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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
Commission file number 1-12551
MAIL-WELL, INC.
(Exact name of Registrant as specified in its charter.)
COLORADO 84-1250533
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
8310 S. Valley Highway, #400 Englewood, CO 80112
(Address of principal executive offices) (Zip Code)
303-790-8023
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECKMARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
Yes /X/ No / /
As of August 12, 2002, the Registrant had 48,251,478 shares of Common
Stock, $0.01 par value, outstanding.
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1
MAIL-WELL, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
- ------------------------------------------------------------------------------
PAGE
----
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements................................. 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............. 24
Item 3. Quantitative and Qualitative Disclosures About
Market Risk..................................... 36
Part II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders. 37
Item 6. Exhibits and Reports on Form 8-K ................... 37
Signature Page.......................................................... 41
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MAIL-WELL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2002 DECEMBER 31, 2001
(UNAUDITED)
------------------ -------------------
ASSETS
Current assets
Cash and cash equivalents $ 147,694 $ 894
Accounts receivable, net 201,114 230,770
Inventories, net 111,164 110,859
Net assets of discontinued operations - 129,568
Net assets held for sale 50,340 52,368
Other current assets 84,792 71,137
---------- ----------
Total current assets 595,104 595,596
Property, plant and equipment, net 401,088 422,278
Goodwill and other intangible assets, net 413,874 411,416
Other assets, net 37,057 46,286
---------- ----------
Total assets $1,447,123 $1,475,576
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 145,173 $ 160,040
Accrued compensation and related liabilities 49,669 50,757
Other current liabilities 58,316 62,499
Current portion of long-term debt 144,426 303,170
---------- ----------
Total current liabilities 397,584 576,466
Long-term debt 794,867 552,051
Deferred income taxes 50,622 88,393
Other long-term liabilities 17,259 16,789
---------- ----------
Total liabilities 1,260,332 1,233,699
SHAREHOLDERS' EQUITY
Preferred stock, $0.01 par value; 25,000 shares authorized, no shares issued - -
Common stock, $0.01 par value; 100,000,000 shares authorized, 48,225,031 and
48,325,801 shares issued and outstanding in 2002 and 2001, respectively 482 483
Paid-in capital 213,711 214,138
Retained earnings (deficit) (13,207) 46,623
Deferred compensation (2,618) (3,359)
Accumulated other comprehensive loss (11,577) (16,008)
---------- ----------
Total shareholders' equity 186,791 241,877
---------- ----------
Total liabilities and shareholders' equity $1,447,123 $1,475,576
========== ==========
See notes to condensed consolidated financial statements.
3
MAIL-WELL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30, JUNE 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Net sales....................................... $420,967 $471,560 $864,449 $960,336
Cost of sales .................................. 342,128 370,692 697,582 755,999
-------- -------- -------- --------
Gross profit.................................... 78,839 100,868 166,867 204,337
Other operating expenses:
Selling and administrative expenses ........... 69,048 70,170 137,239 142,896
Amortization of intangibles.................... 514 4,332 1,016 8,456
Impairment loss on assets held for sale........ 8,871 8,807 8,871 8,807
Impairment on former discontinued operation.... 10,407 - 10,407 -
Restructuring and other charges................ 9,274 19,384 23,800 20,049
-------- -------- -------- --------
Operating income (loss)......................... (19,275) (1,825) (14,466) 24,129
Other expense:
Interest expense............................... 18,973 16,463 33,878 33,771
Other expense ................................. 45 501 337 984
-------- -------- -------- --------
Loss from continuing operations before income
taxes........................................ (38,293) (18,789) (48,681) (10,626)
Income tax benefit ............................. (5,586) (3,461) (7,128) (1,126)
-------- -------- -------- --------
Loss from continuing operations................. (32,707) (15,328) (41,553) (9,500)
Loss from discontinued operations:
Loss from discontinued operations, net
of tax benefit................................ - (1,336) - (2,982)
Loss on disposal, net of tax benefit ........ (153) (75,861) (8,152) (76,421)
-------- -------- -------- --------
Loss before extraordinary loss.................. (32,860) (92,525) (49,705) (88,903)
Extraordinary loss, net of tax benefit.......... (5,362) - (10,125) -
-------- -------- -------- --------
Net loss........................................ $(38,222) $(92,525) $(59,830) $(88,903)
======== ======== ======== ========
Loss per share - basic and diluted
Continuing operations...................... $ (0.69) $ (0.32) $ (0.87) $ (0.20)
Discontinued operations.................... - (1.63) (0.17) (1.67)
Extraordinary loss......................... (0.11) - (0.22) -
-------- -------- -------- --------
Loss per share - basic and diluted......... $ (0.80) $ (1.95) $ (1.26) $ (1.87)
======== ======== ======== ========
Weighted average shares - basic and diluted..... 47,668 47,464 47,663 47,460
See notes to condensed consolidated financial statements.
4
MAIL-WELL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
----------------
JUNE 30,
--------
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Loss from continuing operations........................................... $ (41,553) $ (9,500)
Adjustments to reconcile net loss to cash provided by operating
activities:
Depreciation and amortization........................................... 27,081 35,790
Noncash portion of restructuring and impairment charges................. 30,256 8,807
Deferred income tax expense (benefit)................................... (4,067) 8,630
Other................................................................... 603 909
Changes in operating assets and liabilities, excluding the effects
of businesses sold:
Trade and other receivables......................................... 33,112 25,606
Inventories......................................................... 1,576 4,127
Accounts payable and accrued expenses............................... (10,555) 22,838
Net change in other current assets and other current liabilities.... (22,102) (12,676)
--------- ---------
Net cash provided by operating activities........................... 14,351 84,531
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition costs......................................................... (1,021) (3,844)
Proceeds from divestitures, net........................................... 96,887 -
Capital expenditures...................................................... (21,409) (17,208)
Proceeds from the sales of assets......................................... 6,053 3,340
--------- ---------
Net cash provided by (used in) investing activities................. 80,510 (17,712)
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in accounts receivable securitization............................ - (75,000)
Proceeds from common stock issuance....................................... 18 6
Proceeds from long-term debt.............................................. 706,288 361,530
Repayments of long-term debt ............................................. (629,114) (378,186)
Debt issuance costs....................................................... (16,574) (2,260)
--------- ---------
Net cash provided by (used in) financing activities................. 60,618 (93,910)
CASH FLOWS FROM DISCONTINUED OPERATIONS
Net cash provided by (used in) discontinued operations.................... (8,550) 28,135
Effect of exchange rate changes on cash and cash equivalents................. (129) (22)
--------- ---------
Net increase in cash and cash equivalents.................................... 146,800 1,022
Cash and cash equivalents at beginning of period............................. 894 589
--------- ---------
Cash and cash equivalents at end of period................................... $ 147,694 $ 1,611
========= =========
See notes to condensed consolidated financial statements.
5
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 six-
months ended June 30, 2002 are not necessarily indicative of the results
that may be expected for the year ended December 31, 2002. The balance sheet
at December 31, 2001 has been derived from the audited financial statements
at that date but does not include all of the information and footnote
disclosures required by generally accepted accounting principles for
complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 2001.
