10-Q 1 mw10q.txt ============================================================================= ----------------------------------------------------------------------------- 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 SEPTEMBER 30, 2003 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 80112 ENGLEWOOD, CO (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 / / As of October 31, 2003 the Registrant had 48,386,626 shares of Common Stock, $0.01 par value, outstanding. ------------------------------------------------------------------------------ ============================================================================== TABLE OF CONTENTS PART I--FINANCIAL INFORMATION PAGE ---- Item 1. Financial Statements........................................ 1 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 21 Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................................... 32 Item 4. Controls and Procedures..................................... 33 PART IV Item 6. Exhibits and Reports on Form 8-K............................ 34 i PART I--FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MAIL-WELL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands)
SEPTEMBER 30, 2003 (UNAUDITED) DECEMBER 31, 2002 ------------------ ----------------- ASSETS CURRENT ASSETS: Cash and cash equivalents........................... $ 1,094 $ 2,650 Accounts receivable, net............................ 229,889 219,924 Inventories, net.................................... 97,994 103,533 Net assets held for sale............................ -- 4,492 Other current assets................................ 36,231 45,762 ---------- ---------- TOTAL CURRENT ASSETS............................ 365,208 376,361 Property, plant and equipment, net...................... 390,091 379,624 Goodwill................................................ 297,783 290,361 Other intangible assets, net............................ 17,423 18,586 Other assets, net....................................... 38,228 42,435 ---------- ---------- TOTAL ASSETS............................................ $1,108,733 $1,107,367 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.................................... $ 152,312 $ 151,930 Accrued compensation and related liabilities........ 56,225 53,292 Other current liabilities........................... 55,236 67,848 Current maturities of long-term debt................ 2,733 2,961 ---------- ---------- TOTAL CURRENT LIABILITIES....................... 266,506 276,031 Long-term debt.......................................... 758,614 760,938 Deferred income taxes................................... 3,814 10,336 Other liabilities....................................... 16,133 17,294 ---------- ---------- TOTAL LIABILITIES....................................... 1,045,067 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, 48,386,626 and 48,337,031 shares issued and outstanding as of September 30, 2003 and December 31, 2002, respectively............... 484 483 Paid-in capital..................................... 214,047 213,826 Retained deficit.................................... (152,864) (155,481) Deferred compensation............................... (2,244) (2,471) Accumulated other comprehensive income (loss)....... 4,243 (13,589) ---------- ---------- TOTAL SHAREHOLDERS' EQUITY...................... 63,666 42,768 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............. $1,108,733 $1,107,367 ========== ========== 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 NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ------------------------- --------------------------- 2003 2002 2003 2002 -------- -------- ---------- ---------- Net sales............................. $412,218 $428,720 $1,247,363 $1,293,169 Cost of sales......................... 330,341 343,485 1,002,691 1,041,064 -------- -------- ---------- ---------- Gross profit.......................... 81,877 85,235 244,672 252,105 Operating expenses: Selling, general and administrative.................. 59,278 61,273 185,172 198,509 Amortization of intangibles....... 500 526 1,363 1,542 Loss from the early extinguishment of debt......................... -- -- -- 16,463 Impairment loss on assets held for sale............................ -- -- -- 8,871 Impairment on operations formerly held for sale................... -- -- -- 10,407 Restructuring and other charges... 76 39,408 1,212 63,208 -------- -------- ---------- ---------- Operating income (loss)............... 22,023 (15,972) 56,925 (46,895) Other expense: Interest expense.................. 17,831 18,675 54,163 52,553 Other............................. 574 1,720 1,063 2,061 -------- -------- ---------- ---------- Income (loss) from continuing operations before income taxes and cumulative effect of a change in accounting principle................ 3,618 (36,367) 1,699 (101,509) Provision for income taxes............ 1,446 (14,218) 679 (27,684) -------- -------- ---------- ---------- Income (loss) from continuing operations before cumulative effect of a change in accounting principle........................... 2,172 (22,149) 1,020 (73,825) Loss (gain) on disposal of discontinued operations............. -- 5,804 (1,919) 13,958 Cumulative effect of a change in accounting principle................ -- -- 322 111,748 -------- -------- ---------- ---------- Net income (loss)..................... $ 2,172 $(27,953) $ 2,617 $ (199,531) ======== ======== ========== ========== Earnings (loss) per share--basic: Continuing operations............. $ 0.05 $ (0.46) $ 0.02 $ (1.55) Discontinued operations........... -- (0.13) 0.04 (0.29) Cumulative effect of a change in accounting principle............ -- -- (0.01) (2.35) -------- -------- ---------- ---------- Earnings (loss) per share--basic...... $ 0.05 $ (0.59) $ 0.05 $ (4.19) ======== ======== ========== ========== Earnings (loss) per share--diluted: Continuing operations............. $ 0.04 $ (0.46) $ 0.02 $ (1.55) Discontinued operations........... -- (0.13) 0.04 (0.29) Cumulative effect of a change in accounting principle............ -- -- (0.01) (2.35) -------- -------- ---------- ---------- Earnings (loss) per share--diluted.... $ 0.04 $ (0.59) $ 0.05 $ (4.19) ======== ======== ========== ========== Weighted average shares--basic........ 47,689 47,668 47,677 47,665 Weighted average shares--diluted...... 48,406 47,668 48,268 47,665 See notes to condensed consolidated financial statements.
2 MAIL-WELL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands)
NINE MONTHS ENDED SEPTEMBER 30 ---------------------------------- 2003 2002 ------------ ----------- Cash flows from operating activities: Income (loss) from continuing operations.................. $ 1,020 $ (73,825) Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities: Depreciation......................................... 34,852 34,587 Amortization......................................... 4,393 5,851 Write-off of deferred financing cost................. -- 16,463 Noncash portion of restructuring, impairment and other charges..................................... -- 29,226 Deferred income taxes................................ (7,826) (19,433) Loss on disposal of assets........................... 891 405 Other noncash charges, net........................... 590 250 Changes in operating assets and liabilities, excluding the effects of acquisitions and dispositions: Accounts receivable.................................. (3,886) 5,566 Inventories.......................................... 7,431 5,262 Accounts payable and accrued compensation............ 242 (1,908) Accrued taxes........................................ 10,888 2,459 Other working capital changes........................ (14,717) 2,098 Other, net................................................ (193) 744 ----------- ---------- Net cash provided by operating activities........... 33,634 7,745 Cash flows from investing activities: Acquisitions.......................................... -- (2,552) Capital expenditures.................................. (19,722) (26,943) Proceeds from divestitures, net....................... 3,864 128,649 Proceeds from sales of property, plant and equipment........................................... 658 6,267 ----------- ---------- Net cash (used in) provided by investing activities........................................ (15,200) 105,421 Cash flows from financing activities: Proceeds from issuance of common stock................ 16 18 Proceeds from issuance of long-term debt.............. 1,384,781 1,006,154 Repayments of long-term debt.......................... (1,405,239) (951,077) Capitalized loan fees................................. (484) (17,402) ----------- ---------- Net cash (used in) provided by financing activities........................................ (20,926) 37,693 Effect of exchange rate changes on cash and cash equivalents............................................... 936 (1,088) Cash flows from discontinued operations..................... -- (10,827) ----------- ---------- Net (decrease) increase in cash and cash equivalents....................................... (1,556) 138,944 Cash and cash equivalents at beginning of year.............. 2,650 894 ----------- ---------- Cash and cash equivalents at end of period.................. $ 1,094 $ 139,838 =========== ========== See notes to condensed consolidated financial statements.
3 MAIL-WELL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying condensed consolidated financial statements of Mail-Well, Inc. and subsidiaries (collectively, the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003. The balance sheet at December 31, 2002 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, 2002. The Company adopted the Financial Accounting Standards Board ("FASB") Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51, ("Interpretation 46") in the second quarter retroactive to January 1, 2003. The first quarter Form 10-Q dated March 31, 2003 will be restated when the first quarter Form 10-Q for 2004 is filed. The implementation of Interpretation 46 does not have an impact on earnings per share from continuing operations. The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets, on January 1, 2002 and completed its determination of the goodwill impairment of the Commercial Printing segment in the fourth quarter of 2002. The transitional impairment of $111.7 million was recorded as the cumulative effect of a change in accounting principle as of January 1, 2002 and required the restatement of the condensed consolidated statement of operations for the nine months ended September 30, 2002. 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 condensed consolidated statements of operations for the nine months ended September 30, 2002. The table below is a reconciliation of loss per share for the nine months ended September 30, 2002 as originally reported and the loss per share as restated.
