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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, 2003
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. /X/
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 February 24, 2004 was $101,753,845.
As of February 24, 2003 the Registrant had 48,384,123 shares of Common
Stock, $0.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part III of this form (Items 11, 12, 13
and 14, 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 April 29, 2004.
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TABLE OF CONTENTS
PART I
PAGE
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Item 1. Business.................................................... 1
The Company................................................. 1
Commercial.................................................. 1
Resale...................................................... 1
The Printing and Envelope Industries........................ 1
Our Products................................................ 1
Our Services................................................ 2
Marketing, Distribution and Customers....................... 3
Printing and Manufacturing.................................. 4
Materials and Supply Arrangements........................... 4
Patents, Trademarks and Brand Names......................... 5
Competition................................................. 5
Backlog..................................................... 5
Employees................................................... 5
Environmental............................................... 6
Available Information....................................... 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...................................................... 26
Item 8. Financial Statements and Supplementary Data................. 27
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................. 70
Item 9A. Controls and Procedures..................................... 70
PART III
Item 10. Directors and Executive Officers of Registrant.............. 71
Item 11. Executive Compensation...................................... 74
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters................ 74
Item 13. Certain Relationships and Related Transactions.............. 75
Item 14. Principal Accountant Fees and Services...................... 75
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.................................................. 76
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PART I
ITEM 1. BUSINESS
THE COMPANY
We are one of North America's leading providers of printing and
printing related products and value added services. We produce general
commercial printing, high impact premium printing, custom and stock
envelopes, printed business forms and labels. We believe we are the world's
largest manufacturer of envelopes, the leading printer of envelopes in the
United States and Canada, and the premier printer of high impact color
printing in the United States and the largest US manufacture of business
forms and labels sold through distributors. We operate 86 printing and
manufacturing facilities and five distribution and fulfillment centers.
COMMERCIAL
Our commercial business had sales of $1.3 billion in 2003. This
business segment operates 66 manufacturing facilities and specializes in
the printing of annual reports, car brochures, brand marketing collateral,
financial communications, general commercial printing and the manufacture
and printing of customized envelopes for billing and remittance and direct
mail advertising. In addition, we operate five distribution and fulfillment
centers and provide our customers with other value added services such as
ecommerce.
RESALE
Our resale business had sales of $399 million in 2003. This business
segment operates 20 manufacturing facilities and produces business forms
and labels, custom and stock envelopes and specialty packaging and mailers
generally sold to third-party dealers such as print distributors, forms
suppliers and office-products retail chains.
Refer to Note 17 of our consolidated financial statements included
elsewhere in this report for additional information concerning the
operating and geographic segments.
OUR INDUSTRIES
The printing industry is one of the largest and most fragmented
industries in the United States with total estimated sales of $155.5
billion in 2002 generated by more than 45,000 companies, according to the
Printing Industries of America, Inc. The printing industry includes general
commercial printing, financial and legal printing, greeting cards, labels
and wrappers, magazines, newspapers, books, other specialty and quick
printing and related services such as prepress and finishing. We estimate
that the market in which we primarily compete has total annual sales of
approximately $52.2 billion serviced by over 20,000 printing businesses.
Envelope printing and manufacturing combined constitutes a $4.1 billion
market in North America according to the Envelope Manufacturer's
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.
Printed office products constitutes an estimated $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
and the growing market for visual communications products and services
other than print. Our general commercial printing markets are: (1) high end
color printed materials, such as annual reports and car brochures, which
are longer run premium products for major national and regional companies
and (2) general commercial printing products such as advertising and
promotional materials for local markets. Our printing products also include
advertising literature, corporate identity materials, calendars, greeting
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cards, brand marketing materials, catalogs, maps, CD packaging and direct
mail. We also offer our customers services such as design, fulfillment,
ecommerce, inventory management and other enterprise solutions for
companies seeking strategic partners for their branding and other
communications priorities.
Envelope. We serve two primary markets: (1) customized envelopes and
packaging products, including Tyvek(R) mailers used by the US Postal
Service, sold directly to end users or to independent distributors who sell
to end users; and (2) envelopes and other products sold to wholesalers,
paper merchants, printers, contract stationers, independent retailers 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 stock and 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 mid-size 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 and assist them in using digital
technologies to improve the effectiveness of their visual communications.
Among our services are:
Delivery systems. We offer a flexible "just-in-time" delivery program
which allows customers to receive their products just prior to when they
are needed.
Digital archiving. We offer customers the option to store digitally
rendered artwork on our file servers. The artwork can then be accessed and
retrieved at any time for use by any authorized design or production group
via high speed transmission links.
Direct-to-Plate and Direct Imaging Technology. We have both
direct-to-plate and direct imaging technologies, which eliminate several
manual functions and material costs in the prepress stage. Both
technologies support a completely digital workflow, providing a better
printed product, faster turnaround and in the case of direct imaging,
reduced inventory, capability to print-on-demand and lower distribution
costs.
E-commerce. We have the capability to provide to our customers a full
range of e-commerce services to obtain estimates, do remote proofing, and
order printing or other products through their web page. Included, at
customer request, are a variety of reporting, marketing and service
functions designed to increase on-line sales.
Electronic Prepress. We offer a fully automated electronic prepress
that allows the customer to submit artwork and other data in hardcopy or
digitally either on disk, CD or via high speed transmission line. Hardcopy
artwork is digitally scanned and mastered to create a file for use either
in direct-to-plate or direct-to-press applications. We also provide
traditional prepress services to customers who require graphics and artwork
to be photographed, composed and incorporated into files for plate or
direct-to-press applications.
Fulfillment. Strategically located throughout the United States we
have full-service fulfillment centers with online order assembly and bar
coding. Many of these centers have digital presses to reduce the costs of
inventory and obsolescence.
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Inventory management systems. Large national organizations with
centralized purchasing and supply departments serving multiple locations
use our inventory management services. Included in these services are
reports on usage by inventory unit (SKU) and/or available warehouse supply
and summary billing.
E-Solutions. We offer a full range of robust and dynamic
Internet-based print procurement, print management and print distribution
solutions. We also work with leading service providers to improve the
effectiveness and speed of internet-based processes for our customers.
Warehousing Services. For customers who prefer to contract out the
management of their printed product storage and distribution we have the
expertise and space to store finished product and drop ship in bulk or ship
on an "as needed" basis.
Enterprise solutions. Large national organizations looking for
integrated, managed supply chain solutions can avail themselves of flexible
solutions that connect them to their internal departments and external
customers and suppliers. We have the supply chain management processes,
techniques, systems and resources to manage, produce and deliver their
products from our facilities strategically located across the US.
MARKETING, DISTRIBUTION AND CUSTOMERS
Because of the highly fragmented nature of the general commercial
printing and envelope businesses, and the diversity in customer needs and
preferences, we market most of our general commercial printing and
envelopes locally and regionally. Given the project-oriented nature of
these markets, sales to particular customers may vary significantly from
year to year depending upon the number and size of their communications
plans. 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 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.
Our marketing efforts for commercial printing 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. We
utilize a team approach to customer service relationships that we believe
is unique in the printing industry.
We believe our commercial segment has one of the largest sales forces
in the industry, with approximately 600 sales representatives as of
December 31, 2003. Most of our commercial printing and envelope products
are sold through sales representatives who work closely with customers from
the initial concept through prepress, proofing and production. 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, which generally depends on order size and type, prepress work,
reruns or rework and overall profitability of the job. For our growing list
of enterprise customers we have account teams, some members of which are
situated on the customer's premises.
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.
Our reorganization into two business segments supports our "Total
Customer Solutions" initiative, through which we offer our customers a full
spectrum of products and services from design through fulfillment including
e-services, direct mail and digital printing capabilities. Our Total
Customer
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Solutions sales and service teams are organized to focus on vertical
markets including travel and leisure, health services, financial services
and technology and to offer customers in these markets customized solutions
to their visual communications needs.
In our resale segment, our products are marketed primarily under the
"PrintXcel" brand through distributors who act as intermediaries between us
and the end-users of its products. We also market our office products under
the "Quality Park" brand to office products retailers. The resale segment
sells most of its products through five major channels; independent
solution providers, outsource for "direct" solution providers, commercial
printers, ad specialty dealers and quick printers. Our resale segment sells
its products primarily through catalogs, telemarketing and the Internet to
over 20,000 value-added resellers who distribute our products to end-users.
We coordinate sales efforts among geographic regions within our
operating segments, 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.
Our customer base totals approximately 40,000. The customers of our
commercial segment include Fortune 500 companies, graphic designers and
advertising agencies, regional and local businesses, insurance and finance
companies, government agencies and not-for-profit organizations. The
customers of our resale segment total over 20,000 office products
distributors and office products retail businesses as well as the U.S.
Postal Service. None of our customers accounted for more than 4% of revenue
in 2003.
PRINTING AND MANUFACTURING
Our commercial segment operates 66 manufacturing facilities throughout
the US and Canada. Our 36 commercial printing plants combine advanced
prepress technology with high-quality web and sheet-fed lithographic
presses, digital presses and extensive binding and finishing operations.
Our 30 envelope plants produce envelopes 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 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. Many of our commercial
facilities operate seven days a week, 24 hours a day to meet customer
requirements.
In our resale segement, we operate twenty facilities in the United
States. We design and print business forms and labels and envelopes for a
wide range of businesses. A majority of these products orders are delivered
to us "camera ready," and we perform prepress and plate making functions
and print on web presses. Ten of our resale facilities manufacture stock
envelopes that are sold to office products retail chains.
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.
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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
Commercial printing is highly competitive and fragmented. We compete
against a diminishing number of large, diversified and financially strong
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 there are a significant number of buyers who are price
sensitive, we also believe that customer service and high quality products
are important competitive factors, especially to companies seeking
enterprise solutions and high impact color products. 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 selling our envelope products, 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 videodisks, 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 US
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.
In selling our printed business forms and labels products,we compete
with 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 manufacturers. We compete mainly on the breadth of our
product offerings and close customer relationships.
BACKLOG
At December 31, 2003 and 2002, the backlog of customer orders to be
produced or shipped in the next 120 days was approximately $113.0 million
and $98.8 million, respectively.
EMPLOYEES
We employed approximately 10,000 people as of December 31, 2003, and
approximately 1,800 of our employees at the various facilities are
represented by unions affiliated with the AFL-CIO or Affiliated National
Federation of Independent Unions. Collective bargaining agreements, each of
which cover the workers at a particular facility, expire from time to time
and are negotiated separately. Accordingly, we believe that no single
collective bargaining agreement is material to our operations as a whole.
We are committed to employee development and increased organizational
effectiveness. We operate Mail-Well University, our an in-house training
program, which provides courses in process improvement, quality control,
supervisory and management skills and increasing employee
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empowerment. Complementing our in-house initiatives, Mail-Well contracts
leading industry experts to provide skill-building courses to our sales
representatives and managers.
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.mail-well.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 are web cast live via our website and
presentations to securities analysts are included on our website.
ITEM 2. PROPERTIES
We occupy 86 printing and manufacturing facilities in the United States
and Canada and five print fulfillment and distribution centers, of which 38
are owned and 53 are leased. In addition to on-site storage at these
facilities, we store products in 19 warehouses, of which four are owned,
and we 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
Our common stock is traded on the New York Stock Exchange ("NYSE")
under the symbol "MWL." At February 19, 2004, there were approximately 451
shareholders of record and, as of that date, we estimate that there were
more than 9,702 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 our common stock as reported by the
NYSE.
HIGH LOW
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2003
First Quarter........................................... $2.55 $1.85
Second Quarter.......................................... $3.13 $2.05
Third Quarter........................................... $3.60 $2.76
Fourth Quarter.......................................... $4.61 $3.58
HIGH LOW
----- ---
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
We have not paid a dividend on common stock since our incorporation and
do not anticipate paying dividends in the foreseeable future because our
senior secured credit facility, senior notes and senior subordinated notes
limit our 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 and Statement of Financial Accounting Standards No.
145. The results of acquisitions accounted for under the purchase method
have been included in the income statement data of the Company from their
respective acquisition dates. 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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2003 2002 2001 2000 1999
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales........................ $1,671,664 $1,728,705 $1,868,768 $2,044,350 $1,699,222
Income (loss) from continuing
operations..................... 3,924 (73,488) (45,213) 36,193 61,997
Income (loss) per diluted share
from continuing operations..... 0.08 (1.54) (0.95) 0.73 1.16
Total assets..................... 1,107,393 1,107,367 1,476,867 1,683,592 1,310,260
Total long-term debt, including
current maturities............. 748,961 763,899 855,221 922,351 666,397
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CORPORATE OVERVIEW
We are one of North America's leading providers of printing,
printing-related products and value added services to meet the visual
communications needs of customers. Our mission is to produce
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products and provide services that help our customers deliver their
messages more effectively. In October 2003, we reorganized Mail-Well into
two business segments: commercial and resale. This reorganization aligns
our structure with our principal strategic goals: to operate as one
company; to provide our customers with one point of entry into Mail-Well;
and to go to market with all of our products and services.
The commercial segment combines our commercial printing plants and the
custom portion of our envelope business into a single business that
generally sells directly to national and local customers. The commercial
segment consists of 66 manufacturing facilities and five distribution and
fulfillment centers and specializes in the printing of annual reports, car
brochures, brand marketing collateral, financial communications, general
commercial printing and customized envelopes for billing and remittance and
direct mail advertising.
The resale segment combines all of our operations that sell to
third-party dealers such as print distributors, forms suppliers and
office-products retail chains. This business consists of 20 plants that
produce a variety of products including business forms, business labels,
custom and stock envelopes, specialty packaging and mailers.
BUSINESS IMPROVEMENT INITIATIVES. Our reorganization was a continuation
of the evolution of Mail-Well that began in June 2001 when we announced
plans to divest certain businesses we had identified as non-strategic. In
addition to these divestitures, we initiated a restructuring program to
consolidate many of our manufacturing facilities to reduce excess capacity
and improve our competitive position. We also initiated other programs to
significantly improve operations, reduce costs and increase marketing
effectiveness.
In February 2002, we sold Curtis 1000, the distribution business
included in our printed office products business. In May 2002, we sold
Mail-Well Label, our prime label business. In August 2002, we sold our
filing products division, and in March 2003, we sold certain of our digital
graphics operations. Our divesture program is complete.
We have substantially completed our other restructuring programs, which
included the following:
* The consolidation of our best envelope equipment, expertise and
operational capabilities into 39 facilities, down from 50 in 2000.
* The consolidation of our printing operations in the Philadelphia
market into one facility, the closure of our printing operation in
New York City, and the consolidation of our web printing plant in
Indianapolis, Indiana into our web printing plants in St. Louis,
Missouri and Baltimore, Maryland.
* The consolidation of the Denver, Colorado and Clearwater, Florida
business forms manufacturing facilities into our plants in Girard,
Kansas, Fairhope, Alabama and Marshall, Texas.
* The restructuring of our debt.
RAW MATERIALS. Paper is our most significant raw material. We purchase
approximately 470,000 tons of paper annually to meet our production
requirements. Historical changes in paper pricing generally have not
affected the margins of our commercial printing products because we have
been able to pass on paper price increases to our customers. Paper pricing
has, however, impacted the margins of our envelope products. 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. 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 and 2003.
Prices of uncoated papers, which are the principal grades of paper used to
manufacture envelopes, increased 10% in the fourth quarter of 2002. The
cost of uncoated papers had declined approximately 10% during 2001 after a
year of stable prices in 2000. Margins of our envelope products were
negatively impacted by higher uncoated paper prices in the first half of
2003; however, the market for
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uncoated papers softened in the third quarter of 2003. As a result, the
price of uncoated papers no longer negatively impacted operating margins of
our envelope operations in the second half of 2003.
In early 2004, we received notifications from several paper companies
announcing a 10% increase in the price of uncoated paper. We believe the
current market conditions do not support this price increase. However, if
this price increase takes effect in 2004, the margins of our envelope
products will be negatively impacted in 2004 to the extent we are unable to
increase the prices of our envelope products.
OUTLOOK. The economic slowdown that began in 2001 continued to
adversely affect the sales and margins of our businesses in 2002 and 2003.
Demand for many of our products, especially printed advertising and direct
mail promotions, remained depressed at the end of 2003. The market for
traditional business forms, which has been declining for several years,
continues to decline. These market conditions have led to overcapacity in
our industry and significant competitive pricing pressures. We do not
expect internal growth or increases in margins until the markets we serve,
particularly advertising and direct mail, recover. Our restructuring and
other cost reduction initiatives have mitigated the impact of the downturn
in our markets and we believe these actions have positioned us to benefit
from improvements in our markets when they occur. In the meantime, we have
continued to manage our costs and balance production with the needs of our
customers.
In October 2003, Congress instituted a federal "Do Not Call" program,
which our industry believes will increase demand for printed advertising
and direct mail as our customers shift promotional spending from
telemarketing to direct mail to reach their prospective customers. The
Federal Trade Commission continues to operate the registry despite
litigation brought to challenge its legality on regulatory and
constitutional grounds. If the challenge to the Do Not Call program is
successful, our sales could be adversely affected.
Our reorganization into two business segments supports our "Total
Customer Solutions" initiative, through which we offer our customers a full
spectrum of products and services from design through fulfillment including
e-services, direct mail and digital printing capabilities. By offering the
full breadth of our products and services as one company organized around
the types of customers we serve, we believe we will be an easier company
with which to do business. We believe this new structure will greatly
improve our ability to deliver our quality products and services with the
speed, reliability and efficiency that our customers demand. We also expect
our customers to benefit as a result of a decrease in their total cost of
procuring our products and services. Our Total Customer Solutions sales and
service teams are organized to focus on vertical markets including travel
and leisure, health services, financial services and technology and to
offer customers in these markets customized solutions to their visual
communications needs.
In early 2003, we launched a major initiative we refer to as
"Mobilization". Mobilization is a comprehensive program to actively involve
all of our employees in improving service, quality, efficiency and
innovation. We believe this initiative has improved teamwork, communication
and accountability throughout our business and has resulted in many ideas
which have improved operations, safety, customer service and reduced costs.
We believe the national Do Not Call program and our Total Customer
Solutions and Mobilization initiatives have had a positive impact on our
business during 2003 and will continue to do so in the future.
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. In analyzing our year-over-year financial results, it is
important to recognize
9
the following items that have had a significant impact on the comparability
of our results over the last several years.
* In August 2002, we acquired the in-house printing and fulfillment
operations of American Express Company. This acquisition has been
accounted for as a purchase transaction and the results of this
operation are included in our consolidated results from the date
acquired.
* Consolidated results also include the results of the filing products
division sold in August 2002 and the digital graphics operations sold
in March 2003 until the dates those operations were sold.
* Consolidated results include significant restructuring and other
expenses related to the execution of our strategic plans and other
initiatives as well as other operating charges.
