 $471,560 $465,286 $443,146
Gross profit................................ 103,469 100,868 91,385 91,911
Income (loss) from continuing operations.... $ 5,828 $(15,328) $ (1,597) $(34,116)
Discontinued operations..................... (2,206) (77,197) 34 (11,635)
--------- -------- -------- --------
Net income (loss)........................... $ 3,622 $(92,525) $ (1,563) $(45,751)
========= ======== ======== ========
Earnings (loss) per share--basic and
diluted:
Income (loss) from continuing
operations............................ $ 0.12 $ (0.32) $ (0.03) $ (0.72)
Discontinued operations................. (0.04) (1.63) -- (0.24)
--------- -------- -------- --------
Net income (loss) per share--basic and
diluted............................... $ 0.08 $ (1.95) $ (0.03) $ (0.96)
========= ======== ======== ========
- --------
(a) These results have been restated from those previously reported to
reflect PrintXcel as part of continuing operations and the cumulative
effect of a change in accounting principle effective January 1, 2002.
59
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. 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, and Guarantor
Subsidiaries. The Issuer and the 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, Curtis 1000 Inc.'s financial information is included
in the 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.
60
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF FINANCIAL POSITION
December 31, 2002
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED
--------- ---------- ------------ ----------- ------------
Current assets:
Cash and cash equivalents......... $ -- $ 1,957 $ 693 $ -- $ 2,650
Accounts receivable, net.......... -- 54,274 165,650 -- 219,924
Inventories, net.................. -- 42,805 60,728 -- 103,533
Net assets held for sale.......... -- -- 4,492 -- 4,492
Other current assets.............. -- 32,462 13,300 -- 45,762
------- ---------- --------- ----------- ----------
Total current assets............ -- 131,498 244,863 -- 376,361
Investment in subsidiaries.......... 42,768 417,049 -- (459,817) --
Property, plant and equipment,
net................................ -- 119,737 259,887 -- 379,624
Goodwill and other intangible
assets, net........................ -- 85,097 223,850 -- 308,947
Note receivable from subsidiaries... -- 603,100 -- (603,100) --
Other assets, net................... -- 34,030 8,405 -- 42,435
------- ---------- --------- ----------- ----------
Total assets........................ $42,768 $1,390,511 $ 737,005 $(1,062,917) $1,107,367
======= ========== ========= =========== ==========
Current liabilities:
Accounts payable.................. $ -- $ 41,057 $ 110,873 $ -- $ 151,930
Other current liabilities......... -- 68,128 53,012 -- 121,140
Intercompany payable
(receivable)..................... -- 507,381 (507,381) -- --
Current portion of long-term
debt............................. -- 970 1,991 -- 2,961
------- ---------- --------- ----------- ----------
Total current liabilities....... -- 617,536 (341,505) -- 276,031
Long-term debt...................... -- 754,983 5,955 -- 760,938
Note payable to Issuer.............. -- -- 603,100 (603,100) --
Deferred income tax liabilities
(assets)........................... -- (38,269) 48,605 -- 10,336
Other long-term liabilities......... -- 13,493 3,801 -- 17,294
------- ---------- --------- ----------- ----------
Total liabilities............... -- 1,347,743 319,956 -- 1,064,599
Shareholders' equity................ 42,768 42,768 417,049 (459,817) 42,768
------- ---------- --------- ----------- ----------
Total liabilities and shareholders'
equity............................. $42,768 $1,390,511 $ 737,005 $(1,062,917) $1,107,367
======= ========== ========= =========== ==========
61
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF FINANCIAL POSITION
December 31, 2001
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED
--------- ---------- ------------ ----------- ------------
Current assets:
Cash and cash equivalents........ $ -- $ (1,589) $ 2,483 $ -- $ 894
Accounts receivable, net......... -- 60,039 173,006 -- 233,045
Inventories, net................. -- 51,032 60,616 -- 111,648
Net assets of discontinued
operations...................... -- -- 129,568 -- 129,568
Net assets held for sale......... -- 25,852 6,761 -- 32,613
Note receivable from Issuer...... 147,436 -- -- (147,436) --
Other current assets............. 295 41,988 28,998 -- 71,281
-------- ---------- ---------- ----------- ----------
Total current assets........... 147,731 177,322 401,432 (147,436) 579,049
Investment in subsidiaries......... 240,954 418,579 -- (659,533) --
Property, plant and equipment,
net............................... -- 151,735 276,829 -- 428,564
Goodwill and other intangible
assets, net....................... -- 84,881 335,842 -- 420,723
Note receivable from
subsidiaries...................... -- 749,400 -- (749,400) --
Other assets, net.................. 1,023 29,925 36,464 (18,881) 48,531
-------- ---------- ---------- ----------- ----------
Total assets....................... $389,708 $1,611,842 $1,050,567 $(1,575,250) $1,476,867
======== ========== ========== =========== ==========
Current liabilities:
Accounts payable................. $ -- $ 63,491 $ 97,168 $ -- $ 160,659
Other current liabilities........ 4,291 71,611 38,025 -- 113,927
Intercompany payable
(receivable).................... 4,477 350,311 (354,788) -- --
Note payable to Parent........... -- 147,436 -- (147,436) --
Current portion of long-term
debt............................ 139,063 161,850 2,257 -- 303,170
-------- ---------- ---------- ----------- ----------
Total current liabilities...... 147,831 794,699 (217,338) (147,436) 577,756
Long-term debt..................... -- 523,247 28,804 -- 552,051
Note payable to Issuer............. -- -- 749,400 (749,400) --
Deferred income taxes.............. -- 28,287 60,106 -- 88,393
Other long-term liabilities........ -- 24,655 11,016 (18,881) 16,790
-------- ---------- ---------- ----------- ----------
Total liabilities.............. 147,831 1,370,888 631,988 (915,717) 1,234,990
Shareholders' equity............... 241,877 240,954 418,579 (659,533) 241,877
-------- ---------- ---------- ----------- ----------
Total liabilities and shareholders'
equity............................ $389,708 $1,611,842 $1,050,567 $(1,575,250) $1,476,867
======== ========== ========== =========== ==========
62
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
Year Ended December 31, 2002
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED
--------- --------- ------------ -------- ------------