SEPTEMBER 30, 2002 AS ORIGINALLY IMPACT OF IMPACT OF SEPTEMBER 30, 2002 REPORTED SFAS 142 SFAS 145 RESTATED ------------------ --------- --------- ------------------ Loss per share--basic and diluted: Continuing operations................ $(1.34) $ -- $(0.21) $(1.55) Discontinued operations.............. (0.29) -- -- (0.29) Extraordinary items.................. (0.21) -- 0.21 -- Cumulative effect of a change in accounting principle............... -- (2.35) -- (2.35) ------ ------ ------ ------ Loss per share....................... $(1.84) $(2.35) $ -- $(4.19) ====== ====== ====== ======
4 MAIL-WELL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 2. NEW ACCOUNTING PRONOUNCEMENTS In January 2003, the FASB issued Interpretation 46. Interpretation 46 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 Interpretation 46 to consolidate the Trust in its financial statements. The Company adopted Interpretation 46 effective January 1, 2003 and consolidated equipment valued at $18.1 million, net of accumulated depreciation, and debt of $18.5 million and recorded a charge of $0.3 million, net of tax, as a cumulative effect of a change in accounting principle. 3. STOCK-BASED COMPENSATION Stock options and other stock-based compensation awards are accounted for using the intrinsic value method prescribed by Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued to Employees. This method requires compensation expense to be recognized for the excess of the quoted market price of the stock at the grant date or the measurement date over the amount an employee must pay to acquire the stock. The following table illustrates the pro forma effect of net income (loss) and earnings (loss) per share if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, for the three and nine months ended September 30, 2003 and 2002 (in thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ---------------------- ---------------------- 2003 2002 2003 2002 ------ --------- ------ --------- Net income (loss): As reported......................... $2,172 $ (27,953) $2,617 $(199,531) Pro forma........................... $1,131 $ (28,836) $ (74) $(202,405) Earnings (loss) per share--diluted: As reported......................... $ 0.04 $ (0.59) $ 0.05 $ (4.19) Pro forma........................... $ 0.02 $ (0.60) $(0.01) $ (4.25)
The pro forma effect on net income (loss) and earnings (loss) per share--diluted of expensing the estimated fair value of stock options is not necessarily representative of the effect on reported earnings for future years due to the vesting period of the stock options and the potential for issuance of additional stock options in future years. 5 MAIL-WELL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 4. ACQUISITION 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. 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. Goodwill recorded as a result of this acquisition was $0.8 million. Additional consideration will be paid if annual revenues during each year of the five year period commencing on January 1, 2003 total a specified amount. This may result in additional consideration of up to $17.5 million. Sales included in the three and nine months ended September 30, 2003 were $14.9 million and $45.0 million, respectively. 5. ASSETS HELD FOR SALE The Company sold the filing products division of the Envelope segment in August 2002 and certain digital graphics operations of the Commercial Printing segment in March 2003. The following table presents the sales and operating income of these operations included in the condensed consolidated statements of operations for the three and nine months ended September 30, 2003 and 2002 (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ------------------- -------------------- 2003 2002 2003 2002 ------ ------ ------ ------- Sales......................................... -- $9,746 $2,872 $53,038 Operating income.............................. -- $ 717 $ 167 $ 4,761
6. SUPPLEMENTAL BALANCE SHEET INFORMATION INVENTORIES The Company's inventories by major category are as follows (in thousands):
SEPTEMBER 30, DECEMBER 31, 2003 2002 ------------- ------------ Raw materials........................................... $ 29,596 $ 32,515 Work in process......................................... 23,255 25,832 Finished goods.......................................... 51,219 50,854 -------- -------- 104,070 109,201 Reserves................................................ (6,076) (5,668) -------- -------- $ 97,994 $103,533 ======== ========
6 MAIL-WELL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 6. SUPPLEMENTAL BALANCE SHEET INFORMATION (CONTINUED) PROPERTY, PLANT AND EQUIPMENT The Company's investment in property, plant and equipment consists of the following (in thousands):
SEPTEMBER 30, DECEMBER 31, 2003 2002 ------------- ------------ Land and land improvements.............................. $ 20,273 $ 19,529 Buildings and improvements.............................. 110,642 105,646 Machinery and equipment................................. 489,905 463,896 Furniture and fixtures.................................. 15,392 15,178 Construction in progress................................ 14,111 5,510 --------- --------- 650,323 609,759 Accumulated depreciation................................ (260,232) (230,135) --------- --------- $ 390,091 $ 379,624 ========= =========
The December 31, 2002 balances do not include the impact of the implementation of Interpretation 46 (see Note 2). Machinery and equipment at September 30, 2003 includes approximately $16 million of assets in a VIE that was consolidated on January 1, 2003. COMPREHENSIVE INCOME (LOSS) A summary of the comprehensive income (loss) is as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------- ----------------------- 2003 2002 2003 2002 ------ -------- ------- --------- Net income (loss)........................ $2,172 $(27,953) $ 2,617 $(199,531) Currency translation adjustment, net... (655) (4,778) 17,832 (347) ------ -------- ------- --------- Comprehensive income (loss).............. $1,517 $(32,731) $20,449 $(199,878) ====== ======== ======= =========
7. LONG-TERM DEBT At September 30, 2003 and December 31, 2002, long-term debt consisted of the following (in thousands):
SEPTEMBER 30, DECEMBER 31, 2003 2002 ------------- ------------ Senior Secured Credit Facility, due 2005................ $ 84,710 $101,932 Senior Notes, due 2012.................................. 350,000 350,000 Senior Subordinated Notes, due 2008..................... 300,000 300,000 Other................................................... 26,637 11,967 -------- -------- 761,347 763,899 Less current maturities................................. (2,733) (2,961) -------- -------- Long-term debt...................................... $758,614 $760,938 ======== ========
7 MAIL-WELL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 7. LONG-TERM DEBT (CONTINUED) The December 31, 2002 balances do not include the impact of the implementation of Interpretation 46 (see Note 2). Other long-term debt at September 30, 2003 includes debt of $17.4 million of a VIE that was consolidated on January 1, 2003. During 2002, the Company expensed deferred financing costs in connection with the early payment of the term loans of the bank credit facility which was replaced with a new asset based credit facility in June 2002. The write-off of $16.5 million is reported as loss from the early extinguishment of debt in the condensed consolidated statement of operations for the nine months ended September 30, 2002. The Senior Notes and the Senior Subordinated Notes are guaranteed by Mail-Well, Inc. and all of 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 or fraudulent transfer and bankruptcy laws. As of September 30, 2003, the Company was in compliance with all of the covenants of its various debt agreements. 8. RESTRUCTURING AND OTHER CHARGES The Company has completed most of the restructuring programs initiated in June 2001 which continued during 2002 and into 2003. In 2003, the Company has incurred expenses related to these restructuring programs that could not be accrued and are the result of the continuation of actions to rationalize and realign capacity. The restructuring expenses related to these programs recorded during the nine-month period ended September 30, 2003 were $0.9 million. These expenses were as follows (in thousands):
