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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
COMMISSION FILE NUMBER 1-12551
------------------------
MAIL-WELL, INC.
(Exact name of Registrant as specified in its charter.)
COLORADO 84-1250533
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8310 S. VALLEY HIGHWAY, #400
ENGLEWOOD, CO 80112
(Address of principal executive offices) (Zip Code)
303-790-8023
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
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 April 29, 2004 was $109,200,148.
As of April 29, 2004 the Registrant had 48,384,789 shares of Common
Stock, $0.01 par value, outstanding.
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TABLE OF CONTENTS
PART I--FINANCIAL INFORMATION
PAGE
----
Item 1. Condensed Consolidated Financial Statements................. 1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 17
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 24
Item 4. Controls and Procedures..................................... 25
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................ 26
i
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAIL-WELL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
MARCH 31, 2004
(UNAUDITED) DECEMBER 31, 2003
-------------- -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 259 $ 307
Accounts receivable, net............................... 224,034 223,541
Inventories, net....................................... 99,639 91,402
Other current assets................................... 50,236 48,135
---------- ----------
TOTAL CURRENT ASSETS............................... 374,168 363,385
Property, plant and equipment, net......................... 380,328 388,240
Goodwill................................................... 298,885 299,392
Other intangible assets, net............................... 18,281 19,687
Other assets, net.......................................... 40,311 36,689
---------- ----------
TOTAL ASSETS............................................... $1,111,973 $1,107,393
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable....................................... $ 151,188 $ 140,468
Accrued compensation and related liabilities........... 53,938 53,209
Other current liabilities.............................. 52,102 64,360
Current maturities of long-term debt................... 2,588 2,575
---------- ----------
TOTAL CURRENT LIABILITIES.......................... 259,816 260,612
Long-term debt, less current maturities.................... 774,749 746,386
Deferred income taxes...................................... 1,507 6,717
Other liabilities.......................................... 26,243 25,659
---------- ----------
TOTAL LIABILITIES.......................................... 1,062,315 1,039,374
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, 48,384,123 and 48,380,457 shares issued
and outstanding as of March 31, 2004 and December 31,
2003, respectively................................... 484 484
Paid-in capital........................................ 213,857 213,850
Retained deficit....................................... (166,866) (150,331)
Deferred compensation.................................. (1,569) (1,714)
Accumulated other comprehensive income................. 3,752 5,730
---------- ----------
TOTAL SHAREHOLDERS' EQUITY......................... 49,658 68,019
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................. $1,111,973 $1,107,393
========== ==========
See notes to condensed consolidated financial statements.
1
MAIL-WELL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except earnings per share amounts)
THREE MONTHS ENDED
MARCH 31,
-------------------------
2004 2003
-------- --------
Net sales................................................... $423,742 $427,320
Cost of sales............................................... 335,322 343,400
-------- --------
Gross profit................................................ 88,420 83,920
Operating expenses:
Selling, general and administrative..................... 67,998 63,425
Amortization of intangibles............................. 1,405 445
Restructuring charges................................... 103 771
-------- --------
Operating income............................................ 18,914 19,279
Other expense:
Interest expense........................................ 18,399 18,214
Loss from the early extinguishment of debt.............. 17,748 --
Other................................................... 441 132
-------- --------
Income (loss) from continuing operations before income taxes
and cumulative effect of a change in accounting
principle................................................. (17,674) 933
Income tax benefit (expense)................................ 1,139 (401)
-------- --------
Income (loss) from continuing operations before cumulative
effect of a change in accounting principle................ (16,535) 532
Gain on disposal of discontinued operations................. -- 2,500
Cumulative effect of a change in accounting principle....... -- (322)
-------- --------
Net income (loss)........................................... $(16,535) $ 2,710
======== ========
Earnings (loss) per share--basic and diluted:
Continuing operations................................... $ (0.35) $ 0.01
Discontinued operations................................. -- 0.05
Cumulative effect of a change in accounting principle... -- --
-------- --------
Earnings (loss) per share--basic and diluted................ $ (0.35) $ 0.06
======== ========
Weighted average shares--basic.............................. 47,739 47,668
Weighted average shares--diluted............................ 47,739 48,376
See notes to condensed consolidated financial statements.
2
MAIL-WELL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
THREE MONTHS ENDED MARCH 31,
-----------------------------
2004 2003
----------- ---------
Cash flows from operating activities:
Income (loss) from continuing operations.................. $ (16,535) $ 532
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by (used in) operating
activities:
Depreciation......................................... 11,465 11,723
Amortization......................................... 2,549 1,383
Write-off of deferred financing fees................. 4,220 --
Deferred income tax benefit.......................... (4,672) (2,072)
Loss (gain) on disposal of assets.................... (39) 258
Other noncash charges, net........................... (281) 1,012
Changes in operating assets and liabilities, excluding the
effects of operations sold:
Accounts receivable.................................. (649) (5,716)
Inventories.......................................... (8,038) (414)
Accounts payable and accrued compensation............ 11,752 (12,668)
Income taxes payable................................. (801) (2,379)
Other working capital changes........................ (11,369) (5,388)
Other, net........................................... (2,080) 662
----------- ---------
Net cash used in operating activities............... (14,478) (13,067)
Cash flows from investing activities:
Capital expenditures.................................. (5,647) (6,416)
Proceeds from divestitures, net....................... -- 3,864
Proceeds from sales of property, plant and
equipment........................................... 229 515
----------- ---------
Net cash used in investing activities............... (5,418) (2,037)
Cash flows from financing activities:
Proceeds from issuance of long-term debt.............. 1,174,037 485,122
Repayments of long-term debt.......................... (1,145,661) (472,188)
Proceeds from issuance of common stock................ 7 --
Capitalized loan fees................................. (8,291) (316)
----------- ---------
Net cash provided by financing activities........... 20,092 12,618
Effect of exchange rate changes on cash and cash
equivalents................................................ (244) 180
----------- ---------
Net decrease in cash and cash equivalents........... (48) (2,306)
Cash and cash equivalents at beginning of year.............. 307 2,650
----------- ---------
Cash and cash equivalents at end of quarter................. $ 259 $ 344
=========== =========
See notes to condensed consolidated financial statements.
3
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of
Mail-Well, Inc. and subsidiaries (collectively, the "Company") have been
prepared in accordance with generally accepted accounting principles for
interim financial statements and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three months ended March 31, 2004 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2004. The
balance sheet at December 31, 2003 has been derived from the audited
financial statements at that date but does not include all of the
information and footnote disclosures required by generally accepted
accounting principles for complete financial statements.