Net sales............................ $ -- $ 519,971 $1,208,734 $ -- $1,728,705
Cost of sales........................ -- 420,696 964,665 -- 1,385,361
--------- --------- ---------- -------- ----------
Gross profit......................... -- 99,275 244,069 -- 343,344
Other operating expenses............. 161 75,033 190,777 -- 265,971
Restructuring and other charges...... -- 56,641 17,910 -- 74,551
Impairment charges................... -- 6,061 13,217 -- 19,278
--------- --------- ---------- -------- ----------
Operating income (loss).............. (161) (38,460) 22,165 -- (16,456)
Other expense (income):
Interest expense................... 5,188 75,580 58,008 (68,315) 70,461
Other expense (income)............. (5,820) (61,341) 600 68,315 1,754
--------- --------- ---------- -------- ----------
Income (loss) from continuing
operations before income taxes and
equity in undistributed earnings of
subsidiaries........................ 471 (52,699) (36,443) -- (88,671)
Income tax benefit................... -- (13,308) (12,000) -- (25,308)
--------- --------- ---------- -------- ----------
Income (loss) from continuing
operations before equity in
undistributed earnings of
subsidiaries........................ 471 (39,391) (24,443) -- (63,363)
Equity in undistributed earnings of
subsidiaries........................ (202,575) (136,191) -- 338,766 --
--------- --------- ---------- -------- ----------
Income (loss) from continuing
operations before extraordinary
items and cumulative effect of a
change in accounting principle...... (202,104) (175,582) (24,443) 338,766 (63,363)
Loss on disposal, net of tax
benefit............................. -- (16,868) -- -- (16,868)
Extraordinary loss, net of tax
benefit............................. -- (10,125) -- -- (10,125)
Cumulative effect of a change in
accounting principle................ -- -- (111,748) -- (111,748)
--------- --------- ---------- -------- ----------
Net income (loss).................... $(202,104) $(202,575) $ (136,191) $338,766 $ (202,104)
========= ========= ========== ======== ==========
63
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
Year Ended December 31, 2001
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED
--------- --------- ------------ -------- ------------
Net sales............................ $ -- $ 590,082 $1,278,686 $ -- $1,868,768
Cost of sales........................ -- 477,170 1,003,965 -- 1,481,135
--------- --------- ---------- -------- ----------
Gross profit......................... -- 112,912 274,721 -- 387,633
Operating expenses:
Selling, administrative and
other............................. 378 87,621 205,202 -- 293,201
Impairment on assets held for sale
and former discontinued
operation......................... -- -- 36,523 -- 36,523
Restructuring, asset impairments
and other charges................. -- 38,878 4,207 -- 43,085
--------- --------- ---------- -------- ----------
Total operating expenses......... 378 126,499 245,932 -- 372,809
Operating income (loss).............. (378) (13,587) 28,789 -- 14,824
Other (income) expense:
Interest expense................... 7,970 73,260 58,590 (76,506) 63,314
Other expense (income)............. (8,923) (66,925) 1,265 76,506 1,923
--------- --------- ---------- -------- ----------
Income (loss) from continuing
operations, before income taxes and
undistributed earnings of
subsidiaries........................ 575 (19,922) (31,066) -- (50,413)
Provision (benefit) for income
taxes............................... -- (7,670) 2,470 -- (5,200)
--------- --------- ---------- -------- ----------
Income (loss) from continuing
operations, before undistributed
earnings of subsidiaries............ 575 (12,252) (33,536) -- (45,213)
Equity in undistributed earnings of
subsidiaries........................ (136,792) (42,845) -- 179,637 --
--------- --------- ---------- -------- ----------
Income from continuing operations.... (136,217) (55,097) (33,536) 179,637 (45,213)
Loss from discontinued operations.... -- (81,695) (9,309) -- (91,004)
--------- --------- ---------- -------- ----------
Net income........................... $(136,217) $(136,792) $ (42,845) $179,637 $ (136,217)
========= ========= ========== ======== ==========
64
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
Year Ended December 31, 2000
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED
--------- -------- ------------ -------- ------------
Net sales.............................. $ -- $458,560 $1,585,790 $ -- $2,044,350
Cost of sales.......................... -- 363,416 1,236,197 -- 1,599,613
------- -------- ---------- -------- ----------
Gross profit........................... -- 95,144 349,593 -- 444,737
Operating expenses:
Selling, administrative and other.... 294 75,804 223,937 -- 300,035
Restructuring, asset impairments and
other charges....................... -- 1,146 13,342 -- 14,488
------- -------- ---------- -------- ----------
Total operating expenses........... 294 76,950 237,279 -- 314,523
Operating income (loss)................ (294) 18,194 112,314 -- 130,214
Other (income) expense:
Interest expense..................... 8,035 78,672 63,818 (77,528) 72,997
Other (income) expense............... (8,846) (66,991) (844) 77,528 847
------- -------- ---------- -------- ----------
Income (loss) from continuing
operations, before income taxes and
undistributed earnings of
subsidiaries.......................... 517 6,513 49,340 -- 56,370
Provision for income taxes............. -- 2,435 19,189 -- 21,624
------- -------- ---------- -------- ----------
Income (loss) from continuing
operations, before undistributed
earnings of subsidiaries.............. 517 4,078 30,151 -- 34,746
Equity in undistributed earnings of
subsidiaries.......................... 25,263 21,576 -- (46,839) --
------- -------- ---------- -------- ----------
Income from continuing operations...... 25,780 25,654 30,151 (46,839) 34,746
Loss from discontinued operations...... -- -- (8,575) -- (8,575)
------- -------- ---------- -------- ----------
Income before extraordinary items...... 25,780 25,654 21,576 (46,839) 26,171
Extraordinary items.................... 1,838 (391) -- -- 1,447
------- -------- ---------- -------- ----------
Net income............................. $27,618 $ 25,263 $ 21,576 $(46,839) $ 27,618
======= ======== ========== ======== ==========
65
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
December 31, 2002
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES CONSOLIDATED
--------- ----------- ------------ ------------
Cash flows from operating activities.................. $ (3,914) $ (31,306) $ 58,191 $ 22,971