PRINTED COMMERCIAL OFFICE PRINTING ENVELOPE PRODUCTS TOTAL ---------- -------- -------- ------ Employee separation and related expenses....... $ 750 $ 62 $ (79) $ 733 Equipment moves................................ 943 -- -- 943 Other exit costs............................... 92 (500) (56) (464) ------ ----- ----- ------ Total...................................... $1,785 $(438) $(135) $1,212 ====== ===== ===== ======
COMMERCIAL PRINTING. In the fourth quarter of 2002, Commercial Printing announced the closure of its web printing operation in Indianapolis, Indiana and the redeployment of the 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 has been incurred during 2003. The other restructuring charges incurred in 2003 primarily relate to plans initiated in the fourth quarter of 2002 to right size printing plants in the Northwest. ENVELOPE. Envelope was able to sub-lease a facility idled as a result of its consolidation program 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. PRINTED OFFICE PRODUCTS. In the fourth quarter of 2002, Printed Office Products closed its business forms plant in Clearwater, Florida and consolidated its production in plants located in Fairhope, 8 MAIL-WELL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 8. RESTRUCTURING AND OTHER CHARGES (CONTINUED) Alabama and Marshall, Texas. The employee separation and related expenses and other exit costs paid as a result of this consolidation were less than originally estimated. A summary of the activity charged to the 2002 restructuring liability during the nine months ended September 30, 2003 is as follows (in thousands):
PRINTED COMMERCIAL OFFICE PRINTING PRODUCTS TOTAL ---------- -------- ------- Balance, December 31, 2002.......................... $ 3,990 $ 653 $ 4,643 Payments for severance.......................... (189) (39) (228) Payments for lease termination and property exit costs......................................... (1,946) (47) (1,993) Payments for other exit costs................... (194) (260) (454) Reversal of unused accrual...................... (54) (152) (206) ------- ----- ------- Balance, September 30, 2003......................... $ 1,607 $ 155 $ 1,762 ======= ===== =======
A summary of the activity charged to the 2001 restructuring liability during the nine months ended September 30, 2003 is as follows (in thousands):
COMMERCIAL ENVELOPE PRINTING TOTAL -------- ---------- ------ Balance, December 31, 2002............................ $2,518 $ 449 $2,967 Payments for severance............................ (343) -- (343) Payments for lease termination and property exit costs........................................... (770) (417) (1,187) Reversal of unused accrual........................ (500) -- (500) ------ ----- ------ Balance, September 30, 2003........................... $ 905 $ 32 $ 937 ====== ===== ======
9. DISCONTINUED OPERATIONS The gain on disposal of discontinued operations as of September 30, 2003 reflects a change in the tax impact of the disposition of the Company's prime label business, which was sold in May 2002. 9 MAIL-WELL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 10. INCOME (LOSS) PER SHARE Basic income (loss) per share excludes dilution and is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted income (loss) per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised. A reconciliation of the amounts included in the computation of basic income (loss) per share and diluted income (loss) per share is as follows (in thousands, except per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ---------------------- ---------------------- 2003 2002 2003 2002 ------- -------- ------- -------- Numerator: Numerator for basic and diluted income (loss) per share--income (loss) from continuing operations.................................. $ 2,172 $(22,149) $ 1,020 $(73,825) ======= ======== ======= ======== Denominator: Denominator for basic income (loss) per share--weighted average shares.............. 47,689 47,668 47,677 47,665 Effects of dilutive securities: Stock options and restricted stock........ 717 -- 591 -- ------- -------- ------- -------- Denominator for diluted income (loss) per share--adjusted weighted average shares..... 48,406 47,668 48,268 47,665 ======= ======== ======= ======== Income (loss) for continuing operations per share: Basic..................................... $ 0.05 $ (0.46) $ 0.02 $ (1.55) ======= ======== ======= ======== Diluted................................... $ 0.04 $ (0.46) $ 0.02 $ (1.55) ======= ======== ======= ========
During the three and nine months ended September 30, 2002, interest, net of tax, on Convertible Notes in the amount of $1.2 million and $3.6 million, respectively, and shares of 7,319,000 that would have been issued upon assumed conversion of these Convertible Notes were excluded from the calculation of diluted loss per share due to the antidilutive effect on loss per share. In addition, the outstanding options and shares of restricted stock in the three and nine months ended September 30, 2003 in the amount of 6,181,000 and 6,310,000 common shares, respectively, were excluded from the calculation of diluted income (loss) per share because the effect would have been antidilutive. The options and shares of restricted stock excluded in 2002 totaled 6,943,000. 11. SEGMENT INFORMATION The Company operates in three principal operating segments. The Commercial Printing segment specializes in high impact printing, which includes a wide range of premium printed products such as annual reports, car brochures and brand marketing collateral for national and regional customers, and general commercial printing for local and regional customers. The Envelope segment manufactures customized and stock envelopes for billing and remittance and direct mail advertising. The Envelope segment is also a producer of specialty packaging products and a manufacturer of stock products for the resale market. The Printed Office Products segment produces customized and stock labels, mailers, and printed business documents which are sold to small and mid-size businesses generally through distributors of office products. Intercompany sales for the three and nine months ended September 30, 2003 were $5.4 million and $12.9 million, respectively. Intercompany sales for the three and nine months ended September 30, 2002 were $1.7 million and $11.0 million, respectively. These amounts are eliminated in consolidation and excluded from reported net sales. 10 MAIL-WELL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 11. SEGMENT INFORMATION (CONTINUED) The following tables present certain business segment information for the three and nine months ended September 30, 2003 and 2002 (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ----------------------- --------------------------- 2003 2002 2003 2002 -------- -------- ---------- ---------- Net sales: Commercial Printing.............. $195,090 $194,659 $ 579,690 $ 559,140 Envelope......................... 167,608 183,352 517,510 579,495 Printed Office Products.......... 49,520 50,709 150,163 154,534 -------- -------- ---------- ---------- Total............................ $412,218 $428,720 $1,247,363 $1,293,169 ======== ======== ========== ========== Operating income (loss)(a): Commercial Printing.............. $ 6,539 $ (5,586) $ 11,230 $ (17,549) Envelope......................... 16,037 10,415 47,930 29,280 Printed Office Products.......... 3,996 4,865 12,618 13,540 Corporate........................ (4,549) (25,666) (14,853) (72,166) -------- -------- ---------- ---------- Total............................ $ 22,023 $(15,972) $ 56,925 $ (46,895) ======== ======== ========== ========== Restructuring, impairments and other charges: Commercial Printing.............. $ 474 $ 8,643 $ 1,785 $ 11,098 Envelope......................... (458) 8,376 (438) 27,935 Printed Office Products.......... 60 303 (135) 1,350 Corporate........................ -- 22,086 -- 58,566 -------- -------- ---------- ---------- Total............................ $ 76 $ 39,408 $ 1,212 $ 98,949 ======== ======== ========== ========== -------- (a) Operating income (loss) is net of all costs and expenses directly related to the segment involved. Corporate expenses are net of certain supplier rebates and include corporate general and administrative expenses, lease expenses and other miscellaneous expenses. Corporate expenses in 2002 include the loss from the early extinguishment of debt, impairment loss on assets held for sale and impairment loss on operations formerly held for sale.