For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's annual report on Form 10-K
for the year ended December 31, 2003.
The condensed consolidated financial statements for the three months
ended March 31, 2003 reported in the Form 10-Q for the quarterly period
ended March 31, 2003 have been restated as a result of the Company's
adoption of the Financial Accounting Standards Board Interpretation No. 46,
Consolidation of Variable Interest Entities, an Interpretation of
Accounting Research Bulletin No. 51, ("Interpretation 46") in the second
quarter of 2003. The provisions of Interpretation 46 required the Company
to consolidate a trust that leases equipment to the Company 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 was an after-tax charge of $0.3 million recorded
January 1, 2003.
2. 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 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
Statement of Financial Accounting Standards 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):
THREE MONTHS ENDED
MARCH 31,
---------------------
2004 2003
-------- ------
Net income (loss):
As reported....................................... $(16,535) $2,710
Pro forma......................................... $(17,205) $1,824
Earnings (loss) per share--basic and diluted:
As reported....................................... $ (0.35) $ 0.06
Pro forma......................................... $ (0.36) $ 0.04
The effect on pro forma net income (loss), earnings (loss) per
share--basic and earnings (loss) per share--diluted of expensing the
estimated fair value of stock options is not necessarily representative
4
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. STOCK-BASED COMPENSATION (CONTINUED)
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.
3. SUPPLEMENTAL BALANCE SHEET INFORMATION
INVENTORIES
The Company's inventories by major category were as follows (in
thousands):
MARCH 31, DECEMBER 31,
2004 2003
--------- ------------
Raw materials.......................................... $ 31,047 $ 28,344
Work in process........................................ 24,532 21,483
Finished goods......................................... 49,127 46,570
-------- --------
104,706 96,397
Reserves............................................... (5,067) (4,995)
-------- --------
$ 99,639 $ 91,402
======== ========
PROPERTY, PLANT AND EQUIPMENT
The Company's investment in property, plant and equipment consisted of
the following (in thousands):
MARCH 31, DECEMBER 31,
2004 2003
--------- ------------
Land and land improvements............................. $ 19,758 $ 20,043
Buildings and building improvements.................... 109,848 109,563
Machinery and equipment................................ 515,541 511,820
Furniture and fixtures................................. 16,098 15,986
Construction in progress............................... 10,291 9,696
--------- ---------
671,536 667,108
Accumulated depreciation............................... (291,208) (278,868)
--------- ---------
$ 380,328 $ 388,240
========= =========
COMPREHENSIVE INCOME (LOSS)
A summary of the comprehensive income (loss) was as follows (in
thousands):
THREE MONTHS ENDED
MARCH 31,
-------------------------
2004 2003
--------- ---------
Net income (loss)...................................... $(16,535) $ 2,710
Other comprehensive income (loss):
Currency translation adjustment, net.............. (1,978) 7,388
-------- -------
Comprehensive income (loss)............................ $(18,513) $10,098
======== =======
5
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT
At March 31, 2004 and December 31, 2003, long-term debt consisted of
the following (in thousands):
MARCH 31, DECEMBER 31,
2004 2003
--------- ------------
Senior Secured Credit Facility, due 2008............... $ 83,923 $ 73,310
Senior Notes, due 2012................................. 350,000 350,000
Senior Subordinated Notes, due 2008.................... -- 300,000
Senior Subordinated Notes, due 2013.................... 320,000 --
Other.................................................. 23,414 25,651
-------- --------
777,337 748,961
Less current maturities................................ (2,588) (2,575)
-------- --------
Long-term debt...................................... $774,749 $746,386
======== ========
Current maturities consist of scheduled payments on other long-term
debt.
In January 2004, the Company sold $320 million of 7 7/8% senior
subordinated notes due 2013. The proceeds from the sale of these notes were
used to redeem the $300 million of 8 3/4% senior subordinated notes due
2008. The Company incurred costs of $6.9 million to issue the 7 7/8% senior
subordinated notes. These costs have been deferred and will be amortized
over the term of the notes. A loss of $17.7 million was recorded on the
early extinguishment of the 8 3/4% senior subordinated notes consisting of
redemption premiums of $13.5 million and unamortized debt issuance costs of
$4.2 million.
In March 2004, the Company amended its $300 million senior secured
credit facility due 2005 to extend its term to June 2008. The cost incurred
to amend the credit facility was $1.4 million. These debt issuance costs
will be amortized over the extended term of the facility.
The senior notes due 2012 and the senior subordinated notes due 2013
are guaranteed by Mail-Well, Inc. (the "Parent Guarantor") and all of its
wholly owned operating subsidiaries (the "Guarantor Subsidiaries"). 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.
As of March 31, 2004, the Company was in compliance with all of the
covenants of its various debt agreements.
5. INCOME TAXES
The effective tax rate for the three months ended March 31, 2004 was
6.4% which was primarily the result of an additional tax valuation
allowance of $6.8 million recorded as of March 31, 2004. At December 31,
2003, the Company had recorded a valuation allowance of $6.5 million for
the estimated impairment of certain loss carryforwards. The Company had tax
planning strategies available that it believed could enable it to realize
remaining net deferred tax assets. Since the Company incurred additional
net operating losses in the first quarter of 2004, it was necessary to
record a valuation allowance to reduce the estimated tax benefit from this
additional net operating loss. This valuation allowance covers the
estimated portion of the tax benefit that would not be utilized by the
reversal of existing temporary tax differences or tax planning strategies.
6
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. RESTRUCTURING CHARGES
In February 2004, the commercial segment announced the closure of its
envelope manufacturing plant in Bensalem, Pennsylvania and its integration
into the Company's Philadelphia printing facility. The expenses incurred
during the three months ended March 31, 2004 were $0.1 million and were
primarily fees related to human resource issues and expenses incurred
incidental to equipment moves. The total cost of the closure is expected to
be approximately $2.2 million consisting of the following (in thousands):
Employee separation and related expenses................ $ 868
Equipment write-downs, net.............................. 500
Equipment moving expenses............................... 225
Building clean-up and other expenses.................... 570
------
Total............................................... $2,163
======
The Company has substantially completed the restructuring programs
initiated in June 2001 and 2002.