Cash flows from investing activities:
Acquisition costs................................... -- (2,610) -- (2,610)
Capital expenditures................................ -- (8,336) (22,560) (30,896)
Proceeds from divestitures, net..................... -- 122,330 -- 122,330
Intercompany advances............................... -- (108,783) 108,783 --
Proceeds from the sale of assets.................... -- 9,862 2,133 11,995
--------- ----------- --------- -----------
Net cash provided by (used in) investing
activities......................................... -- 12,463 88,356 100,819
Cash flows from financing activities:
Proceeds from common stock issuance................. 18 -- -- 18
Proceeds from long-term debt........................ -- 1,635,102 -- 1,635,102
Proceeds for repayment of intercompany note from
Issuer............................................. 142,959 (142,959) -- --
Repayments of long-term debt........................ (139,063) (1,575,902) (11,753) (1,726,718)
Intercompany dividends.............................. -- 129,246 (129,246) --
Debt issuance costs................................. -- (18,624) -- (18,624)
--------- ----------- --------- -----------
Net cash provided by (used in) financing
activities......................................... 3,914 26,863 (140,999) (110,222)
Effect of exchange rate changes on cash............... -- -- (985) (985)
Net cash used in discontinued operations.............. -- -- (10,827) (10,827)
--------- ----------- --------- -----------
Net change in cash and cash equivalents............... -- 8,020 (6,264) 1,756
Balance at beginning of year.......................... -- (1,589) 2,483 894
--------- ----------- --------- -----------
Balance at end of year................................ $ -- $ 6,431 $ (3,781) $ 2,650
========= =========== ========= ===========
66
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
December 31, 2001
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED
--------- --------- ------------ --------- ------------
Cash flows from operating
activities........................... $ -- $ 17,692 $(101,449) $ 254,692 $ 170,935
Cash flows from investing activities:
Acquisition costs, net of cash
acquired........................... -- (3,838) -- -- (3,838)
Capital expenditures................ -- (13,187) (19,555) -- (32,742)
Purchase of investments............. -- (100) -- -- (100)
Investment in subsidiaries.......... (413) (12,940) 13,353 -- --
Other, net.......................... -- -- 3,782 -- 3,782
----- --------- --------- --------- ---------
Net cash provided by (used in)
investing activities............... (413) (30,065) (2,420) -- (32,898)
Cash flows from financing activities:
Decrease in accounts receivable
financing facility................. -- -- (75,000) -- (75,000)
Proceeds from exercise of stock
options............................ 413 -- -- -- 413
Proceeds from issuance of long-term
debt............................... -- 628,013 6,391 -- 634,404
Repayments of long-term debt........ -- (682,612) (16,910) -- (699,522)
Capitalized loan fees............... -- (4,439) -- -- (4,439)
Investment by parent................ -- 68,233 186,459 (254,692) --
----- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities............... 413 9,195 100,940 (254,692) (144,144)
Effect of exchange rate changes on
cash and cash equivalents............ -- -- (73) -- (73)
Cash flows from discontinued
operations........................... -- -- 6,612 -- 6,612
----- --------- --------- --------- ---------
Net increase (decrease) in cash and
cash equivalents..................... -- (3,178) 3,610 -- 432
Cash and cash equivalents at beginning
of year.............................. -- 1,589 (1,127) -- 462
----- --------- --------- --------- ---------
Cash and cash equivalents at end of
year................................. $ -- $ (1,589) $ 2,483 $ -- $ 894
===== ========= ========= ========= =========
67
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
December 31, 2000
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED
--------- ---------- ------------ --------- ------------
Cash flows from operating
activities.......................... $ (4,601) $ (43,147) $ 200,920 $ -- $ 153,172
Cash flows from investing activities:
Acquisitions, net of cash
acquired.......................... -- (2,978) (223,691) -- (226,669)
Proceeds from divestitures......... -- 110,646 -- -- 110,646
Capital expenditures............... -- (12,555) (54,508) -- (67,063)
Purchase of investments............ -- (1,500) -- -- (1,500)
Investment in subsidiaries......... 9,665 (362,584) -- 352,919 --
Other, net......................... 14,599 48,004 281,163 (312,629) 31,137
-------- ---------- --------- --------- ----------
Net cash provided by (used in)
investing activities.............. 24,264 (220,967) 2,964 40,290 (153,449)
Cash flows from financing activities:
Decrease in accounts receivable
financing facility................ -- -- (73,500) -- (73,500)
Proceeds from exercise of stock
options........................... 335 -- -- -- 335
Proceeds from issuance of long-term
debt.............................. -- 1,121,000 10,069 -- 1,131,069
Repayments of long-term debt....... (9,998) (846,782) (22,985) -- (879,765)
Repurchase of common stock......... (10,000) -- -- -- (10,000)
Capitalized loan fees.............. -- (15,002) -- -- (15,002)
Other.............................. -- (3,508) -- -- (3,508)
Investment by parent............... -- (9,665) 49,955 (40,290) --
-------- ---------- --------- --------- ----------
Net cash provided by (used in)
financing activities.............. (19,663) 246,043 (36,461) (40,290) 149,629
Effect of exchange rate changes on
cash and cash equivalents........... -- -- (10) -- (10)
Cash flows from discontinued
operations.......................... -- -- (149,052) -- (149,052)
-------- ---------- --------- --------- ----------
Net increase (decrease) in cash and
cash equivalents.................... -- (18,071) 18,361 -- 290
Cash and cash equivalents at
beginning of year................... -- 27,667 (27,495) -- 172
-------- ---------- --------- --------- ----------
Cash and cash equivalents at end of
year................................ $ -- $ 9,596 $ (9,134) $ -- $ 462
======== ========== ========= ========= ==========
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
68
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Under the terms of the Company's Articles of Incorporation and Bylaws,
each of the Directors named below is to serve until the next annual meeting
of Shareholders.