During June 2002, the decision was made to discontinue efforts to sell the
PrintXcel business. As such, the statement of operations for the three- and
six-months ended June 30, 2001 and for the three-months ended March 31,
2002 have been restated to include this business as part of the continuing
operations. The balance sheet for the year ended December 31, 2001 also has
been restated. PrintXcel, which is a business in the Company's Printed
Office Products operating segment, had previously been reported in
discontinued operations.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.
Statement 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. Statement 141 also
includes guidance on the initial recognition and measurement of goodwill and
other intangible assets arising from business combinations completed after
June 30, 2001. Statement 142 prohibits the amortization of goodwill and
intangible assets with indefinite useful lives. Statement 142 requires that
these assets be reviewed for impairment at least annually. Intangible assets
with finite lives will continue to be amortized over their estimated useful
lives. Additionally, Statement 142 requires that goodwill included in the
carrying value of equity method investments no longer be amortized.
Mail-Well adopted Statement 142 on January 1, 2002. The Company has
completed the first step of the two-step process prescribed in Statement 142
to test goodwill for impairment and has concluded that a portion of the
$213.5 million of goodwill related to our commercial printing business is
impaired. The extent of this impairment will not be known until step two of
the process has been completed. The Company will recognize the amount of the
impairment as a cumulative effect of a change in accounting principle as of
January 1, 2002 when it is determined, but no later than December 31, 2002.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. Statement 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. Mail-Well will adopt Statement 143 on
January 1, 2003. The Company is evaluating the impact of the adoption of
Statement 143 on the consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which establishes one accounting model to
be used for long-lived assets to be disposed of by sale and broadens the
presentation of discontinued operations to include more disposal
transactions. Statement 144 supercedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets to Be Disposed Of and the accounting and
reporting provisions of
6
Accounting Principles Board Opinion No. 30, Reporting the Results of
Operations - Reporting the Effects Of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. Mail-Well adopted Statement 144 as of January 1, 2002 and
there was no impact from the adoption of this statement.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statement
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. This statement provides guidance on the classification of gains
and losses from the extinguishment of debt and on the accounting for certain
specified lease transactions. The Company is currently evaluating the
provisions of the new statement.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which addresses financial accounting and
reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring).
Generally, SFAS No. 146 requires that a liability for a cost associated with
an exit or disposal activity be recognized as incurred, whereas EITF Issue
No. 94-3 required such a liability to be recognized at the time that an
entity committed to an exit plan. The company is currently evaluating the
provisions of the new rule, which is effective for exit or disposal
activities that are initiated after December 31, 2002.
3. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of acquisition costs over the fair value of
net assets of businesses acquired and prior to the adoption of Statement 142
on January 1, 2002 was amortized on a straight-line basis over 40 years.
Other intangible assets primarily arise from the purchase price allocations
of businesses acquired and are based on independent appraisals or internal
estimates and are amortized on a straight-line basis over appropriate
periods.
In accordance with the provisions of SFAS 142, the Company ceased amortizing
goodwill on January 1, 2002. Had SFAS 142 been in effect on January 1, 2001,
the Company would not have recorded goodwill amortization expense of $3.6
million and $7.0 million for the three- and six-months ended June 30, 2001,
respectively. The following table summarizes the reported net losses for the
three- and six-months ended June 30, 2002 and June 30, 2001, adjusted to
exclude goodwill amortization expense, and the related tax effect, that
would not have been recorded had the provisions of SFAS 142 been in effect
January 1, 2001 (in thousands, except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2002 JUNE 30, 2001 JUNE 30, 2002 JUNE 30, 2001
- -----------------------------------------------------------------------------------------------------------------
Reported net loss $(38,222) $(92,525) $(59,830) $(88,903)
Goodwill amortization, net of tax - 3,142 - 6,110
- -----------------------------------------------------------------------------------------------------------------
Adjusted net loss $(38,222) $(89,383) $(59,830) $(82,793)
======== ======== ======== ========
- -----------------------------------------------------------------------------------------------------------------
Basic and diluted loss per share - as reported $ (0.80) $ (1.95) $ (1.26) $ (1.87)
Basic and diluted loss per share - adjusted $ (0.80) $ (1.88) $ (1.26) $ (1.74)
- -----------------------------------------------------------------------------------------------------------------
7
The following is a summary of other intangible assets, net of related
accumulated amortization (in thousands):
COMMERCIAL
ENVELOPE PRINTING PRINTXCEL TOTAL
- -----------------------------------------------------------------------------------------------------------------
Trademarks and tradenames $ 8,260 $ - $4,704 $12,964
Patents 2,021 - - 2,021
Non-compete agreements 1,038 1,729 - 2,767
Other 429 881 481 1,791
- -----------------------------------------------------------------------------------------------------------------
Balance as of June 30, 2002 $11,748 $2,610 $5,185 $19,543
=================================================================================================================
Other intangible assets are all subject to amortization and have original
estimated useful lives as follows: Trademarks - 43 years; Tradenames - 35
years; Patents - 12 years; Non-compete agreements - 5 years; Other - 10 - 40
years. The estimated amortization expense for each of the succeeding five
years is as follows: $2.2 million, $1.9 million, $0.7 million, $0.6 million
and $0.6 million.
4. INVENTORIES
The Company's inventories by major category are as follows (in thousands):
JUNE 30, 2002 DECEMBER 31, 2001
- --------------------------------------------------------------------------------------------------------------------
Raw materials $ 34,926 $ 34,011
Work in process 22,904 22,750
Finished goods 58,977 58,710
- --------------------------------------------------------------------------------------------------------------------
116,807 115,471
Reserves (5,643) (4,612)
- --------------------------------------------------------------------------------------------------------------------
$111,164 $110,859
====================================================================================================================
5. COMPREHENSIVE LOSS
A summary of the comprehensive loss is as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30, 2002 JUNE 30, 2001 JUNE 30, 2002 JUNE 30, 2001
------------- ------------- ------------- -------------
Net loss $(38,222) $(92,525) $(59,830) $(88,903)
Other comprehensive income (loss):
Currency translation adjustments, net 5,779 5,120 4,431 (1,408)
Unrealized gain (loss) on investments, net - 27 - (997)
- ---------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) 5,779 5,147 4,431 (2,405)
- ---------------------------------------------------------------------------------------------------------------
Comprehensive loss $(32,443) $(87,378) $(55,399) $(91,308)
===============================================================================================================
8
6. LOSS PER SHARE
Basic loss per share is computed by dividing the net loss by the weighted
average number of common shares outstanding for the period. Diluted loss per
share reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into
common stock. There are no reconciling items between basic and diluted loss
per share.
During the three- and six-months ended June 30, 2002 and 2001, interest on
the Convertible Notes in the amount of $1,214,000 and $2,427,000,
respectively, and shares of 7,319,000 that would be issued upon assumed
conversion of the Convertible Notes were excluded from the calculation of
diluted loss per share due to the antidilutive effect on loss per share. In
addition, the outstanding options to purchase approximately 6,104,000 shares
of common stock in 2002 and 6,500,000 shares of common stock in 2001 were
excluded from the calculation of diluted loss per share because the effect
would be antidilutive.
7. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
JUNE 30, DECEMBER 31,
2002 2001
- -----------------------------------------------------------------------------------
Senior Secured Credit Facility:
Tranche A term loan, retired $ - $ 194,918
Tranche B term loan, retired - 192,749
Revolving loan facility, retired - 6,000
Revolving loan facility, due 2005 135,000 -
Senior Notes, due 2012 350,000 -
Senior Subordinated Notes, due 2008 300,000 300,000
Convertible Subordinated Notes, due 2002 139,063 139,063
Other 15,230 22,491
- -----------------------------------------------------------------------------------
939,293 855,221
Less current maturities (144,426) (303,170)
- -----------------------------------------------------------------------------------
Long-term debt $ 794,867 $ 552,051
===================================================================================
Current maturities at June 30, 2002 include the anticipated retirement of
the Convertible Notes and current maturities from other debt.
In June 2002, the Company entered into a new three year $300 million Senior
Secured Credit Facility with a consortium of banks (the "Facility"). The
Facility was used to refinance the Company's $800 million Secured Senior
Credit Facility. Under the Facility, loans may be made and letters of credit
issued on a revolving basis in each case subject to availability and subject
to a borrowing base. On June 30, 2002, the Company had outstanding loans and
letters of credit of $146.5 million and had $107.2 million of availability.
Loans made under the Facility bear interest at a base rate or LIBOR, plus a
margin. The Company is required to meet a fixed charge coverage ratio and a
minimum tangible net worth. The Facility is secured by substantially all of
the assets of the Company.
In March 2002, the Company issued $350 million of 9 5/8% Senior Notes due
2012 ("Senior Notes"). Interest is payable semi-annually. The Company may
redeem the Senior Notes, in whole or in part, on or after March 15, 2007, at
redemption prices from 100% to 104.813%, plus accrued and unpaid interest.
In addition, before March 2005, the Company can redeem up to 35% of the
Senior Notes at 109.625% of the principal amount thereof, plus accrued and
unpaid interest, with the net cash proceeds from certain common stock
offerings.
Deferred financing costs of $16.9 million incurred in connection with the
$800 million Secured Senior Credit Facility refinanced in June 2002 were
written off during the six-months ended June 30, 2002. During the quarter
ended March 31, 2002, the pro rata portion of the fees related to the
Tranche A and B term loans repaid with the
9
proceeds from the sale of the Senior Notes and the sale of Curtis 1000, Inc.
were written off. The write-off is reported net of tax as an extraordinary
loss in the condensed consolidated statements of operations.
As of June 30, 2002, the Company was in compliance with all of the covenants
of its various debt agreements.
8. RESTRUCTURING AND OTHER CHARGES
As announced in 2001, the Company is consolidating certain operations to
eliminate excess internal capacity in order to reduce costs and improve its
long-term competitive position. In addition, the Company is significantly
reducing the size of certain of its facilities in response to current market
conditions. The restructuring charge related to these plans totaled $20.7
million in 2002, of which $9.0 million were incurred in the second quarter
of 2002. The following table and discussion present the details of this
restructuring charge, as well as other related charges recorded during the
six-months ended June 30, 2002:
PRINTED
COMMERCIAL OFFICE
(IN THOUSANDS) ENVELOPE PRINTING PRODUCTS CORPORATE TOTAL
---------------------------------------------------------------------------------------------------------------------
Employee separation and related
employee expenses $ - $1,041 $ 507 $ - $ 1,548
Employee training expenses 4,531 - - - 4,531
Other exit costs 3,657 - 807 - 3,957
Asset impairment charges, net 4,730 - 240 - 4,970
Project management expenses 5,656 - - - 5,656
---------------------------------------------------------------------------------------------------------------------
Total restructuring costs 18,574 1,041 1,047 - 20,662
Other charges 985 1,414 - 739 3,138
---------------------------------------------------------------------------------------------------------------------
Total restructuring and other charges $19,559 $2,455 $1,047 $739 $23,800
=====================================================================================================================
In addition to the three envelope manufacturing facilities consolidated in
2001, the envelope business has consolidated six facilities in 2002 and will
consolidate one additional operation in the third quarter of 2002. When this
consolidation plan is completed, the Company will have closed ten envelope
plants and substantially reduced excess internal capacity and improved
utilization of equipment and resources at the remaining 39 plants in the
United States and Canada. In 2001, the Company accrued the separation and
related employee expenses covering the 923 employees expected to be
terminated over the course of this project. As of June 30, 2002, 666
employees had been separated. Employee training expenses include the costs
to train the new employees that have been hired at the plants that are
absorbing the production of the plants being closed. The training programs
for these employees are between three and nine months in duration. Other
exit costs include the expenses incurred to move and reinstall equipment,
and the cost incurred to restore buildings to the condition required by
lease agreements or to prepare them for sale. Project management expenses
are primarily consulting fees and related expenses incurred to assist
management in managing the consolidation project. Consultants were used to
assist in such tasks as capacity planning, workflow planning, production
scheduling and change management. The write-downs recorded for property and
equipment taken out of service or sold as a result of the plant
consolidations are reported net of $6.2 million of proceeds received from
the sales of those assets.
The Commercial Printing segment completed the consolidation of its
operations in the Philadelphia, Pennsylvania area in 2001. In addition, in
response to changes in market conditions, Commercial Printing has made
significant changes to its cost structure by reducing its fixed costs. The
severance costs incurred as a result of eliminating 136 overhead positions
totaled $819,000.
The Printed Office Products segment closed a manufacturing facility in 2002
to eliminate excess internal capacity and reduce costs. Severance incurred
as a result of this plant closure were $134,000 covering 19 employees.
Expenses were also incurred to prepare the building for sale and to write
assets down to fair market value. In addition, Printed Office Products has
reduced headcount at certain of its other facilities in response to market
10
conditions. Severance costs incurred in connection with these reductions,
covering 128 employees, totaled $249,000.
In 2001, the Company initiated several programs to significantly improve
operations and marketing effectiveness. These programs included the
implementation of best practices, the installation of pricing disciplines
and the alignment of equipment and services to better serve customers and
markets. The Company invested $2.4 million in outside assistance in order to
expedite the implementation of these programs. In addition, the Company
incurred consulting fees of $587,000 related to tax matters that arose as a
result of the divestitures. These expenses have been reported as other
charges.
A summary of the activity charged to the restructuring liability during the
six-months ended June 30, 2002 was as follows (in thousands):
PRINTED
COMMERCIAL OFFICE
ENVELOPE PRINTING PRODUCTS TOTAL
------------------------------------------------------------------
Balance, December 31, 2001 $10,126 $ 604 $ 629 $11,359
Payments for severance (4,132) (13) (163) (4,308)
Payments for lease termination costs (100) (110) (99) (309)
Payments for other exit costs (1,338) (118) (126) (1,582)
------------------------------------------------------------------
Balance, June 30, 2002 $ 4,556 $ 363 $ 241 $ 5,160
==================================================================
9. DISCONTINUED OPERATIONS
In June 2001, the Company announced plans to sell its Label and Printed
Office Products operating segments. The Printed Office Products segment was
comprised of two separate businesses, Curtis 1000, Inc. and PrintXcel. The
Label and Printed Office Products segments were segregated from continuing
operations and reported as discontinued operations for all periods presented
through March 31, 2002. On February 22, 2002, the Company sold the stock of
Curtis 1000, Inc. for $40.0 million, including the assumption of debt. On
May 21, 2002, the Company sold the Label operating segment for $75.0
million. In June 2002, the Company decided that it would not sell PrintXcel.