A summary of the activity charged to the 2002 restructuring liability
during the three months ended March 31, 2004 is as follows (in thousands):
COMMERCIAL RESALE TOTAL
---------- ------ ------
Balance, December 31, 2003............................. $1,279 $ 30 $1,309
Payments for lease termination and property exit
costs............................................ (143) (10) (153)
Payments for other exit costs...................... (43) -- (43)
------ ---- ------
Balance, March 31, 2004................................ $1,093 $ 20 $1,113
====== ==== ======
A summary of the activity charged to the 2001 restructuring liability
during the three months ended March 31, 2004 is as follows (in thousands):
COMMERCIAL
----------
Balance, December 31, 2003.............................. $688
Payments for lease termination and property exit
costs............................................. (56)
----
Balance, March 31, 2004................................. $632
====
7. PENSION PLANS
The components of the net periodic pension cost for the Company's
pension plans and the supplemental executive retirement plans were as
follows (in thousands):
THREE MONTHS ENDED
MARCH 31,
-------------------
2004 2003
----- -----
Service cost........................................... $ 544 $ 362
Interest cost.......................................... 711 834
Expected return on plan assets......................... (844) (906)
Net amortization and deferral.......................... 53 (47)
Other.................................................. -- 83
----- -----
Net periodic pension expense........................... $ 464 $ 326
===== =====
7
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. PENSION PLANS (CONTINUED)
The Company previously disclosed in its financial statements for the
year ended December 31, 2003, that it expects to contribute $2.8 million to
its pension plans in 2004. As of March 31, 2004, contributions of $0.1
million have been made.
8. 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):
THREE MONTHS ENDED
MARCH 31,
----------------------
2004 2003
-------- -------
Numerator:
Numerator for basic and diluted earnings (loss) per
share--income (loss) from continuing operations........... $(16,535) $ 532
======== =======
Denominator:
Denominator for basic earnings (loss) per share--weighted
average shares............................................ 47,739 47,668
Effects of dilutive securities:
Stock options and restricted stock...................... -- 708
-------- -------
Denominator for diluted earnings (loss) per share--adjusted
weighted average shares................................... 47,739 48,376
======== =======
Earnings (loss) from continuing operations per share:
Basic and diluted....................................... $ (0.35) $ 0.01
======== =======
In the three months ended March 31, 2004 and 2003, outstanding options
and shares of restricted stock in the amount of 6,468,000 and 6,072,000,
respectively, were excluded from the calculation of diluted earnings per
share because the effect would be antidilutive.
9. ASSETS HELD FOR SALE
The Company sold certain digital graphics operations of its commercial
segment in March 2003. The condensed consolidated statement of operations
for the three months ended March 31, 2003 includes sales of $2.9 million
and operating income of $0.2 million related to these operations.
10. DISCONTINUED OPERATIONS
During the first quarter of 2003, the Company recorded a gain on the
disposal of discontinued operations in the amount of $2.5 million. This
gain was the result of a change in the estimated tax impact of the
disposition of its prime label business, which was sold in May 2002. The
data required to determine the full tax impact of this transaction was not
available until 2003. The Company finalized this estimate upon filing the
final tax return in the second quarter of 2003.
8
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SEGMENT INFORMATION
In October 2003, the Company reorganized into two operating segments:
commercial and resale. This reorganization aligns the Company's structure
with its strategic goals. Segment information for the three months ended
March 31, 2003 has been restated to reflect the new operating segments.
The commercial segment specializes in printing annual reports, car
brochures, brand marketing collateral, financial communications, general
commercial printing and the manufacturing and printing of customized
envelopes for billing and remittance and direct mail advertising. The
commercial segment also offers services such as design, fulfillment,
e-commerce and inventory management. These products and services are sold
directly to national and local customers.
The resale segment produces business forms and labels, custom and stock
envelopes and specialty packaging and mailers. These products are generally
sold through professional print distributors, business forms suppliers,
office-products retail chains and the Internet.
Operating income of each segment includes all costs and expenses
directly related to the segment's operations. Corporate expenses include
corporate general and administrative expenses. Inter-company sales for the
three months ended March 31, 2004 and 2003 were $5.2 million and $4.1
million, respectively. These amounts were eliminated in consolidation and
excluded from reported net sales.
The following tables present certain segment information for the three
months ended March 31, 2004 and 2003 (in thousands):
THREE MONTHS ENDED
MARCH 31,
-----------------------
2004 2003
-------- --------
Net sales:
Commercial.......................................... $323,849 $324,063
Resale.............................................. 99,893 103,257
-------- --------
Total............................................... $423,742 $427,320
======== ========
Operating income (expense):
Commercial.......................................... $ 11,996 $ 12,481
Resale.............................................. 11,463 11,851
Corporate........................................... (4,545) (5,053)
-------- --------
Total............................................... $ 18,914 $ 19,279
======== ========
Restructuring charges:
Commercial.......................................... $ 103 $ 911
Resale.............................................. -- (140)
-------- --------
Total............................................... $ 103 $ 771
======== ========
Net sales by product line:
Commercial printing................................. $198,647 $196,830
Envelopes........................................... 173,764 180,190
Business forms and labels........................... 51,331 50,300
-------- --------
Total............................................... $423,742 $427,320
======== ========
9
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Mail-Well I Corporation ("Issuer" or "MWI"), the Company's wholly-owned
subsidiary, and the only direct subsidiary of the Company, has issued $350
million aggregate principal amount of 9 5/8% Senior Notes ("Senior Notes")
due in 2012 and $320 million aggregate principal amount of 7 7/8% Senior
Subordinated Notes ("Senior Subordinated Notes") due in 2013. The Senior
Notes and Senior Subordinated Notes are guaranteed by the Guarantor
Subsidiaries and 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.