* The results of our Canadian operations were positively impacted by
the strength of the Canadian dollar during 2003.
The impacts of these items are specifically noted when significant in
the following discussions of our consolidated results and the results of
our business segments.
NET SALES
YEAR ENDED DECEMBER 31
--------------------------------------------
2003 2002 2001
---------- ---------- ----------
(IN THOUSANDS)
Commercial.............................. $1,272,525 $1,268,367 $1,357,430
Resale.................................. 399,139 460,338 511,338
---------- ---------- ----------
Total net sales..................... $1,671,664 $1,728,705 $1,868,768
========== ========== ==========
Consolidated net sales decreased $57.0 million, or 3.3%, in 2003
compared to sales in 2002. Included in this sales decline was an $11.2
million decrease in sales from the digital graphics operations that we sold
in March 2003. In addition, the filing products division that we sold in
August 2002 had sales of $42.3 million in 2002 prior to its divestiture.
* Sales of our commercial segment increased $4.2 million despite the
sale of the digital graphics operations which resulted in a sales
decline of $11.2 million. Sales of the in-house printing and
fulfillment operations acquired in August 2002 were $38.8 million
higher for the full year 2003 than in 2002. Sales of our Canadian
operations increased approximately $16.7 million in 2003 due to the
impact of foreign currency exchange rates. Sales of the commercial
segment in 2003 were lower on a comparable basis than in 2002 due to
lower sales volume and lower selling prices.
* Sales of our resale segment declined $61.2 million in 2003 compared
to 2002 due to the sale of the filing products division and a decline
of $18.9 million primarily driven by lower sales volume of business
forms to distributors of office products, lower sales volume to
office-products retail chains and lower average selling prices.
Consolidated net sales decreased $140.1 million, or 7.5%, in 2002
compared to sales in 2001. The explanation of this sales decline by segment
is as follows:
* Sales of our commercial segment declined $89.1 million, or 6.6%, in
2002. Approximately 50% of our commercial printing sales and 40% of
our envelope sales are related to advertising and direct mail
promotions. In response to the economic slowdown in 2002, many of our
customers significantly reduced promotional spending which had a
significant impact on the sales of our commercial segment.
* Sales of our resale segment declined $51.0 million in 2002. Sales of
the filing products division were $32.0 million lower in 2002 than in
2001 due to our divestiture of this division in August
10
2002. In addition, sales of business forms to office products distributors
and sales to office products retail chains declined approximately
$19.0 million.
RESTRUCTURING, 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 several years by many of our operations, we have taken actions to
consolidate facilities, optimize capacity and otherwise reduce costs. These
actions have resulted in significant restructuring, impairment and other
related charges. This process is ongoing due to continuing changes in our
industry and markets, and we expect to take the actions we believe
necessary to react to these changes. We anticipate additional restructuring
charges in 2004.
2003 ACTIVITY
In 2003, we substantially completed the restructuring programs
described above under "Business Improvement Initiatives." We incurred
expenses related to these programs in 2003 that could not be accrued and
were the result of our continuing initiatives to optimize capacity.
Restructuring expenses recorded during 2003 were $1.5 million. The
following table and discussion present the details of these charges (in
thousands):
COMMERCIAL RESALE TOTAL
---------- ------ -------
Employee separation and related expenses............ $ 815 $ 660 $ 1,475
Equipment moves..................................... 1,002 -- 1,002
Other costs......................................... 94 (10) 84
Reversal of unused accruals......................... (713) (318) (1,031)
------ ----- -------
Total restructuring charges..................... $1,198 $ 332 $ 1,530
====== ===== =======
Continued efforts in 2003 to adjust the operations of both segments to
reflect lower sales volumes, resulted in additional employee separation
expenses of $1.5 million in 2003.
COMMERCIAL. In the fourth quarter of 2002, we announced the closure of
our web printing operation in Indianapolis and the redeployment of its two
web presses and related equipment to St. Louis and Baltimore. A substantial
portion of the cost to dismantle, move and reinstall this equipment was
incurred during 2003.
We were able to sub-lease a facility that was idled as a result of the
consolidation of our envelope plant in the Northeast sooner than estimated
when the liability under the lease contract was established. Accordingly,
$0.5 million of the reserve recorded for this lease was reversed. In
addition, we reversed the remaining expenses that had been accrued to cover
the costs of maintaining a building that was sold in 2003.
RESALE SEGMENT. In the fourth quarter of 2002, we closed our business
forms plant in Clearwater, Florida and consolidated its production in
plants located in Fairhope, Alabama and Marshall, Texas. The employee
separation expenses and other costs incurred as a result of this
consolidation were less than originally estimated.
11
2002 ACTIVITY
Restructuring, impairment and other related charges recorded in 2002
were $74.6 million. The following table and discussion present the details
of these charges (in thousands):
COMMERCIAL RESALE CORPORATE TOTAL
---------- ------ --------- -------
Employee separation and related expenses............ $ 4,090 $1,404 $ -- $ 5,494
Employee training expenses.......................... 6,647 396 -- 7,043
Project management expenses......................... 8,101 1,145 -- 9,246
Asset impairment charges, net....................... 12,178 1,650 -- 13,828
Other costs......................................... 7,685 1,883 -- 9,568
Reversal of unused accruals......................... (500) -- -- (500)
------- ------ ------- -------
Total restructuring costs....................... 38,201 6,478 -- 44,679
Other charges....................................... 6,693 161 23,018 29,872
------- ------ ------- -------
Total restructuring and other charges........... $44,894 $6,639 $23,018 $74,551
======= ====== ======= =======
COMMERCIAL. We completed the consolidation of our envelope
manufacturing facilities in 2002. 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 costs incurred during 2002 related to this consolidation
were as follows:
* Employee training expenses of $6.6 million were incurred to train the
employees 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 $8.1 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 $8.9 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 $3.0 million include the expenses incurred to
dismantle, move and reinstall equipment, and the costs incurred to
restore buildings to the condition required by lease agreements or to
maintain them while they are held for sale.
* In 2001, we accrued employee separation expenses to cover the 766
employees we expected would be affected over the course of the
project to consolidate our envelope manufacturing facilities. At the
completion of the project, 722 employees had been separated and we
reduced the accrual by $0.5 million.
We closed our commercial printing operation in New York City in
September 2002. We recorded employee separation expenses of $1.0 million
covering 80 employees, asset impairment charges of $1.0 million and lease
commitment and other expenses of $2.2 million in connection with this plant
closure.
We moved a web press from our plant in Portland, Oregon to our plant in
St. Louis and began the consolidation of our web printing operation in
Indianapolis with our web plants in St. Louis and Baltimore. We recorded
employee separation expenses of $0.3 million to cover the cost of 52
employees affected by these actions, impairment charges of $1.0 million on
equipment taken out of service and $1.8 million to cover the expenses
associated with terminating lease commitments and the costs incurred in
2002 to dismantle, move and reinstall equipment.
Additionally, the commercial segment reduced the size of many of its
operations during 2002 in response to the significant decline in sales. The
costs associated with these actions included $2.8 million to cover the cost
of the elimination of 331 jobs, impairment charges of $1.3 million for
equipment
12
taken out of service and $0.7 million for expenses associated with lease
commitments and the cost incurred to dismantle, move and reinstall
equipment.
RESALE. During 2002, the documents division of our resale segment
closed its business forms plant in Clearwater, Florida and its plant in
Denver, Colorado which had been curtailed in 2001. The employee separation
expenses covering 64 employees were $0.7 million. Impairment charges
related to equipment taken out of service as a result of these closures
totaled $0.6 million. Other expenses of $0.7 million primarily related to
expenses incurred to maintain the two buildings held for sale.
The resale segment completed the closure of its envelope operations in
Hattiesburg, Mississippi. The costs in 2002 were $2.4 million, which were
primarily additional impairment charges, consulting fees, the costs
incurred to dismantle, move and reinstall equipment and expenses incurred
to clean up the building.
Additionally, the resale segment incurred $2.1 million in expenses to
reduce the size of several of its other operations. Employee separation
expenses incurred to cover the elimination of 193 jobs were $0.7 million,
asset impairments were $0.5 million and training, project management and
other costs were $0.9 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 commercial segment 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 recorded an impairment charge of $1.8 million related to the
write-down of idle equipment in our commercial business to net
realizable value.
* We incurred severance payments unrelated to the restructure plans of
$1.1 million.
* We incurred consulting fees of $0.7 million related to tax matters
that arose as a result of our divestitures.
2001 ACTIVITY
The restructuring, impairment and other related charges totaled $43.1
million in 2001. The following table and discussion present the details of
these charges (in thousands):
COMMERCIAL RESALE CORPORATE TOTAL
---------- ------ --------- -------
Employee separation and related expenses............ $ 7,276 $2,769 $ -- $10,045
Employee training expenses.......................... 2,414 214 -- 2,628
Project management expenses......................... 4,985 419 -- 5,404
Asset impairment charges, net....................... 4,897 2,582 -- 7,479
Other costs......................................... 7,524 1,655 -- 9,179
Strategic assessment costs.......................... -- -- 2,677 2,677
------- ------ ------ -------
Total restructuring costs....................... 27,096 7,639 2,677 37,412
Other charges....................................... 2,842 -- 1,600 4,442
------- ------ ------ -------
Total restructuring and other charges........... $29,938 $7,639 $4,277 $41,854
======= ====== ====== =======
13
COMMERCIAL. Our commercial segment announced the consolidation of eight
envelope plants in 2001 and recorded employee separation expenses of $6.9
million covering 766 employees that were expected to be affected over the
course of the consolidation project. In 2001, we incurred training costs of
$2.4 million and project management fees of $5.0 million, and recorded
impairment charges of $4.3 million on the equipment that was taken out of
service and $5.5 million to cover lease termination costs, the costs of
equipment moves and building clean-up expenses.
We closed a printing 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 expenses of $0.4 million
covering the elimination of 25 jobs, impairment charges of $0.6 million on
equipment taken out of service and other costs of $2.0 million to cover the
lease termination costs and costs to dismantle, move and reinstall
equipment.
RESALE. Our resale segment began the closure of its envelope
manufacturing facility in Mississippi. The cost recorded in 2001 was $6.5
million and included employee separation expenses of $1.6 million covering
142 employees, impairments on equipment taken out of service of $3.9
million and $1.0 million of training, project management and other costs.
The documents division of our resale segment substantially curtailed
its business forms plant in Denver, Colorado in 2001. The employee
separation expenses of $0.6 million related to the elimination of 62 jobs.
Other costs of $0.7 million were incurred to dismantle, move and reinstall
equipment. Additionally, we reversed an 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.
Our resale segment closed a warehouse and distribution center in Santa
Fe Springs, California. The cost associated with this closure was $0.9
million which was primarily employee separation expenses covering 17
employees and lease termination costs.
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 commercial segment to establish best practices, standardize our
costing and pricing systems, and align equipment and services to
better serve our customers and markets totaled $2.1 million in 2001.
* We wrote off costs of $0.7 million incurred by our commercial segment
for a human resource information system that was not implemented.
* We wrote off a $1.6 million investment in a company that was
developing a service, which would enable online collaborative design
and management of a printing job.
OTHER SIGNIFICANT OPERATING EXPENSES
The table below summarizes other significant charges we have recorded
over the last three years related to the restructuring of our debt and the
divestitures announced in June 2001.
YEAR ENDED DECEMBER 31
--------------------------------------
2003 2002 2001
-------- -------- --------
(IN THOUSANDS)
Loss from the early extinguishment of debt............... $ -- $ 16,463 $ --
Impairment loss (gain) on assets held for sale........... $ (117) $ 6,436 $ --
Impairment on operations formerly held for sale.......... $ -- $ 12,842 $ 36,523
Settlement of litigation................................. $ 5,330 $ -- $ 1,231
14
LOSS FROM THE EARLY EXTINGUISHMENT OF DEBT. In 2002, we wrote off the
deferred financing fees of $16.5 million related to our bank credit
facility that was refinanced in June 2002.
IMPAIRMENT LOSS (GAIN) ON ASSETS HELD FOR SALE. In August 2002, we
completed the sale of the filing products division of our resale segment,
which had been held for sale since June 2001. The impairment loss on assets
held for sale recorded in 2002 included a $6.1 million impairment in
connection with this divestiture.
The impairment loss on assets held for sale also includes a $0.3
million impairment charge related to the digital graphics assets of our
commercial segment held for sale at December 31, 2002 and sold in March
2003. No additional impairment on these assets was required as a result of
the sale.
IMPAIRMENT ON OPERATIONS FORMERLY HELD FOR SALE. PrintXcel, part of our
former printed office products segment, was held for sale at the end of
2001 and during the first half of 2002. 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 was reported as
an impairment on operations formerly held for sale in 2001.
Due to our decision in June 2002 not to sell PrintXcel, we reversed the
tax benefit because 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 was reported as an impairment on operations formerly held
for sale in 2002. PrintXcel is now an important part of our resale segment.
In October 2002, we discontinued our efforts to sell one of our digital
graphics operations. The impairment on operations formerly held for sale in
2001 and 2002 includes $2.9 million and $2.5 million, respectively, related
to the digital graphics operation no longer held for sale.
SETTLEMENT OF LITIGATION. In 2003, we accrued $5.3 million to cover the
cost of settling a lawsuit after an unfavorable award was granted by a jury
in Los Angeles County, California on February 20, 2004 to an ex-employee
who had contested his termination.
OPERATING INCOME (LOSS)
YEAR ENDED DECEMBER 31
--------------------------------------
2003 2002 2001
-------- -------- --------
(IN THOUSANDS)
Commercial.................................. $ 60,816 $ 3,076 $ 42,305
Resale...................................... 45,711 44,317 44,588
Corporate................................... (26,312) (80,312) (72,069)
-------- -------- --------
Total operating income (loss)........... $ 80,215 $(32,919) $ 14,824
======== ======== ========
Consolidated operating income increased $113.1 million in 2003 compared
to the loss recorded in 2002. This improvement in operating income was due
to the following:
* The operating income of the commercial segment improved $57.7 million
in 2003. This improvement was due primarily to lower restructuring
expenses of $43.7 million and a reduction in fixed costs of $11.4
million.
* The operating income of the resale segment increased $1.4 million in
2003. This improvement was due primarily to lower restructuring
expenses of $6.3 million and $3.0 million in reductions in fixed
costs partially offset by the impact of lower sales volume and lower
selling prices and the loss of the operating income of the filing
products division that was sold in August 2002.
* Corporate expenses were $54.0 million lower in 2003 due primarily to
restructuring and other significant operating charges which were
$53.5 million lower in 2003 than in 2002.
15
Consolidated operating income decreased $47.7 million in 2002. This
decrease in operating income was due to the following:
* The operating income of the commercial segment declined $39.2 million
in 2002. Restructuring expenses were $15.0 million higher and the
impact on operating income of the sales decline was approximately
$48.0 million. Reduced benefit expenses, lower fixed manufacturing
and administrative expenses realized from our restructuring and other
cost reductions programs totaled $22.5 million.
* The operating income of the resale segment decreased $0.3 million in
2002. Operating income in 2002 included $2.8 million of operating
income from the filing products division which was $5.3 million lower
than the full year of 2001. In addition, restructuring expenses were
$2.2 million lower in 2002, and fixed manufacturing costs and
administrative expenses were reduced $7.1 million in 2002 as a result
of our restructuring and other cost reduction initiatives. These
reductions more than offset the impact on operating income of lower
sales.
* Corporate expenses were $8.2 million higher in 2002. Corporate
expenses increased due to higher restructuring and other charges of
$18.7 million, the $16.5 million loss on the early extinguishment of
debt and the impairment charge of $6.4 million on assets held for
sale. Also in 2002, we recorded a $4.4 million charge to cover the
cost of workers' compensation claims estimated by our insurance
actuary. The impairment charge of $12.8 million on operations
formerly held for sale was $23.7 million lower than the charge
recorded in 2001. Amortization expense was $14.8 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.
INTEREST EXPENSE
YEAR ENDED DECEMBER 31
------------------------------------
2003 2002 2001
------- ------- --------
(IN THOUSANDS)
Total interest expense............................ $71,891 $76,031 $ 78,891
Less: Allocated to discontinued operations........ -- (5,570) (15,577)
------- ------- --------
Reported interest expense......................... $71,891 $70,461 $ 63,314
======= ======= ========
Total interest expense declined 5.4% in 2003 compared to 2002. In 2003,
total interest expense reflects average outstanding debt of $792.7 million
and a weighted average interest rate of 8.4% compared to the average
outstanding debt of $890.6 million and a weighted average interest rate of
7.9% for 2002. The average outstanding debt decreased in 2003 primarily due
to the application of the proceeds from our divestitures to the repayment
of debt in 2002. Our weighted average interest rate increased in 2003 as a
result of the issuance of $350 million of 9 5/8% senior notes in March
2002, the proceeds of which were used primarily to repay bank debt that
accrued interest at a lower variable rate. In November 2002, we redeemed
our 5% convertible subordinated notes. In addition, total interest expense
in 2002 was higher as a result of the write-off of the deferred financing
fees associated with the bank credit facility that was refinanced in June
of that year.
Total interest expense declined 3.6% in 2002 compared to 2001. In 2002,
total interest expense reflects average outstanding debt of $890.6 million
in 2002 compared to $978.8 million in 2001. The reduction in the
outstanding debt in 2002 was due to the use of proceeds from our
divestitures to repay debt. Our weighted average interest rate was 7.9% in
2002 compared to 7.3% in 2001. The increase in the weighted average
interest rate was primarily due to the issuance of $350 million of 9 5/8%
senior notes in March 2002, the proceeds of which were used to repay bank
debt, which accrued interest at a lower variable rate, and redeem our 5%
convertible notes.
16
Reported interest expense excludes the allocation of interest expense
to discontinued operations which was based on the net assets of those
operations relative to the net assets of the Company. Reported interest
expense in 2003 and 2002 was substantially higher than in 2001 because the
net asset amounts used to allocate interest expense exceeded the actual net
proceeds received from the dispositions of the discontinued operations.
INCOME TAXES
YEAR ENDED DECEMBER 31
-----------------------------------
2003 2002 2001
------ -------- -------
(DOLLARS IN THOUSANDS)
Provision (benefit) for income taxes......... $2,581 $(31,646) $(5,200)
Effective tax rate........................... 39.7% 30.1% 10.3%
The effective tax rate in 2003 was 39.7%. The effective tax rates for
2002 and 2001 were lower than 2003 primarily due to the pre-tax losses in
2002 and 2001 that increased the impact of nondeductible permanent
differences on the overall effective rate.