On October 27, 2003, the Company announced a reorganization of its management structure and manufacturing operations. Under the new organization, operations that sell directly to end users of the Company's products will be managed separately from those operations that sell the Company's products to distributors, wholesalers or other value-added resellers. The Company anticipates a change in its operating segments as a result of this reorganization. 12. CONTINGENCIES The Company is party to various legal actions that are ordinary and incidental to its business. While the outcome of legal actions cannot be predicted with certainty, management believes the outcome of these various proceedings will not have a material adverse effect on the Company's consolidated financial condition or results of operations. The Company's income, sales and use and other tax returns are routinely subject to audit by various taxing 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. 11 MAIL-WELL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 13. 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. 12 MAIL-WELL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) CONSOLIDATING CONDENSED STATEMENT OF FINANCIAL POSITION (UNAUDITED) September 30, 2003 (in thousands)
COMBINED PARENT GUARANTOR GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED --------- -------- ------------ --------- ------------ Current assets: Cash and cash equivalents............ $ -- $ (229) $ 1,323 $ -- $ 1,094 Accounts receivable, net............. -- 47,385 182,504 -- 229,889 Inventories, net..................... -- 38,626 59,368 -- 97,994 Other current assets................. -- 25,360 10,871 -- 36,231 ------- -------- -------- --------- ---------- Total current assets............... -- 111,142 254,066 -- 365,208 Investment in subsidiaries............. 63,666 16,347 -- (80,013) -- Property, plant and equipment, net..... -- 97,877 292,214 -- 390,091 Goodwill and other intangible assets, net................................... -- 84,895 230,311 -- 315,206 Note receivable from subsidiaries...... -- 603,100 -- (603,100) -- Other assets, net...................... -- 31,178 7,050 -- 38,228 ------- -------- -------- --------- ---------- Total assets........................... $63,666 $944,539 $783,641 $(683,113) $1,108,733 ======= ======== ======== ========= ========== Current liabilities: Accounts payable..................... $ -- $ 27,869 $124,443 $ -- $ 152,312 Other current liabilities............ -- 55,009 56,452 -- 111,461 Intercompany payable (receivable).... -- 39,361 (39,361) -- -- Current portion of long-term debt.... -- 1,772 961 -- 2,733 ------- -------- -------- --------- ---------- Total current liabilities.......... -- 124,011 142,495 -- 266,506 Long-term debt......................... -- 753,434 5,180 -- 758,614 Note payable to Issuer................. -- -- 603,100 (603,100) -- Deferred income tax (asset) liability............................. -- (9,167) 12,981 -- 3,814 Other long-term liabilities............ -- 12,595 3,538 -- 16,133 ------- -------- -------- --------- ---------- Total liabilities.................. -- 880,873 767,294 (603,100) 1,045,067 Shareholders' equity................... 63,666 63,666 16,347 (80,013) 63,666 ------- -------- -------- --------- ---------- Total liabilities and shareholders' equity................................ $63,666 $944,539 $783,641 $(683,113) $1,108,733 ======= ======== ======== ========= ==========
13 MAIL-WELL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 13. 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 ======= ========== ========= =========== ==========
14 MAIL-WELL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS (UNAUDITED) Three Months Ended September 30, 2003 (in thousands)
COMBINED PARENT GUARANTOR GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED --------- -------- ------------ ------- ------------ Net sales................................ $ -- $100,697 $311,521 $ -- $412,218 Cost of sales............................ -- 83,173 247,168 -- 330,341 ------ -------- -------- ------- -------- Gross profit............................. -- 17,524 64,353 -- 81,877 Other operating expenses................. -- 15,388 44,390 -- 59,778 Restructuring and other charges.......... -- (458) 534 -- 76 ------ -------- -------- ------- -------- Operating income (loss).................. -- 2,594 19,429 -- 22,023 Other expense (income): Interest expense....................... -- 17,594 237 -- 17,831 Intercompany interest (income) expense............................... -- (13,422) 13,422 -- -- Other expense.......................... -- 440 134 -- 574 ------ -------- -------- ------- -------- Income (loss) from continuing operations before income taxes and equity in undistributed earnings of subsidiaries............................ -- (2,018) 5,636 -- 3,618 Provision for income taxes............... -- (746) 2,192 -- 1,446 ------ -------- -------- ------- -------- Income (loss) from continuing operations before equity in undistributed earnings of subsidiaries......................... -- (1,272) 3,444 -- 2,172 Equity in undistributed earnings of subsidiaries............................ 2,172 3,444 -- (5,616) -- ------ -------- -------- ------- -------- Net income (loss)........................ $2,172 $ 2,172 $ 3,444 $(5,616) $ 2,172 ====== ======== ======== ======= ========
15 MAIL-WELL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS (UNAUDITED) Three Months Ended September 30, 2002 (in thousands)
COMBINED PARENT GUARANTOR GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED --------- -------- ------------ -------- ------------ Net sales............................... $ -- $124,827 $303,893 $ -- $428,720 Cost of sales........................... -- 100,445 243,040 -- 343,485 -------- -------- -------- -------- -------- Gross profit............................ -- 24,382 60,853 -- 85,235 Operating expenses: Selling, administrative and other..... 76 16,698 45,025 -- 61,799 Restructuring, asset impairments and other charges........................ -- 31,077 8,331 -- 39,408 -------- -------- -------- -------- -------- Operating income (loss)................. (76) (23,393) 7,497 -- (15,972) Other (income) expense: Interest expense...................... 1,740 19,469 15,964 (18,498) 18,675 Other expense (income)................ (1,977) (15,108) 307 18,498 1,720 -------- -------- -------- -------- -------- Income (loss) from continuing operations, before income taxes and undistributed earnings of subsidiaries........................... 161 (27,754) (8,774) -- (36,367) Provision (benefit) for income taxes.... -- (7,773) (6,445) -- (14,218) -------- -------- -------- -------- -------- Income (loss) from continuing operations, before cumulative effect of a change in accounting principle and undistributed earnings of subsidiaries........................... 161 (19,981) (2,329) -- (22,149) Equity in undistributed earnings of subsidiaries........................... (28,114) (8,133) -- 36,247 -- -------- -------- -------- -------- -------- Income from continuing operations before cumulative effect of a change in accounting principle................... (27,953) (28,114) (2,329) 36,247 (22,149) Loss from discontinued operations....... -- -- 5,804 -- 5,804 -------- -------- -------- -------- -------- Net income (loss)....................... $(27,953) $(28,114) $ (8,133) $ 36,247 $(27,953) ======== ======== ======== ======== ========
16 MAIL-WELL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS (UNAUDITED) Nine Months Ended September 30, 2003 (in thousands)
COMBINED PARENT GUARANTOR GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED --------- -------- ------------ ------- ------------ Net sales................................ $ -- $310,244 $937,119 $ -- $1,247,363 Cost of sales............................ -- 257,396 745,295 -- 1,002,691 ------ -------- -------- ------- ---------- Gross profit............................. -- 52,848 191,824 -- 244,672 Operating expenses: Selling, administrative and other...... -- 49,426 137,109 -- 186,535 Restructuring, asset impairments and other charges......................... -- (458) 1,670 -- 1,212 ------ -------- -------- ------- ---------- Operating income......................... -- 3,880 53,045 -- 56,925 Other (income) expense: Interest expense....................... -- 53,852 311 -- 54,163 Intercompany interest (income) expense............................... -- (40,778) 40,778 -- -- Other expense.......................... -- 415 648 -- 1,063 ------ -------- -------- ------- ---------- Income (loss) from continuing operations, before income taxes and undistributed earnings of subsidiaries................ -- (9,609) 11,308 -- 1,699 Provision (benefit) for income taxes..... -- (3,844) 4,523 -- 679 ------ -------- -------- ------- ---------- Income (loss) from continuing operations, before cumulative effect of a change in accounting principle and undistributed earnings of subsidiaries................ -- (5,765) 6,785 -- 1,020 Equity in undistributed earnings of subsidiaries............................ 2,617 6,785 -- (9,402) -- ------ -------- -------- ------- ---------- Income from continuing operations before cumulative effect of a change in accounting principle.................... 2,617 1,020 6,785 (9,402) 1,020 Loss (gain) from discontinued operations.............................. -- (1,919) -- -- (1,919) Cumulative effect of a change in accounting principle.................... -- 322 -- -- 322 ------ -------- -------- ------- ---------- Net income (loss)........................ $2,617 $ 2,617 $ 6,785 $(9,402) $ 2,617 ====== ======== ======== ======= ==========
17 MAIL-WELL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS (UNAUDITED) Nine Months Ended September 30, 2002 (in thousands)
COMBINED PARENT GUARANTOR GUARANTOR ISSUER SUBSIDIARIES ELIM. CONSOLIDATED --------- --------- ------------ -------- ------------ Net sales............................. $ -- $ 403,207 $ 889,962 $ -- $1,293,169 Cost of sales......................... -- 327,422 713,642 -- 1,041,064 --------- --------- --------- -------- ---------- Gross profit.......................... -- 75,785 176,320 -- 252,105 Other operating expenses.............. 110 57,250 142,691 -- 200,051 Restructuring and other charges....... -- 74,321 24,628 -- 98,949 --------- --------- --------- -------- ---------- Operating income (loss)............... (110) (55,786) 9,001 -- (46,895) Other expense (income): Interest expense.................... 5,216 57,355 44,344 (54,362) 52,553 Other expense (income).............. (5,931) (46,796) 426 54,362 2,061 --------- --------- --------- -------- ---------- Income (loss) from continuing operations before income taxes and equity in undistributed earnings of subsidiaries......................... 605 (66,345) (35,769) -- (101,509) Income tax benefit.................... -- (16,387) (11,297) -- (27,684) --------- --------- --------- -------- ---------- Income (loss) from continuing operations before equity in undistributed earnings of subsidiaries......................... 605 (49,958) (24,472) -- (73,825) Equity in undistributed earnings of subsidiaries......................... (200,136) (150,178) -- 350,314 -- --------- --------- --------- -------- ---------- Income (loss) from continuing operations........................... (199,531) (200,136) (24,472) 350,314 (73,825) Loss from discontinued operations..... -- -- 13,958 -- 13,958 Cumulative effect of a change in accounting principle................. -- -- 111,748 -- 111,748 --------- --------- --------- -------- ---------- Net income (loss)..................... $(199,531) $(200,136) $(150,178) $350,314 $ (199,531) ========= ========= ========= ======== ==========
18 MAIL-WELL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED) September 30, 2003 (in thousands)