DIRECTOR
NAME AGE POSITION SINCE
- ---- --- -------- ---------
Paul V. Reilly(4)................. 50 Chairman, President and Chief Executive Officer 1998
Thomas E. Costello................ 63 Director 2003
Frank P. Diassi(3)(4)............. 69 Director 1993
Frank J. Hevrdejs(1).............. 57 Director 1993
Martin J. Maloney................. 58 Director 2003
David M. Olivier.................. 59 Director 2003
Janice C. Peters(2)............... 51 Director 1999
Jerome W. Pickholz(1)(3).......... 70 Director 1994
Alister W. Reynolds(2)(3)......... 45 Director 2002
Susan O. Rheney................... 43 Director 2003
Gordon A. Griffiths............... 60 President and Chief Executive Officer--Commercial
Printing Division
Robert C. Hart.................... 66 President and Chief Executive Officer--Envelope Division
Kevin P. Lombardo................. 42 President and Chief Executive Officer--PrintXcel
Division
Herbert H. Davis III.............. 55 Senior Vice President--Corporate Development and Chief
Legal Officer
Michel P. Salbaing................ 57 Senior Vice President--Finance and Chief Financial
Officer
Brian P. Hairston................. 45 Vice President--Human Resources
Keith T. Pratt.................... 57 Vice President--Purchasing
William W. Huffman, Jr............ 54 Vice President--Corporate Controller
D. Robert Meyer, Jr............... 46 Vice President--Treasurer
Wayne M. Wolberg.................. 53 Vice President--General Auditor
Mark L. Zoeller................... 43 Vice President--General Counsel and Secretary
- --------
(1) Member of the Governance and Nominating Committee.
(2) Member of the Compensation and Human Resources Committee.
(3) Member of the Audit Committee.
(4) Member of the Health, Safety and Environmental Committee.
PAUL V. REILLY has served as the Company's President and Chief
Executive Officer since January 2001 and as Chairman of the Board since
June 2001. Mr. Reilly was President and Chief Operating Officer from
January 1998 to March 2001 and was Senior Vice President--Finance and
Chief Financial Officer from 1995 to 1998. Mr. Reilly spent 14 years with
Polychrome Corporation, a prepress supplier to the printing industry, where
he held a number of positions including Assistant Corporate Treasurer,
Corporate Treasurer, Vice President and Chief Financial Officer, and
General Manager of United States Operations. Mr. Reilly is a Certified
Public Accountant. He is a member of the Health, Safety and Environmental
Committee of the Board of Directors.
THOMAS E. COSTELLO became a director in February 2003. From 1991
through retirement in 2002, Mr. Costello served as Chief Executive Officer
of Xpedx, a multi-billion dollar business to business distributor of
printing and packaging products. Xpedx is a wholly owned division of
International Paper. Before 1991 he was with Dixon Paper in a variety of
executive positions, including Vice President of Sales and Marketing for
the three hundred million dollar industrial distributor. He is a
69
director of Cadmus Communications Corporation, a customized printer, and
Intertape Polymer Group, a manufacturer of tape and polymers for plastic
packaging.
FRANK P. DIASSI has been a director since 1993. Mr. Diassi was
Chairman of Sterling Chemicals, Inc., a manufacturer of commodity
petrochemicals and chemicals used primarily in the pulp and paper
industry, from 1996 through 2001. He was a founding director of Arcadian
Corporation, the largest nitrogen fertilizer company in North America.
From 1989 to 1994 Mr. Diassi was a director and Chairman of the Finance
Committee of Arcadian Corporation. Mr. Diassi has been manager and a
member of The Unicorn Group, LLC, an investment company, since 1981. Mr.
Diassi is a director of Fibreglass Holdings, Inc., a truck accessory
manufacturer, a director and Chairman of Amerlux Inc., a commercial
lighting company, a director and Chairman of Software Plus, Inc., a human
resources/payroll software design firm, and a director of Lifelines
Technology, Inc., a manufacturer of time and temperature indicator labels.
On July 16, 2001, Sterling Chemicals, Inc., a company for which Mr. Diassi
has served as an executive officer, filed a voluntary petition for
reorganization under Chapter 11 of the United States Bankruptcy Code. Mr.
Diassi is a member of the Audit Committee and Chairman of the Health,
Safety and Environmental Committee of the Board of Directors.
FRANK J. HEVRDEJS has been a director since 1993. In 1982 Mr. Hevrdejs
co-founded The Sterling Group, L.P., a major management buyout company,
where he is currently a principal shareholder and president. He also serves
as Chairman of First Sterling Ventures Corp., an investment company, Endoro
Holdings, Inc., a structural and electrical manufacturing company, and
Fibreglass Holdings, Inc., a truck accessory manufacturer. He is a director
of Eagle U.S.A., an air-freight company, Sterling Chemicals, Inc., a
petroleum chemical company and serves on the Houston Regional Board of
J.P. Morgan Chase and Co., a financial institution. Mr. Hevrdejs serves as
Chairman of the Governance and Nominating Committee of the Board of
Directors.