LOSS FROM DISCONTINUED OPERATIONS
The $1.5 million gain on disposal of discontinued operations for 2003
was primarily an adjustment made to the tax impact of the disposition of
our prime label business, which was sold in May 2002. Further adjustments
to the overall losses incurred on the disposals of Curtis 1000 and our
prime label business are possible if expenses accrued in connection with
the sales of these operations are different than those estimated or if
there are further revisions to the tax impacts of these dispositions.
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.
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.
* 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.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
We adopted Financial Accounting Standards Board Interpretation No. 46,
Consolidation of Variable Interest Entities, an Interpretation of
Accounting Research Bulletin No. 51 ("FIN 46"), effective January 1, 2003.
The implementation of FIN 46 required us to consolidate a trust that is
leasing equipment to us under an operating lease. The effect of this
consolidation was to increase net property, plant and equipment by $18.1
million and total debt by $18.5 million on January 1, 2003. The cumulative
effect of this change in accounting principle recorded January 1, 2003 was
an after-tax charge of $0.3 million at the time of adoption.
We adopted SFAS No. 142 on January 1, 2002. SFAS No. 142 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 the commercial printing operations in our commercial segment.
This impairment was due to the significant decline in the performance of
our commercial printing operations in 2001 and the impact of that decline
on expected future cash flows. We estimated the fair value of our
commercial printing operations by discounting the expected future cash
flows and
17
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 the goodwill associated with our commercial printing
operations was impaired. This transitional impairment loss was reported as
a cumulative effect of a change in accounting principle in 2002.
Our annual impairment tests of goodwill as of December 1, 2003 and 2002
did not indicate any additional impairment.
NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE--DILUTED
YEAR ENDED DECEMBER 31
--------------------------------------
2003 2002 2001
------ --------- ---------
(DOLLARS IN THOUSANDS)
Net income (loss)........................... $5,150 $(202,104) $(136,217)
Net income (loss) per share--diluted........ $ 0.11 $ (4.24) $ (2.86)
The net income and net income per share in 2003 reflect the
substantial improvement in operating results, the gain on disposal of
discontinued operations and no impairment of our goodwill in 2003.
The net loss and net loss per share in 2002 reflect the substantial
loss from operations, the loss on the disposal of discontinued operations
and the goodwill impairment charge recorded as a cumulative effect of a
change in accounting principle as a result of the adoption of SFAS No. 142.
BUSINESS SEGMENTS
COMMERCIAL
YEAR ENDED DECEMBER 31
--------------------------------------------
2003 2002 2001
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Sales............................. $1,272,525 $1,268,367 $1,357,430
Operating income.................. 60,816 3,076 42,305
Operating income margins.......... 4.8% 0.2% 3.1%
Sales of our commercial segment increased $4.2 million, or 0.3%, in
2003 compared to sales in 2002. The following factors influenced sales in
2003:
* The increase in the sales due to the in-house printing and
fulfillment operations acquired from American Express Company in
August 2002 was $38.8 million in 2003.
* The sales of our Canadian operations were $16.7 million higher in
2003 primarily due to the strength of the Canadian dollar. Sales of
our Canadian operations in local currency were lower in 2003 than in
2002.
* Sales of envelope products were approximately $27.4 million lower in
2003 than in 2002. A significant portion of this sales decline was
due to lower average selling prices in 2003.
* Sales to our local printing customers were $12.4 million higher which
we believe reflects an improvement in demand in our local markets.
Sales of our high impact printing were $13.1 million lower primarily
due to work performed in 2002 that did not repeat in 2003.
* Sales of our digital graphics operations that were sold in March 2003
were $11.2 million lower in 2003.
* In September 2002, we closed our printing facility in New York City.
Sales of this operation were $12.0 million in 2002.
18
Sales declined $89.1 million, or 6.6%, in 2002 compared to sales in
2001. The following factors influenced sales in 2002:
* Approximately 50% of our commercial printing sales and 40% of our
custom envelope sales are related to advertising and direct mail
promotions. Many of our customers significantly reduced promotional
spending in 2002 in response to the economic slowdown. The impact on
the sales of our printing operations serving local markets was
approximately $21.1 million. Additionally, sales of envelopes
decreased approximately $10.9 million as a result of less spending by
our customers on direct mail promotions.
* Sales of commercial printing in the Philadelphia market were
approximately $24.0 million lower in 2002 than in 2001. This decline
was due in part to the closure of one of our plants 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 area. In October 2001, we consolidated our other
two plants serving this market, and many of our customers did not
move their printing to the new facility.
* The average selling price of our custom envelope products fell
approximately 2% in 2002 due to competitive pressures on the prices
of many of our products and lower sales of higher value added
products.
* The sales of the in-house printing and fulfillment operations
acquired in August 2002 were $11.9 million.
* Sales at our printing plant in Indianapolis declined $9.4 million
during 2002. In our efforts to improve the profitability of this
plant, we lost some of our low margin business. We have since closed
the web printing operation at the plant.
* In February 2002, we exited the domestic photo envelope market. Sales
of these envelopes were $5.4 million in 2001.
* Sales at our plant in New York City declined $4.7 million in 2002. We
ceased production at this plant in September 2002.
The operating income of the commercial segment increased $57.7 million
in 2003. Operating income in 2003 was impacted by the following:
* Restructuring expenses and other charges incurred in 2003 were $1.2
million, $43.7 million lower than incurred in 2002.
* The operating income of the printing and fulfillment operations we
acquired in August 2002 and the impact of the strong Canadian dollar
offset much of the impact of lower sales volume and lower selling
prices in 2003.
* Fixed manufacturing costs and administrative expenses were reduced
$11.4 million primarily due to the closure of our web printing
operation in Indianapolis and other cost control initiatives during
2003.
* Results in 2002 included a $3.2 million loss incurred by our printing
operation in New York City, which was closed in September 2002.
Operating income of the commercial segment declined $39.2 million in
2002. Operating income in 2002 was impacted by the following:
* Restructuring expenses and other charges incurred in 2002 were $44.9
million, $15.0 million higher than incurred in 2001.
* The impact on operating income of the sales decline was approximately
$48.0 million, of which approximately $18.6 million was related to
lower average selling prices.
19
* Fixed manufacturing costs and administrative expenses were reduced
$22.5 million, primarily due to the consolidation of eight envelope
facilities during 2001 and 2002, the closure and consolidation of our
printing operations in Philadelphia and lower employee benefit
expenses.
RESALE
YEAR ENDED DECEMBER 31
--------------------------------------
2003 2002 2001
-------- -------- --------
(DOLLARS IN THOUSANDS)
Sales........................... $399,139 $460,338 $511,338
Operating income................ 45,711 44,317 44,588
Operating income margin......... 11.5% 9.6% 8.7%
Sales of our resale segment declined $61.2 million, or 13.3%, in 2003
compared to sales in 2002. This decline in sales was due to the following:
* Sales in 2002 included sales of $42.3 million from the filing
products division that was sold in August 2002.
* Approximately $6.4 million of the sales decline in 2003 was due to
lower selling prices driven by competitive pricing pressures in the
market.
* Sales to our merchant and office products customers were $5.2 million
lower in 2003 due to losses of certain customers and weak demand in
the office products retail market.
* Sales of our high strength mailing envelopes were $4.0 million lower
due in part to planned reductions of certain low margin business.
* Sales to our office products distribution customers were $3.2 million
lower due primarily to lower sales of traditional business forms.
Over the last few years demand for traditional business forms has
declined as businesses have acquired laser printing capabilities.
Sales of labels and envelopes to our distribution customers in 2003
were approximately the same as in 2002.
Sales declined $51.0 million, or 10.0%, in 2002 compared to sales in
2001. This decline in sales was due to the following:
* Sales of the filing products division were $32.0 million lower in
2002 than for the full year of 2001.
* Sales to office products distribution customers declined $12.8
million due to lower sales of traditional business forms, lower sales
of our label products to quick printers and lower sales of envelopes.
* Sales to our merchant and office products customers declined
approximately $6.3 million due to inventory reductions by many of our
customers and planned reductions of certain low margin business.
The operating income of the resale segment increased 3.1% to $45.7
million in 2003 from operating income of $44.3 million in 2002. Operating
income in 2003 was impacted by the following factors:
* Restructuring expenses and other charges in 2003 were $0.3 million,
$6.3 million lower than in 2002.
* The impact of lower sales volume and lower selling prices on
operating income was approximately $5.2 million.
20
* Fixed manufacturing and administrative expenses were reduced $3.0
million primarily due to the closure of our Clearwater, Florida
business forms plant in 2002 and other cost control initiatives in
2003.
* Operating income in 2002 included operating income of $2.8 million
from the filing products division.
Operating income declined slightly in 2002 to $44.3 million from
operating income of $44.6 million in 2001. Operating income in 2002 was
impacted by the following:
* Restructuring expenses and other charges in 2002 were $2.2 million
lower than in 2001.
* The impact of lower sales volume and lower selling prices on
operating income was approximately $4.3 million.
* Fixed manufacturing and administrative expenses were reduced $7.1
million in 2002 primarily as a result of the curtailment of the
business forms plant in Denver, the closure of the envelope operation
in Hattiesburg, Mississippi and the closure of the warehouse and
distribution center in Santa Fe Springs, California.
* Operating income of the filing products division was $5.3 million
lower in 2002 than the full year of 2001.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2003, our outstanding debt was $749.0 million, $14.9
million lower than at December 31, 2002. At December 31, 2003, our
revolving loan balance was $28.6 million lower than at December 31, 2002.
Our outstanding debt at December 31, 2003 included $17.0 million of debt
held by a variable interest entity that was consolidated on January 1, 2003
in accordance with FIN 46.
CASH PROVIDED BY OPERATIONS. Our operations generated cash flow of
$59.5 million in 2003 compared with $23.0 million in 2002 and $170.9
million in 2001. The increase in operating cash flow in 2003 from the
amount generated in 2002 was primarily due to earnings from continuing
operations compared to the loss in 2002.
INVESTING ACTIVITIES. Acquisition spending was $2.8 million in 2003,
$2.6 million in 2002 and $3.8 million in 2001. In 2002, we purchased the
in-house printing and fulfillment operations of American Express Company.
The acquisition spending in 2003 also relates to this investment. In 2001,
we purchased a small printing and fulfillment operation in Denver,
Colorado.
Capital expenditures were $31.6 million in 2003, $30.9 million in 2002
and $32.7 million in 2001. We anticipate capital expenditures in 2004 to be
approximately $20.0 to $30.0 million.
In March 2003, we received net proceeds of $3.9 million from the sale
of the digital graphics operations. In 2002, we received net proceeds of
$31.5 million from the sale of the filing products division, $67.0 million
from the sale of the prime label business and $20.5 million from the sale
of Curtis 1000.
FINANCING ACTIVITIES. During 2002, we completed a significant
restructuring 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 other debt. The
remaining $2.0 million of net proceeds from the offering were used for
other working capital needs.
In June 2002, we entered into a three-year $300 million senior secured
credit facility with a syndicate of banks. The purpose of the 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.
21
On November 1, 2002, we redeemed the $139.1 million convertible
subordinated notes due on that date.
At December 31, 2003, we had outstanding letters of credit of
approximately $25.1 million related to performance and payment guarantees.
In addition, we have issued letters of credit of $1.9 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 current credit ratings are as follows:
SENIOR SENIOR
SECURED SENIOR SUBORDINATED
REVIEW AGENCY CREDIT FACILITY NOTES DEBT LAST UPDATE
- ------------- --------------- ------ ------------ ------------
Standard & Poors..... BB- BB- B May 2003
Moody's.............. Ba3 B1 B3 January 2004
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.
On February 4, 2004, we sold $320 million of 7 7/8% senior subordinated
notes due 2013. The proceeds of these notes will be used to purchase the
$300 million of 8 3/4% senior subordinated notes due 2008. On February 3,
2004, we accepted tenders of $166.4 million of the 8 3/4% notes at a price
of $1,045 for each $1,000 of principal amount together with accrued
interest. The remaining outstanding notes were called for redemption at a
price of $1,043.75 for each $1,000 of principal amount plus accrued
interest to the redemption date. In the first quarter of 2004 we will
record a loss of approximately $17.8 million on the early extinguishment of
our 8 3/4% senior subordinated notes.
CONTRACTUAL OBLIGATIONS. The following table aggregates material
expected contractual obligations and commitments as of December 31, 2003,
as adjusted for the new 7 7/8% senior subordinated notes sold on February
4, 2004 (in thousands):
OTHER
LONG-TERM OPERATING LONG-TERM PURCHASE TOTAL CASH
DEBT LEASES LIABILITIES COMMITMENTS OBLIGATIONS
--------- --------- ----------- ----------- -----------
2004............... $ 2,575 $ 31,057 $ -- $ 720 $ 34,352
2005............... 75,834 26,308 3,521 420 106,083
2006............... 2,327 21,786 3,259 -- 27,372
2007............... 13,532 16,301 2,220 -- 32,053
2008............... 300,964 14,777 2,042 -- 317,783
Thereafter......... 373,729 11,412 14,617 -- 399,758
-------- -------- ------- ------ --------
Total.............. $768,961 $121,641 $25,659 $1,140 $917,401
======== ======== ======= ====== ========
EMPLOYMENT CONTRACTS. We have an employment contract with Paul Reilly,
our CEO, providing for severance payments under certain circumstances. We
have also entered into change of control agreements with certain other
executives providing for severance payments in the event of a change of
control.
OFF-BALANCE SHEET ARRANGEMENTS. We do not have any off-balance sheet
arrangements with unconsolidated entities or other persons.
We expect to be able to fund our operations, capital expenditures, debt
and other contractual commitments within the next year from internally
generated cash flow and funds available under our senior secured credit
facility. The borrowing base certificate filed January 16, 2004, reflecting
assets included in the December 31, 2003 consolidated balance sheet,
reported $111.6 million of unused credit available under our senior secured
credit facility.
22
SEASONALITY AND ENVIRONMENT
Our commercial segment experiences seasonal variations. 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. As a result of these seasonal
variations, some of our commercial printing operations are at or near
capacity at certain times during these periods.
In addition, several envelope market segments and certain segments of
the direct mail market, experience seasonality, with a higher percentage of
the volume of products sold 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.
The mailer operations of our resale segment are at or near capacity at
times during the fourth quarter.
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
Our consolidated financial statements have been prepared in accordance
with generally accepted accounting principles. In preparing these financial
statements, we are required to make estimates and assumptions that affect
the reported amounts of assets and liabilities, 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. We evaluate these estimates and assumptions on an ongoing basis,
including those related to bad debts, property, plant and equipment,
intangible assets, income taxes, and contingencies. We base our estimates
on historical experience and various other assumptions that are considered
reasonable in view of relevant facts and circumstances. Because of the
uncertainty inherent in such estimates, actual results may differ from our
estimates.
Critical accounting policies are defined as those policies that relate
to estimates that require assumptions about matters that are highly
uncertain at the time the estimate is made and could have a material impact
on our results due to changes in the estimate or the use of different
estimates that reasonably could have been used.
ALLOWANCES FOR LOSSES ON ACCOUNTS RECEIVABLE. We maintain a valuation
allowance based upon the expected collectibility of accounts receivable.
The allowance includes specific amounts for customer collection issues we
have identified and an estimate of accounts that may become uncollectible
based on the age of the receivables. Our accounts receivable allowance at
December 31, 2003 was $4.0 million. In 2003, we wrote-off uncollectible
accounts of $4.0 million to the reserve net of recoveries. In 2002, we
wrote-off uncollectible accounts of $4.7 million net of recoveries. While
credit losses have historically been within our expectations, we cannot
guarantee that we will continue to experience the same credit loss rates
that we have in the past. These estimates may prove to be inaccurate, in
which case we may have overstated or understated the reserve required for
uncollectible accounts receivable.
GOODWILL. We evaluate the carrying value of our goodwill as of December
1 of each year, or if there are indications of impairment. Our evaluation
is based on discounting the future cash flows of each of our business
segments and comparisons to market multiples of other similar companies. In
preparing projected future cash flows, we use our judgment in projecting
the profitability of our segments, their 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 use our judgment in the selection of the
companies used in the analysis. While we believe there is no further
impairment of our goodwill, if our estimates of future cash flows prove to
be inaccurate, an impairment charge could be necessary in future years.
23
IMPAIRMENT OF LONG-LIVED ASSETS. We periodically evaluate long-lived
assets, including property, plant and equipment and other intangible assets
whenever events or changes in conditions indicate that the carrying value
may not be recoverable. The evaluation requires us to estimate future
undiscounted cash flows associated with an asset or group of assets. If the
cost of the asset or group of assets cannot be recovered by these
undiscounted cash flows, then an impairment may exist. Estimating future
cash flows requires judgments regarding future economic conditions, product
demand and pricing. Although we believe our estimates are appropriate,
significant differences in the actual performance of the asset or group of
assets may materially affect our asset values and require an impairment
charge to future results.
SELF-INSURANCE. We are self-insured for the majority of our workers'
compensation costs and group health insurance costs, subject to specific
retention levels. We rely on claims experience and the advice of consulting
actuaries and administrators in determining an adequate liability for
self-insurance claims. Our self-insured workers' compensation liability is
estimated based on reserves for claims that are established by a
third-party administrator. The estimate of these reserves is increased to
reflect the estimated future development of the claims. Our liability for
workers' compensation claims is the estimated total cost of the claims on a
fully-developed basis. Our liability for workers' compensation claims at
December 31, 2003 was $8.1 million. The actuarial estimate of the cost of
claims incurred in 2003 was $3.6 million and $5.1 million in 2002. In
addition, in 2002, we recorded a charge of $4.4 million to adjust our
workers' compensation liability to a fully developed basis. In 2003, we
recorded additional charges of $1.8 million due to negative development of
old claims.
Our self-insured healthcare liability is estimated based on our actual
claims experience and multiplied by a lag factor. Our healthcare liability
represents our estimate of claims that have been incurred but have not been
reported. The liability at December 31, 2003 was $6.8 million. The lag
factor used to estimate this liability was approximately 75 days.
While we believe that our assumptions are appropriate, significant
differences in our experience or a significant change in any of our
assumptions could materially affect our workers' compensation costs and
group health insurance costs.
ACCOUNTING FOR INCOME TAXES. As part of the process of preparing our
consolidated financial statements we are required to estimate our income
taxes in each of the jurisdictions in which we operate. This process
involves estimating our actual current tax exposure, together with
assessing temporary differences resulting from differing treatment of items
for tax and financial reporting purposes. 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 our tax return in future years for which we
have already recorded the tax benefit in the statement of operations.
Deferred tax liabilities generally represent tax items that have been
deducted for tax purposes, but have not yet been recorded in the statement
of operations.