Accordingly, PrintXcel has been reclassified to continuing operations for
all periods presented.
The reported loss on the disposition of the Label segment and Curtis 1000,
Inc. as of June 30, 2002 includes adjustments to the net realizable value of
these operations based on actual proceeds received, costs associated with
the dispositions, the earnings or losses from the operations through the
date of disposition and the related income tax expense.
Interest expense was allocated to the operating results included in the
calculation of the loss on disposal of discontinued operations based upon
the relative net assets of the Label operating segment and Curtis 1000, Inc.
This allocation of interest expense totaled $2.0 million and $5.6 million
for the three-months ended June 30, 2002 and 2001, respectively, and $3.7
million and $7.9 million for the six-months ended June 30, 2002 and 2001,
respectively.
11
Operating results of the discontinued operations are summarized as follows
(in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------------------------------
2002 2001 2002 2001
------------------------------------------------------------
Net sales:
Label $31,482 $ 57,637 $ 84,758 $ 113,145
Curtis 1000, Inc. - 41,435 22,788 87,049
------------------------------------------------------------
$31,482 $ 99,072 $107,546 $ 200,194
============================================================
Income (loss) from operations:
Label $ - $ (565) $ - $ (1,028)
Curtis 1000, Inc. - (1,343) - (3,588)
------------------------------------------------------------
- (1,908) - (4,616)
Income tax expense (benefit) - (572) - (1,634)
------------------------------------------------------------
Loss from discontinued operations, net
of tax benefit $ - $ (1,336) $ - $ (2,982)
============================================================
Loss on disposal of discontinued operations:
Label $(5,045) $(59,725) $ (8,545) $(59,725)
Curtis 1000, Inc. (166) (17,990) (892) (17,990)
------------------------------------------------------------
(5,211) (77,715) (9,437) (77,715)
Income tax benefit (5,058) (1,854) (1,285) (1,294)
------------------------------------------------------------
Loss on disposal, net of tax benefit $ (153) $(75,861) $ (8,152) $(76,421)
============================================================
The assets and liabilities of discontinued operations, which have been
reflected as net assets of discontinued operations in the December 31, 2001
condensed consolidated balance sheet, are summarized as follows (in
thousands):
DECEMBER 31,
2001
--------------
Label segment:
Current assets $ 46,285
Long-term assets 97,109
--------------
Total assets 143,394
Current liabilities 40,085
Long-term liabilities 3,909
--------------
Total liabilities 43,994
--------------
Net assets of the Label segment 99,400
Curtis 1000, Inc.:
Current assets 24,840
Long-term assets 37,103
--------------
Total assets 61,943
Current liabilities 18,657
Long-term liabilities 13,118
--------------
Total liabilities 31,775
--------------
Net assets of Curtis 1000, Inc. 30,168
--------------
Net assets of discontinued operations $129,568
==============
Assets primarily consist of accounts receivable, inventories, property and
equipment and deferred income taxes. Liabilities primarily consist of
accounts payable, accrued expenses, deferred income taxes and other
long-term liabilities. The net assets of discontinued operations presented
in the condensed consolidated balance sheet reflect
12
the write-down of the assets of these operations to estimated net realizable
value, the accrual of obligations associated with the divestitures and the
accrual of estimated losses to the expected date of disposal.
In connection with the proposed divestiture of the Company's PrintXcel
business in 2001, the Company reduced the carrying amounts of the net assets
of PrintXcel by $45.0 million to the expected net realizable value based on
estimated proceeds, net of costs associated with its planned disposition. As
a result of the Company's decision not to sell PrintXcel, it reversed a tax
benefit in the amount of $11.5 million that would not be realized and $1.1
million of expenses related to the sale that had been accrued but not
incurred. The net amount of these adjustments has been reported as
"Impairment on former discontinued operation" in the condensed consolidated
statements of operations.
10. ASSETS HELD FOR SALE
The Company's divestiture plans also include the sale of certain operations
that are not strategic to its Envelope and Commercial Printing segments. The
Company expects to complete the dispositions of these operations by
September 30, 2002. The following table presents the sales and operating
income of these operations for the three- and six-months ended June 30, 2002
and 2001 (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------------------------------------------------------------------------------------
2002 2001 2002 2001
-------------------------------------------------------------------------------------------------------------
Sales $25,557 $29,180 $51,667 $57,796
Operating income 1,559 3,385 3,063 6,257
The assets of these operations at June 30, 2002 and December 31, 2001
totaled $61.0 million and $65.7 million, respectively, and are reported net
of $10.7 million and $13.3 million of related liabilities, respectively, as
"Net assets held for sale" in the accompanying condensed consolidated
balance sheets. Certain of these assets were written down to fair market
value during 2001 based on sales proceeds anticipated at the time. In the
quarter ended June 30, 2002, the Company recorded an impairment charge of
$2.8 million based on the sales proceeds currently anticipated on the sale
of certain assets of the commercial printing segment, and recorded an
additional $6.1 million as a result of the sale of the Company's filing
products division that closed in August 2002, for a total impairment on
assets held for sale of $8.9 million.
11. SEGMENT INFORMATION
The Company operates in three principal operating segments. The Commercial
Printing operating segment specializes in printing annual reports, brand
marketing collateral, catalogs, brochures, maps and guidebooks, calendars,
financial communications and CD packaging. The Envelope operating segment
manufactures customized and stock envelopes for billing and remittance,
direct mail advertising, filing systems, photo processing, medical records
and catalog orders. The Envelope segment is also a producer of specialty
packaging products and a manufacturer of stock products for the resale
market. The Printed Office Products operating segment produces customized
and stock labels, mailers, and printed business documents to small and
mid-size businesses generally through distributors of office products.
The following tables present certain business segment information for the
three- and six-months ended June 30, 2002 and 2001 as follows (in
thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
- -----------------------------------------------------------------------------------------------------------
2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------
Net sales:
Commercial Printing $173,727 $206,714 $364,482 $418,750
Envelope 195,168 210,746 396,143 432,362
Printed Office Products 52,072 54,100 103,824 109,224
- -----------------------------------------------------------------------------------------------------------
Total $420,967 $471,560 $864,449 $960,336
===========================================================================================================
13
Operating income (loss):
Commercial Printing $ (6,240) $ 6,465 $ (8,696) $ 12,671
Envelope 19,319 21,506 39,070 44,632
Printed Office Products 5,319 5,757 9,822 11,543
Corporate (9,121) (7,362) (11,584) (15,861)
Impairments, restructuring and other charges (28,552) (28,191) (43,079) (28,856)
- -----------------------------------------------------------------------------------------------------------
Total $(19,275) $ (1,825) $(14,467) $ 24,129
===========================================================================================================
JUNE 30, DECEMBER 31,
2002 2001
- --------------------------------------------------------------------------------------------------
Identifiable assets (b):
Commercial Printing $598,599 $622,173
Envelope 511,952 537,747
Printed Office Products 139,683 144,334
Corporate 146,549 (10,614)
- --------------------------------------------------------------------------------------------------
Total 1,396,783 1,293,640
Net assets of discontinued operations - 129,568
Net assets held for sale 50,340 52,368
- --------------------------------------------------------------------------------------------------
Total $1,447,123 $1,475,576
==================================================================================================
(a) Operating income is net of all costs and expenses directly related to
the operating segment involved. Corporate expenses include corporate
general and administrative expenses, lease expense, amortization
expense of other intangible assets and goodwill (in 2001), gains or
losses on disposal of assets and other miscellaneous expenses.