COMBINED PARENT GUARANTOR GUARANTOR ISSUER SUBSIDIARIES CONSOLIDATED --------- ----------- ------------ ------------ Cash flows from (used in) operating activities................................... $ -- $ (1,057) $ 34,691 $ 33,634 Cash flows from investing activities: Capital expenditures........................ -- (1,111) (18,611) (19,722) Proceeds from divestitures, net............. -- 3,864 -- 3,864 Intercompany advances....................... (16) 15,848 (15,832) -- Proceeds from the sale of assets............ -- -- 658 658 --------- ----------- -------- ----------- Net cash provided by (used in) investing activities................................. (16) 18,601 (33,785) (15,200) Cash flows from financing activities: Proceeds from the issuance of common stock...................................... 16 -- -- 16 Proceeds from long-term debt................ -- 1,384,781 -- 1,384,781 Repayments of long-term debt................ -- (1,404,027) (1,212) (1,405,239) Capitalized loan fees....................... -- (484) -- (484) --------- ----------- -------- ----------- Net cash provided by (used in) financing activities................................. 16 (19,730) (1,212) (20,926) Effect of exchange rate changes on cash....... -- -- 936 936 --------- ----------- -------- ----------- Net change in cash and cash equivalents....... -- (2,186) 630 (1,556) Balance at beginning of year.................. -- 1,957 693 2,650 --------- ----------- -------- ----------- Balance at end of year........................ $ -- $ (229) $ 1,323 $ 1,094 ========= =========== ======== ===========
19 MAIL-WELL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED) September 30, 2002 (in thousands)
COMBINED PARENT GUARANTOR GUARANTOR ISSUER SUBSIDIARIES CONSOLIDATED --------- --------- ------------ ------------ Cash flows from operating activities............. $(18) $ (41,419) $ 49,182 $ 7,745 Cash flows from investing activities: Acquisition costs, net of cash acquired........ -- (2,552) -- (2,552) Capital expenditures........................... -- (2,762) (24,181) (26,943) Proceeds from divestitures, net................ -- 128,649 -- 128,649 Proceeds from sale of property, plant & equipment..................................... -- 5,940 327 6,267 ---- --------- --------- --------- Net cash provided by (used in) investing activities.................................... -- 129,275 (23,854) 105,421 Cash flows from financing activities: Proceeds from issuance of common stock......... 18 -- -- 18 Proceeds from issuance of long-term debt....... -- 1,006,154 -- 1,006,154 Repayments of long-term debt................... -- (939,683) (11,394) (951,077) Capitalized loan fees.......................... -- (17,402) -- (17,402) ---- --------- --------- --------- Net cash provided by (used in) financing activities.................................... 18 49,069 (11,394) 37,693 Effect of exchange rate changes on cash and cash equivalents..................................... -- -- (1,088) (1,088) Cash flows from discontinued operations.......... -- -- (10,829) (10,827) ---- --------- --------- --------- Net increase (decrease) in cash and cash equivalents..................................... -- 49,069 2,019 138,944 Cash and cash equivalents at beginning of year... -- -- 894 894 ---- --------- --------- --------- Cash and cash equivalents at end of year......... $ -- $ 136,925 $ 2,913 $ 139,838 ==== ========= ========= =========
20 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CORPORATE OVERVIEW We are one of North America's largest printing companies. Our mission is to produce products and provide services that help our customers deliver their messages more effectively. We are one company organized into three business segments: * Envelopes * Commercial Printing * Printed Office Products We believe we are the world's largest manufacturer of envelopes. We produce approximately 38 billion envelopes annually in our 39 envelope manufacturing facilities located throughout the United States and Canada. Approximately 84% of these envelopes are customized specifically for our customers for use in billing and remittance, direct mail advertising and specialty packaging. The remaining 16% are stock envelopes sold into the resale market. We are one of the largest commercial printers in the United States. We operate 35 printing plants located strategically throughout the United States and one in Canada. We specialize in high impact printing, which includes a wide range of premium printed products such as annual reports, car brochures and brand marketing collateral, for national and regional customers, and general commercial printing for local and regional customers. We are also a leading domestic supplier of customized and stock labels, mailers and printed business documents to small and mid-size businesses generally through independent distributors of office products. Our Printed Office Products segment operates 11 manufacturing plants strategically located throughout the United States. We have substantially completed the restructuring of Mail-Well that began in June 2001. This restructuring 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 manufacturing facilities into other plants of our Printed Office Products segment. * The sale of Curtis 1000 (a distributor of business documents and envelopes), our prime label business, the filing products division of our Envelope segment and certain of the digital graphics operations of our Commercial Printing segment. * The restructuring of our debt. Paper is our most significant raw material. We purchase approximately 500,000 tons of paper annually for our businesses. Prices of uncoated papers, which are the principal grades of paper used to manufacture envelopes, increased approximately 10% in the fourth quarter of 2002. Prices of coated papers, which are used principally in commercial printing, did not increase in 2002 and have remained unchanged in 2003. Historically, changes in paper pricing generally have not affected the operating results of our Commercial Printing segment because we have been able to pass on paper price increases to our customers. Paper pricing, however, impacts the operating margins of our Envelope segment. 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. The 21 market for uncoated papers softened in the third quarter. As a result, the price of uncoated papers is no longer negatively impacting operating margins of our Envelope segment. CONSOLIDATED RESULTS OF OPERATIONS In August 2002, we acquired the in-house printing and fullfillment operations of American Express Company. The acquisition has been accounted for as a purchase transaction, which impacts comparability of our financial statements because the results of these operations are included in the consolidated results from the date acquired. Where appropriate, we have noted the impact of this acquisition in the following discussions of our results. The tables and discussions of sales and operating income that follow present reported amounts as well as "ongoing" amounts. Ongoing sales exclude sales of the filing products division of our Envelope segment that was sold in August 2002 and the sales of certain digital graphics operations of our Commercial Printing segment that were held for sale at December 2002 and sold in March 2003. Ongoing operating income excludes the operating income of the operations sold and restructuring and other charges incurred in 2002 and during 2003. Since our planned dispositions are now complete and we have completed our restructuring programs, we believe that this analysis provides the most meaningful basis for an understanding of our results during the third quarter and nine months ended September 30, 2003. Demand for many of our products, especially printed advertising and direct mail promotions, remain depressed, and the market for traditional business forms continues to decline. This has led to overcapacity in our industry and significant competitive pricing pressures. We do not expect internal growth or increases in margins, especially in the Envelope segment, until the markets we serve, particularly advertising and direct mail, recover. 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. In addition, our restructuring and other cost reduction initiatives have enabled us to mitigate the impact of the downturn in our markets and position us to benefit from improvements in our markets when they occur. In 2003, we began a "Total Customer Solutions" initiative to align the capabilities of our three operating segments to better service the needs of customers who purchase a variety of the products and services we provide. We also initiated "Mobilization", a comprehensive program to actively involve all of our employees in improving service, quality, efficiency and innovation. We believe all of these factors, both external and internal, have improved our business during 2003 and will continue to do so in the fourth quarter, in 2004 and beyond. NET SALES
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ----------------------- --------------------------- 2003 2002 2003 2002 -------- -------- ---------- ---------- (IN THOUSANDS) Ongoing................................ $412,218 $418,974 $1,244,491 $1,240,131 Filing products division.......... -- 6,330 -- 42,340 Digital graphics operations....... -- 3,416 2,872 10,698 -------- -------- ---------- ---------- Reported............................... $412,218 $428,720 $1,247,363 $1,293,169 ======== ======== ========== ==========
Reported sales in the third quarter of 2003 were $16.5 million, or 3.8%, lower than in the third quarter of 2002 and during the nine months ended September 30, 2003 were $45.8 million, or 3.5%, lower than during the comparable period of 2002. Excluding the sales of the filing products division sold in August 2002 and sales of the digital graphics operations that were sold in March 2003, sales of 22 our ongoing operations decreased $6.8 million, or 1.6%, in the third quarter of 2003 and increased $4.4 million, or 0.4%, during the nine months ended September 30, 2003 from the comparable periods of 2002. Significant factors influencing the ongoing sales of our business segments during the three and nine months ended September 30, 2003 were as follows: * Envelope sales were $9.4 million lower in the third quarter of 2003 compared to the third quarter of 2002. On a year to date basis, Envelope sales were $19.6 million lower than the comparable period of 2002. Approximately 60% of this revenue decline in the third quarter was due to a decline in units shipped and the remaining 40% was due to lower average selling prices. On a year to date basis volume made up 52% of the decline and lower average selling prices accounted for 48%. We believe that overcapacity in this industry has lead to significant price competition. A portion of our volume decline is the result of our not reducing prices sufficiently to retain certain low margin business. * Sales of the Commercial Printing segment were $3.8 million higher in the third quarter of 2003 and $28.4 million higher during the nine months ended September 30, 2003 than the comparable periods of 2002. These increases were primarily due to the acquisition completed in August 2002, which contributed sales of $14.9 million during the third quarter and $45.0 million on a year to date basis, partially offset by the sales lost as a result of the closure of our printing facility in New York City in the third quarter of 2002. * Sales of Printed Office Products decreased $1.2 million in the third quarter of 2003 and $4.4 million on a year to date basis from the comparable periods of 2002 primarily due to lower sales of multi-ply traditional business forms and lower average selling prices due to competitive pricing pressures. RESTRUCTURING EXPENSES As mentioned, we have completed most of the restructuring programs initiated in June 2001 and continued during 2002 and into 2003. In 2003, we have incurred expenses related to these restructuring programs that could not be accrued and are the result of the continuation of actions to rationalize and realign capacity. We continually evaluate opportunities to improve our operations and anticipate additional restructuring charges in the fourth quarter of approximately $1.0 million. Restructuring expenses recorded during the nine months ended September 30, 2003 were $1.2 million, all of which related to restructuring programs initiated prior to 2003.