10
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF FINANCIAL POSITION (UNAUDITED)
March 31, 2004
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED
--------- ---------- ------------ --------- ------------
Current assets:
Cash and cash equivalents.......... $ -- $ -- $ 259 $ -- $ 259
Accounts receivable, net........... -- 47,318 176,716 -- 224,034
Inventories, net................... -- 40,180 59,459 -- 99,639
Note receivable from
subsidiaries...................... -- 603,100 -- (603,100) --
Other current assets............... -- 30,268 19,968 -- 50,236
------- ---------- -------- --------- ----------
Total current assets............. -- 720,866 256,402 (603,100) 374,168
Investment in subsidiaries........... 49,658 132,384 -- (182,042) --
Property, plant and equipment, net... -- 90,676 289,652 -- 380,328
Goodwill and other intangible assets,
net................................. -- 67,253 249,913 -- 317,166
Other assets, net.................... -- 33,736 6,575 -- 40,311
------- ---------- -------- --------- ----------
Total assets......................... $49,658 $1,044,915 $802,542 $(785,142) $1,111,973
======= ========== ======== ========= ==========
Current liabilities:
Accounts payable................... $ -- $ 30,835 $120,353 $ -- $ 151,188
Other current liabilities.......... -- 47,232 58,808 -- 106,040
Intercompany payable
(receivable)...................... -- 137,359 (137,359) -- --
Note payable to Issuer............. -- -- 603,100 (603,100) --
Current maturities of long-term
debt.............................. -- 1,780 808 -- 2,588
------- ---------- -------- --------- ----------
Total current liabilities........ -- 217,206 645,710 (603,100) 259,816
Long-term debt, less current
maturities.......................... -- 770,291 4,458 -- 774,749
Deferred income taxes................ -- (8,671) 10,178 -- 1,507
Other liabilities.................... -- 16,431 9,812 -- 26,243
------- ---------- -------- --------- ----------
Total liabilities................ -- 995,257 670,158 (603,100) 1,062,315
Shareholders' equity................. 49,658 49,658 132,384 (182,042) 49,658
------- ---------- -------- --------- ----------
Total liabilities and shareholders'
equity.............................. $49,658 $1,044,915 $802,542 $(785,142) $1,111,973
======= ========== ======== ========= ==========
11
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. 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 maturities of long-term
debt................................ -- 1,776 799 -- 2,575
------- -------- -------- --------- ----------
Total current liabilities.......... -- 98,795 764,917 (603,100) 260,612
Long-term debt, less current
maturities............................ -- 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
======= ======== ======== ========= ==========
12
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
Quarter Ended March 31, 2004
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED
--------- -------- ------------ ------- ------------
Net sales................................ $ -- $100,591 $323,151 $ -- $423,742
Cost of sales............................ -- 81,144 254,178 -- 335,322
-------- -------- -------- ------- --------
Gross profit............................. -- 19,447 68,973 -- 88,420
Operating expenses:
Selling, general and administrative.... -- 16,063 53,340 -- 69,403
Restructuring charges.................. -- -- 103 -- 103
-------- -------- -------- ------- --------
Operating income......................... -- 3,384 15,530 -- 18,914
Other expense:
Interest expense....................... -- 18,333 66 -- 18,399
Intercompany interest expense
(income).............................. -- (13,562) 13,562 -- --
Loss on early extinguishment of debt... -- 17,748 -- -- 17,748
Other.................................. -- 318 123 -- 441
-------- -------- -------- ------- --------
Income (loss) from continuing operations,
before income taxes and undistributed
earnings of subsidiaries................ -- (19,453) 1,779 -- (17,674)
Income tax benefit....................... -- 112 1,027 -- 1,139
-------- -------- -------- ------- --------
Income (loss) from continuing operations,
before undistributed earnings of
subsidiaries............................ -- (19,341) 2,806 -- (16,535)
Equity in undistributed earnings of
subsidiaries............................ (16,535) 2,806 -- 13,729 --
-------- -------- -------- ------- --------
Net income (loss)........................ $(16,535) $(16,535) $ 2,806 $13,729 $(16,535)
======== ======== ======== ======= ========
13
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
Quarter Ended March 31, 2003
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED
--------- -------- ------------ -------- ------------
Net sales............................... $ -- $107,643 $319,677 $ -- $427,320
Cost of sales........................... -- 88,797 254,603 -- 343,400
------ -------- -------- -------- --------
Gross profit............................ -- 18,846 65,074 -- 83,920
Operating expenses:
Selling, general and administrative... -- 15,713 48,157 -- 63,870
Restructuring charges................. -- -- 771 -- 771
------ -------- -------- -------- --------
Operating income (loss)................. -- 3,133 16,146 -- 19,279
Other expense (income):
Interest expense...................... -- 17,852 14,016 (13,654) 18,214
Other expense (income)................ -- (13,657) 135 13,654 132
------ -------- -------- -------- --------
Income (loss) from continuing operations
before income taxes and equity in
undistributed earnings of
subsidiaries........................... -- (1,062) 1,995 -- 933
Income tax benefit (expense)............ -- 457 (858) -- (401)
------ -------- -------- -------- --------
Income (loss) from continuing operations
before equity in undistributed earnings
of subsidiaries........................ -- (605) 1,137 -- 532
Equity in undistributed earnings of
subsidiaries........................... 2,710 1,248 -- (3,958) --
------ -------- -------- -------- --------
Income (loss) from continuing
operations............................. 2,710 643 1,137 (3,958) 532
Gain on disposal........................ -- 2,500 -- -- 2,500
Cumulative effect of a change in
accounting principle................... -- -- (322) -- (322)
------ -------- -------- -------- --------
Net income (loss)....................... $2,710 $ 3,143 $ 815 $ (3,958) $ 2,710
====== ======== ======== ======== ========
14
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
Quarter Ended March 31, 2004
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES CONSOLIDATED
--------- ----------- ------------ ------------
Cash flows from operating
activities.......................... $ -- $ (36,876) $ 22,398 $ (14,478)
Cash flows from investing activities:
Capital expenditures............... (2,950) (2,697) (5,647)
Intercompany advances.............. (7) 19,736 (19,729) --
Proceeds from sale of property,
plant & equipment................. -- -- 229 229
------- ----------- -------- -----------
Net cash used in investing
activities........................ (7) 16,786 (22,197) (5,418)
Cash flows from financing activities:
Proceeds from long-term debt....... -- 1,174,037 -- 1,174,037
Repayments of long-term debt....... -- (1,145,343) (318) (1,145,661)
Proceeds from issuance of common
stock............................. 7 -- -- 7
Capitalized loan fees.............. -- (8,291) -- (8,291)
------- ----------- -------- -----------
Net cash used in financing
activities........................ 7 20,403 (318) 20,092
Effect of exchange rate changes on
cash and cash equivalents........... -- (313) 69 (244)
------- ----------- -------- -----------
Net decrease in cash and cash
equivalents......................... -- -- (48) (48)
Cash and cash equivalents at
beginning of year................... -- -- 307 307
------- ----------- -------- -----------
Cash and cash equivalents at end of
quarter............................. $ -- $ -- $ 259 $ 259
======= =========== ======== ===========
15
MAIL-WELL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
Quarter Ended March 31, 2003
(in thousands)
COMBINED
PARENT GUARANTOR
GUARANTOR ISSUER SUBSIDIARIES CONSOLIDATED
--------- --------- ------------ ------------
Cash flows from operating activities............ $ -- $ 1,760 $(14,827) $ (13,067)
Cash flows from investing activities:
Capital expenditures.......................... -- (809) (5,607) (6,416)
Proceeds from divestitures, net............... -- 3,864 -- 3,864
Intercompany advances......................... -- (20,902) 20,902 --
Proceeds from the sale of assets.............. -- -- 515 515
--------- --------- -------- ---------
Net cash provided by (used in) investing
activities................................... -- (17,847) 15,810 (2,037)
Cash flows from financing activities:
Proceeds from long-term debt.................. -- 485,122 -- 485,122
Repayments of long-term debt.................. -- (471,147) (1,041) (472,188)
Capitalized loan fees......................... -- (316) -- (316)
--------- --------- -------- ---------
Net cash provided by (used in) financing
activities................................... -- 13,659 (1,041) 12,618
Effect of exchange rate changes on cash......... -- -- 180 180
--------- --------- -------- ---------
Net change in cash and cash equivalents......... -- (2,428) 122 (2,306)
Cash and cash equivalents at beginning of year.. -- 1,957 693 2,650
--------- --------- -------- ---------
Cash and cash equivalents at end of quarter..... $ -- $ (471) $ 815 $ 344
========= ========= ======== =========
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS OVERVIEW
We are one of North America's leading providers of visual
communications. We produce a variety of products and provide services that
help our customers deliver customized messages more effectively. In October
2003, we reorganized Mail-Well into two business segments. This
reorganization aligned 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.