(b) Identifiable assets are accumulated by facility within each operating
segment. Certain operating assets, which are under lease, are reported
as operating segment assets for evaluation purposes. The net book value
of these assets has been eliminated by contra assets included with
corporate assets in order to reconcile identifiable assets with the
total assets of the Company. Corporate assets consist primarily of cash
and cash equivalents, other receivables, other assets and deferred tax
assets.
Intercompany sales for the three- and six-months ended June 30, 2002 were
$2.4 million and $9.2 million, respectively. Intercompany sales for the
three- and six-months ended June 30, 2001 were $10.6 million and $24.1
million, respectively. These amounts, which are eliminated in consolidation,
are excluded from reported net sales.
12. SUBSEQUENT EVENTS
On August 8, 2002, the Company sold the filing products division of its
Envelope segment for $36.7 million. The Company has recorded an impairment
loss of $6.1 million in connection with this divestiture. Net proceeds of
$31.5 million received from the sale of this operation were applied to the
revolving credit facility.
Subsequent to June 30, 2002, the Company was required to refinance a
sale/leaseback arrangement due to the fact that it was tied to the Company's
prior banking agreement that was replaced by the new Senior Secured Credit
Facility. In connection with the refinancing, the Company was required to
make a payment of $15.8 million that will be expensed in the Company's third
quarter. In addition, $5.5 million of the deferred costs associated with
this arrangement will be written-off.
14
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
U.S. subsidiaries (the "Guarantor Subsidiaries") of MWI, all of which are
wholly owned, and by Mail-Well, Inc. ("Parent Guarantor"). The guarantees
are joint and several, full, complete and unconditional. There are no
material restrictions on the ability of the Guarantor Subsidiaries to
transfer funds to MWI in the form of cash dividends, loans or advances,
other than ordinary legal restrictions under corporate law, fraudulent
transfer and bankruptcy laws.
In December 1998, MWI issued $300. million aggregate principal amount of
8 3/4% Senior Subordinated Notes ("Senior Subordinated Notes") due in 2008.
The Senior Subordinated Notes are guaranteed by Guarantor Subsidiaries and
by the Parent Guarantor. The guarantees are joint and several, full,
complete and unconditional. There are no material restrictions on the
ability of the Guarantor Subsidiaries to transfer funds to MWI in the form
of cash dividends, loans or advances, other than ordinary legal restrictions
under corporate law, fraudulent transfer and bankruptcy laws.
The following condensed consolidating financial information illustrates the
composition of the Parent Guarantor, Issuer, Guarantor Subsidiaries and
non-guarantor subsidiaries. The Issuer, the Guarantor Subsidiaries and the
non-guarantor subsidiaries comprise all of the direct and indirect
subsidiaries of the Parent Guarantor. Curtis 1000, Inc. was, until it was
divested in the first quarter of 2002, a subsidiary of the Issuer and a
guarantor of the Senior Subordinated Notes. Curtis 1000, Inc. was not at any
time a guarantor of the Senior Notes. In order to provide a coherent
presentation in the following condensed consolidating financial information,
and because Curtis 1000, Inc. has been divested and is not a guarantor of
the Senior Subordinated Notes or the Senior Notes, Curtis 1000, Inc.'s
financial information is included in the non-guarantor information for all
periods presented. Management has determined that separate complete
financial statements would not provide additional material information that
would be useful in assessing the financial composition of the Guarantor
Subsidiaries.
Investments in subsidiaries are accounted for under the equity method,
wherein the investor company's share of earnings and income taxes applicable
to the assumed distribution of such earnings are included in net income. In
addition, investments increase in the amount of permanent contributions to
subsidiaries and decrease in the amount of distributions from subsidiaries.
The elimination entries remove the equity method investment in subsidiaries
and the equity in earnings of subsidiaries, intercompany payables and
receivables and other transactions between subsidiaries.
15
CONSOLIDATING CONDENSED STATEMENT OF FINANCIAL POSITION
June 30, 2002
(Unaudited)
(in thousands)
COMBINED COMBINED
PARENT GUARANTOR NONGUARANTOR
GUARANTOR ISSUER SUBSIDIARIES SUBSIDIARIES ELIM. CONSOLIDATED
--------- ------ ------------ ------------ ----- ------------
Current assets:
Cash and cash equivalents $ - $ 146,968 $ 612 $ 114 $ - $ 147,694
Accounts receivable, net - 50,913 127,644 22,557 - 201,114
Inventories, net - 49,122 47,457 14,585 - 111,164
Net assets held for sale - 27,514 22,826 - - 50,340
Note receivable from Issuer 147,436 - - - (147,436) -
Other current assets 98 40,515 41,220 2,959 - 84,792
-------- ---------- -------- -------- ----------- ----------
Total current assets 147,534 315,032 239,759 40,215 (147,436) 595,104
Investment in subsidiaries 189,302 187,837 27,529 - (404,668) -
Property, plant and equipment, net - 130,539 217,182 53,367 - 401,088
Goodwill and other intangible assets, net - 84,396 281,633 47,845 - 413,874
Note receivable from subsidiaries - 603,100 - - (603,100) -
Other assets, net 520 38,162 (4,618) 2,993 - 37,057
-------- ---------- -------- -------- ----------- ----------
Total assets $337,356 $1,359,066 $761,485 $144,420 $(1,155,204) $1,447,123
======== ========== ======== ======== =========== ==========
Current liabilities:
Accounts payable $ - $ 51,613 $ 83,860 $ 9,700 $ - $ 145,173
Other current liabilities 3,966 64,104 29,972 9,943 - 107,985
Intercompany payable (receivable) 3,659 80,939 (68,170) (16,428) - -
Note payable to Parent - 147,436 - - (147,436) -
Current portion of long-term debt 139,063 2,529 2,590 244 - 144,426
-------- ---------- -------- -------- ----------- ----------
Total current liabilities 146,688 346,621 48,252 3,459 (147,436) 397,584
Long-term debt - 788,185 6,682 - - 794,867
Note payable to Issuer - - 603,100 - (603,100) -
Deferred income taxes - 26,104 12,981 11,538 - 50,623
Other long-term liabilities - 12,732 3,954 573 - 17,259
-------- ---------- -------- -------- ----------- ----------
Total liabilities 146,688 1,173,642 674,969 15,570 (750,536) 1,260,333
Shareholders' equity 190,668 185,424 86,516 128,850 (404,668) 186,790
-------- ---------- -------- -------- ------------ ----------
Total liabilities and shareholders'
equity $337,356 $1,359,066 $761,485 $144,420 $(1,155,204) $1,447,123
======== ========== ======== ======== =========== ==========
16
CONSOLIDATING CONDENSED STATEMENT OF FINANCIAL POSITION
December 31, 2001
(in thousands)