MARTIN J. MALONEY became a director in February 2003. Since 1984
Mr. Maloney has served as Chairman and Co-Founder of Broadford and Maloney,
Inc., an agency specializing in public relations, advertising and marketing
communications for graphic arts related companies. Since 1989 he has served
on the Board of Advisors of the New York University Center for Graphic Arts
Management.
DAVID M. OLIVIER became a director in February 2003. Mr. Olivier was
with Wyeth Corporation, a pharmaceutical company, and its affiliated
entities for over 35 years when he retired in May 2002. He was Senior Vice
President at the time of his retirement. He is a director of Summerset
Medical Center, Summerset Medical Foundation and the Shansby Group, a
private equity investment firm.
JANICE C. PETERS has been a director since 1999. From 1997 to 2000
Ms. Peters served as President and Chief Executive Officer of MediaOne(R), the
broadband services arm of MediaOne Group where she also served as Executive
Vice President. Prior to 1997 Ms. Peters was employed by US WEST,
MediaOne's former parent company, in various positions including Managing
Director of One2One, a United Kingdom wireless communications joint venture
between US WEST and Cable & Wireless, and President of Wireless Operations
for US WEST Media Group. Ms. Peters serves as a director of Primus
Knowledge Solutions, Inc., a knowledge-enabled software provider, and
OptiStor Technologies, a data management supplier, and is a trustee of
The Overlake School. Ms. Peters serves as Chairperson of the Compensation and
Human Resources Committee of the Board of Directors.
JEROME W. PICKHOLZ has been a director since 1994. From 1978 until 1994
he was Chief Executive Officer of Ogilvy & Mather Direct Worldwide, a
direct advertising agency. From 1994 through 1995 he served as Chairman of
the Board of Ogilvy & Mather Direct Worldwide where he is now Chairman
Emeritus. Mr. Pickholz served as founder and Chairman of Pickholz, Tweedy,
Cowan, L.L.C., a marketing communications company, from 1996 until January
2001 and he has been a direct marketing consultant since February 2001.
Mr. Pickholz serves as the Chairman of the Audit Committee and as a member
of the Governance and Nominating Committee of the Board of Directors.
70
ALISTER W. REYNOLDS has been a director since 2002. Mr. Reynolds has
been employed by Quest Diagnostics, Inc., a provider of diagnostic
laboratory testing services, and its former parent company, Corning
Incorporated, since 1982 in various positions, including Senior Vice
President--U.S. Operations and, most recently, Senior Advisor to the Office
of the Chairman. He serves as director of Soma Logic Incorporated, a
privately-held biotechnology company, and Health Care Waste Solutions. He
is a member of the Compensation and Human Resources Committee and the Audit
Committee of the Board of Directors.
SUSAN O. RHENEY became a director in February 2003. Ms. Rheney
previously served as a director of the Company from 1993 to 1997. She was
a principal in The Sterling Group, L.P., a major management buyout
company, from 1987 to 2001. Ms. Rheney is a director of Genesis Energy LP,
an oil pipeline company, Texas Petrochemical Holdings, a chemical company,
and American Plumbing and Mechanical, Inc., a plumbing contractor.
GORDON A. GRIFFITHS has served as President and Chief Executive
Officer--Commercial Printing Division since April 2002. From February 2000
until April 2002, Mr. Griffiths was Chairman and Chief Executive Officer of
Pareto Corporation, a Canadian knowledge services provider. He continues to
serve as Chairman of Pareto Corporation. In 2000 Mr. Griffiths co-founded
the Caxton Group, a marketing services agency, which became a public
company in 2001. He was President of St. Joseph Corporation, Canada's
largest privately owned printer, from May 1997 until February 2000. Before
that Mr. Griffiths was with Quebecor World, the largest North American
printer, where he served in various positions including President of
Quebecor Printing Canada.
ROBERT C. HART has served as President and Chief Executive
Officer--Envelope Division since October 2000. From 1998 until he joined
the Company, he owned his own consulting firm after having spent over
thirty years with Riverwood International, a paperboard and packaging
company. While at Riverwood, Mr. Hart served as Vice President and Mill
Manager, Vice President, Sales and Marketing, Vice President, and General
Manager of Paperboard Operations. As Senior Vice President of the
paperboard operation, Mr. Hart directed the operations of three paper
mills.
KEVIN P. LOMBARDO has served as President and Chief Executive
Officer--PrintXcel Division since February 2002. From April 1999 until
February 2002 he was Chief Financial Officer of the PrintXcel Division.
Prior to joining the Company Mr. Lombardo spent four years with the
electronic drives division of Emerson Electric as its Vice President of
Finance and Administration. Mr. Lombardo has also served in various finance
and administrative positions in the automotive, thermoplastics and printing
industries.
HERBERT H. "WOODY" DAVIS III has been Senior Vice President--Corporate
Development and Chief Legal Officer since August 2001. Before that,
Mr. Davis was in the private practice of law and was a partner at the Denver,
Colorado law firm of Rothgerber Johnson & Lyons LLP for over 20 years.
Mr. Davis remains "Of Counsel" at Rothgerber Johnson & Lyons LLP.