COMMERCIAL
Our commercial segment specializes in printing annual reports, car
brochures, brand marketing collateral, financial communications, general
commercial printing and the manufacturing and printing of customized
envelopes for billing and remittance and direct mail advertising. We also
offer our customers services such as design, fulfillment, e-commerce,
inventory management and other enterprise solutions for companies seeking
strategic partners for their branding and other communications priorities.
These products and services are sold directly to national and local
customers. Our commercial segment consists of 36 printing plants, 29
envelope plants and five distribution and fulfillment centers.
MARKET AND OTHER FACTORS. Approximately 50% of our commercial printing
sales and approximately 40% of our custom envelope sales are related to
advertising and direct mail promotions. Beginning in 2001, many of our
customers significantly reduced promotional spending in response to the
economic slowdown. Advertising and promotional spending historically has
not improved as quickly as the overall economy after a recession.
Additionally, we expect growth in printed advertising and promotional
spending to be slower than it was prior to the recession. As a result,
there is overcapacity in our industry and significant competitive pricing
pressures. We do not expect internal growth or increases in margins until
capacity is reduced or the markets served by our commercial segment,
particularly advertising and direct mail, begin to recover from the
recession.
AREAS OF FOCUS. Because of the changes that have occurred in our
markets we have two principal areas of focus:
* It is important that we grow our share of the market. We have made a
substantial investment in our sales and marketing organization to
differentiate ourselves from our competitors and enable us to offer
and deliver to our customers a full spectrum of our products and
services with speed, reliability and efficiency.
* We must continue to manage our capacity and operating leverage. In
2001, we began a restructuring program to consolidate many of our
manufacturing facilities to reduce excess capacity and improve our
competitive position. We have closed eleven of our envelope
facilities and four printing operations to improve the utilization of
our capacity. In the first quarter of 2004 we announced the closure
of another envelope facility.
RESALE
Our resale segment produces business forms and labels, custom and stock
envelopes and specialty packaging and mailers. These products are generally
sold through professional print distributors, business forms suppliers,
office-products retail chains and the Internet. The resale segment operates
20 manufacturing facilities.
MARKET AND OTHER FACTORS. Demand for business forms has been declining
for several years as businesses have acquired laser-printing capabilities.
The resale market for office products has become extremely price
competitive. Mass merchandisers, wholesalers and paper merchants are
consolidating suppliers. Product offerings, competitive prices and service
are keys to retaining business.
17
AREAS OF FOCUS. In response to industry and market challenges, we are
focusing on the following:
* We are defending our share of the business forms market and our sales
into the office products retail channel. We believe we have the
national manufacturing capability and the cost structure to be
successful in this effort.
* We must grow our sales of business labels and specialty business
documents. The markets for these products are growing and we have the
production capability and products to benefit from this market
growth.
* We must match our manufacturing capacity of business forms to the
demands of our customers. Since 2001, we have closed two of our
business forms plants.
CORPORATE
In addition to the business improvement actions and areas of focus for
each of our business segments, we have several important corporate-wide
initiatives.
* Our company was formed through a strategic roll-up of many
acquisitions. The companies we acquired had different cultures,
operating procedures and information systems. We have taken and will
continue to take actions to integrate our operations into one
company, build our own unique culture and standardize procedures and
systems. In keeping with our strategy to unite the organization under
one identity, on April 29, 2004, our shareholders approved a proposal
to amend the Articles of Incorporation of Mail-Well, Inc. to change
its corporate name to "Cenveo, Inc." The Company intends to file the
amendment with the Colorado Secretary of State to be effective May
17, 2004. On such date, our common stock is expected to begin trading
on the New York Stock Exchange under its new symbol: "CVO."
* We have refinanced our debt over the last several years. Currently,
we have no significant maturities on any of our long-term debt until
2008. Our focus is on generating sufficient internal cash flow to
fund investments in capital equipment and acquisitions and reductions
in our outstanding debt.
* In 2003, we launched a major initiative we refer to as
"Mobilization." Mobilization is a comprehensive program designed to
actively involve all of our employees in improving service, quality,
efficiency and innovation. We believe this initiative has and will
continue to improve teamwork, communication and accountability
throughout our business and thus improve operations, safety, customer
service and reduce costs.
* Uncoated paper prices increased 10% on April 1, 2004. This increase
in the cost of manufacturing our envelope products will negatively
impact the margins of both segments to the extent we are unable to
increase our prices on these products. It will be important for us to
manage the impact of this price increase.