COMBINED COMBINED
PARENT GUARANTOR NONGUARANTOR
GUARANTOR ISSUER SUBSIDIARIES SUBSIDIARIES ELIM. CONSOLIDATED
--------- ------ ------------ ------------ ----- ------------
Current assets:
Cash and cash equivalents $ - $ (1,589) $ 1,698 $ 785 $ - $ 894
Accounts receivable, net - 60,039 146,353 24,378 - 230,770
Inventories, net - 51,032 47,634 12,193 - 110,859
Net assets of discontinued operations - - 60,070 69,498 - 129,568
Net assets held for sale - 25,852 26,516 - - 52,368
Note receivable from Issuer 147,436 - - - (147,436) -
Other current assets 295 41,988 26,113 2,741 - 71,137
-------- ---------- --------- -------- ------------ ----------
Total current assets 147,731 177,322 308,384 109,595 (147,436) 595,596
Investment in subsidiaries 240,954 233,432 157,794 - (632,180) -
Property, plant and equipment, net - 151,735 216,975 53,568 - 422,278
Goodwill and other intangible assets, net - 96,585 269,097 45,734 - 411,416
Note receivable from subsidiaries - 749,400 - - (749,400) -
Other assets, net 1,023 29,925 31,227 2,992 (18,881) 46,286
-------- ---------- --------- -------- ------------ ----------
Total assets $389,708 $1,438,399 $ 983,477 $211,889 $ (1,547,897) $1,475,576
======== ========== ========= ======== ============ ==========
Current liabilities:
Accounts payable $ - $ 63,491 $ 88,056 $ 8,493 $ - $ 160,040
Other current liabilities 4,291 71,611 23,450 13,904 - 113,256
Intercompany payable (receivable) 4,477 190,395 (167,446) (27,426) - -
Note payable to Parent - 147,436 - - (147,436) -
Current portion of long-term debt 139,063 161,850 2,085 172 - 303,170
-------- ---------- --------- -------- ------------ ----------
Total current liabilities 147,831 634,783 (53,855) (4,857) (147,436) 576,466
Long-term debt - 523,247 19,708 9,096 - 552,051
Note payable to Issuer - - 749,400 - (749,400) -
Deferred income taxes - 28,287 48,882 11,224 - 88,393
Other long-term liabilities - 24,655 10,466 549 (18,881) 16,789
-------- ---------- --------- -------- ------------ ----------
Total liabilities 147,831 1,210,972 774,601 16,012 (915,717) 1,233,699
Shareholders' equity 241,877 227,427 208,876 195,877 (632,180) 241,877
-------- ---------- --------- -------- ------------ ----------
Total liabilities and shareholders' equity $389,708 $1,438,399 $ 983,477 $211,889 $ (1,547,897) $1,475,576
======== ========== ========= ======== ============ ==========
17
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
Quarter Ended June 30, 2002
(Unaudited)
(in thousands)
COMBINED COMBINED
PARENT GUARANTOR NONGUARANTOR
GUARANTOR ISSUER SUBSIDIARIES SUBSIDIARIES ELIM. CONSOLIDATED
--------- ------ ------------ ------------ ----- ------------
Net sales $ - $ 137,506 $ 242,870 $ 40,591 $ - $ 420,967
Cost of sales - 114,145 199,210 28,773 - 342,128
-------- ---------- --------- -------- -------- ----------
Gross profit - 23,361 43,660 11,818 - 78,839
Other operating expenses 29 21,409 43,990 4,134 - 69,562
Restructuring and other charges - 7,306 949 1,019 - 9,274
Impairment charges - 6,061 13,217 - 19,278
-------- ---------- --------- -------- -------- ----------
Operating income (loss) (29) (11,415) (14,496) 6,665 - (19,275)
Other expense (income):
Interest expense 1,262 21,752 12,691 (61) (16,671) 18,973
Other expense (income) (1,500) (15,201) 125 (50) 16,671 45
-------- ---------- --------- -------- -------- ----------
Income (loss) before income taxes and
equity in undistributed earnings of
subsidiaries 209 (17,966) (27,312) 6,776 - (38,293)
Provision (benefit) for income taxes - (6,904) (1,051) 2,369 - (5,586)
-------- ---------- --------- -------- -------- ----------
Income (loss) before equity in
undistributed earnings of subsidiaries 209 (11,062) (26,261) 4,407 - (32,707)
Equity in undistributed earnings of
subsidiaries (34,554) (22,121) 4,070 - 52,605 -
-------- ---------- --------- -------- -------- ----------
Income (loss) before discontinued
operations and extraordinary items (34,345) (33,183) (22,191) 4,407 52,605 (32,707)
Income (loss) on disposal, net of tax
benefit - - 187 (340) - (153)
Extraordinary loss, net of tax benefit (5,362) - - - (5,362)
-------- ---------- --------- -------- -------- ----------
Net income (loss) $(34,345) $ (38,545) $ (22,004) $ 4,067 $ 52,605 $ (38,222)
======== ========== ========= ======== ======== ==========
18
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
Quarter Ended June 30, 2001
(Unaudited)
(in thousands)
COMBINED COMBINED
PARENT GUARANTOR NONGUARANTOR
GUARANTOR ISSUER SUBSIDIARIES SUBSIDIARIES ELIM. CONSOLIDATED
--------- ------ ------------ ------------ ----- ------------
Net sales $ - $117,231 $311,648 $ 42,681 $ - $471,560
Cost of sales - 94,770 244,972 30,950 - 370,692
-------- -------- -------- -------- -------- --------
Gross profit - 22,461 66,676 11,731 - 100,868
Other operating expenses 92 17,765 52,295 4,350 - 74,502
Restructuring and other charges - 15,725 3,658 1 - 19,384
Impairment loss on assets held for sale - - 8,807 - - 8,807
-------- -------- -------- -------- -------- --------
Operating income (loss) (92) (11,029) 1,916 7,380 - (1,825)
Other expense (income):
Interest expense 1,739 19,476 13,984 1,244 (19,980) 16,463
Other expense (income) (1,978) (17,625) 116 8 19,980 501
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes and equity
in undistributed earnings of subsidiaries 147 (12,880) (12,184) 6,128 - (18,789)
Provision (benefit) for income taxes - (1,775) (3,595) 1,909 - (3,461)
-------- -------- -------- -------- -------- ---------
Income (loss) before equity in undistributed
earnings of subsidiaries 147 (11,105) (8,589) 4,219 - (15,328)
Equity in undistributed earnings of
subsidiaries (92,672) (78,913) (28,733) - 200,318 -
-------- -------- -------- -------- -------- --------
Income before discontinued operations (92,525) (90,018) (37,322) 4,219 200,318 (15,328)
Loss on disposal, net of tax benefit - - (42,483) (33,378) - (75,861)
Income (loss) from discontinued operations, - - 1,318 (2,654) - (1,336)
-------- -------- -------- -------- -------- --------
net of tax benefit
Net income (loss) $(92,525) $(90,018) $(78,487) $(31,813) $200,318 $(92,525)
======== ======== ======== ======== ======== ========
19
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
Six-months ended June 30, 2002
(Unaudited)
(in thousands)
COMBINED COMBINED
PARENT GUARANTOR NONGUARANTOR
GUARANTOR ISSUER SUBSIDIARIES SUBSIDIARIES ELIM. CONSOLIDATED
--------- ------ ------------ ------------ ----- ------------
Net sales $ - $278,380 $504,026 $82,043 $ - $864,449
Cost of sales - 227,640 411,886 58,056 - 697,582
-------- -------- -------- ------- -------- --------
Gross profit - 50,740 92,140 23,987 - 166,867
Other operating expenses 34 40,935 88,842 8,444 - 138,255
Restructuring and other charges - 20,720 2,061 1,019 - 23,800
Impairment charges - 6,061 13,217 - - 19,278
-------- -------- -------- ------- -------- --------