We must then assess the likelihood that our deferred tax assets support
the use of the future deduction or credit. To the extent we believe that
the use of the future tax asset is not likely, we must establish a
valuation allowance. The valuation allowance is based on our estimates of
taxable income by jurisdiction in which we operate, tax planning strategies
and the period over which our deferred tax assets will be recoverable. In
the event that actual results differ from these estimates, we are unable to
implement certain tax planning strategies or we adjust these estimates in
future periods, we may need to establish an additional valuation allowance
that could have a material negative impact on our statement of operations
and our balance sheet.
Significant judgment is required in determining our effective tax rate
and in evaluating our tax positions. We establish reserves when, despite
our belief that our tax return positions are fully supportable, we believe
that certain positions are likely to be challenged and that we may not
succeed. We adjust these reserves in light of changing facts and
circumstances, such as the progress of a tax audit. Our effective tax rate
includes the impact of reserve provisions and changes to reserves that we
consider appropriate, as well as related interest.
24
A company of our size is often under audit by various tax agencies in
the jurisdictions in which we operate. A number of years may elapse before
a particular matter, for which we have established a reserve, is audited
and finally resolved. The number of years with open tax audits varies
depending on the tax jurisdiction. We currently have no open audits for the
years prior to 1997. While it is difficult to predict the final outcome or
the timing of resolution of any particular tax matter, we believe that our
reserves reflect the probable outcome of known tax contingencies.
NEW ACCOUNTING STANDARDS
In April 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 149, Amendment of Statement No. 133 on Derivative Instruments and
Hedging Activities. This statement amends SFAS No. 133 to provide
clarification on the financial accounting and reporting of derivative
instruments and hedging activities and requires contracts with similar
characteristics to be accounted for on a comparable basis. The adoption of
SFAS No. 149, which is effective for contracts entered into or modified
after June 30, 2003, did not have an impact on our financial condition or
results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
SFAS No. 150 establishes standards for how to classify and measure certain
financial instruments with characteristics of both liabilities and equity.
SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003. The adoption of
SFAS No. 150 did not have an impact on our financial condition or results
of operations.
In December 2003, the FASB issued SFAS No. 132 (revised 2003),
Employers' Disclosures about Pensions and Other Postretirement Benefits,
that improves financial statement disclosures for defined benefit plans.
The change replaces existing SFAS No. 132 disclosure requirements for
pensions and other postretirement benefits and revises employers'
disclosures about pension plans and other postretirement benefit plans. It
does not change the measurement or recognition of those plans required by
SFAS No. 87, Employers' Accounting for Pensions, SFAS No. 88, Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension
Plans and for Termination Benefits. SFAS No. 132 retains the disclosure
requirements contained in the original SFAS No. 132, but requires
additional disclosures about the plan assets, obligations, cash flows, and
net periodic benefit cost of defined benefit pension plans and other
defined benefit postretirement plans. SFAS No. 132 is effective for annual
and interim periods with fiscal years ending after December 15, 2003. We
have adopted the revised disclosure provisions as of December 31, 2003.
On December 17, 2003, the Securities and Exchange Commission issued
Staff Accounting Bulletin ("SAB") No. 104, Revenue Recognition, which
supersedes SAB No. 101, Revenue Recognition in Financial Statements. SAB
No. 104's primary purpose is to rescind accounting guidance contained in
SAB No. 101 related to multiple element revenue arrangements. SAB No. 104
will not have an impact on our recognition of revenue.
FORWARD-LOOKING STATEMENTS
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. These statements are
often identified by the words, "believe," "expect," "intend," "appear,"
"estimate," "anticipate," "project," "will" and other similar expressions.
All such statements which address operating performance, events or
developments that we expect or anticipate will occur in the future and are
not historical in nature. All forward-looking 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, these statements
involve known and unknown risks, including, but not limited to:
* General economic, business and labor conditions
25
* The ability of the Company to implement its strategic initiatives
* The ability to sustain profitability after substantial losses in 2002
and 2001
* The ability to successfully identify, manage or integrate possible
future acquisitions
* Sales are not subject to long-term contracts
* The industry is extremely competitive
* The impact of the Internet and other electronic media on the demand
for envelopes and printed material
* Postage rates and other changes in the direct mail industry
* Environmental laws may affect our business
* The ability to retain key management personnel
* Compliance with recently enacted and proposed changes in laws and
regulations affecting public companies could be burdensome and
expensive
* Dependence on suppliers and the costs of paper and other raw
materials
* The ability of the company to meet customer demand for additional
value-added products and services
* Changes in interest rates and currency exchange rates of the Canadian
dollar
* The ability to manage operating expenses
* The risk that a decline in business volume or profitability could
result in a further impairment of goodwill
* The ability to timely or adequately respond to technological changes
in our industry
* The ability to extend our current credit facility beyond 2005
In view of such uncertainties, investors should not place undue
reliance on any 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.
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 do
we hedge interest rate exposure through the use of swaps and options or
foreign exchange exposure through the use of forward contracts.
Exposure to market risk from changes in interest rates relates
primarily to our variable rate debt obligations. The interest on this debt
is the London Interbank Offered Rate ("LIBOR") plus a margin. At December
31, 2003 and 2002, we had variable rate debt outstanding of $91.8 million
and $103.8 million, respectively. A 1% increase in LIBOR on the maximum
amount of debt subject to variable interest rates, which was $318.5 million
in 2003 and $301.8 million in 2002, would increase our interest expense by
$3.2 million in 2003 and $3.0 million in 2002 and reduce our net income by
approximately $1.9 million in 2003 and 2002.
We have operations in Canada, and thus are exposed to market risk for
changes in foreign currency exchange rates of the Canadian dollar.
26
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, 2003 and 2002, 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, 2003. Our audits also included the financial statement
schedules for each of the three years in the period ended December 31, 2003
listed in the Index at Item 15(a)(2). These financial statements and
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules 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, 2003 and 2002,
and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 2003, in
conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedules,
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 4, 2004, except for Note 19,
as to which the date is February 23, 2004
27
MAIL-WELL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
DECEMBER 31
---------------------------
2003 2002
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................... $ 307 $ 2,650
Accounts receivable, net................................ 223,541 219,924
Inventories, net........................................ 91,402 103,533
Net assets held for sale................................ -- 4,492
Other current assets.................................... 48,135 45,762
---------- ----------
TOTAL CURRENT ASSETS................................ 363,385 376,361
Property, plant and equipment, net.......................... 388,240 379,624
Goodwill.................................................... 299,392 290,361
Other intangible assets, net................................ 19,687 18,586
Other assets, net........................................... 36,689 42,435
---------- ----------
TOTAL ASSETS............................................ $1,107,393 $1,107,367
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................ $ 140,468 $ 151,930
Accrued compensation and related liabilities............ 53,209 53,292
Other current liabilities............................... 64,360 63,386
Current maturities of long-term debt.................... 2,575 2,961
---------- ----------
TOTAL CURRENT LIABILITIES........................... 260,612 271,569
Long-term debt.............................................. 746,386 760,938
Deferred income taxes....................................... 6,717 10,336
Other liabilities........................................... 25,659 21,756
---------- ----------
TOTAL LIABILITIES....................................... 1,039,374 1,064,599
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, 48,380,457 and 48,337,031 shares issued
and outstanding as of December 31, 2003 and 2002,
respectively.......................................... 484 483
Paid-in capital......................................... 213,850 213,826
Retained deficit........................................ (150,331) (155,481)
Deferred compensation................................... (1,714) (2,471)
Accumulated other comprehensive income (loss)........... 5,730 (13,589)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY.......................... 68,019 42,768
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $1,107,393 $1,107,367
========== ==========
See notes to consolidated financial statements.
28
MAIL-WELL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except earnings per share amounts)
YEAR ENDED DECEMBER 31
--------------------------------------------
2003 2002 2001
---------- ---------- ----------
Net sales.......................................... $1,671,664 $1,728,705 $1,868,768
Cost of sales...................................... 1,337,118 1,385,361 1,481,135
---------- ---------- ----------
Gross profit....................................... 334,546 343,344 387,633
Operating expenses:
Selling, general and administrative............ 245,689 263,734 277,004
Amortization of intangibles.................... 1,899 2,237 16,197
Loss from the early extinguishment of debt..... -- 16,463 --
Impairment loss (gain) on assets held for
sale......................................... (117) 6,436 --
Impairment on operations formerly held for
sale......................................... -- 12,842 36,523
Settlement of litigation....................... 5,330 -- 1,231
Restructuring, impairments and other charges... 1,530 74,551 41,854
---------- ---------- ----------
Operating income (loss)............................ 80,215 (32,919) 14,824
Other expense:
Interest expense............................... 71,891 70,461 63,314
Other.......................................... 1,819 1,754 1,923
---------- ---------- ----------
Income (loss) from continuing operations before
income taxes and cumulative effect of a change in
accounting principle............................. 6,505 (105,134) (50,413)
Provision (benefit) for income taxes............... 2,581 (31,646) (5,200)
---------- ---------- ----------
Income (loss) from continuing operations before
cumulative effect of a change in accounting
principle........................................ 3,924 (73,488) (45,213)
Loss from discontinued operations.................. -- -- (2,982)
Gain (loss) on disposal of discontinued
operations....................................... 1,548 (16,868) (88,022)
Cumulative effect of a change in accounting
principle........................................ (322) (111,748) --
---------- ---------- ----------
Net income (loss).................................. $ 5,150 $ (202,104) $ (136,217)
========== ========== ==========
Earnings (loss) per share--basic and diluted:
Continuing operations.......................... $ 0.08 $ (1.54) $ (0.95)
Discontinued operations........................ 0.04 (0.35) (1.91)
Cumulative effect of a change in accounting
principle.................................... (0.01) (2.35) --
---------- ---------- ----------
Earnings (loss) per share--basic and diluted... $ 0.11 $ (4.24) $ (2.86)
========== ========== ==========
Weighted average shares--basic................. 47,687 47,665 47,562
Weighted average shares--diluted............... 48,315 47,665 47,562
See notes to consolidated financial statements.
29
MAIL-WELL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEAR ENDED DECEMBER 31
---------------------------------------------
2003 2002 2001
----------- ----------- ---------
Cash flows from operating activities:
Income (loss) from continuing operations.................. $ 3,924 $ (73,488) $ (45,213)
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by operating
activities:
Depreciation......................................... 46,069 47,818 47,199
Amortization......................................... 5,883 7,635 22,203
Loss from the early extinguishment of debt........... -- 16,463 --
Noncash portion of restructuring, impairment and
other charges..................................... -- 42,282 47,596
Loss on assets held for sale......................... -- 6,436 --
Deferred income tax expense (benefit)................ (10,854) (27,726) 5,063
Loss on disposal of assets........................... 1,221 346 1,241
Other noncash expenses, net.......................... 435 91 958
Changes in operating assets and liabilities, excluding the
effects of acquired businesses:
Accounts receivable.................................. 3,414 12,756 57,135
Inventories.......................................... 14,647 8,906 20,160
Accounts payable and accrued compensation............ (15,417) (11,036) 24,942
Income taxes payable................................. 12,212 4,193 (5,824)
Other working capital changes........................ (1,952) (7,130) (3,359)
Other, net........................................... (123) (4,575) (1,166)
----------- ----------- ---------
Net cash provided by operating activities........... 59,459 22,971 170,935
Cash flows from investing activities:
Acquisitions, net of cash acquired.................... (2,800) (2,610) (3,838)
Capital expenditures.................................. (31,602) (30,896) (32,742)
Proceeds from divestitures, net....................... 3,864 122,330 --
Proceeds from sales of property, plant and
equipment........................................... 682 11,995 3,782
Purchase of investment................................ -- -- (100)
----------- ----------- ---------
Net cash provided by (used in) investing
activities........................................ (29,856) 100,819 (32,898)
Cash flows from financing activities:
Decrease in accounts receivable financing facility.... -- -- (75,000)
Proceeds from exercise of stock options............... 75 18 413
Proceeds from issuance of long-term debt.............. 1,915,452 1,635,102 634,404
Repayments of long-term debt.......................... (1,948,299) (1,726,718) (699,522)
Capitalized loan fees................................. (484) (18,624) (4,439)
----------- ----------- ---------
Net cash used in financing activities............... (33,256) (110,222) (144,144)
Effect of exchange rate changes on cash and cash
equivalents................................................ 1,310 (985) (73)
Cash flows provided by (used in) discontinued operations.... -- (10,827) 6,612
----------- ----------- ---------
Net increase (decrease) in cash and cash
equivalents....................................... (2,343) 1,756 432
Cash and cash equivalents at beginning of year.............. 2,650 894 462
----------- ----------- ---------
Cash and cash equivalents at end of year.................... $ 307 $ 2,650 $ 894
=========== =========== =========
See notes to consolidated financial statements.
30
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, 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
Comprehensive income (loss):
Net income.................................... 5,150 5,150
Other comprehensive income (loss):
Pension liability adjustment, net of tax
benefit of $1,996.......................... (3,188) (3,188)
Currency translation adjustment............. 22,507 22,507
---------
Other comprehensive income................ 19,319
---------
Total comprehensive loss................ 24,469
Cancellation of restricted shares............. (1) (199) 102 (98)
Issuance of restricted shares................. 1 149 (150) --
Exercise of stock options..................... 1 74 75
Amortization of deferred compensation......... 805 805
---- -------- --------- ------- -------- ---------
BALANCE AT DECEMBER 31, 2003.................. $484 $213,850 $(150,331) $(1,714) $ 5,730 $ 68,019
==== ======== ========= ======= ======== =========
See notes to consolidated financial statements.
31
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. Mail-Well, Inc. and subsidiaries (collectively,
the "Company") are engaged in commercial printing, the printing and
manufacturing of envelopes and the printing and manufacturing of business
forms and labels. 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".
The consolidated financial statements include the accounts of
Mail-Well, Inc. and its wholly-owned subsidiaries. In October 2003, the
Company reorganized into two business segments: commercial and resale.
Prior to this reorganization, the Company was organized into three business
segments based on product lines: commercial printing, envelope and printed
office products. Refer to Note 17 for disclosures related to the Company's
operating segments. All significant intercompany accounts and transactions
have been eliminated and all amounts and disclosures reflect the Company's
continuing operations and the Company's new segment reporting.
USE OF ESTIMATES. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting 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, self-insurance accruals 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.
FREIGHT COSTS. The costs of delivering finished goods to the Company's
customers are recorded as freight costs and included in cost of sales. Any
freight costs billed to and paid by a customer are included in net sales.
ADVERTISING COSTS. All advertising costs are expensed as incurred.
Advertising costs were $5.7 million, $6.0 million and $6.5 million for the
years ended December 31, 2003, 2002 and 2001, respectively.
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. Trade accounts receivable are recorded at the
invoiced amount. The Company maintains a valuation allowance based upon the
expected collectibility of accounts receivable. Account balances are
charged to the allowance after all means of collection have been exhausted
and the potential for recovery is remote. Allowances for losses on accounts
receivable of $4.0 million and $4.7 million have been applied as reductions
of accounts receivable at December 31, 2003 and 2002, respectively.
INVENTORIES. Inventories are carried at the lower of cost or market,
with cost determined on a first-in, first-out basis. Cost includes
materials, labor and overhead. The Company estimates reserves for
unsaleable inventory based on management's judgment of future realization.
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
32
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
or useful lives of existing assets are capitalized. The recoverability of
property, plant and equipment is periodically reviewed by management based
on current and anticipated conditions.
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.
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. Net computer software costs included in
property, plant and equipment were $8.7 million and $7.5 million at
December 31, 2003 and 2002, respectively.
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
$15.6 million and $18.9 million at December 31, 2003 and 2002,
respectively, net of accumulated amortization, are amortized over the term
of the related debt as interest expense. Interest expense includes $4.0
million, $5.4 million and $6.0 million of amortized deferred financing fees
for the years ended December 31, 2003, 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.
Goodwill was amortized on a straight-line basis over 40 years prior to
2002. Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible
Assets. Under SFAS No. 142, goodwill is no longer amortized to earnings,
but instead is reviewed annually to determine if there is an impairment, or
more frequently, if an indication of possible impairment exits. The Company
performed its impairment assessments in the fourth quarters of 2003 and
2002 and concluded that there was no impairment of goodwill other than the
transitional impairment recognized upon the adoption of SFAS No. 142. Refer
to Note 2 for disclosures related to the adoption of SFAS No. 142.
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.
LONG-LIVED ASSETS. Long-lived 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.
SELF-INSURANCE. The Company is self-insured for the majority of its
workers' compensation costs and group health insurance costs, subject to
specific retention levels. The Company records its liability for workers'
compensation claims on a developed basis. The Company's liability for
health insurance claims includes an estimate for claims incurred but not
reported.
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 year-end exchange rates. The effects of
translation are included as a component of other comprehensive income.
Income and expense items are translated at the average monthly rate.
Foreign currency transaction gains and losses are recorded in income when
realized.
33
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.
If the Company had applied the fair value recognition provisions of
SFAS No. 123, Accounting for Stock-Based Compensation, the Company's
reported and pro forma net income (loss) and earnings (loss) per share
would have been as follows (in thousands, except per share data):
DECEMBER 31
--------------------------------------
2003 2002 2001
------ --------- ---------
Net income (loss):
As reported..................................... $5,150 $(202,104) $(136,217)
Pro forma....................................... $1,950 $(205,747) $(140,587)
Earnings (loss) per share--basic and diluted:
As reported..................................... $ 0.11 $ (4.24) $ (2.86)
Pro forma....................................... $ 0.04 $ (4.32) $ (2.96)
The effect on reported net income (loss), earnings (loss) per share 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. Refer to Note 13 for the
assumptions used to compute the pro forma amounts.
RECLASSIFICATIONS. Certain prior year amounts have been reclassified to
conform with the current year presentation.
NEW ACCOUNTING PRONOUNCEMENTS. The Company adopted SFAS No. 145,
Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections, on January 1, 2003. The
provisions of SFAS No. 145 required the reclassification of the loss from
the early extinguishment of debt that was recorded as an extraordinary item
in 2002 into income from continuing operations and the restatement of the
consolidated statement of operations for the year ended December 31, 2002.
The table below is a reconciliation of loss per share for the year
ended December 31, 2002 as originally reported and the loss per share as
restated.
DECEMBER 31, 2002
AS ORIGINALLY IMPACT OF DECEMBER 31, 2002
REPORTED SFAS 145 RESTATED
----------------- --------- -----------------
Loss per share--basic and diluted:
Continuing operations.......................... $(1.33) $(0.21) $(1.54)
Discontinued operations........................ (0.35) -- (0.35)
Extraordinary items............................ (0.21) 0.21 --
Cumulative effect of a change in accounting
principle.................................... (2.35) -- (2.35)
------ ------ ------
Loss per share................................. $(4.24) $ -- $(4.24)
====== ====== ======
In April 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and
Hedging Activities. This statement amends SFAS No. 133 to provide
clarification on the financial accounting and reporting of derivative
34
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
instruments and hedging activities and requires contracts with similar
characteristics to be accounted for on a comparable basis. The adoption of
SFAS No. 149, which is effective for contracts entered into or modified
after June 30, 2003, did not have an impact on the Company's financial
condition or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
SFAS No. 150 establishes standards for how to classify and measure certain
financial instruments with characteristics of both liabilities and equity.
SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003. The adoption of
SFAS No. 150 did not have an impact on the Company's financial condition or
results of operations.
In December 2003, the FASB issued SFAS No. 132 (revised 2003),
Employers' Disclosures about Pensions and Other Postretirement Benefits,
that improves financial statement disclosures for defined benefit plans.
The change replaces existing SFAS No. 132 disclosure requirements for
pensions and other postretirement benefits and revises employers'
disclosures about pension plans and other postretirement benefit plans. It
does not change the measurement or recognition of those plans required by
SFAS No. 87, Employers' Accounting for Pensions, SFAS No. 88, Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension
Plans and for Termination Benefits. SFAS No. 132 retains the disclosure
requirements contained in the original SFAS No. 132, but requires
additional disclosures about the plan assets, obligations, cash flows, and
net periodic benefit cost of defined benefit pension plans and other
defined benefit postretirement plans. SFAS No. 132 is effective for annual
and interim periods with fiscal years ending after December 15, 2003. The
Company adopted the revised disclosure provisions as of December 31, 2003.
On December 17, 2003, the Securities and Exchange Commission issued
Staff Accounting Bulletin ("SAB") No. 104, Revenue Recognition, which
supersedes SAB No. 101, Revenue Recognition in Financial Statements. SAB
No. 104's primary purpose is to rescind accounting guidance contained in
SAB No. 101 related to multiple element revenue arrangements. The adoption
of SAB No. 104 did not have an impact on the Company's recognition of
revenue.
2. CHANGES IN ACCOUNTING PRINCIPLES
FASB Interpretation No. 46 Consolidation of Variable Interest Entities,
an Interpretation of Accounting Research Bulletin No. 51, ("FIN 46") issued
in January 2003 introduced a new consolidation model, the variable interest
model, which determines control and whether an entity is to be consolidated
based on potential variability in gains and losses of the entity. Variable
interests are contractual, ownership or other interests in an entity that
expose its holders to the risks and rewards of the variable interest entity
("VIE"). Variable interests include equity investments, loans, leases,
derivatives, guarantees and other instruments whose values change with
changes in the VIE's assets.
The Company leases printing equipment from a bankruptcy-remote trust
(the "Trust") under an operating lease. At the end of the lease, the
Company has the option to purchase the equipment for the aggregate
outstanding loan balance of the Trust or to direct the sale of the
equipment to a third party. If the Company were to direct the sale of the
equipment, it has guaranteed the Trust that the proceeds from the sale will
be at least 60.9% of the original fair value of the leased assets which
could be as much as $11.6 million. If the sales proceeds exceed the
guaranteed value of the leased assets, the Company retains the excess.
The Company is the primary beneficiary of this Trust, a VIE, and is
therefore required by FIN 46 to consolidate the Trust in its financial
statements. The Company adopted FIN 46 effective January 1, 2003 and
consolidated equipment valued at $18.1 million, net of accumulated
depreciation, and debt of
35
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. CHANGES IN ACCOUNTING PRINCIPLES (CONTINUED)
$18.5 million and recorded a charge of $0.3 million, net of tax, as a
cumulative effect of a change in accounting principle in the consolidated
statement of operations for the year ended December 31, 2003.
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 the Company's commercial printing
operations.
Since the first step indicated an impairment of the goodwill of the
commercial printing operations, 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 this goodwill to its
carrying value. The implied fair value of the goodwill was determined by
allocating the fair value of the combined assets and liabilities of the
commercial printing operations as if these operations 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 the goodwill exceeded the implied value by
$111.7 million, which was recorded as a cumulative effect of a change in
accounting principle in the consolidated statement of operations for the
year ended December 31, 2002. The impairment loss on the goodwill recorded
by the commercial printing operations (formerly the commercial printing
segment) was due to the significant decline in the performance of these
operations in 2001 and the impact of that decline on expected future cash
flows.
The following table summarizes the Company's income (loss) from
continuing operations before 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, 2001 (in thousands, except per share amounts):
YEAR ENDED DECEMBER 31
------------------------------------
2003 2002 2001
------ -------- --------
Reported income (loss) from continuing operations before
cumulative effect of a change in accounting principle... $3,924 $(73,488) $(45,213)
Goodwill amortization, net of tax of $1.9 million in
2001.................................................... -- -- 12,923
------ -------- --------
Adjusted income (loss) from continuing operations
before cumulative effect of a change in accounting
principle........................................... $3,924 $(73,488) $(32,290)
====== ======== ========
Diluted earnings (loss) per share--as reported............ $ 0.08 $ (1.54) $ (0.95)
Diluted earnings (loss) per share--as adjusted............ $ 0.08 $ (1.54) $ (0.68)
36
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. CHANGES IN ACCOUNTING PRINCIPLES (CONTINUED)
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, 2001 (in thousands, except per share amounts):
YEAR ENDED DECEMBER 31
--------------------------------------
2003 2002 2001
------ --------- ---------
Reported net income (loss).............................. $5,150 $(202,104) $(136,217)
Goodwill amortization, net of tax of $1.9 million in
2001.................................................. -- -- 12,923
------ --------- ---------
Adjusted net income (loss).......................... $5,150 $(202,104) $(123,294)
====== ========= =========
Diluted earnings (loss) per share--as reported.......... $ 0.11 $ (4.24) $ (2.86)
Diluted earnings (loss) per share--as adjusted.......... $ 0.11 $ (4.24) $ (2.59)
3. 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 with additional consideration of up to $17.0
million payable if annual revenues during each year of the five-year period
commencing on January 1, 2003 total a specified amount. The Company paid
additional consideration of $2.8 million in 2003. All additional
consideration paid will be recorded as an identified intangible. This
acquisition has been accounted for as a purchase; accordingly, its assets
and liabilities have been recorded at estimated fair value with the excess
of the purchase price over the estimated fair value recorded as goodwill.
The consolidated financial statements reflect the operations of the
acquired business since August 2002. The total amount of goodwill related
to this acquisition at December 31, 2003 was $0.8 million. Sales included
in the years ended December 31, 2003 and 2002 were $64.5 million and $11.9
million, respectively.
In January 2001, the Company acquired Communigraphics, Inc., a
commercial printing and fulfillment operation in Denver, Colorado for $3.8
million. This acquisition was also recorded as a purchase.
4. DISCONTINUED OPERATIONS
In June 2001, the Company announced plans to sell its prime label and
printed office products operating segments. The printed office products
segment was comprised of two separate businesses, Curtis 1000 and
PrintXcel. In June 2002, the Company decided that it would not sell
PrintXcel. The prime label segment and Curtis 1000 have been segregated
from continuing operations and reported as discontinued operations for all
periods presented. 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 prime label operating segment for $75.0 million.
The loss on disposal of discontinued operations for the year ended
December 31, 2001 of $88.0 million included adjustments to record the prime
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 which
was less than originally estimated. In addition, the cumulative translation
adjustment which related to the
37
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. DISCONTINUED OPERATIONS (CONTINUED)
investment in the foreign operations of the prime 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.
The gain on disposal of discontinued operations recorded for the year
ended December 31, 2003 reflects a change in the tax impact of the
disposition of the Company's prime label business, which was sold in May
2002. This gain was partially offset by the accrual of additional expenses
related to the sale.
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 the prime label business and Curtis 1000.
This allocation of interest expense totaled $5.6 million and $15.6 million
for the years ended December 31, 2002 and 2001, respectively. Tax benefits
allocated to discontinued operations based on the losses of these
operations were $1.6 million and $1.7 million for the years ended December
31, 2002 and 2001, respectively.
Operating results of the discontinued operations are summarized as
follows (in thousands):
YEAR ENDED DECEMBER 31
---------------------------------------
2003 2002 2001
-------- -------- ---------
Net sales:
Prime label....................................... $ -- $ 84,758 $ 219,182
Curtis 1000....................................... -- 22,788 171,148
-------- -------- ---------
$ -- $107,546 $ 390,330
======== ======== =========
Loss from operations:
Prime label........................................ $ -- $ -- $ (1,028)
Curtis 1000........................................ -- -- (3,588)
-------- -------- ---------
-- -- (4,616)
Income tax benefit................................. -- -- 1,634
-------- -------- ---------
$ -- $ -- $ (2,982)
======== ======== =========
Gain (loss) on disposal of discontinued operations:
Prime label........................................ $ (830) $(16,299) $ (87,062)
Curtis 1000........................................ 139 (1,028) (36,395)
-------- -------- ---------
(691) (17,327) (123,457)
Income tax benefit................................. 2,239 459 35,435
-------- -------- ---------
$ 1,548 $(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 because 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.
38
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 resale segment in
August 2002 and certain digital graphics operations of the commercial
segment in March 2003. The following table presents the sales and operating
income of these operations (in thousands):
YEAR ENDED DECEMBER 31
----------------------------------
2003 2002 2001
------ ------- -------
Sales................................................. $2,872 $56,445 $89,950
Operating income...................................... $ 167 $ 3,304 $ 8,238
The assets of operations held for sale at December 31, 2002 totaled
$5.9 million and are reported net of $1.4 million of related liabilities as
"Net assets held for sale" in the consolidated balance sheet.
In 2001, the digital graphics operations were written down $2.9
million to 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
digital graphics operations originally held for sale. The $2.9 million
impairment charge recorded in 2001 has been included in impairment on
operations formerly held for sale in the consolidated statement of
operations for the year ended December 31, 2001. The impairment on
operations formerly held for sale in the consolidated statement of
operations for the year ended December 31, 2002 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.
A $6.1 million impairment charge was recorded in 2002 as a result of
the sale of the filing products division.
6. INVENTORIES
The Company's inventories by major category are as follows (in
thousands):
DECEMBER 31
----------------------
2003 2002
------- --------
Raw materials...................... $28,344 $ 32,515
Work in process.................... 21,483 25,832
Finished goods..................... 46,570 50,854
------- --------
96,397 109,201
Reserves........................... (4,995) (5,668)
------- --------
$91,402 $103,533
======= ========
39
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. PROPERTY, PLANT AND EQUIPMENT
The Company's investment in property, plant and equipment consists of
the following (in thousands):
DECEMBER 31
-------------------------
2003 2002
--------- ---------
Land and land improvements.............................. $ 20,043 $ 19,529
Buildings and improvements.............................. 109,563 105,646
Machinery and equipment................................. 511,820 463,896
Furniture and fixtures.................................. 15,986 15,178
Construction in progress................................ 9,696 5,510
--------- ---------
667,108 609,759
Accumulated depreciation................................ (278,868) (230,135)
--------- ---------
$ 388,240 $ 379,624
========= =========
8. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the years ended
December 31, 2003 and 2002 were as follows (in thousands):
COMMERCIAL RESALE TOTAL
---------- -------- ---------
Balance as of January 1, 2002......................... $ 299,233 $100,668 $ 399,901
Goodwill acquired during the year................... 1,750 -- 1,750
Impairment losses................................... (111,748) -- (111,748)
Impairment on assets formerly held for sale......... (2,435) -- (2,435)
Other - primarily translation adjustments........... 3,110 (217) 2,893
--------- -------- ---------
Balance as of December 31, 2002....................... $ 189,910 $100,451 $ 290,361
Purchase price adjustment........................... -- (302) (302)
Foreign currency translation........................ 9,333 -- 9,333
--------- -------- ---------
Balance as of December 31, 2003....................... $ 199,243 $100,149 $ 299,392
========= ======== =========
The following is a summary of other intangible assets (in thousands):
DECEMBER 31, 2003
---------------------------------------------
ACCUMULATED
LIFE (YEARS) GROSS AMOUNT AMORTIZATION NET
------------ ------------ ------------ -------
Trademarks and tradenames......... 40-43 $14,238 $1,377 $12,861
Non-compete agreements............ 5-7 7,562 6,581 981
Customer relationship............. 4 2,800 -- 2,800
Patents........................... 7-14 2,438 669 1,769
Other............................. 5-40 1,970 694 1,276
------- ------ -------
Total.......................... $29,008 $9,321 $19,687
======= ====== =======
40
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED)
DECEMBER 31, 2002
---------------------------------------------
ACCUMULATED
LIFE (YEARS) GROSS AMOUNT AMORTIZATION NET
------------ ------------ ------------ -------
Trademarks and tradenames......... 40-43 $14,238 $ 987 $13,251
Non-compete agreements............ 5-7 7,562 5,533 2,029
Patents........................... 7-14 2,408 479 1,929
Other............................. 5-40 1,841 464 1,377
------- ------ -------
Total.......................... $26,049 $7,463 $18,586
======= ====== =======
The estimated amortization expense for each of the succeeding five
years is as follows: $5.6 million, $0.7 million, $0.5 million, $0.5 million
and $0.5 million.
9. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) consisted of the
following (in thousands):
DECEMBER 31
----------------------
2003 2002
------- --------
Currency translation adjustment........................ $11,182 $(11,325)
Pension liability adjustment........................... (5,452) (2,264)
------- --------
$ 5,730 $(13,589)
======= ========
10. LONG-TERM DEBT
At December 31, 2003 and 2002, long-term debt consisted of the
following (in thousands):
DECEMBER 31
-------------------------
2003 2002
-------- --------
Senior Secured Credit Facility, due 2005............... $ 73,310 $101,932
Senior Notes, due 2012................................. 350,000 350,000
Senior Subordinated Notes, due 2008.................... 300,000 300,000
Other.................................................. 25,651 11,967
-------- --------
748,961 763,899
Less current maturities................................. (2,575) (2,961)
-------- --------
Long-term debt.......................................... $746,386 $760,938
======== ========
Current maturities consist of scheduled payments on other long-term
debt.
On February 4, 2004, the Company sold $320,000,000 of 7 7/8% senior
subordinated notes due 2013 ("New Senior Subordinated Notes"). The proceeds
of the New Senior Subordinated Notes will be used to purchase the
$300,000,000 of 8 3/4% Senior Subordinated Notes due 2008 which were issued
in December 1998. The Company purchased $166.4 million of the 8 3/4 Senior
Subordinated Notes pursuant to a tender offer to purchase the bonds at
$1,045 for each $1,000 of principal amount together plus accrued interest.
The remaining outstanding notes were called at a redemption price of
$1,043.75 for each $1,000 of principal amount plus accrued interest. The
Company will record a loss of approximately $17.8 million on the early
extinguishment of the 8 3/4% Senior Subordinated Notes in the first quarter
of 2004.
41
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. LONG-TERM DEBT (CONTINUED)
In June 2002, the Company entered into a three year $300,000,000 Senior
Secured Credit Facility due in 2005 with a consortium of banks (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, 2003, the Company had outstanding loans and letters of credit of $98.4
million and had $111.6 million of availability based on the borrowing base
certificate filed for the December 31, 2003 balance sheet. Loans made under
the Credit Facility bear interest at a base rate or LIBOR, plus a margin.
The interest rate at December 31, 2003 was 4.35%. 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, 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 prior to March
2005.
Deferred financing costs of $16.5 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 as a loss from the
early extinguishment of debt in the consolidated statement of operations
for the year ended December 31, 2002.
Other long-term debt at December 31, 2003 includes debt of $17.0
million of a variable interest entity that was consolidated on January 1,
2003 as a result of the adoption of FIN 46. Refer to Note 2 for additional
disclosures related to the adoption of FIN 46. The interest on this debt
was 4.89% at December 31, 2003. The remaining balance in other long-term
debt is primarily term debt with banks with interest rates which range from
1.6% to 10.5% and capital lease obligations.
The aggregate annual maturities for long-term debt, including the
issuance of the New Senior Subordinated Notes, are as follows (in
thousands):
2004................................. $ 2,575
2005................................. 75,834
2006................................. 2,327
2007................................. 13,532
2008................................. 300,964
Thereafter........................... 373,729
--------
$768,961
========
Cash paid for interest (including interest allocated to discontinued
operations) on long-term debt was $68.1 million, $63.0 million and $71.5
million for the years ended December 31, 2003, 2002 and 2001, 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
$784.5 million and $610.0 million at December 31, 2003 and 2002,
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
42
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. LONG-TERM DEBT (CONTINUED)
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, 2003, 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 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.
11. INCOME TAXES
Income (loss) from continuing operations (in thousands):
YEAR ENDED DECEMBER 31
---------------------------------------
2003 2002 2001
-------- --------- --------
Domestic............................................ $(29,532) $(136,409) $(78,472)
Foreign............................................. 36,037 31,275 28,059
-------- --------- --------
Income (loss) from continuing operations before
income taxes and cumulative effect of a change in
accounting principle.............................. $ 6,505 $(105,134) $(50,413)
======== ========= ========
The provision for income taxes on income from continuing operations
consisted of the following (in thousands):
YEAR ENDED DECEMBER 31
--------------------------------------
2003 2002 2001
-------- -------- --------
Current tax provision (benefit):
Federal.......................................... $ 1,482 $(12,747) $(18,052)
Foreign.......................................... 11,805 10,050 9,594
State............................................ 148 (1,273) (1,805)
-------- -------- --------
13,435 (3,970) (10,263)
Deferred provision (benefit):
Federal.......................................... (9,564) (26,168) 4,245
Foreign.......................................... (334) 475 393
State............................................ (956) (1,983) 425
-------- -------- --------
(10,854) (27,676) 5,063
-------- -------- --------
Provision (benefit) for income taxes................. $ 2,581 $(31,646) $ (5,200)
======== ======== ========
43
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES (CONTINUED)
A reconciliation of the federal statutory tax rate to the Company's
effective income tax rate is summarized below:
2003 2002 2001
---- ---- ----
Federal statutory tax rate.............................. 35.0% 35.0% 35.0%
State tax, net of federal benefit....................... 4.5 4.5 3.5
Nontaxable investment benefit........................... (13.6) -- 4.3
Impairment on divestitures.............................. -- (10.5) (32.8)
Valuation allowance..................................... 34.1 (1.1) --
Utilization of foreign tax credits...................... (17.8) -- --
Other................................................... (2.5) 2.2 0.3
----- ----- -----
Effective income tax rate............................... 39.7% 30.1% 10.3%
===== ===== =====
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 Company
has tax planning strategies available which will enable them to realize all
net tax assets. The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities are presented below (in thousands):
DECEMBER 31
-------------------------
2003 2002
--------- ---------
Deferred tax assets:
Alternative minimum tax credit carryforwards........ $ 4,650 $ 4,608
Net operating loss carryforwards.................... 74,834 69,736
Capital loss carryforwards.......................... 23,180 15,977
Foreign tax credit carryforwards.................... 4,090 --
Compensation and benefit related accruals........... 21,394 17,870
Restructuring accruals.............................. 804 179
Accounts receivable................................. 1,416 1,704
Other............................................... 6,641 3,648
Valuation allowance................................. (6,932) (570)
--------- ---------
Total deferred tax assets............................... 130,077 113,152
Deferred tax liabilities:
Property, plant and equipment....................... (90,744) (84,516)
Goodwill and other intangibles...................... (19,488) (20,491)
Other............................................... (7,910) (7,536)
--------- ---------
Total deferred tax liabilities.......................... (118,142) (112,543)
--------- ---------
Net deferred tax asset.................................. $ 11,935 $ 609
========= =========
44
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES (CONTINUED)
The net deferred income tax asset (liability) includes the following
components (in thousands):
DECEMBER 31
-----------------------
2003 2002
-------- --------
Current deferred tax asset.................... $ 18,652 $ 10,945
Non-current deferred tax liability............ (6,717) (10,336)
-------- --------
Total..................................... $ 11,935 $ 609
======== ========
Net operating losses of $175.2 million are being carried forward and
are available to reduce future taxable income. These net operating losses
will expire in 2021 through 2023. The Company also has foreign tax credit
carryforwards of $4.1 million that will expire in 2007 and alternative
minimum tax credit carryforwards of $4.7 million at December 31, 2003. In
2002, the Company generated capital loss carryforwards in the amount of
$53.4 million. These capital losses will expire in 2007. The Company has
recorded a valuation allowance in the amount of $6.5 million at December
31, 2003 for the estimated future impairment of certain loss carryforwards.