18
CONSOLIDATED RESULTS
THREE MONTHS ENDED
MARCH 31,
-----------------------
2004 2003
-------- --------
(DOLLARS IN THOUSANDS)
Division net sales.......................................... $423,742 $424,446
Divested operations.................................... -- 2,873
-------- --------
Net sales................................................... $423,742 $427,320
======== ========
Division operating income................................... $ 23,562 $ 24,935
Unallocated corporate expenses.......................... (4,545) (5,053)
Restructuring expenses.................................. (103) (771)
Divested operations..................................... -- 168
-------- --------
Operating income............................................ 18,914 19,279
Interest expense........................................ (18,399) (18,214)
Loss from the early extinguishment of debt.............. (17,748) --
Other................................................... (441) (132)
-------- --------
Income before income taxes.................................. (17,674) 933
Income tax benefit (expense)............................ 1,139 (401)
Gain on disposal of discontinued operations............. -- 2,500
Change in accounting principle.......................... -- (322)
-------- --------
Net income (loss)........................................... $(16,535) $ 2,710
======== ========
Earnings (loss) per share................................... $ (0.35) $ 0.06
======== ========
NET SALES
Net sales declined $3.6 million in the first quarter of 2004 compared
to the first quarter of 2003. Net sales in 2003 included sales of $2.9
million from the digital graphics operations that were divested in March
2003.
Division net sales were down only slightly. Sales of our commercial
segment increased primarily due to higher sales of annual reports and other
high impact commercial printing products. Sales in our resale segment
declined in the quarter primarily due to lower demand for office products
in the retail segment of the market.
OPERATING INCOME
Operating income declined $0.4 million in the first quarter of 2004
from $19.3 million in the first quarter of 2003.
DIVISION OPERATING INCOME. Division operating income was $1.4 million
lower in the first quarter of 2004 than in the first quarter of 2003
primarily due to investments made in sales and marketing in our commercial
segment, higher employee related expenses and higher amortization expense.
RESTRUCTURING EXPENSES. We continue to evaluate our operations for
opportunities to optimize capacity and reduce costs. In February 2004, we
announced the closure of our envelope plant in Bensalem, Pennsylvania and
its integration into our Philadelphia printing facility. The expenses
incurred in connection with this closure were primarily fees related to
human resource issues and
19
expenses incurred incidental to equipment moves. The total cost of the
closure is expected to be approximately $2.2 million consisting of the
following (in thousands):
Employee separation and related expenses................ $ 868
Equipment write-downs, net.............................. 500
Equipment moving expenses............................... 225
Building clean-up and other expenses.................... 570
------
Total............................................... $2,163
======
We anticipate incurring most of these expenses prior to June 30, 2004.
UNALLOCATED CORPORATE EXPENSES. Corporate unallocated expenses include
the costs of our corporate headquarters. The decrease in corporate expenses
in the first quarter of 2004 was primarily due to adjustments to vendor
rebate accruals which were not allocated to the segments.
DIVESTED OPERATIONS. Operating income in 2003 included operating income
of $0.2 million from the digital graphics operations divested in March
2003.
INTEREST EXPENSE
Interest expense increased slightly in the first quarter of 2004
compared to the first quarter of 2003. Interest expense incurred during the
first quarter of 2004 reflects our average outstanding debt during the
quarter of $817.7 million and a weighted average interest rate of 8.38%
compared to the average outstanding debt of $813.2 million and a weighted
average interest rate of 8.34% in the first quarter of 2003. Our average
outstanding debt was higher in the first quarter of 2004 due to issuance of
the 7 7/8% senior subordinated notes in January and the period of time that
a portion of the 8 3/4% senior subordinated notes remained outstanding
prior to their redemption.
LOSS FROM THE EARLY EXTINGUISHMENT OF DEBT
In January 2004, we sold $320 million of 7 7/8% senior subordinated
notes due 2013. The proceeds from the sale of these notes were used to
redeem our 8 3/4% senior subordinated notes due 2008. The premium paid to
redeem the 8 3/4% notes and the unamortized debt issuance costs on the
8 3/4% notes, which were written off, totaled $17.7 million.
TAX BENEFIT
The effective tax rate for the first quarter of 2004 was 6.4% which was
primarily the result of an additional tax valuation allowance of $6.8
million recorded as of March 31, 2004. At December 31, 2003, we recorded a
valuation allowance of $6.5 million for the estimated impairment of certain
loss carryforwards. We had tax planning strategies available that we
believed could enable us to realize remaining net deferred tax assets.
Since we incurred additional net operating losses in the first quarter of
2004, it was necessary for us to record a valuation allowance to reduce the
recorded estimated tax benefit from this additional net operating loss.
This valuation allowance covers the estimated portion of the tax benefit
that would not be utilized by the reversal of our existing temporary
differences or tax planning strategies.
NET INCOME (LOSS) AND EARNINGS (LOSS) PER SHARE--DILUTED
Net loss and loss per share for the first quarter of 2004 reflect the
loss from the early extinguishment of debt and the tax valuation allowance
recorded in the first quarter of 2004; and higher selling, general and
administrative expenses and higher amortization expense in the first
quarter of 2004 than in the first quarter of 2003. Net income and earnings
per share in the first quarter of 2003 included a gain on the disposal of
discontinued operations, which was the result of an adjustment to the tax
impact of the sale of the prime label business in 2002, and the cumulative
effect of a change in accounting principle resulting from the adoption of
Financial Accounting Standards Board Interpretation No. 46.
20
BUSINESS SEGMENTS
COMMERCIAL
THREE MONTHS ENDED
MARCH 31,
-----------------------
2004 2003
-------- --------
(DOLLARS IN THOUSANDS)
Division net sales.......................................... $323,849 $321,190
Divested operations.................................... -- 2,873
-------- --------
Total net sales............................................. $323,849 $324,063
======== ========
Division operating income................................... $ 12,099 $ 13,224
Restructuring expenses.................................. (103) (911)
Divested operations..................................... -- 168
-------- --------
Operating income............................................ $ 11,996 $ 12,481
======== ========
Operating margin............................................ 3.7% 3.9%
Net sales of the commercial segment declined slightly in the first
quarter of 2004 compared to the first quarter of 2003. The change in net
sales is explained as follows:
* Sales of commercial printing products were $4.7 million, or 2.3%,
higher driven by higher sales of high impact printing to our national
customers. Sales of annual reports in the first quarter of 2004 were
stronger than in the first quarter of 2003.
* Envelope sales of our domestic operations were $5.2 million, or 5.7%,
lower due to a decline in units sold and lower average selling
prices.
* The strength of the Canadian dollar in the first quarter of 2004
compared to the first quarter of 2003 had a $4.4 million favorable
impact on the envelope sales of our Canadian operations. In local
currency, sales were 10.2% lower due to lower volume and lower
average selling prices.