Operating income (loss) (34) (16,976) (11,980) 14,524 - (14,466)
Other expense (income):
Interest expense 3,000 39,414 26,913 (61) (35,388) 33,878
Other expense (income) (3,477) (31,687) 211 (98) 35,388 337
-------- -------- -------- ------- -------- --------
Income (loss) before income taxes and
equity in undistributed earnings of
subsidiaries 443 (24,703) (39,104) 14,683 - (48,681)
Provision (benefit) for income taxes - (9,594) (2,437) 4,903 - (7,128)
-------- -------- -------- ------- -------- --------
Income (loss) before equity in
undistributed earnings of subsidiaries 443 (15,109) (36,667) 9,780 - (41,553)
Equity in undistributed earnings of
subsidiaries (56,396) (34,919) 4,070 - 87,245 -
-------- -------- -------- ------- -------- --------
Income (loss) before discontinued
operations and extraordinary items (55,953) (50,028) (32,597) 9,780 87,245 (41,553)
Loss on disposal, net of tax benefit
- - (8,862) 710 - (8,152)
Extraordinary loss, net of tax benefit - (10,125) - - - (10,125)
-------- -------- -------- ------- -------- --------
Net income (loss) $(55,953) $(60,153) $(41,459) $10,490 $ 87,245 $(59,830)
======== ======== ======== ======= ======== ========
20
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
Six-months ended June 30, 2001
(Unaudited)
(in thousands)
COMBINED COMBINED
PARENT GUARANTOR NONGUARANTOR
GUARANTOR ISSUER SUBSIDIARIES SUBSIDIARIES ELIM. CONSOLIDATED
--------- ------ ------------ ------------ ----- ------------
Net sales $ - $230,054 $638,968 $ 91,314 $ - $960,336
Cost of sales - 184,931 504,242 66,826 - 755,999
-------- -------- -------- -------- -------- --------
Gross profit - 45,123 134,726 24,488 - 204,337
Other operating expenses 183 35,716 105,928 9,525 - 151,352
Restructuring and other charges - 15,876 4,326 (153) - 20,049
Impairment loss on assets held for sale - - 8,807 - - 8,807
-------- -------- -------- -------- -------- --------
Operating income (loss) (183) (6,469) 15,665 15,116 - 24,129
Other expense (income):
Interest expense 3,477 38,244 28,515 3,495 (39,960) 33,771
Other expense (income) (3,953) (34,907) (113) (3) 39,960 984
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes and equity
in undistributed earnings of subsidiaries 293 (9,806) (12,737) 11,624 - (10,626)
Provision (benefit) for income taxes - (429) (5,718) 5,021 - (1,126)
-------- -------- -------- -------- -------- --------
Income (loss) before equity in undistributed
earnings of subsidiaries 293 (9,377) (7,019) 6,603 - (9,500)
Equity in undistributed earnings of
subsidiaries (89,196) (77,165) (20,400) - 186,761 -
-------- -------- -------- -------- -------- --------
Income (loss) before discontinued operations (88,903) (86,542) (27,419) 6,603 186,761 (9,500)
Loss from discontinued operations, net of tax - - 103 (3,085) - (2,982)
Loss on disposal, net of tax benefit - - (43,043) (33,378) - (76,421)
-------- -------- -------- -------- -------- --------
Net income (loss) $(88,903) $(86,542) $(70,359) $(29,860) $186,761 $(88,903)
======== ======== ======== ======== ======== ========
21
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
June 30, 2002
(Unaudited)
(in thousands)
COMBINED COMBINED
PARENT GUARANTOR NONGUARANTOR
GUARANTOR ISSUER SUBSIDIARIES SUBSIDIARIES ELIM. CONSOLIDATED
--------- ------ ------------ ------------ ----- ------------
CASH FLOWS FROM OPERATING ACTIVITIES $ (18) $ (12,105) $ 16,409 $ 95,104 $(85,039) $ 14,351
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition costs - (1,021) - - - (1,021)
Capital expenditures - (1,814) (17,849) (1,746) - (21,409)
Proceeds from divestitures, net - 96,887 - - - 96,887
Proceeds from the sale of assets - 5,940 113 - - 6,053
-------- --------- -------- -------- -------- ---------
Net cash provided by (used in)
investing activities - 99,992 (17,736) (1,746) - 80,510
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock issuance 18 - - - - 18
Proceeds from long-term debt - 706,288 - - - 706,288
Repayments of long-term debt - (612,629) (7,469) (94,055) 85,039 (629,114)
Debt issuance costs - (16,574) - - - (16,574)
-------- --------- -------- -------- -------- ---------
Net cash provided by (used in)
financing activities 18 77,085 (7,469) (94,055) 85,039 60,618
EFFECT OF EXCHANGE RATE CHANGES ON CASH - - - (129) - (129)
NET CASH USED IN DISCONTINUED OPERATIONS - - (8,245) (305) - (8,550)
-------- --------- -------- -------- -------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS - 164,972 (17,041) (1,131) - 146,800
BALANCE AT BEGINNING OF YEAR - (18,004) 17,653 1,245 - 894
-------- --------- -------- -------- -------- ---------
BALANCE AT END OF YEAR $ - $ 146,968 $ 612 $ 114 $ - $ 147,694
======== ========= ======== ======== ======== =========
22
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
June 30, 2001
(Unaudited)
(in thousands)
COMBINED COMBINED
PARENT GUARANTOR NONGUARANTOR
GUARANTOR ISSUER SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
--------- ------ ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES $ (6) $ 20,468 $(12,447) $ 76,516 $ 84,531
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition costs - (3,844) - - (3,844)
Capital expenditures - (5,848) (10,319) (1,041) (17,208)
Proceeds from sale of assets - 2,592 362 386 3,340
-------- --------- -------- -------- ---------
Net cash provided by (used in) investing
activities - (7,100) (9,957) (655) (17,712)
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes due to accounts receivable
securitization, net - - - (75,000) (75,000)
Proceeds from common stock issuance 6 - - - 6
Proceeds from long-term debt - 357,013 - 4,517 361,530
Repayments of long-term debt - (368,923) (3,823) (5,440) (378,186)
Debt issuance costs - (2,260) - - (2,260)
-------- --------- -------- -------- ---------
Net cash provided by financing activities 6 (14,170) (3,823) (75,923) (93,910)
EFFECT OF EXCHANGE RATE CHANGES ON CASH - - - (22) (22)
CASH FLOWS FROM DISCONTINUED OPERATIONS - - 27,402 733 28,135
-------- --------- -------- -------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS - (802) 1,175 649 1,022
BALANCE AT BEGINNING OF YEAR - 30 441 118 589
-------- --------- -------- -------- ---------
BALANCE AT END OF YEAR $ - $ (772) $ 1,616 $ 767 $ 1,611
======== ========= ======== ======== =========
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
CORPORATE OVERVIEW
In 2001, we adopted a strategy to focus on our two primary businesses -
envelopes and commercial printing - and announced plans to divest our label
and printed office products businesses and certain operations not strategic
to our envelope and commercial printing businesses. In addition to the
planned divestitures, we initiated a restructuring program to consolidate
manufacturing facilities in our three businesses to improve our competitive
position and several other initiatives to significantly improve operations,
reduce costs and increase marketing effectiveness.