Net cash payments for income taxes were $2.5 million, $6.0 million and
$2.4 million in 2003, 2002 and 2001, respectively.
12. RESTRUCTURING, 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 related charges.
2003 ACTIVITY
The Company completed most of the restructuring programs initiated in
June 2001 and continued during 2002 and 2003. Restructuring expenses
related to these programs that could not be accrued and were the result of
continuing initiatives to optimize capacity were $1.5 million in 2003. The
following table and discussion present the details of these charges (in
thousands):
COMMERCIAL RESALE TOTAL
---------- ------ -------
Employee separation and related expenses....... $ 815 $ 660 $ 1,475
Equipment moves................................ 1,002 -- 1,002
Other costs.................................... 94 (10) 84
Reversal of unused accruals.................... (713) (318) (1,031)
------ ----- -------
Total restructuring charges................ $1,198 $ 332 $ 1,530
====== ===== =======
Continued efforts in 2003 to adjust the operations of both segments to
reflect lower sales volumes, resulted in employee separation expenses of
$1.5 million in 2003.
COMMERCIAL. In the fourth quarter of 2002, the commercial segment
announced the closure of the web printing operation in Indianapolis,
Indiana and the redeployment of its two web presses and related equipment
to St. Louis, Missouri and Baltimore, Maryland. A substantial portion of
the cost to dismantle, move and reinstall this equipment was incurred
during 2003.
The Company was able to sub-lease a facility which was idled as a
result of the consolidation of the envelope plant in the Northeast sooner
than estimated when the liability under the lease contract
45
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. RESTRUCTURING, IMPAIRMENTS AND OTHER CHARGES (CONTINUED)
was established. Accordingly, $0.5 million of the reserve recorded for this
lease was reversed. In addition, the remaining expenses that had been
accrued to cover the cost of maintaining a building that has been sold were
reversed.
RESALE SEGMENT. In the fourth quarter of 2002, the resale segment
closed its business forms plant in Clearwater, Florida and consolidated its
production in plants located in Fairhope, Alabama and Marshall, Texas. The
employee separation expenses and other costs incurred as a result of this
consolidation were less than originally estimated.
A summary of the activity charged to the 2002 restructuring liability
during the year ended December 31, 2003 is as follows (in thousands):
COMMERCIAL RESALE TOTAL
---------- ------ -------
Balance, December 31, 2002............................ $ 3,990 $ 653 $ 4,643
Payments for severance............................ (189) (39) (228)
Payments for lease termination and property exit
costs........................................... (2,230) (47) (2,277)
Payments for other exit costs..................... (238) (220) (458)
Reversal of unused accrual........................ (54) (317) (371)
------- ----- -------
Balance, December 31, 2003............................ $ 1,279 $ 30 $ 1,309
======= ===== =======
A summary of the activity charged to the 2001 restructuring liability
during the year ended December 31, 2003 is as follows (in thousands):
COMMERCIAL
----------
Balance, December 31, 2002.............................. $ 2,967
Payments for severance.............................. (452)
Payments for lease termination and property exit
costs............................................. (1,167)
Reversal of unused accrual.......................... (660)
-------
Balance, December 31, 2003.............................. $ 688
=======
2002 ACTIVITY
Restructuring and other related 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):
COMMERCIAL RESALE CORPORATE TOTAL
---------- ------ --------- -------
Employee separation and related expenses...... $ 4,090 $1,404 $ -- $ 5,494
Employee training expenses.................... 6,647 396 -- 7,043
Project management expenses................... 8,101 1,145 -- 9,246
Asset impairment charges, net................. 12,178 1,650 -- 13,828
Other exit costs.............................. 7,685 1,883 -- 9,568
Reversal of unused accrual.................... (500) -- -- (500)
------- ------ ------- -------
Total restructuring costs................. 38,201 6,478 -- 44,679
Other charges................................. 6,693 161 23,018 29,872
------- ------ ------- -------
Total restructuring, impairments and other
charges................................. $44,894 $6,639 $23,018 $74,551
======= ====== ======= =======
46
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. RESTRUCTURING, IMPAIRMENTS AND OTHER CHARGES (CONTINUED)
COMMERCIAL. The consolidation of envelope manufacturing facilities of
the commercial segment which began in 2001, was completed in 2002. The
objective of this consolidation was to reduce excess internal capacity and
improve utilization of the equipment and resources at the other envelope
plants in the United States and Canada. The costs incurred during 2002
related to this consolidation were as follows:
* Employee training expenses of $6.6 million were incurred to train new
employees 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 $8.1 million that were primarily
consulting fees and related expenses were 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 $8.9 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 $3.0 million include the expenses incurred to
dismantle, move and reinstall equipment, and the costs incurred to
restore buildings to the condition required by lease agreements or to
maintain them while they are held for sale.
* In 2001, employee separation expenses were accrued to cover the 766
employees expected to be affected over the course of this project. At
the completion of the project, 722 employees had been separated and
the accrual was reduced by $0.5 million.
The Company's commercial printing operation in New York City was closed
in September 2002. Employee separation expenses of $1.0 million were
recorded covering 80 employees. Asset impairment charges of $1.0 million
and lease commitment and other expenses of $2.2 million were also recorded
in connection with this plant closure.
A web press has moved from Portland, Oregon to the web printing plant
in St. Louis and the consolidation of the web printing operation in
Indianapolis with the web plants in St. Louis and Baltimore was announced.
Employee separation expenses of $0.3 million were recorded to cover the
cost of 52 employees affected by these actions. Other restructuring
expenses included impairment charges of $1.0 million on equipment taken out
of service and $1.8 million to cover the expenses associated with
terminating lease commitments and the costs incurred in 2002 to dismantle,
move and reinstall equipment.
Additionally, the commercial segment reduced the size of many of its
operations during 2002 in response to the significant decline in sales. The
costs associated with these actions included $2.8 million to cover the cost
of the elimination of 331 jobs, impairment charges of $1.3 million for
equipment taken out of service and $0.7 million for expenses associated
with lease commitments and the cost incurred to dismantle, move and
reinstall equipment.
RESALE. During 2002, the documents division of the resale segment
closed its business forms plant in Clearwater, Florida and its plant in
Denver, Colorado which had been curtailed in 2001. The employee separation
expenses covering 64 employees were $0.6 million. Impairment charges
related to equipment taken out of service as a result of these closures
totaled $0.6 million. Other expenses of $0.7 million primarily related to
expenses incurred to maintain the two buildings held for sale.
The resale segment completed the closure of its envelope operations in
Hattiesburg, Mississippi. The costs in 2002 were $2.4 million which were
primarily additional impairment charges, consulting
47
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. RESTRUCTURING, IMPAIRMENTS AND OTHER CHARGES (CONTINUED)
fees, the costs incurred to dismantle, move and reinstall equipment and
expenses incurred to clean-up the building.
Additionally, the resale segment incurred $2.2 million in expenses to
reduce the size of several of its other operations. Employee separation
expenses incurred to cover the elimination of 193 jobs were $0.8 million,
asset impairments were $0.5 million and training, project management and
other costs were $0.9 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 the commercial segment 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 the commercial segment 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.
A summary of the activity charged to the 2002 restructuring liability
during the year ended December 31, 2002 is as follows (in thousands):
COMMERCIAL RESALE 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
======= ====== =======
48
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. RESTRUCTURING, IMPAIRMENTS AND OTHER CHARGES (CONTINUED)
2001 ACTIVITY
The restructuring and other related charges totaled $43.1 million in
2001. The following table and discussion present the details of these
charges (in thousands):
COMMERCIAL RESALE CORPORATE TOTAL
---------- ------ --------- -------
Employee separation and related expenses...... $ 7,276 $2,769 $ -- $10,045
Employee training expenses.................... 2,414 214 -- 2,628
Project management expenses................... 4,985 419 -- 5,404
Asset impairment charges, net................. 4,897 2,582 -- 7,479
Other exit costs.............................. 7,524 1,655 -- 9,179
Strategic assessment costs.................... -- -- 2,677 2,677
------- ------ ------ -------
Total restructuring costs................. 27,096 7,639 2,677 37,412
Other charges................................. 2,842 -- 1,600 4,442
------- ------ ------ -------
Total restructuring, impairments and other
charges................................. $29,938 $7,639 $4,277 $41,854
======= ====== ====== =======
COMMERCIAL. The commercial segment announced the consolidation of eight
envelope plants in 2001 and recorded employee separation expenses of $6.9
million covering 766 employees that were expected to be affected over the
course of the consolidation project. Restructuring expenses incurred in
2001 included training costs of $2.4 million, project management fees of
$5.0 million, impairment charges of $4.3 million on the equipment that was
taken out of service, and $5.5 million to cover lease termination costs,
the costs of equipment moves and building clean-up expenses.
A printing plant in Philadelphia, Pennsylvania has closed and two other
printing operations in the Philadelphia area were consolidated. These
actions were taken to improve the Company's cost effectiveness and
competitive position in the Philadelphia market. The costs associated with
the consolidation included employee separation expenses of $0.4 million
covering the elimination of 25 jobs, impairment charges of $0.6 million on
equipment taken out of service and other costs of $2.0 million to cover
lease termination costs and costs to dismantle, move and reinstall
equipment.
RESALE. The resale segment began the closure of its envelope
manufacturing facility in Mississippi. The cost recorded in 2001 was $6.5
million and included employee separation expenses of $1.6 million covering
142 employees, impairments on equipment taken out of service of $3.9
million and $1.0 million of training, project management and other costs.
Resale's documents division substantially curtailed its business forms
plant in Denver, Colorado in 2001. The employee separation expenses of $0.6
million related to the elimination of 62 jobs. Other costs were the
expenses incurred to dismantle, move and reinstall equipment. Additionally,
an impairment charge of $1.3 million taken in 2000 to write down a building
to its estimated fair market value was reversed. This building was sold for
more than its original carrying value.
A warehouse and distribution center in Santa Fe Springs, California was
closed. The cost associated with this closure was $0.9 million which was
primarily employee separation expenses covering 17 employees and lease
termination costs.
CORPORATE. Outside advisors were used in developing the Company's
strategic plan to research and evaluate markets, survey customers and
assess existing strategies. In addition, financial advisors evaluated
options for improving the Company's capital structure. The cost of these
advisors was $2.7 million in 2001.
49
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. RESTRUCTURING, IMPAIRMENTS AND OTHER CHARGES (CONTINUED)
OTHER CHARGES. Other charges include the following items:
* The outside assistance used in the implementation of initiatives in
the commercial segment to implement best practices, standardize
costing and pricing systems, and align equipment and services to
better serve customers and markets totaled $2.1 million in 2001.
* Cost of $0.7 million incurred by the commercial segment for a human
resource information system that was not implemented was written-off.
* A $1.6 million investment in a company that was developing a service,
which would enable online collaborative design and management of a
printing job, was written off.
A summary of the activity charged to the 2001 restructuring liability
during the year ended December 31, 2002 is as follows (in thousands):
COMMERCIAL RESALE TOTAL
---------- ------ -------
Balance, December 31, 2001............................. $10,730 $ 70 $10,800
Additions to the accrual............................... 169 -- 169
Payments for severance................................. (5,026) -- (5,026)
Payments for lease termination and property exit
costs................................................ (2,406) (70) (2,476)
Reversal of unused portion............................. (500) -- (500)
------- ---- -------
Balance, December 31, 2002............................. $ 2,967 $ -- $ 2,967
======= ==== =======
13. 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. The Company has 1,397,769
stock options available for issuance. Stock options generally vest over
four to six years and expire 10 years from the date granted. Restricted
stock vests fifty percent in five years from the date of grant and fifty
percent in six years from the date of grant. Restricted stock issued to
directors vests six months from the date of grant. Options are granted at a
price equal to the fair market value of the Company's common stock on the
date of grant. The Incentive Plan provides for an acceleration of the
vesting of both the stock options and the restricted stock if the Company's
stock price closes at certain levels for 20 consecutive trading days.
Upon the issuance of restricted stock, the Company records deferred
compensation as a charge to shareholders' equity for the market value of
the restricted stock on the date of grant. This deferred compensation is
being recognized as compensation expense ratably over the vesting period.
The Company has awarded 684,398 shares of restricted stock of which 40,398
shares have vested. The Company recorded compensation expense in the amount
of $0.8 million, $0.6 million and $0.3 million for the years ended December
31, 2003, 2002 and 2001, respectively.
50
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STOCK OPTION PLANS (CONTINUED)
The following table summarizes the activity and terms of outstanding
options at December 31, 2003, 2002 and 2001:
2003 2002 2001
----------------------- ----------------------- -----------------------
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- -------- --------- --------
Options outstanding at beginning
of year........................ 5,442,002 $6.96 6,128,637 $7.08 3,670,867 $8.75
Granted.......................... 1,021,044 2.26 255,250 4.63 3,265,036 5.45
Exercised........................ (30,831) 2.33 (11,230) 1.63 (201,922) 2.05
Expired/cancelled................ (693,646) 7.59 (930,655) 6.85 (605,344) 9.83
--------- ----- --------- ----- --------- -----
Options outstanding at end of
year........................... 5,738,569 $6.16 5,442,002 $6.96 6,128,637 $7.08
========= ===== ========= ===== ========= =====
Options exercisable at end of
year........................... 3,629,843 $6.49 2,458,607 $8.01 1,679,137 $8.60
========= ===== ========= ===== ========= =====
Summary information about the Company's stock options outstanding at
December 31, 2003 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 2003 (IN YEARS) PRICE 2003 PRICE
- ---------------------------- -------------- -------------- -------- -------------- --------
$ 1.32-$2.19................ 772,056 3.9 $ 2.10 709,863 $ 2.09
$ 2.19-$4.37................ 442,005 5.0 $ 3.62 254,405 $ 3.64
$ 4.37-$6.56................ 2,881,050 2.9 $ 5.46 1,222,917 $ 5.45
$ 6.56-$8.74................ 786,040 4.6 $ 7.62 659,000 $ 7.46
$ 8.74-$10.93............... 237,200 5.9 $ 9.71 197,600 $ 9.78
$10.93-$13.11............... 427,800 4.9 $12.33 408,240 $12.29
$13.11-$15.30............... 174,418 4.3 $13.81 159,818 $13.79
$21.86...................... 18,000 4.3 $21.86 18,000 $21.86
--------- --- ------ --------- ------
$ 1.32-$21.86............... 5,738,569 3.7 $ 6.16 3,629,843 $ 6.49
========= === ====== ========= ======
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 2003,
2002 and 2001 using the Black-Scholes option pricing model as prescribed by
SFAS No. 123 and using the following average assumptions:
2003 2002 2001
--------- --------- ---------
Risk-free interest rate....................... 2.6% 3.0% 3.5%
Expected dividend yield....................... 0% 0% 0%
Expected option lives......................... 5 years 5 years 4-6 years
Expected volatility........................... 73% 71% 65%
The weighted average fair value of options granted in 2003, 2002 and
2001 was $1.39, $1.16 and $3.22, 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 2003,
2002 and 2001.
51
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. 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 $6.0 million, $6.5 million and
$10.5 million for the years ending in December 31, 2003, 2002 and 2001,
respectively. No discretionary contributions were made in 2003 or 2002. The
plan held 2,776,000 shares of the Company's common stock at December 31,
2003. Shares held in a frozen employee stock ownership plan were 2,524,000
at December 31, 2003.
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.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS. As a result of the acquisition
of American Business Products ("ABP") in 2000, 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, which are included in other assets in the consolidated
balance sheets, to cover the benefits for certain participants.