PRINTED COMMERCIAL OFFICE PRINTING ENVELOPE PRODUCTS TOTAL ---------- -------- -------- ------ (IN THOUSANDS) Employee separation and related expenses....... $ 750 $ 62 $ (79) $ 733 Equipment moves................................ 943 -- -- 943 Other exit costs............................... 92 (500) (56) (464) ------ ----- ----- ------ Total...................................... $1,785 $(438) $(135) $1,212 ====== ===== ===== ======
COMMERCIAL PRINTING. In the fourth quarter of 2002, Commercial Printing announced the closure of its web printing operation in Indianapolis and the redeployment of the two web presses and related equipment to St. Louis and Baltimore. A substantial portion of the cost to dismantle, move and reinstall this equipment has been incurred during 2003. The other restructuring charges incurred in 2003 relate primarily to plans initiated in the fourth quarter of 2002 to right size our printing plants in the Northwest. ENVELOPE. Envelope was able to sub-lease a facility idled as a result of its consolidation program 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. 23 PRINTED OFFICE PRODUCTS. In the fourth quarter of 2002, Printed Office Products closed its business forms plant in Clearwater, Florida and consolidated its production in plants located in Fairhope, Alabama and Marshall, Texas. The employee separation and related expenses and other exit costs paid as a result of this consolidation were less than originally estimated. OPERATING INCOME (LOSS)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ---------------------- ---------------------- 2003 2002 2003 2002 ------- -------- ------- -------- (IN THOUSANDS) Ongoing...................................... $22,099 $ 22,719 $57,970 $ 47,293 Assets held for sale..................... -- 717 167 4,761 Restructuring, impairments and other charges................................ (76) (39,408) (1,212) (98,949) ------- -------- ------- -------- Reported..................................... $22,023 $(15,972) $56,925 $(46,895) ======= ======== ======= ========
Reported operating income in the third quarter of 2003 was $22.0 million, a $38.0 million improvement over the loss reported in the third quarter of 2002. For the nine months ended September 30, 2003 operating income was $56.9 million, a $103.8 million improvement over the loss reported for the comparable period of 2002. Excluding the operating income of the filing products division and digital graphics operations that have been sold and restructuring, impairments and other charges, ongoing operating income decreased $0.6 million in the third quarter of 2003 and increased $10.7 million on a year to date basis over operating income in the comparable periods of 2002. * Ongoing operating income of our Envelope segment for the third quarter was $3.0 million lower than the third quarter of 2002 and on a year to date basis was $7.0 million below results in 2002. This decline in operating income was due primarily to lower sales volume and lower average selling prices. * Commercial Printing's ongoing operating income improved $4.0 million in the third quarter of 2003 and $19.4 on a year to date basis from the comparable periods of 2002. The improvement in operating income was attributed primarily to the results of the acquisition completed in August 2002, the closure of our unprofitable printing operation in New York City, and savings that have resulted from the restructuring and other actions taken during 2002. * The ongoing operating income of Printed Office Products for the third quarter of 2003 was $1.1 million lower than the third quarter of 2002 and on a year to date basis was $2.4 million lower than 2002. This decline in operating income reflects the impact of lower sales partially offset by savings from the plant consolidations during 2002. * Expenses associated with corporate services were higher in the third quarter of 2003 and lower on a year to date basis. The increase in the third quarter is primarily due to higher spending on employee safety and training programs. On a year to date basis corporate expenses are lower due to a reduction in workers' compensation expense offset by lower supplier rebates and higher spending on the employee safety and training programs. * In 2002, we recorded a charge of $4.4 million to cover the estimated cost of workers' compensation claims based on estimates provided by our insurance actuary. This charge is reflected in the ongoing results for the nine months ended September 30, 2002. In the third quarter of 2003, our actuaries revised their estimate of the cost of workers' compensation claims incurred prior to 2003 by $1.5 million. This charge has been included in the ongoing results for the third quarter. 24 INTEREST EXPENSE
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 --------------------- --------------------- 2003 2002 2003 2002 ------- ------- ------- ------- (IN THOUSANDS) Total interest expense........................ $17,831 $18,675 $54,163 $58,123 Less: Allocated to discontinued operations.... -- -- -- (5,570) ------- ------- ------- ------- Reported interest expense..................... $17,831 $18,675 $54,163 $52,553 ======= ======= ======= =======
Interest expense incurred during the third quarter of 2003 reflects our average outstanding debt during the quarter of $777.7 million and a weighted average interest rate of 8.44% compared to the average outstanding debt of $856.1 million during the third quarter of 2002 and a weighted average interest rate of 8.23%. Interest expense incurred during the nine months ended September 30, 2003 reflects average outstanding debt of $797.6 million and a weighted average interest rate of 8.38% compared to the average outstanding debt of $915.4 million during the comparable period of 2002 and a weighted average interest rate of 7.72%. The average outstanding debt has decreased year over year due primarily to the application of the proceeds from our divestitures to the repayment of debt. Our weighted average interest increased in 2003 as a result of the issuance of $350 million of 9 5/8% senior notes on March 13, 2002 the proceeds of which were used primarily to repay bank debt that accrued interest at a lower variable rate, and in November 2002, our 5% convertible subordinated notes were redeemed. In addition, total interest expense has been reduced in 2003 from amounts recorded in 2002 as a result of the write-off of the deferred financing costs associated with the bank credit facility that was refinanced in June 2002. Reported interest expense for the nine months ended September 30, 2003 was higher than in the nine months ended September 30, 2002 due to the allocation of interest expense to discontinued operations in 2002. In 2002, a portion of our interest expense was allocated to discontinued operations based on the net assets of the discontinued operations relative to the net assets of the Company as required by generally accepted accounting principles. The net asset amounts used to allocate interest expense exceeded the actual net proceeds received from the dispositions of the discontinued operations. INCOME TAXES
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 --------------------- ------------------- 2003 2002 2003 2002 ------ -------- ---- -------- (DOLLARS IN THOUSANDS) Income tax expense (benefit).................... $1,446 $(14,218) $679 $(27,684) Effective tax rate.............................. 40% 39% 40% 27%
The effective tax rate for 2003 is estimated to be 40%. The effective tax rate for 2002 was lower than 2003 primarily due to the estimated pre-tax loss in 2002 that increased the impact of nondeductible permanent differences on the overall effective rate. INCOME (LOSS) FROM CONTINUING OPERATIONS AND INCOME (LOSS) PER SHARE--DILUTED
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 --------------------- --------------------- 2003 2002 2003 2002 ------ -------- ------ -------- (DOLLARS IN THOUSANDS) Income (loss) from continuing operations....... $2,172 $(22,149) $1,020 $(73,825) Income (loss) from continuing operations per share--diluted............................... $ 0.04 $ (0.46) $ 0.02 $ (1.55)
25 Income from continuing operations in the third quarter of 2003 was $24.3 million more than the loss recorded in the third quarter of 2002, and for the nine months ended September 30, 2003, income from continuing operations was a $74.8 million improvement over the loss reported during the nine months ended September 30, 2002. The improvement in income from continuing operations is due to the acquisition completed in August 2002, the closure of our unprofitable operation in New York City, improved operating performance, lower overhead, and significantly lower restructuring and other charges. Interest expense was higher during the nine months ended September 30, 2003 than during the comparable period of 2002. In addition, the $16.5 million loss on the early extinguishment of debt recorded as an extraordinary item in the nine months ended September 30, 2002 was reclassified as a loss from continuing operations in accordance with Statement of Financial Accounting Standards ("SFAS") No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. LOSS (GAIN) ON DISPOSAL OF DISCONTINUED OPERATIONS The gain on disposal of discontinued operations as of September 30, 2003 reflects an adjustment made prior to the third quarter to the tax impact of the disposition of our prime label business, which was sold in May 2002. 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 ("Interpretation 46") effective January 1, 2003. The implementation of Interpretation 46 required the Company to consolidate a trust that is leasing 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 recorded on January 1, 2003 was an after-tax charge of $0.3 million at the time of adoption. NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE--DILUTED
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 --------------------- ---------------------- 2003 2002 2003 2002 ------ -------- ------ --------- (DOLLARS IN THOUSANDS) Net income (loss)............................. $2,172 $(27,953) $2,617 $(199,531) Net income (loss) per share--diluted.......... $ 0.04 $ (0.59) $ 0.05 $ (4.19)