* Net sales in 2003 included sales of $2.9 million of the digital
graphics operations that were sold in March 2003.
Operating income of the commercial segment decreased $0.5 million in
the first quarter of 2004 compared to the first quarter of 2003. Gross
profit improved 6.8% as a result of an overall improvement in margins and
lower fixed manufacturing expenses. In addition, restructuring expenses
declined $0.8 million. These gains, however, were offset by an increase in
spending for sales and marketing, higher employee related expenses and
higher amortization expense. Amortization expense increased $1.0 million in
the first quarter of 2004 due to the amortization of an intangible asset
recorded in connection with the payment of contingent purchase price on an
acquisition consummated in 2002.
RESALE
THREE MONTHS ENDED
MARCH 31,
----------------------
2004 2003
------- --------
(DOLLARS IN THOUSANDS)
Division net sales.......................................... $99,893 $103,257
======= ========
Division operating income................................... $11,463 $ 11,711
Reversal of restructuring expenses...................... -- 140
------- --------
Operating income............................................ $11,463 $ 11,851
======= ========
Operating margin............................................ 11.5% 11.5%
21
Net sales of our resale segment declined $3.4 million in the first
quarter of 2004 compared to the first quarter of 2003. Sales of business
labels increased $3.5 million, or 14.4%, during the quarter. This strong
sales performance, however, was not sufficient to offset the decline in
sales in the office products retail channel, which were down $5.2 million,
or 11.0%, in the quarter compared to the prior year, and lower sales of
business forms, which declined $1.7 million, or 7.0%, from the prior year.
The decline in sales of office products was due to lower retail demand for
these products which has driven increased competition and lower prices.
Demand for traditional business forms continues to decline as users of
these products acquire laser printing capabilities.
Operating income was $0.4 million lower in the first quarter of 2004
than in the first quarter of 2003 primarily due to lower sales. Despite the
decrease in sales, our resale segment has controlled its costs and
maintained its overall operating margin of 11.5%.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. Cash used in operations was $1.4 million greater
in the first quarter of 2004 than cash used by operations in the first
quarter of 2003. During the first quarter of 2004, we paid a $4.9 million
legal settlement accrued at December 31, 2003 and accelerated the payment
of $4.7 million of interest in connection with the redemption of our 8 7/8%
senior subordinated notes.
INVESTING ACTIVITIES. Capital expenditures were $5.6 million in the
first quarter of 2004 compared to $6.4 million in the first quarter of
2003. We anticipate capital expenditures for all of 2004 to be
approximately $25.0 million.
FINANCING ACTIVITIES. In January 2004, we sold $320 million of 7 7/8%
senior subordinated notes due 2013. The proceeds from the sale of these
notes were used to redeem the $300 million of 8 3/4% senior subordinated
notes due 2008. The cost incurred to issue the 7 7/8% senior subordinated
notes was $6.9 million. These debt issuance costs have been deferred and
will be amortized over the term of the notes. We recorded a loss of $17.7
million on the early extinguishment of the 8 3/4% senior subordinated notes
which consisted of redemption premiums of $13.5 million and unamortized
debt issuance costs of $4.2 million.
In March 2004, we amended our $300 million senior secured credit
facility to extend its term to June 2008. The cost incurred to amend the
credit facility was $1.4 million. These debt issuance costs will be
amortized over the extended term of the facility.
The following table summarizes our cash payment obligations as of March
31, 2004 by year:
OTHER LONG- PURCHASE TOTAL CASH
LONG-TERM DEBT OPERATING LEASES TERM LIABILITIES COMMITMENTS OBLIGATIONS
-------------- ---------------- ---------------- ----------- -----------
2004................. $ 2,588 $ 32,213 $ -- $540 $ 35,341
2005................. 2,309 27,625 3,521 420 33,875
2006................. 2,345 24,155 3,259 -- 29,759
2007................. 13,181 18,267 2,220 -- 33,668
2008................. 84,911 11,658 2,042 -- 98,611
Thereafter........... 672,003 19,339 15,201 -- 706,543
-------- -------- ------- ---- --------
Total................ $777,337 $133,257 $26,243 $960 $937,797
======== ======== ======= ==== ========
At March 31, 2004, we had outstanding letters of credit of
approximately $24.8 million related to performance and payment guarantees.
In addition, we have issued letters of credit of $1.6 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.
22
Our current credit ratings are as follows:
SENIOR
SECURED SENIOR
CREDIT SENIOR SUBORDINATED
REVIEW AGENCY FACILITY NOTES DEBT LAST UPDATE
- ------------- -------- ------ ------------ -----------
Standard & Poor's......... BB BB- B April 2004
Moody's................... Ba3 B1 B3 April 2004
The terms of our existing debt agreements have no rating triggers, and
we do not believe that our current ratings will impact our ability to raise
additional capital.
We expect to be able to fund our operations, capital expenditures, debt
and other contractual commitments within the next year from internally
generated cash flow and funds available under our senior secured credit
facility. At March 31, 2004, we had $119.2 million of unused credit
available under this credit facility.
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.
AVAILABLE INFORMATION
Our Internet address is: www.mailwell.com. We make available free of
charge through our website our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange
Act of 1934 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.
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 can be
estimated. Although the ultimate outcome of these claims or lawsuits cannot
be ascertained, on the basis of present information and advice received
from counsel, it is our opinion that the disposition or ultimate
determination of such claims or lawsuits will not have a material adverse
effect on us.
23
FORWARD-LOOKING INFORMATION
Certain statements in this report, and in particular, statements found
in Management's Discussion and Analysis of Financial Condition and Results
of Operations, constitute forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. These statements are
often identified by the words, "believe," "expect," "intend," "appear,"
"estimate," "anticipate," "project," "will" and other similar expressions.
All such statements 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
* The ability to implement our strategic initiatives
* The ability to sustain profitability after substantial losses in 2002
and 2001 and in the first quarter of 2004
* 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 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 2008
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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks such as changes in interest and foreign
currency exchange rates, which may adversely affect results of our
operations and our 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 have we hedged interest rate
24
exposure through the use of swaps and options or foreign exchange exposure
through the use of forward contracts. Our Board of Directors has given
management authority to engage in interest rate swaps and we are currently
considering this option.