MICHEL P. SALBAING has been Senior Vice President--Finance and Chief
Financial Officer since November 2000. From 1996 to November 2000,
Mr. Salbaing was with Quebecor World, the largest North American printer,
where he held a number of positions including Chief Financial Officer of
the overall corporation, President and Chief Executive Officer of Quebecor
Printing Europe and Senior Vice President and Chief Financial Officer of
Quebecor World North America. Before 1996 Mr. Salbaing held various senior
financial positions with three large Canadian manufacturing firms and spent
eight years with Ernst & Young LLP. Mr. Salbaing is a member of the
Canadian Institute of Chartered Accountants.
BRIAN P. HAIRSTON has been Vice President--Human Resources since
August 2002. From April 2001 through August 2002 he was a human resources
consultant for a variety of firms. From October 1999 until April 2001 he
was Senior Vice President--Human Resources for Kellogg Corporation, a
71
cereal producer. From 1997 to 1999 he served as Vice President--Human
Resources for CitiGroup, a financial institution.
KEITH T. PRATT has been Vice President--Purchasing since 1998. From
1994 to 1998 Mr. Pratt was Vice President of Material Sourcing and
Logistics of Ply Gem Industries, a subsidiary of Nortek, Inc., a building
products manufacturer. Before that, Mr. Pratt was responsible for
purchasing and logistics with several companies where he held a variety of
positions up to the director level.
WILLIAM W. HUFFMAN, JR. has been Vice President--Corporate Controller
since November 2000. From January 1999 to November 2000 he was Vice
President--Chief Financial Officer of the Company's commercial printing
division. In 1997 and 1998 he was a financial consultant. Prior to that he
served in various financial capacities at Custom Papers Group, a
manufacturer of specialty papers, Specialty Coatings International, a
manufacturer and converter of specialty paper products, and James River
Corporation. Mr. Huffman began his career with the accounting firm of
Coopers & Lybrand and is a Certified Public Accountant.
D. ROBERT MEYER, JR. has been Vice President--Treasurer since 1998.
From 1994 to 1998 Mr. Meyer was a partner in the tax department of the
accounting firm of Deloitte & Touche LLP. Mr. Meyer is a licensed attorney,
Certified Public Accountant and Certified Financial Planner.
WAYNE W. WOLBERG has been Vice President--General Auditor since October
2001. From June 2000 to April 2001 he served as Vice President--Finance of
AT&T Broadband. Mr. Wolberg was Vice President and General Auditor of
MediaOne from 1996 to 2000. He is a Certified Management Accountant.
MARK L. ZOELLER has been Vice President--General Counsel and Secretary
since January 2003. He joined the Company in 1997 as Corporate Counsel, was
Assistant General Counsel from May 2000 to May 2001 and was Vice
President--Corporate Development from May 2001 until January 2003. Before
1997 Mr. Zoeller was an associate at the law firm of Rothgerber Johnson &
Lyons LLP. He is a licensed attorney.
The sections captioned "Compliance With Section 16(a)" and "Corporate
Governance" appearing in the Company's Proxy Statement filed pursuant to
Regulation 14A in connection with the 2003 Annual Meeting of Stockholders
are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The sections captioned "Director Compensation," "Compensation and Human
Resources Committee Interlocks and Insider Participation," "Executive
Compensation," "2001 Long-Term Incentive Plan." "Executive Agreements,"
"Employee Benefits," "Compensation and Human Resources Committee Report on
Executive Compensation" and "Stock Price Performance Graph" appearing in
the Company's Proxy Statement filed pursuant to Regulation 14A in
connection with the 2003 Annual Meeting of Stockholders are incorporated
herein by reference.
72
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
EQUITY COMPENSATION PLANS
The table below provides information relating to our equity
compensation plans as of December 31, 2002:
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER
BE ISSUED UPON EXERCISE EXERCISE PRICE OF COMPENSATION PLANS
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN FIRST COLUMN)
------------- ----------------------- -------------------- --------------------------
Equity compensation plans
approved by security holders... 5,442,002 $6.96 1,809,449
Equity compensation plans not
approved by security holders... N/A N/A N/A
--------- ----- ---------
Total............................ 5,442,002 $6.96 1,809,449
========= ===== =========
We do not have any equity compensation plans not approved by our
stockholders.
The section captioned "Security Ownership of Certain Beneficial Owners
and Management" appearing in the Company's Proxy Statement filed pursuant
to Regulation 14A in connection with the 2003 Annual Meeting of
Stockholders is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. 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 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 in other factors that could significantly
affect our disclosure controls and procedures subsequent to the Evaluation
Date.
73
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
Included in Part II, Item 8 of this Report.
(a)(2) FINANCIAL STATEMENT SCHEDULES
Included in Part IV of this Report:
PAGE
----
Schedule I Condensed Parent-Only Balance Sheets at December 31, 2002
and 2001 and Condensed Parent-Only Statements of
Operations and Cash Flows for the Years Ended December 31,
2002, 2001, and 2000 78
Schedule II Valuation and Qualifying Accounts for the Years Ended
December 31, 2002, 2001, and 2000 82
(a)(3) EXHIBITS
EXHIBIT
NUMBER 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 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.
4.2 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.
4.3 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.
4.4 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.
74
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
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 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.
10.6 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.
10.7 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.
10.8 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.
10.9 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.
10.10 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.
10.11 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.
10.12 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.
10.13 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.
75
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.14 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.
10.15 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.
10.16 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.
10.17 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.
10.18 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.
10.19 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.
10.20 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--
incorporated by reference to Exhibit 10.26 of Mail-Well, Inc.'s
Form 10-Q for the quarter ended September 30, 2002.
10.21 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--incorporated by reference to Exhibit 10.27 of Mail-Well,
Inc.'s Form 10-Q for the quarter ended September 30, 2002.
10.22 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--incorporated by reference to Exhibit 10.28
of Mail-Well, Inc.'s Form 10-Q for the quarter ended September 30,
2002.
76
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.23 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--incorporated by
reference to Exhibit 10.29 of Mail-Well, Inc.'s Form 10-Q for the
quarter ended September 30, 2002.