The net income and net income per share in the third quarter of 2003 and on a year to date basis reflect the improvement in income from continuing operations in 2003 over the losses from continuing operations recorded in 2002, the gain recorded on the disposal of discontinued operations and the cumulative effect of a change in accounting principle recorded upon the adoption of Interpretation 46. The net loss and net loss per share reported in the third quarter of 2002 and for the nine months ended September 30, 2002 reflected the loss from continuing operations, losses of $5.8 million and $14.0 million for the three and nine months ended September 30, 2002, respectively, on disposal of discontinued operations and the $111.7 million goodwill impairment charge recorded as a cumulative effect of a change in accounting principle as a result of the adoption of SFAS No. 142, Goodwill and Other Intangible Assets. 26 BUSINESS SEGMENTS ENVELOPE SALES
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ----------------------- ----------------------- 2003 2002 2003 2002 -------- -------- -------- -------- (IN THOUSANDS) Ongoing................................... $167,608 $177,022 $517,510 $537,155 Filing products division.............. -- 6,330 -- 42,340 -------- -------- -------- -------- Reported.................................. $167,608 $183,352 $517,510 $579,495 ======== ======== ======== ========
OPERATING INCOME
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 --------------------- ---------------------- 2003 2002 2003 2002 ------- ------- ------- -------- (IN THOUSANDS) Ongoing....................................... $15,579 $18,625 $47,492 $ 54,509 Filing products division.................. -- 166 -- 2,706 Restructuring expenses.................... 458 (8,376) 438 (27,935) ------- ------- ------- -------- Reported...................................... $16,037 $10,415 $47,930 $ 29,280 ======= ======= ======= ========
Reported sales of the Envelope segment were $167.6 million in the third quarter of 2003, $15.7 million below sales in the third quarter of 2002. Excluding sales of the filing products division, which was sold in August 2002, the sales decline was $9.4 million, or 5.3%. * Domestic sales of our direct mail and transactional envelopes were down approximately $6.5 million, or 7.2%, in the third quarter. Approximately 60% of this decline was related to volume and 40% related to lower pricing. The decline in volume is due to lower demand by our customers for transactional envelopes, lower sales to direct mail customers and volume lost due to competitive pricing. Our average selling price has decreased approximately 2% due to competitive pricing pressures and lower sales of higher value added products. Many of the price concessions we have made have been in connection with long-term contracts we have with certain customers. * Sales into the resale segment of the market were down approximately $3.4 million, or 8.8%, due primarily to lower volume. Units sold were down approximately 7.8%. * Sales of our high strength specialty envelopes were down approximately $2.2 million due to the planned reductions of certain low margin business. * Sales in Canada were $2.7 million higher in the third quarter, however, excluding the favorable impact of foreign currency, sales in Canada declined approximately $1.4 million, or 4.3%, due primarily to lower volume. Reported operating income of the Envelope segment in the third quarter of 2003 was $16.0 million, $5.6 million higher than the third quarter of 2002. Excluding the operating income of the filing products division and restructuring expenses, operating income was $3.0 million lower than the third quarter of 2002. * Lower sales reduced operating income by approximately $2.5 million. Productivity gains and reductions in cost of materials were not sufficient to offset the impact of lower volume. * Fixed expenses increased approximately $1.2 million primarily due to the relocation of our Sacramento facility and higher employee benefit expenses. 27 * Operating income was increased $0.7 million by the strength of the Canadian dollar during the third quarter. Reported sales were $517.5 million for the nine months ended September 30, 2003, $62.0 million below sales during the comparable period of 2002. Excluding sales of the filing products division, the sales decline was $19.6 million, or 3.7%. * Domestic sales of our direct mail and transactional envelopes decreased approximately $18.1 million, or 6.7%. Lower volume contributed to 52% of this decline and lower average selling prices contributed the remaining 48%. * Sales into the resale segment of the market decreased approximately $4.8 million. Lower volume during the nine months ended September 30, 2003 contributed to 77% of this sales decline. * Sales of our high strength specialty envelopes were down approximately $3.7 million due to the planned reductions of certain low margin business. * Sales in Canada increased $7.0 million, however, excluding the favorable effect of foreign currency, sales declined $2.6 million. Approximately 60% of this decline was due to lower average selling prices of products sold. Reported operating income was $47.9 million for the nine months ended September 30, 2003, $18.6 million higher than the comparable period of 2002. Excluding operating income of the filing products division and restructuring expenses, operating income was $47.5 million, $7.0 million lower than during the first nine months of 2002. * Lower volume and lower average selling prices for products sold have reduced profits $8.3 million. * Fixed expenses have increased $0.7 million. Higher manufacturing overhead was partially offset by lower administrative expenses. * The favorable effect of the strength of the Canadian dollar on operating income has been $2.0 million. COMMERCIAL PRINTING SALES
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ----------------------- ----------------------- 2003 2002 2003 2002 -------- -------- -------- -------- (IN THOUSANDS) Ongoing................................... $195,090 $191,243 $576,818 $548,442 Digital graphics operations........... -- 3,416 2,872 10,698 -------- -------- -------- -------- Reported.................................. $195,090 $194,659 $579,690 $559,140 ======== ======== ======== ========
OPERATING INCOME
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 -------------------- ---------------------- 2003 2002 2003 2002 ------ ------- ------- -------- (IN THOUSANDS) Ongoing........................................ $7,013 $ 2,982 $12,848 $ (6,592) Digital graphics operations................ -- 75 167 141 Restructuring expenses..................... (474) (8,643) (1,785) (11,098) ------ ------- ------- -------- Reported....................................... $6,539 $(5,586) $11,230 $(17,549) ====== ======= ======= ========
28 Reported sales of the Commercial Printing segment were $195.1 million in the third quarter of 2003, $0.4 million higher than sales in the third quarter of 2002. Excluding sales of the digital graphics operations sold in March 2003, the sales increase was $3.8 million, or 2.0%. * Sales of our high impact printing to national and regional customers were $58.9 million, $3.9 million lower than the third quarter of 2002. This decline was a combination of the loss of volume and lower prices. Demand for high impact printing continued to be weak in the third quarter. * Sales to our local commercial printing customers were $136.2 million, $7.7 million more than the third quarter of 2002. Excluding sales of an acquisition completed in August 2002 and sales of the operation in New York City closed in 2002, sales to our local commercial printing customers were $127.5 million, approximately $2.6 million higher than the third quarter of 2002. Most of this sales increase occurred in our operations in the East and the Southwest. Reported operating income of the Commercial Printing segment in the third quarter of 2003 was $6.5 million, an improvement of $12.1 million over the loss reported in the third quarter of 2002. Excluding the operating income of the digital graphics operations and restructuring expenses, operating income was $7.0 million, an improvement of $4.0 million over the third quarter of 2002. The improvement in ongoing operating income can be attributed to the results of the acquisition completed in August 2002 and the closure of our unprofitable operation in New York City. In addition, productivity improvements and reductions in materials costs mitigated most of the impact of lower sales to our national and regional customers. Manufacturing overhead was $1.7 million lower and administrative expenses were $1.0 million lower in the third quarter of 2003 primarily due to restructuring and other actions taken in 2002. Reported sales of the Commercial Printing segment were $579.7 million during the nine months ended September 30, 2003, $20.5 million higher than sales during the comparable period of 2002. Excluding sales of the digital graphics operations, the sales increase was $28.4 million, or 5.2%. * Sales of our high impact printing to our national and regional customers were $162.0 million, $6.1 million lower than during the first nine months of 2002. The market for high impact printing has been extremely competitive in 2003 due to continued weak demand. This has resulted in lower volume and lower prices during the nine months ended September 30, 2003 compared to 2002. * Sales to our local commercial printing customers were $414.8 million, $34.5 million more than the comparable period of 2002. Excluding sales of the acquisition completed in August 2002 and sales of the operation closed in 2002, sales to our local commercial printing customers were $379.9 million, $6.8 million higher than the same period of 2002. Sales in most of the local markets we serve have improved during nine months ended September 30, 2003 compared to 2002. Reported operating income of the Commercial Printing segment for the nine months ended September 30, 2003 was $11.2 million, an improvement of $28.8 million over the loss reported in the comparable period of 2002. Excluding the operating income of the digital graphics operations and restructuring expenses, operating income was $12.8 million, an improvement of $19.4 million. The improvement in ongoing operating income can be attributed to the acquisition and the closure of the unprofitable operation in New York City. Profitability on sales improved $2.1 million due to reduced costs of materials and significant increases in productivity. In addition, we have reduced manufacturing overhead by $3.8 million and selling and administrative expenses by $4.6 million as a result of the restructuring and other actions taken in 2002. 29 PRINTED OFFICE PRODUCTS SALES