52
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. 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, 2003 and 2002 (in thousands):
PENSION PLANS SERP
-------------------- --------------------
2003 2002 2003 2002
------- ------- ------- -------
Change in benefit obligation:
Benefit obligation at beginning of year.......... $34,810 $31,549 $ 9,051 $ 9,042
Service cost..................................... 1,908 1,541 -- --
Interest cost.................................... 2,664 2,250 670 998
Actuarial gains and loss......................... 3,997 1,307 -- --
Foreign currency translation..................... 5,057 316 -- --
Benefits paid.................................... (2,572) (2,153) (985) (989)
------- ------- ------- -------
Benefit obligation at end of year.............. 45,864 34,810 8,736 9,051
------- ------- ------- -------
Change in plan assets:
Fair value of plan assets at beginning of year... 31,188 32,715 -- --
Actual return on plan assets..................... 3,455 (1,420) -- --
Employer contributions........................... 1,056 1,793 -- --
Foreign currency translation..................... 4,859 475 -- --
Benefits paid.................................... (2,881) (2,375) -- --
------- ------- ------- -------
Fair value of plan assets at end of year....... 37,677 31,188 -- --
------- ------- ------- -------
Funded status...................................... (8,187) (3,623) (8,736) (9,051)
Unrecognized actuarial gain........................ 18,540 13,526 -- --
Unrecognized prior service cost.................... 239 230 -- --
Unrecognized transition asset...................... (3,885) (4,293) -- --
------- ------- ------- -------
Net amount recognized.............................. $ 6,707 $ 5,840 $(8,736) $(9,051)
======= ======= ======= =======
Amounts recognized in the consolidated balance
sheets:
Prepaid benefit cost........................... $ 5,100 $ 4,471 $ -- $ --
Accrued benefit liability...................... (7,507) (2,378) (8,736) (9,051)
Intangible asset............................... 250 67 -- --
Deferred tax asset............................. 3,412 1,416 -- --
Accumulated other comprehensive loss........... 5,452 2,264 -- --
------- ------- ------- -------
Net amount recognized.............................. $ 6,707 $ 5,840 $(8,736) $(9,051)
======= ======= ======= =======
The components of the net periodic pension cost for the pension plans
and the SERP were as follows (in thousands):
2003 2002 2001
------- ------- -------
Service cost........................................... $ 1,447 $ 1,185 $ 1,075
Interest cost on projected benefit obligation.......... 3,334 3,248 2,991
Expected return on plan assets......................... (3,622) (3,148) (3,017)
Net amortization and deferral.......................... (482) (399) (396)
Recognized actuarial loss.............................. 295 179 36
Other.................................................. 330 1 129
------- ------- -------
Net periodic pension expense............................ $ 1,302 $ 1,066 $ 818
======= ======= =======
53
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RETIREMENT PLANS (CONTINUED)
The assumptions used in computing the net pension cost and the funded
status were as follows:
2003 2002 2001
--------- ----- -------
Weighted average discount rate....................... 6.00% 6.75% 7.25%
Expected long-term rate of return on assets.......... 8.00% 8.75% 8.75-9%
Rate of compensation increase........................ 3.5-4% 3-4% 2-4%
The Company's overall expected long-term rate of return on assets is
8.0%. The expected return on assets assumption is based on the long-term
expected return on the U.S. and Canadian investment portfolios as estimated
by the Company's investment advisors. The portfolio return for the U.S.
pension plans is calculated based on capital market projections of returns,
risks and correlations of these asset classes projected five-years out. The
portfolio return for the Canadian portfolio is calculated based upon the
long-term rate for Canadian bonds and projected long-term equity returns
plus an additional 0.75% for active management of the investment portfolio.
The allocations of the assets of the pension plans at December 31, 2003
and 2002 by investment category were as follows:
US PLANS CANADIAN PLANS
DECEMBER 31 DECEMBER 31
--------------- ---------------
2003 2002 2003 2002
---- ---- ---- ----
US Large Cap Equity.................................... 38% 39% -- --
US Small Cap Equity.................................... 13% 12% -- --
International Equity................................... 16% 15% 17% 14%
US Emerging Markets Equity............................. 3% 3% -- --
US Fixed income........................................ 24% 25% -- --
Real estate mutual funds............................... 5% 5% -- --
Cash equivalents....................................... 1% 1% 6% 8%
Canadian equity funds.................................. -- -- 30% 28%
Canadian fixed income.................................. -- -- 47% 50%
--- --- --- ---
Total.............................................. 100% 100% 100% 100%
The Company employs a total return investment approach whereby a mix of
equities and fixed income investments are used to maximize the long-term
return on the assets of the pension plans for a prudent level of risk. In
order to achieve investment objectives, target asset allocations have been
established and are reviewed quarterly. The intent of this strategy is to
minimize pension cost by outperforming liabilities of the pension plans
over the long run. Risk tolerance is established through careful
consideration of the liabilities and the funded status of the pension plans
and the Company's financial condition. The investment portfolio contains a
diversified blend of equity and fixed income investments. Furthermore,
equity investments are diversified across U.S. and non-U.S. stocks as well
as growth, value, and small and large capitalizations.
54
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RETIREMENT PLANS (CONTINUED)
The Company's policy is to allocate pension plan assets for each major
asset category as follows:
US PLANS CANADIAN PLANS
-------- --------------
US Large Cap Equity......................................... 38% 8%
US Small Cap Equity......................................... 12% --
International Equity........................................ 15% 17%
US Emerging Markets Equity.................................. 3% --
US Fixed income............................................. 26% --
Real estate mutual funds.................................... 5% --
Cash equivalents............................................ 1% 5%
Canadian equity funds....................................... -- 25%
Canadian fixed income....................................... -- 45%
--- ---
Total................................................... 100% 100%
The accumulated benefit obligation and fair value of plan assets for
the plans with accumulated benefit obligations in excess of plan assets
were as follow (in thousands):
US PLANS CANADIAN PLANS
DECEMBER 31 DECEMBER 31
-------------------- ---------------------
2003 2002 2003 2002
------- ------ ------- -------
Projected benefit obligation...................... $10,556 $9,700 $35,308 $25,111
Accumulated benefit obligation.................... $ 2,019 $2,378 $ 6,527 $ --
Fair value of plan assets......................... $ 8,347 $7,054 $29,330 $24,134
The increase in the minimum liability included in other comprehensive
income was $5.2 million in 2003 and $1.9 million in 2002.
The Company expects to contribute $2.8 million to its pension plans in
2004. The Company does not expect to contribute to the SERP in 2004.
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 $3.0 million, $3.1 million and
$2.9 million for the years ended December 31, 2003, 2002 and 2001,
respectively.
55
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. 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, 2003, future minimum
annual payments under non-cancelable lease agreements with original terms
in excess of one year were as follows (in thousands):
2004................................. $ 31,057
2005................................. 26,308
2006................................. 21,786
2007................................. 16,301
2008................................. 14,777
Thereafter........................... 11,412
--------
Total............................ $121,641
========
Aggregate future minimum rentals to be received under noncancelable
subleases as of December 31, 2003 are approximately $0.8 million.
Rent expense for the years ended December 31, 2003, 2002 and 2001 was
$37.2 million, $40.5 million and $39.9 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. Refer to Note 19 for disclosure
related to the settlement of a lawsuit. While the outcome of pending 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.
TAX AUDITS. The Company's income, sales and use, and other tax returns
are routinely subject to audit by various authorities. The Company believes
that the resolution of any matters raised during such audits will not have
a material adverse effect on the Company's financial position or results of
operations.
56
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. 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
-------------------------------------
2003 2002 2001
------- -------- --------
Numerator:
Numerator for basic and diluted earnings (loss) per
share--income (loss) from continuing operations........ $ 3,924 $(73,488) $(45,213)
======= ======== ========
Denominator:
Denominator for basic earnings (loss) per share--weighted
average shares......................................... 47,687 47,665 47,562
Effects of dilutive securities:
Stock options........................................ 628 -- --
------- -------- --------
Denominator for diluted earnings (loss) per
share--adjusted weighted average shares................ 48,315 47,665 47,562
======= ======== ========
Earnings (loss) for continuing operations per share:
Basic and diluted.................................... $ 0.08 $ (1.54) $ (0.95)
======= ======== ========
During the years ended December 31, 2003, 2002 and 2001, outstanding
options and shares of restricted stock in the amount of 5,795,000,
5,357,000 and 5,625,000 common shares, respectively, were excluded from the
calculation of diluted earnings per share because the effect would be
antidilutive. In 2002 and 2001, interest, net of tax, on 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.
17. SEGMENT INFORMATION
In October 2003, the Company reorganized into two business segments:
commercial and resale. This reorganization aligns the structure with the
Company's distribution channels and with the Company's principle strategic
goals: to operate as one company; to provide customers with one point of
entry into Mail-Well; and to go to market with a complete range of products
and services. Segment data for prior years has been restated to reflect the
new operating segments.
The commercial segment consists of commercial printing facilities that
specialize in printing of annual reports, car brochures, brand marketing
collateral, catalogs, maps and guidebooks, calendars, financial
communications, and facilities that produce customized envelopes for
billing and remittance and direct mail advertising. The resale segment
includes facilities that produce specialty packaging, customized and stock
labels, envelopes, and printed business documents which are sold to
distributors and value-added resellers of office products. Intercompany
sales for 2003, 2002 and 2001 were $164.5 million, $142.7 million and
$177.0 million, respectively, which are eliminated in consolidation and
excluded from reported net sales.
Operating income includes all costs and expenses directly related to
the segment involved. Corporate expenses include corporate general and
administrative expenses, amortization expense, and gains and losses on
disposal of assets.
57
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. SEGMENT INFORMATION (CONTINUED)
Identifiable assets are accumulated by facility within each business
segment. Corporate assets consist primarily of cash and cash equivalents,
miscellaneous receivables, deferred financing fees, deferred tax assets and
other assets.
The following tables present certain business segment information (in
thousands):
YEAR ENDED DECEMBER 31
--------------------------------------------
2003 2002 2001
---------- ---------- ----------
Net sales:
Commercial................................. $1,272,525 $1,268,367 $1,357,430
Resale..................................... 399,139 460,338 511,338
---------- ---------- ----------
Total...................................... $1,671,664 $1,728,705 $1,868,768
========== ========== ==========
Operating income (loss):
Commercial................................. $ 60,816 $ 3,076 $ 42,305
Resale..................................... 45,711 44,317 44,588
Corporate(a)............................... (26,312) (80,312) (72,069)
---------- ---------- ----------
Total...................................... $ 80,215 $ (32,919) $ 14,824
========== ========== ==========
Restructuring, asset impairments and other
charges:
Commercial................................. $ 1,198 $ 44,894 $ 29,938
Resale..................................... 332 6,639 7,639
Corporate.................................. -- 23,018 4,277
---------- ---------- ----------
Total...................................... $ 1,530 $ 74,551 $ 41,854
========== ========== ==========
Significant other noncash charges(b):
Commercial................................. $ -- $ 23,016 $ 9,476
Resale..................................... -- 925 --
Corporate.................................. -- 41,240 36,523
---------- ---------- ----------
Total...................................... $ -- $ 65,181 $ 45,999
========== ========== ==========
Depreciation and amortization:
Commercial................................. $ 36,428 $ 36,014 $ 36,272
Resale..................................... 9,106 11,389 12,613
Corporate(c)............................... 2,433 2,652 14,511
---------- ---------- ----------
Total...................................... $ 47,967 $ 50,055 $ 63,396
========== ========== ==========
Capital expenditures:
Commercial................................. $ 28,507 $ 22,949 $ 22,097
Resale..................................... 3,076 7,668 9,537
Corporate.................................. 19 279 1,108
---------- ---------- ----------
Total...................................... $ 31,602 $ 30,896 $ 32,742
========== ========== ==========
Net sales by product line:
Commercial Printing........................ $ 781,010 $ 764,404 $ 817,937
Envelopes.................................. 691,968 760,487 835,534
Printed Office Products.................... 198,686 203,814 215,297
---------- ---------- ----------
Total...................................... $1,671,664 $1,728,705 $1,868,768
========== ========== ==========
58
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. SEGMENT INFORMATION (CONTINUED)
DECEMBER 31
---------------------------
2003 2002
---------- ----------
Identifiable assets:
Commercial.......................................... $ 785,649 $ 763,250
Resale.............................................. 261,619 275,948
Corporate........................................... 60,125 63,677
---------- ----------
$1,107,393 $1,102,875
Net assets held for sale............................ -- 4,492
---------- ----------
Total............................................... $1,107,393 $1,107,367
========== ==========
- --------
(a) Includes $5.3 million for a settlement of litigation in 2003. In 2002,
corporate expenses includes $16.5 million loss from the early
extinguishment of debt, the $6.4 million impairment loss on assets
held for sale and the $12.8 million impairment on operations formerly
held for sale. In 2001, corporate expenses include the $36.5 million
impairment on operations formerly held for sale.
(b) Represents the noncash portion of restructuring, impairments, and
other charges.
(c) Includes adjustments to depreciation for assets held for sale in 2002
and 2001.
Geographic information for the years ended December 31, 2003, 2002 and
2001 and at December 31, 2003 and 2002, is presented below (in thousands):
2003 2002 2001
---------- ---------- ----------
Net sales:
U.S........................................ $1,482,443 $1,561,859 $1,691,837
Canada..................................... 189,221 166,846 176,931
---------- ---------- ----------
Total...................................... $1,671,664 $1,728,705 $1,868,768
========== ========== ==========
Identifiable assets:
U.S........................................ $ 948,530 $ 964,310
Canada..................................... 158,863 138,565
---------- ----------
Total...................................... $1,107,393 $1,102,875
========== ==========
59
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. 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
---------- ---------- ---------- ----------
2003
Net sales................................... $ 427,320 $407,826 $412,218 $424,300
Gross profit................................ 83,920 79,125 81,877 89,624
Income (loss) from continuing operations.... 532 (1,683) 2,172 2,903
Discontinued operations..................... (2,500) 581 -- 371
Cumulative effect of a change in accounting
principle................................. 322 -- -- --
--------- -------- -------- --------
Net income (loss)........................... $ 2,710 $ (2,264) $ 2,172 $ 2,532
========= ======== ======== ========
Earnings (loss) per share--basic and
diluted:
Income (loss) from continuing
operations............................ $ 0.01 $ (0.04) $ 0.05 $ 0.06
Discontinued operations................. 0.05 (0.01) -- (0.01)
Cumulative effect of a change in
accounting principle.................. -- -- -- --
--------- -------- -------- --------
Net income (loss) per share--basic and
diluted............................... $ 0.06 $ (0.05) $ 0.05 $ 0.05
========= ======== ======== ========
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
2002
Net sales................................... $ 443,482 $420,967 $428,720 $435,536
Gross profit................................ 88,029 78,838 85,235 91,239
Income (loss) from continuing operations.... (13,609) (38,069) (22,149) 339
Discontinued operations..................... (7,999) (153) (5,804) (2,912)
Cumulative effect of a change in accounting
principle................................. (111,748) -- -- --
--------- -------- -------- --------
Net loss.................................... $(133,356) $(38,222) $(27,953) $ (2,573)
========= ======== ======== ========
Loss per share--basic and diluted
Income (loss) from continuing
operations............................ $ (0.29) $ (0.80) $ (0.46) $ 0.01
Discontinued operations................. (0.17) -- (0.13) (0.06)
Cumulative effect of a change in
accounting principle.................. (2.34) -- -- --
--------- -------- -------- --------
Net loss per share--basic and diluted... $ (2.80) $ (0.80) $ (0.59) $ (0.05)
========= ======== ======== ========
- --------
(a) The first quarter data for 2003 has been restated from data previously
reported to reflect the adoption of FIN 46 effective January 1, 2003
(See Note 2).
19. SUBSEQUENT EVENT
On February 20, 2004, a jury in Los Angeles County, California returned
a $5.3 million verdict in favor of an ex-employee who had sued the Company
alleging wrongful dismissal. In order to avoid the expense and risk of
further litigation and appeals, the Company settled the dispute. The amount
of the settlement and the costs of the litigation are reflected in the
consolidated statement of operations for the year ended December 31, 2003.
60
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. 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 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. 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.
61
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF FINANCIAL POSITION
December 31, 2003
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED
--------- -------- ------------ --------- ------------
Current assets:
Cash and cash equivalents............ $ -- $ -- $ 307 $ -- $ 307
Accounts receivable, net............. -- 50,125 173,416 -- 223,541
Inventories, net..................... -- 35,509 55,893 -- 91,402
Note receivable from subsidiaries.... -- 603,100 -- (603,100) --
Other current assets................. -- 32,109 16,026 -- 48,135
------- -------- -------- --------- ----------
Total current assets............... -- 720,843 245,642 (603,100) 363,385
Investment in subsidiaries............. 68,019 12,364 -- (80,383) --
Property, plant and equipment, net..... -- 90,956 297,284 -- 388,240
Goodwill and other intangible assets,
net................................... -- 67,474 251,605 -- 319,079
Other assets, net...................... -- 29,322 7,367 -- 36,689
------- -------- -------- --------- ----------
Total assets........................... $68,019 $920,959 $801,898 $(683,483) $1,107,393
======= ======== ======== ========= ==========
Current liabilities:
Accounts payable..................... $ -- $ 29,092 $111,376 $ -- $ 140,468
Other current liabilities............ -- 58,868 58,701 -- 117,569
Intercompany payable (receivable).... -- 9,059 (9,059) -- --
Note payable to Issuer............... -- -- 603,100 (603,100) --
Current portion of long-term debt.... -- 1,776 799 -- 2,575
------- -------- -------- --------- ----------
Total current liabilities.......... -- 98,795 764,917 (603,100) 260,612
Long-term debt......................... -- 741,589 4,797 -- 746,386
Deferred income taxes.................. -- (4,040) 10,757 -- 6,717
Other long-term liabilities............ -- 16,596 9,063 -- 25,659
------- -------- -------- --------- ----------
Total liabilities.................. -- 852,940 789,534 (603,100) 1,039,374
Shareholders' equity................... 68,019 68,019 12,364 (80,383) 68,019
------- -------- -------- --------- ----------
Total liabilities and shareholders'
equity................................ $68,019 $920,959 $801,898 $(683,483) $1,107,393
======= ======== ======== ========= ==========
62
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. 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 (603,100) 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
======= ========== ========= =========== ==========
63
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
Year Ended December 31, 2003
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED
--------- -------- ------------ -------- ------------
Net sales.............................. $ -- $412,819 $1,258,845 $ -- $1,671,664
Cost of sales.......................... -- 342,852 994,266 -- 1,337,118
------ -------- ---------- -------- ----------
Gross profit........................... -- 69,967 264,579 -- 334,546
Operating expenses:
Selling, administrative and other.... -- 62,671 184,917 -- 247,588
Restructuring and other operating
charges............................. -- 4,617 2,126 -- 6,743
------ -------- ---------- -------- ----------
Operating income (loss)................ -- 2,679 77,536 -- 80,215
Other (income) expense:
Interest expense..................... -- 71,503 388 -- 71,891
Intercompany interest expense
(income)............................ -- (54,340) 54,340 -- --
Other (income) expense............... -- 1,154 665 -- 1,819
------ -------- ---------- -------- ----------
Income (loss) from continuing
operations, before income taxes and
undistributed earnings of
subsidiaries.......................... -- (15,638) 22,143 -- 6,505
Provision for income taxes............. -- (6,255) 8,836 -- 2,581
------ -------- ---------- -------- ----------
Income (loss) from continuing
operations, before undistributed
earnings of subsidiaries.............. -- (9,383) 13,307 -- 3,924
Equity in undistributed earnings of
subsidiaries.......................... 5,150 13,307 -- (18,457) --
------ -------- ---------- -------- ----------
Income from continuing operations...... 5,150 3,924 13,307 (18,457) 3,924
Gain from discontinued operations...... -- 1,548 -- -- 1,548
Cumulative effect of a change in
accounting principle.................. -- (322) -- -- (322)
------ -------- ---------- -------- ----------
Net income (loss)...................... $5,150 $ 5,150 $ 13,307 $(18,457) $ 5,150
====== ======== ========== ======== ==========
64
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. 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 operating
charges............................. -- 56,641 17,910 -- 74,551
Impairment charges................... -- 22,524 13,217 -- 35,741
--------- --------- ---------- -------- ----------
Operating income (loss).............. (161) (54,923) 22,165 -- (32,919)
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 (69,162) (36,443) -- (105,134)
Income tax benefit................... -- (19,646) (12,000) -- (31,646)
--------- --------- ---------- -------- ----------
Income (loss) from continuing
operations before equity in
undistributed earnings of
subsidiaries........................ 471 (49,516) (24,443) -- (73,488)
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) (185,707) (24,443) 338,766 (73,488)
Loss on disposal, net of tax
benefit............................. -- (16,868) -- -- (16,868)
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)
========= ========= ========== ======== ==========
65
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. 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 and other operating
charges........................... -- 38,878 4,207 -- 43,085
--------- --------- ---------- -------- ----------
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 (loss).................... $(136,217) $(136,792) $ (42,845) $179,637 $ (136,217)
========= ========= ========== ======== ==========
66
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
December 31, 2003
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES CONSOLIDATED
--------- ----------- ------------ ------------
Cash flows from operating activities........... $ -- $ 5,431 $ 54,028 $ 59,459
Cash flows from investing activities:
Acquisitions, net of cash acquired........... -- -- (2,800) (2,800)
Proceeds from divestitures, net.............. -- -- 3,864 3,864
Capital expenditures......................... -- (2,162) (29,440) (31,602)
Intercompany advances........................ (75) 26,341 (26,266) --
Proceeds from sales of property, plant and
equipment................................... -- 3 679 682
---- ----------- -------- -----------
Net cash provided by (used in) investing
activities.................................. (75) 24,182 (53,963) (29,856)
Cash flows from financing activities:
Proceeds from exercise of stock options...... 75 -- -- 75
Proceeds from issuance of long-term debt..... -- 1,915,452 -- 1,915,452
Repayments of long-term debt................. -- (1,946,539) (1,760) (1,948,299)
Capitalized loan fees........................ -- (484) -- (484)
---- ----------- -------- -----------
Net cash provided by (used in) financing
activities.................................. 75 (31,571) (1,760) (33,256)
Effect of exchange rate changes on cash and
cash equivalents.............................. -- -- 1,310 1,310
---- ----------- -------- -----------
Net decrease in cash and cash equivalents...... -- (1,958) (385) (2,343)
Cash and cash equivalents at beginning of
year.......................................... -- 1,958 692 2,650
---- ----------- -------- -----------
Cash and cash equivalents at end of year....... $ -- $ -- $ 307 $ 307
==== =========== ======== ===========
67
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. 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 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
========= =========== ========= ===========
68
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. 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 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
===== ========= ========= ========= =========
69
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Our disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) are designed to ensure that information required to be
disclosed in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange Commission.