10.24 Amendment No. 2 to Amended and Restated Credit Agreement, dated
December 27, 2002, among the Company, 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 99.1 of the Company's Current Report on Form 8-K filed
January 8, 2003.
10.25 Amendment No. 1 to Amended and Restated Security Agreement, dated
December 27, 2002, among the Company, Mail-Well I Corporation,
certain subsidiaries of Mail-Well I, and Bank of America, N.A., as
agent--incorporated by reference to Exhibit 99.2 of the Company's
Current Report on Form 8-K filed January 8, 2003.
10.26* Employment and Executive Severance Agreement dated as of March 10,
2003, between the Company and Paul V. Reilly.
10.27* Form of Executive Severance Agreement entered into between the
Company and each of the following: Michel Salbaing, Gordon Griffiths,
Brian Hairston, Keith Pratt, William Huffman, D. Robert Meyer and
Mark Zoeller.
21 * Subsidiaries of the Company
23.1 * Consent of Ernst & Young LLP
24 Power of Attorney--incorporated by reference to page 84.
- --------
* Filed herewith.
(b) REPORTS ON FORM 8-K
1. Current Report on Form 8-K filed November 4, 2002, providing certain
disclosures under Regulation FD.
2. Current Report on Form 8-K filed November 8, 2002, disclosing other
events.
(c) EXHIBITS FILED
Included in Item 15(a)(3) of this Report.
(d) FINANCIAL STATEMENT SCHEDULES FILED
Included in Item 15(a)(2) of this Report.
77
SCHEDULE I
MAIL-WELL, INC.
(PARENT-ONLY SUPPLEMENTAL FINANCIAL STATEMENTS)
CONDENSED BALANCE SHEETS
(dollars in thousands)
DECEMBER 31
-----------------------
2002 2001
-------- --------
ASSETS
Current assets:
Other current assets.................................... $ -- $ 295
Note receivable from Mail-Well I Corporation............ -- 147,436
-------- --------
Total current assets................................ -- 147,731
Investment in subsidiary.................................... 42,768 240,954
Other assets................................................ -- --
Intangible assets (net of accumulated amortization of
$3,747)................................................... -- 1,023
-------- --------
Total assets................................................ $ 42,768 $389,708
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accrued interest and other current liabilities.......... $ -- $ 4,291
Intercompany payable.................................... -- 4,477
Convertible subordinated notes.......................... -- 139,063
-------- --------
Total current liabilities........................... -- 147,831
Convertible subordinated notes.............................. -- --
-------- --------
Total liabilities........................................... -- 147,831
Shareholders' equity........................................ 42,768 241,877
-------- --------
Total liabilities and shareholders' equity.................. $ 42,768 $389,708
======== ========
See notes to condensed financial statements.
78
SCHEDULE I
MAIL-WELL, INC.
(PARENT-ONLY SUPPLEMENTAL FINANCIAL STATEMENTS)
CONDENSED STATEMENTS OF OPERATIONS
(dollars in thousands)
FOR THE YEAR ENDED DECEMBER 31
-------------------------------------------
2002 2001 2000
--------- --------- -------
Other operating costs:
Administrative................................. $ -- $ 359 $ 267
Amortization................................... 161 19 27
--------- --------- -------
Total other operating costs................ 161 378 294
--------- --------- -------
Operating loss..................................... (161) (378) (294)
Other (income) expense:
Interest expense-debt.......................... 5,188 7,970 8,035
Interest income from subsidiary................ 5,820 (8,923) (8,846)
--------- --------- -------
Income before extraordinary items and equity in
undistributed earnings of subsidiary............. 471 575 517
--------- --------- -------
Equity (loss) in undistributed earnings of
subsidiary....................................... (202,575) (136,792) 25,263
--------- --------- -------
Income (loss) before extraordinary items........... (202,104) (136,217) 25,780
Extraordinary items................................ -- -- 1,838
--------- --------- -------
Net income (loss).................................. $(202,104) $(136,217) $27,618
========= ========= =======
See notes to condensed financial statements.
79
SCHEDULE I
MAIL-WELL, INC.
(PARENT-ONLY FINANCIAL SUPPLEMENTAL STATEMENTS)
CONDENSED STATEMENTS OF CASH FLOWS
(dollars in thousands)
FOR THE YEAR ENDED DECEMBER 31
----------------------------------------
2002 2001 2000
--------- --------- --------
Cash flow from operating activities:
Net income (loss).................................. $(202,104) $(136,217) $ 27,618
Adjustments to reconcile net income to net cash
provided (used in) by operating activities:
Equity in undistributed earnings (loss) of
subsidiary................................... 202,575 136,792 (25,263)
Amortization................................... 1,023 859 795
Extraordinary item--pre-tax........................ -- -- (2,989)
Changes in operating assets and liabilities, net of
effects of acquired businesses:
Other working capital...................... (5,408) (1,434) (4,762)
--------- --------- --------
Net cash provided by (used in) operating
activities............................... (3,914) -- (4,601)
Cash flow from investing activities:
Investment in subsidiary........................... -- (413) 9,665
Other activity with subsidiary, net................ -- -- 14,599
--------- --------- --------
Net cash provided by (used in) investing
activities............................... -- (413) 24,264
Cash flow from financing activities:
Net proceeds from issuance of common stock......... 18 413 335
Proceeds from intercompany debt.................... 142,959 -- --
Repurchase of common stock......................... -- -- (10,000)
Repayment of long-term debt........................ (139,063) -- (9,998)
--------- --------- --------
Net cash provided by (used in) financing
activities............................... 3,914 413 (19,663)
--------- --------- --------
Net increase (decrease) in cash and cash equivalents... -- -- --
Cash and cash equivalents at beginning of year......... -- -- --
--------- --------- --------
Cash and cash equivalents at end of year............... $ -- $ -- $ --
========= ========= ========
See notes to condensed financial statements.