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 --------------------- ----------------------- 2003 2002 2003 2002 ------- ------- -------- -------- (IN THOUSANDS) Reported.................................... $49,520 $50,709 $150,163 $154,534 ======= ======= ======== ========
OPERATING INCOME
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ------------------- --------------------- 2003 2002 2003 2002 ------ ------ ------- ------- (IN THOUSANDS) Ongoing......................................... $4,056 $5,168 $12,483 $14,890 Restructuring expenses...................... (60) (303) 135 (1,350) ------ ------ ------- ------- Reported........................................ $3,996 $4,865 $12,618 $13,540 ====== ====== ======= =======
Sales of Printed Office Products were $1.2 million lower in the third quarter of 2003 and $4.4 million lower in the nine months ended September 30, 2003 than the comparable periods of 2002. Sales of multi-ply traditional business forms have declined in 2003. We believe that the declines we have experienced in sales of these products are consistent with declines in the industry. In addition, we have had to reduce the prices of our specialty mailer products in order to meet the pricing of competitors. Sales of our label products in 2003 have been comparable to sales of these products in 2002. Reported operating income of Printed Office Products in the third quarter was $4.0 million, $0.9 million lower than the third quarter of 2002. Excluding restructuring expenses, operating income was $1.1 million lower than the third quarter of 2002. This decline was due to the decline in sales volume, lower sales margins and higher employee benefit expenses. Reported operating income for the nine months ended September 30, 2003 was $0.9 million lower than the comparable period of 2003. Excluding restructuring expenses, operating income was $2.4 million lower. The decline in ongoing operating income was due to the decline in sales volume, lower sales margins and higher employee benefit expenses partially offset by reductions in fixed manufacturing costs and administrative expenses. LIQUIDITY AND CAPITAL RESOURCES At September 30, 2003, our outstanding debt was $761.3 million, $2.6 million lower than at December 31, 2002. At September 30, 2003, our revolving loan balance was $17.2 million lower than at December 31, 2002. Our outstanding debt at September 30, 2003 includes $17.4 million of debt held by a variable interest entity that was consolidated on January 1, 2003 in accordance with Interpretation 46. Our operations generated cash flow of $33.6 million as of September 30, 2003 compared to $7.7 million generated during the same period of 2002. Capital expenditures were $19.7 million during the nine months ended September 30, 2003 compared to capital expenditures of $26.9 million during the same period of 2002. The $3.9 million of net proceeds received from the sale of the digital graphics operations in March 2003 were applied to our revolving bank debt. 30 The following table summarizes our cash payment obligations as of September 30, 2003 by year:
TOTAL CASH LONG-TERM DEBT OPERATING LEASES OBLIGATIONS -------------- ---------------- ----------- Year 1..................... $ 2,733 $ 32,229 $ 34,962 Year 2..................... 87,198 28,074 115,272 Year 3..................... 2,354 23,477 25,831 Year 4..................... 13,888 18,452 32,340 Year 5..................... 947 11,821 12,768 Thereafter................. 654,227 18,856 673,083 -------- -------- -------- Total...................... $761,347 $132,909 $894,256 ======== ======== ========
At September 30, 2003, we had outstanding letters of credit of approximately $23.1 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 CREDIT RATING AGENCY NOTES NOTES FACILITY LAST UPDATE ------------- ------- ------------ -------- ------------ Standard & Poor's..... BB- B BB- May 2003 Moody's............... B1 B3 Ba3 October 2003
The terms of our existing debt do not have any rating triggers, and we do not believe that our current ratings will impact our ability to raise additional capital. We expect to be able to fund our operations, capital expenditures, debt and other contractual commitments within the next year from internally generated cash flow and funds available under our senior secured credit facility. At September 30, 2003, we had $113.0 million of unused credit available under this credit facility. SEASONALITY AND ENVIRONMENT Our Commercial Printing 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, and calendars from May to September. As a result of these seasonal variations, we are at or near capacity in some facilities at certain times during these periods. Several consumer direct market segments served by our Envelope segment 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. 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.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 31 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 posted 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 estimable. Although the ultimate outcome of these claims or lawsuits cannot be ascertained, on the basis of present information and advice received from counsel, it is our opinion that the disposition or ultimate determination of such claims or lawsuits will not have a material adverse effect on us. FORWARD-LOOKING INFORMATION This report, including "Management's Discussion and Analysis of Financial Condition and Results of Operations," may contain various "forward-looking statements," within the meaning of Section 21E of the Securities Exchange Act of 1934, that are based on management's belief and assumptions, as well as information currently available to management. Although we believe that the expectations reflected in any such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Any such statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, our actual financial results, performance or condition may vary materially from those expected. Some of the key factors that may have a direct bearing on our actual financial results, performance or condition are as follows: * Paper and other raw material costs * The degree and nature of competition * The ability to achieve productivity and cost savings goals * The success of certain strategic initiatives, including our "Total Customer Solutions" and "Mobilization" strategies * Postage rates and other changes in the direct-mail industry * Interest rates and foreign currency exchange rates * Ability to obtain additional or alternative financing * General economic conditions * General labor conditions * The impact of the Internet and other electronic media on the demand for envelopes and printed material * Other factors as described in our most recent annual report on Form 10-K under the heading "Forward Looking Information" In view of such uncertainties, investors are cautioned not to place undue reliance on these forward-looking statements. We do not assume any obligation to update these forward-looking statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risks such as changes in interest and foreign currency exchange rates, which may adversely affect results of operations and financial position. Risks from interest and foreign currency exchange rate fluctuations are managed through normal operating and financing activities. We 32 do not utilize derivatives for speculative purposes, nor did we hedge interest rate exposure through the use of swaps and options or foreign exchange exposure through the use of forward contracts as of September 30, 2003. 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 September 30, 2003, we had variable rate debt outstanding of $103.6 million. A 1% increase in LIBOR on the maximum amount of debt subject to variable interest rates, which is $318.9 million, would increase our interest expense by $3.2 million and reduce our net income by approximately $1.9 million. We have operations in Canada, and thus are exposed to market risk for changes in foreign currency exchange rate of the Canadian dollar. ITEM 4. 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. 33 PART IV 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 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. 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. 34 EXHIBIT NUMBER DESCRIPTION ------- ----------- 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 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. 35 EXHIBIT NUMBER DESCRIPTION ------- ----------- 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 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. 10.25 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. 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 filed under Item 5 on Form 8-K dated as of August 8, 2003 in connection with the script of the company's investor conference call held on May 6, 2003. 36 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 October 31, 2003. MAIL-WELL, INC. By: /s/ PAUL V. REILLY ------------------------------------------ Paul V. Reilly, Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) By: /s/ MICHEL P. SALBAING ------------------------------------------- Michel P. Salbaing, Senior Vice President-- Finance and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 37