The Chief Executive Officer and the Chief Financial Officer, with
assistance from other members of management, have reviewed the
effectiveness of our disclosure controls and procedures as of the end of
the period covered by this report and, based on their evaluation, have
concluded that the disclosure controls and procedures were effective as of
such date.
There has been no change in our internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act)
during the quarter ended September 30, 2003 that has materially affected,
or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
70
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(1)
- ---- --- -------- ---------
Paul V. Reilly.................... 51 Chairman, President and Chief Executive Officer 1998
Thomas E. Costello(3)(5).......... 64 Director 2003
Frank P. Diassi(2)(5)............. 70 Director 1993
Frank J. Hevrdejs(2)(4)........... 58 Director 1993
Martin J. Maloney(3)(4)........... 59 Director 2003
David M. Olivier(3)(5)............ 60 Director 2003
Jerome W. Pickholz(2)(4).......... 71 Director 1994
Alister W. Reynolds(3)(4)......... 46 Director 2002
Susan O. Rheney(2)(4)............. 44 Director 2003
Gordon A. Griffiths............... 61 President--Commercial Division
Robert C. Hart.................... 66 President--Resale Division
Herbert H. Davis III.............. 56 Senior Vice President--Corporate Development and Chief
Legal Officer
Michel P. Salbaing................ 58 Senior Vice President--Finance and Chief Financial
Officer
Brian P. Hairston................. 46 Vice President--Human Resources
William W. Huffman, Jr............ 55 Vice President--Corporate Controller
D. Robert Meyer, Jr............... 47 Vice President--Treasurer
Matthew H. Mitchell............... 39 Vice President--Chief Information Officer
Keith T. Pratt.................... 57 Vice President--Purchasing
Wayne M. Wolberg.................. 54 Vice President--General Auditor
Mark L. Zoeller................... 44 Vice President--General Counsel and Secretary
- --------
(1) Directors serve one year terms.
(2) Member of the Governance and Nominating Committee.
(3) Member of the Compensation and Human Resources Committee.
(4) Member of the Audit Committee.
(5) Member of the Health, Safety and Environmental Committee.
PAUL V. REILLY has served as the Parent Company's President and Chief
Executive Officer since January 2001, Chairman of the Board since June
2001, and has been a Director since 1998. 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.
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, and Senior Vice President of International
Paper Co. Xpedx is a wholly-owned division of International Paper. He is a
director of Cadmus Communications
71
Corporation, a customized printer, and Intertape Polymer Group, a
manufacturer of tape for plastic packaging. Mr. Costello is a member of the
Compensation and Human Resources Committee and the Health, Safety and
Environmental Committee of the Board of Directors.
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 Governance and
Nominating 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 private investment company, where he
is currently a principal and Chairman. He also serves as President of First
Sterling Ventures Corp., an investment company, and Chairman of Enduro
Holdings, Inc., a structural and electrical manufacturing company, and
Chairman of Fibreglass Holdings, Inc., a truck accessory manufacturer. He
is a director of Eagle U.S.A., an air-freight company. From 1998 through
2003, he was a director of the Houston Regional Board of J.P. Morgan Chase
and Co., a financial institution. Mr. Hevrdejs is a certified public
accountant. He was a public accounting auditor in the accounting firm of
Deloitte Haskins and Sells, now known as Deloitte & Touche LLP, corporate
accounting manager of Baker International and a financial consultant. He is
also chairman of the audit committee of Eagle U.S.A. Mr. Hevrdejs is a
member of the Audit Committee and 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. He is also a Director of the Association of
Graphic Communications and serves on the Board of Governors of Legatus. Mr.
Maloney served as internal auditor and prepared annual reports for
companies for over 20 years. Mr. Maloney is a member of the Compensation
and Human Resources Committee and the Audit Committee of the Board of
Directors.
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 a Director
and Senior Vice President at the time of his retirement. He is also a
Director of Summerset Medical Center, a Director and advisor to Taratec, a
management consulting company, and an Advisor to AIG Healthcare Partners, a
private equity firm. Mr. Oliver is a member of the Compensation and Human
Resources Committee and the Health, Safety and Environmental 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 is a certified public accountant. Mr. Pickholz serves as the
72
Chairman of the Audit Committee and as a member of the Governance and
Nominating Committee of the Board of Directors.
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. Mr. Reynolds received an MBA in finance from Cornell
University. He is also a director of Soma Logic Incorporated, a privately
held biotechnology company, Health Care Waste Solutions and Viecore, Inc.,
a privately held software integration company. He is a member of the Audit
Committee and Chairman of the Compensation and Human Resources 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 private investment company, from
1992 to 2001. Ms. Rheney is also a Director of Genesis Energy LP, an oil
pipeline company, and Texas Petrochemical Holdings, Inc., a chemical
manufacturer. From 1999 through 2003, she served as a Director of American
Plumbing and Mechanical, Inc., a plumbing contractor. Texas Petrochemical
filed a voluntary petition for reorganization under Chapter 11 of the
United States Bankruptcy Code in July 2003. In connection with this filing,
the holder of discount notes issued by Texas Petrochemical filed a lawsuit
against the directors and officers of Texas Petrochemical in December 2003.
Ms. Rheney received an MBA from Harvard University. She is a certified
public accountant and was a public accounting auditor for the accounting
firm of Deloitte & Touche. Ms. Rheney is a member of the Governance and
Nominating Committee and the Audit Committee of the Board of Directors.
GORDON A. GRIFFITHS served as Senior Vice President since 2002 and as
President of our Commercial Segment since our reorganization in October
2003. From April 2002 until October 2003, he served as President and Chief
Executive Officer of our former Commercial Printing Division. 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 Director 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.
ROBERT C. HART served as Senior Vice President since 2000, and as
President of our Resale Segment since our reorganization in October 2003.
From 2000 until October 2003, he served as President and Chief Executive
Officer of our former Envelope Division. From 1998, until he joined the
Company, he owned his own consulting firm after having spent over 30 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.
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.
73
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
cereal producer. From 1997 to 1999, he served as Vice President--Human
Resources for CitiGroup, a financial institution.
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. 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.
MATTHEW H. MITCHELL has been Vice President--Chief Information Officer
since December 2003. From 1996 to November 2003, he served as Vice
President--Information Services with Aramark Educational Resources, Inc.,
an educational service provider.
KEITH T. PRATT has been Vice President--Purchasing and Supply Chain
Management 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.
WAYNE M. 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. He is a
licensed attorney.
The sections captioned "GOVERNANCE, BOARD COMMITTEES AND BOARD
COMPENSATION--Corporate Governance," and "OTHER INFORMATION--Section 16(a)
Beneficial Ownership Reporting Compliance" appearing in the Company's Proxy
Statement filed pursuant to Regulation 14A in connection with the 2004
Annual Meeting of Stockholders are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The sections captioned "GOVERNANCE, BOARD COMMITTEES AND BOARD
COMPENSATION--Board Compensation," and "--Compensation and Human Resources
Committee Interlocks and Insider Participation," "COMPENSATION OF EXECUTIVE
OFFICERS," "REPORT ON EXECUTIVE COMPENSATION," and "COMPARISON OF FIVE-YEAR
CUMULATIVE TOTAL RETURN" appearing in the Company's Proxy Statement filed
pursuant to Regulation 14A in connection with the 2004 Annual Meeting of
Stockholders are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The sections captioned "OWNERSHIP OF VOTING SECURITIES" and
"COMPENSATION OF EXECUTIVE OFFICERS--Equity Compensation Plan Information"
appearing in the Company's Proxy Statement filed pursuant to Regulation 14A
in connection with the 2004 Annual Meeting of Stockholders are incorporated
herein by reference.
74
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section captioned "COMPENSATION OF EXECUTIVE OFFICERS--Executive
Agreements--Loan to Mr. Salbaing" appearing in the Company's Proxy
Statement filed pursuant to Regulation 14A in connection with the 2004
Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The section captioned "INDEPENDENT PUBLIC AUDITORS" appearing in the
Company's Proxy Statement filed pursuant to Regulation 14A in connection
with the 2004 Annual Meeting of Stockholders is incorporated herein by
reference.
75
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, 2003
and 2002 and Condensed Parent-Only Statements of
Operations and Cash Flows for the Years Ended December 31,
2003, 2002, and 2001...................................... 80
Schedule II Valuation and Qualifying Accounts for the Years Ended
December 31, 2003, 2002, and 2001......................... 84
(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 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.
4.5* Indenture dated as of February 4, 2004 between Mail-Well I
Corporation and U.S. Bank National Association, as Trustee,
and Form of Senior Subordinated Note and Guarantee
76
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
relating to Mail-Well I Corporation's $320,000,000 aggregate principal
amount of 7 7/8% Senior Subordinated Notes due 2013.
4.6* Registration Rights Agreement dated February 4, 2004, between
Mail-Well I Corporation, and Credit Suisse First Boston, as Initial
Purchaser, relating to Mail-Well I Corporation's $320,000,000
aggregate principal amount of 7 7/8% Senior Notes due 2013.
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
77
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
9 5/8% Senior Notes due 2012--incorporated by reference to Exhibit
10.30 to Mail-Well I Corporation's Registration Statement on Form
S-4 filed June 11, 2002.
10.14 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 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.
10.16 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.
10.17 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.
10.18 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.
10.19 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.
10.20 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.
10.21 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.
10.22 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
78
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
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.
10.23 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.
10.24 Employment and Executive Severance Agreement dated as of March 10,
2003, between the Company and Paul V. Reilly--incorporated by
reference to Exhibit 10.26 of the Company's Annual Form 10-K filed
March 21, 2003.
10.25 Form of Executive Severance Agreement entered into between the
Company and each of the following: Michel Salbaing, Gordon
Griffiths, Brian Hairston, Herbert H. Davis, Keith Pratt, William
Huffman, D. Robert Meyer and Mark Zoeller--incorporated by
reference to Exhibit 10.27 of the Company's Annual Form 10-K filed
March 21, 2003.
21* Subsidiaries of the Company.
23* Consent of Ernst & Young LLP.
24 Power of Attorney--incorporated by reference to page 86.
31.1* Certification of Periodic Report by Paul V. Reilly, President and
Chief Executive Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2* Certification of Periodic Report by Michel P. Salbaing, Senior Vice
President--Finance and Chief Financial Officer, pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1** Certification of Periodic Report by Paul V. Reilly, President and
Chief Executive Officer, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2** Certification of Periodic Report by Michel P. Salbaing, Senior Vice
President--Finance and Chief Financial Officer, pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
- --------
* Filed herewith.
** Furnished herewith.
(b) REPORTS ON FORM 8-K
1. Current Report on Form 8-K filed November 3, 2003, providing certain
disclosures under Regulation FD.
2. Current Report on Form 8-K filed November 5, 2003, disclosing other
events and providing certain disclosures under Regulation FD.
(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.
79
SCHEDULE I
MAIL-WELL, INC.
(PARENT-ONLY SUPPLEMENTAL FINANCIAL STATEMENTS)
CONDENSED BALANCE SHEETS
(dollars in thousands)
DECEMBER 31
---------------------
2003 2002
------- -------
ASSETS
Investment in subsidiary........................ $68,019 $42,768
------- -------
Total assets.................................... $68,019 $42,768
======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
Shareholders' equity............................ $68,019 $42,768
------- -------
Total liabilities and shareholders' equity...... $68,019 $42,768
======= =======
See notes to condensed financial statements.
80
SCHEDULE I
MAIL-WELL, INC.
(PARENT-ONLY SUPPLEMENTAL FINANCIAL STATEMENTS)
CONDENSED STATEMENTS OF OPERATIONS
(dollars in thousands)
FOR THE YEAR ENDED DECEMBER 31
------------------------------------------
2003 2002 2001
------ --------- ---------
Other operating costs:
Administrative.................................. $ -- $ -- $ 359
Amortization.................................... -- 161 19
------ --------- ---------
Total other operating costs................. -- 161 378
------ --------- ---------
Operating loss...................................... -- (161) (378)
Other (income) expense:
Interest expense-debt........................... -- 5,188 7,970
Interest income from subsidiary................. -- (5,820) (8,923)
------ --------- ---------
Income before equity in undistributed earnings of
subsidiary........................................ -- 471 575
------ --------- ---------
Equity (loss) in undistributed earnings of
subsidiary........................................ 5,150 (202,575) (136,792)
------ --------- ---------
Net income (loss)................................... $5,150 $(202,104) $(136,217)
====== ========= =========
See notes to condensed financial statements.
81
SCHEDULE I
MAIL-WELL, INC.
(PARENT-ONLY FINANCIAL SUPPLEMENTAL STATEMENTS)
CONDENSED STATEMENTS OF CASH FLOWS
(dollars in thousands)
FOR THE YEAR ENDED DECEMBER 31
--------------------------------------
2003 2002 2001
------ --------- ---------
Cash flow from operating activities:
Net income (loss).................................... $5,150 $(202,104) $(136,217)
Adjustments to reconcile net income to net cash
provided (used in) by operating activities:
Equity in undistributed earnings (loss) of
subsidiary..................................... 5,150 202,575 136,792
Amortization..................................... -- 1,023 859
Changes in operating assets and liabilities, net of
effects of acquired businesses:
Other working capital........................ -- (5,408) (1,434)
------ --------- ---------
Net cash used in operating activities........ -- (3,914) --
Cash flow from investing activities:
Investment in subsidiary............................. -- -- (413)
Other activity with subsidiary, net.................. (75) -- --
------ --------- ---------
Net cash provided by (used in) investing
activities................................. (75) -- (413)
Cash flow from financing activities:
Net proceeds from issuance of common stock........... 75 18 413
Proceeds from intercompany debt...................... -- 142,959 --
Repayment of long-term debt.......................... -- (139,063) --
------ --------- ---------
Net cash provided by financing activities.... 75 3,914 413
------ --------- ---------
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.
82
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. DEBT AND GUARANTEES
The Company has guaranteed all debt of MWI and it's subsidiaries
($749.0 million outstanding at December 31, 2003, 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 2003 are: 2004--$2.6 million;
2005--$75.8 million; 2006--$2.3 million; 2007--$13.5 million; 2008--$301.0
million; and $353.8 million thereafter.
4. 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.
83
SCHEDULE II
MAIL-WELL, INC. AND SUBSIDIARIES
SUPPLEMENTAL VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(amounts in thousands)
FOR THE YEAR ENDED DECEMBER 31
---------------------------------------
2003 2002 2001
------- ------- -------
ACCOUNTS RECEIVABLE ALLOWANCES
Balance at beginning of year......................... $ 4,673 $ 5,385 $ 4,618
Charged to costs and expenses........................ 3,276 4,026 3,674
Recoveries and other charges......................... (72) 552 3,994 (1)
Deductions(2)........................................ (3,893) (5,290) (6,901)
------- ------- -------
Balance at end of year............................... $ 3,984 $ 4,673 $ 5,385
======= ======= =======
INVENTORY RESERVES
Balance at beginning of year......................... $ 5,668 $ 4,636 $ 4,995
Charged to costs and expenses........................ 2,072 2,830 1,408
Recoveries and other charges......................... (1,514) (602) (559)(1)
Deductions(2)........................................ (1,234) (1,196) (1,208)
------- ------- -------
Balance at end of year............................... $ 4,992 $ 5,668 $ 4,636
======= ======= =======
- --------
(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) Accounts and inventories written off.
84
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 February 25, 2004.
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)
85
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, February 25, 2004
---------------------------- President & Chief Executive Officer
Paul V. Reilly
/s/ THOMAS E. COSTELLO Director February 25, 2004
----------------------------
Thomas E. Costello
/s/ FRANK P. DIASSI Director February 25, 2004
----------------------------
Frank P. Diassi
/s/ FRANK. J. HEVRDEJS Director February 25, 2004
----------------------------
Frank J. Hevrdejs
/s/ MARTIN J. MALONEY Director February 25, 2004
----------------------------
Martin J. Maloney
/s/ DAVID M. OLIVIER Director February 25, 2004
----------------------------
David M. Olivier
/s/ JEROME W. PICKHOLZ Director February 25, 2004
----------------------------
Jerome W. Pickholz
/s/ ALISTER W. REYNOLDS Director February 25, 2004
----------------------------
Alister W. Reynolds
/s/ SUSAN O. RHENEY Director February 25, 2004
----------------------------
Susan O. Rheney
86
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