80
SCHEDULE I
MAIL-WELL, INC.
(PARENT-ONLY SUPPLEMENTAL FINANCIAL STATEMENTS)
CONDENSED SUPPLEMENTAL FINANCIAL INFORMATION OF THE REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The financial statements of Mail-Well, Inc. (the "Company") reflect the
investment in Mail-Well I Corporation ("MWI"), a wholly-owned subsidiary,
using the equity method.
2. CONSOLIDATED FINANCIAL STATEMENTS
Reference is made to the consolidated financial statements and related
Notes of Mail-Well, Inc. and Subsidiaries included elsewhere herein for
additional information.
3. NOTES RECEIVABLE
During 1997, the Company loaned MWI $147,436,000 which was payable on
demand and earned interest at 6% payable annually. This note was repaid by
MWI in November 2002 upon the repayment of the Convertible Subordinated
Notes.
4. DEBT AND GUARANTEES
The Company has guaranteed all debt of MWI and it's subsidiaries ($763.9
million outstanding at December 31, 2002, including current maturities) and
certain other obligations arising in the ordinary course of business. The
aggregate amounts of MWI's and it's subsidiaries debt maturities for the five
years following 2002 are: 2003--$3.0 million; 2004--$1.2 million;
2005--$102.9 million; 2006-- $0.8 million; 2007--$0.8 million; and $655.2
million thereafter.
5. DIVIDENDS RECEIVED
No dividends have been received from MWI since the Company's inception.
MWI's ability to declare dividends to the Company is restricted by the
terms of its bank credit agreements and the indentures relating to MWI's
Senior Notes and Senior Subordinated Notes.
81
SCHEDULE II
MAIL-WELL, INC. AND SUBSIDIARIES
SUPPLEMENTAL VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(amounts in thousands)
FOR THE YEAR ENDED DECEMBER 31
---------------------------------------
2002 2001 2000
------- ------- -------
ACCOUNTS RECEIVABLE ALLOWANCES
Balance at beginning of year......................... $ 5,385 $ 4,618 $ 5,385
Charged to costs and expenses........................ 4,026 3,674 4,145
Recoveries and other charges......................... 552 3,994 (1) (2,828) (2)
Deductions(3)........................................ (5,290) (6,901) (2,084)
------- ------- -------
Balance at end of year............................... $ 4,673 $ 5,385 $ 4,618
======= ======= =======
INVENTORY RESERVES
Balance at beginning of year......................... $ 4,636 $ 4,995 $ 3,673
Charged to costs and expenses........................ 2,830 1,408 2,259
Recoveries and other charges......................... (602) (559)(1) 525 (2)
Deductions(3)........................................ (1,196) (1,208) (1,462)
------- ------- -------
Balance at end of year............................... $ 5,668 $ 4,636 $ 4,995
======= ======= =======
- --------
(1) Includes amounts transferred from Mail-Well Trade Receivable
Corporation in the amount of $3,169. In addition, this amount includes
the reclassifications in the amounts of $290 and $169 which relate to
reserves for accounts receivable allowances and inventory reserves
transferred to assets held for sale, respectively.
(2) Includes the beginning balances of $409 of the allowance for doubtful
accounts for the companies acquired in 2000 and $3,352 of amounts
transferred to Mail-Well Trade Receivable Corporation. In addition,
this includes beginning balances of $525 for inventory reserves for
companies acquired in 2000.
(3) Accounts and inventories written off.
82
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the
city of Englewood, state of Colorado, on March 20, 2003.
MAIL-WELL, INC.
By: /s/ PAUL V. REILLY
-------------------------------------------
Paul V. Reilly, Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ MICHEL P. SALBAING
-------------------------------------------
Michel P. Salbaing, Senior Vice President--
Finance and Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
83
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed by the following persons
in the capacities and on the dates indicated.
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints
Herbert H. Davis III as attorneys-in-fact, each with the power of
substitution, for him or her in any and all capacities, to sign any
amendments to this report and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ PAUL V. REILLY Chairman of the Board, March 20, 2003
---------------------------- President & Chief Executive Officer
Paul V. Reilly
/s/ THOMAS E. COSTELLO Director March 20, 2003
----------------------------
Thomas E. Costello
/s/ FRANK P. DIASSI Director March 20, 2003
----------------------------
Frank P. Diassi
/s/ FRANK. J. HEVRDEJS Director March 20, 2003
----------------------------
Frank J. Hevrdejs
/s/ MARTIN MALONEY Director March 20, 2003
----------------------------
Martin Maloney
/s/ DAVID OLIVIER Director March 20, 2003
----------------------------
David Olivier
/s/ JANICE C. PETERS Director March 20, 2003
----------------------------
Janice C. Peters
/s/ JEROME W. PICKHOLZ Director March 20, 2003
----------------------------
Jerome W. Pickholz
/s/ ALISTER W. REYNOLDS Director March 20, 2003
----------------------------
Alister W. Reynolds
/s/ SUSAN O. RHENEY Director March 20, 2003
----------------------------
Susan O. Rheney
84
I, Paul V. Reilly, certify that:
1. I have reviewed this annual report on Form 10-K of Mail-Well, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 functions):
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
annual report whether 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: March 20, 2003
/s/ Paul V. Reilly
----------------------------------------
Chief Executive Officer
85
I, Michel P. Salbaing, certify that:
1. I have reviewed this annual report on Form 10-K of Mail-Well, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 functions):
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
annual report whether 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: March 20, 2003
/s/ Michel P. Salbaing
-------------------------------------------
Chief Financial Officer
86