Exposure to market risk from changes in interest rates relates
primarily to our variable rate debt obligations. The interest on this debt
is the London Interbank Offered Rate ("LIBOR") plus a margin. At March 31,
2004, we had variable rate debt outstanding of $100.3 million. A 1%
increase in LIBOR on the maximum amount of debt subject to variable
interest rates, which is $316.4 million, would increase our annual interest
expense by $3.2 million.
We have operations in Canada, and thus are exposed to market risk for
changes in foreign currency exchange rates of the Canadian dollar.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our chief executive
officer and our chief financial officer, after evaluating the effectiveness
of our "disclosure controls and procedures" (as defined in the Securities
Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of a date (the
"Evaluation Date") within 90 days before the filing date of this report,
have concluded that as of the Evaluation Date, our disclosure controls and
procedures were adequate and designed to ensure that material information
relating to us and our consolidated subsidiaries would be made known to
them by others within those entities.
CHANGES IN INTERNAL CONTROLS. There were no significant changes in our
internal controls or procedures or in other factors that could
significantly affect our disclosure controls and procedures subsequent to
the Evaluation Date.
25
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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 Errors in the
Certificate of Amendment of Mail-Well I Corporation Filed in the
Office of the Secretary of State of Delaware on September 11,
1995--incorporated by reference from Mail-Well I Corporation's Form
S-4 filed March 15, 1999 (Reg. No. 333-74409).
3.4 Certificate of Change of Registered Agent and Registered
Office--incorporated by reference from Mail-Well I Corporation's
Form S-4 filed March 15, 1999 (Reg. No. 333-74409).
3.5 Bylaws of Mail-Well I Corporation--incorporated by reference from
Mail-Well I Corporation's Form S-4 filed March 15, 1999 (Reg. No.
333-74409).
4.1 Indenture dated as of 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.
4.2 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.
4.3 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 relating to
Mail-Well I Corporation's $320,000,000 aggregate principal amount
of 7 7/8 Senior Subordinated Notes due 2013--incorporated by
reference to Exhibit 4.5 to Mail-Well, Inc.'s Annual Form 10-K
filed February 27, 2004.
4.4 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 Subordinated Notes due
2013-- incorporated by reference to Exhibit 4.6 to Mail-Well,
Inc.'s Annual Form 10-K filed February 27, 2004.
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.
26
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.4 Form of M-W Corp. 401(k) Savings Retirement Plan--incorporated by
reference from Exhibit 10.20 of Mail-Well, Inc.'s Registration
Statement on Form S-1 dated March 25, 1994.
10.5 Form of Mail-Well, Inc. Incentive Stock Option Agreement--
incorporated by reference from Exhibit 10.22 of Mail-Well, Inc.'s
Registration Statement on Form S-1 dated March 25, 1994.
10.6 Form of Mail-Well, Inc. Nonqualified Stock Option Agreement--
incorporated by reference from Exhibit 10.23 of Mail-Well, Inc.'s
Registration Statement on Form S-1 dated March 25, 1994.
10.7 1997 Non-Qualified Stock Option Agreement--incorporated by
reference from Exhibit 10.54 of Mail-Well, Inc.'s Form 10-Q
for the quarter ended March 31, 1997.
10.8 Mail-Well, Inc. 1998 Incentive Stock Option Plan Incentive
Stock Option Agreement--incorporated by reference from
Exhibit 10.59 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998.
10.9 Mail-Well, Inc. 2001 Long-Term Equity Incentive
Plan--incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2001.
10.10 Form of Non-Qualified Stock Option Agreement under 2001
Long-Term Equity Incentive Plan--incorporated by reference
from the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001.
10.11 Form of Incentive Stock Option Agreement under 2001
Long-Term Equity Incentive Plan--incorporated by reference
from the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001.
10.12 Form of Restricted Stock Award Agreement under 2001
Long-Term Equity Incentive Plan--incorporated by reference
from the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001.
10.13 Purchase Agreement dated March 8, 2002, between Mail-Well I
Corporation, and Credit Suisse First Boston, UBS Warburg
LLC, Banc of America Securities LLC, U.S. Bancorp Piper
Jaffray Inc., First Union Securities, Inc., and Scotia
Capital (USA) Inc., as Initial Purchasers, relating to
Mail-Well I Corporation's $350,000,000 aggregate principal
amount of 9 5/8% Senior Notes due 2012--incorporated by
reference to Exhibit 10.30 to Mail-Well I Corporation's
Registration Statement on Form S-4 filed June 11, 2002.
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 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.
10.16 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.
27
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.17 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.
10.18 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.
10.19 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 31, 2003.
10.20 Form of Executive Severance Agreement entered into between
the Company and each of the following: Michel Salbaing,
Gordon Griffiths, Brian Hairston, Keith Pratt, William
Huffman, D. Robert Meyer and Mark Zoeller--incorporated by
reference to Exhibit 10.27 of the Company's Annual Form 10-K
filed March 31, 2003.
10.21* Amendment Agreement No. 2 dated as of March 25, 2004 among
Mail-Well I Corporation as Lessee, certain of its
subsidiaries and Mail-Well, Inc. as Guarantor, Fleet Capital
Corporation as Agent, and the Trust Purchasers named
therein.
10.22* Second Amended and Restated Credit Agreement dated March 25,
2004 among Mail-Well, Inc., Mail-Well I Corporation, certain
subsidiaries of Mail-Well I, the lenders under the Second
Amended and Restated Credit Agreement, and Bank of America,
N.A., as administrative agent for the lenders.
10.23* Second Amended and Restated Security Agreement dated March
25, 2004 among Mail-Well, Inc., Mail-Well I Corporation,
certain subsidiaries of Mail-Well I, the lenders under the
Second Amended and Restated Credit Agreement, and Bank of
America, N.A., as administrative agent for the lenders.
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.
28
(b) REPORTS ON FORM 8-K
1. Current report filed under Item 5 of Form 8-K dated as of
January 21, 2004 in connection with a tender offer and consent
solicitation for the Company's 8 3/4% Senior Subordinated Notes
due 2008.
2. Current report filed under Item 5 of Form 8-K dated as of
February 9, 2004 in connection with the accompanying pro forma
condensed consolidated income statements.
3. Current report filed under Item 9 of Form 8-K dated as of
February 9, 2004 in connection with the Company's earnings release
for the fourth quarter.
4. Current report filed under Item 5 of Form 8-K dated as of
February 17, 2004 in connection with the transcript of the Company's
investor conference call held on February 9, 2004.
29
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 May 3, 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)
30