In February 2002, we sold Curtis 1000, Inc., a business included in our
printed office products business, and in May 2002, we sold our label
business. As of June 2002, we had not received an offer for PrintXcel, also
part of our printed office products business, that we considered consistent
with its value. Because PrintXcel generates reliable cash flow and a
satisfactory return on assets we concluded that it was not in the best
interest of the Company to sell this business and we discontinued our
efforts to do so. This business will now be an integral part of our strategy
of expanding our print products and services to a larger customer base.
On August 8, 2002, we sold the filing products division of our envelope
business. We are continuing our efforts to sell certain non-strategic assets
in our commercial printing business.
Mail-Well is the world's largest manufacturer of envelopes. We produce
approximately 43 billion envelopes annually in our 40 envelope manufacturing
facilities located throughout the United States and Canada. Approximately
84% of these envelopes are customized specifically for our customers for use
in billing and remittance, direct mail advertising and specialty packaging.
The remaining 16% are stock envelopes sold into the resale market.
We are also one of the largest commercial printers in the United States. We
operate 29 printing plants located strategically throughout the United
States and one in Canada. We specialize in high impact printing, in which we
print a wide range of premium printed products for national and regional
customers, including advertising literature, corporate identity materials,
annual reports, car brochures, calendars, greeting cards, brand marketing
collateral, catalogs, maps, CD packaging and direct mail. We also produce
general commercial printing for local and regional customers.
In addition, we operate a printed office products business. This business,
which operates 12 manufacturing facilities throughout the United States, is
a leading supplier of customized and stock labels, mailers and printed
business documents to small and mid-size businesses generally through
independent distributors of office products. The labels produced and sold by
our printed office products division do not compete with those produced and
sold by the now-divested label segment due to differences in customer base,
distribution channels and production methods.
CONSOLIDATED RESULTS OF OPERATIONS
The financial statements for all periods presented have been restated as
required by generally accepted accounting principles to report the results
of our label business and Curtis 1000, Inc. as discontinued operations. Our
PrintXcel business had also been reported as a discontinued operation prior
to the second quarter of 2002. Since this business is no longer held for
sale, the results of PrintXcel are now included in continuing operations.
The summary financial data set forth in the tables that follow present
reported amounts as well as comparable financial data for New Mail-Well. New
Mail-Well excludes the results of our label business and Curtis 1000, Inc.
and the results of the operations of our envelope and commercial printing
businesses that are held for sale, but contrary to prior presentations, New
Mail-Well now includes our PrintXcel business. In addition, New Mail-Well's
results exclude
24
restructuring, impairments and other charges reported in the condensed
consolidated statements of operations for the three- and six-months ended
June 30, 2002 and 2001.
The economic slowdown which began in 2001 has continued to adversely affect
the sales and margins of our businesses in 2002, especially the portion of
our commercial printing business related to print advertising, the direct
mail and resale segments of our envelope business, and the traditional
documents market of PrintXcel. We do not expect significant increases in
sales and margins until the markets we serve, especially advertising, direct
mail and resale, recover. In the meantime, we have continued to take steps
through our strategic initiatives and otherwise to reduce costs and improve
operations.
SALES
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
(dollars in thousands) 2002 2001 2002 2001
- -------------------------------------------------------------------------------
Reported $420,967 $471,560 $864,449 $960,336
New Mail-Well* $394,711 $451,256 $816,477 $920,907
- -------------------------------------------------------------------------------
* Excludes sales of certain operations of our envelope and commercial
printing businesses held for sale and includes sales to discontinued
operations that are expected to continue. Sales to discontinued operations
included above prior to their divestiture were $0.7 million and $3.7 million
for the three- and six-months ended June 30, 2002 and $8.9 million and $18.4
million for the three- and six-months ended June 30, 2001.
New Mail-Well's sales in the second quarter of 2002 were $56.5 million, or
12.5%, below sales during the second quarter of 2001. For the first six
months of 2002, sales were $104.4 million, or 11.3%, below the comparable
period in 2001. We have seen no improvements in the key markets we serve,
specifically:
o Demand for commercial printing continues to be weak.
o Sales of envelopes into the resale and direct mail markets are below
levels a year ago.
o The market for traditional business documents produced by our printed
office products business continues to decline.
Reported sales during the three- and six-month periods ended June 30, 2002
compared to the prior year declined similarly to the sales of New Mail-Well
and were affected by the same market dynamics.
RESTRUCTURING AND OTHER CHARGES
In 2001, we began consolidating certain of our operations to eliminate
excess internal capacity, reduce costs and improve our long-term competitive
position. In addition, we have significantly reduced the size of certain of
our facilities in response to current market conditions. The restructuring
charge related to these plans totaled $20.7 million in 2002, of which $9.0
million were incurred in the second quarter of 2002. The following table and
discussion present the details of this restructuring, as well as other
charges recorded during the six months ended June 30, 2002:
25
COMMERCIAL PRINTED OFFICE
(IN THOUSANDS) ENVELOPE PRINTING PRODUCTS CORPORATE TOTAL
- --------------------------------------------------------------------------------------------------------------------
Employee separation and related
employee expenses $ - $1,041 $ 507 $ - $ 1,548
Employee training expenses 4,531 - - - 4,531
Other exit costs 3,657 - 300 - 3,957
Asset impairment charges, net 4,730 - 240 - 4,970
Project management expenses 5,656 - - - 5,656
- --------------------------------------------------------------------------------------------------------------------
Total restructuring costs 18,574 1,041 1,047 - 20,662
- --------------------------------------------------------------------------------------------------------------------
Other charges 985 1,414 - 739 3,138
- --------------------------------------------------------------------------------------------------------------------
Total restructuring and other charges $19,559 $2,455 $1,047 $ 739 $23,800
====================================================================================================================
In addition to the three manufacturing facilities consolidated in 2001, our
envelope business has consolidated six facilities in 2002 and will
consolidate one additional operation during the third quarter of 2002. When
this consolidation plan is completed, we will have closed ten envelope
plants and substantially reduced excess internal capacity and improved
utilization of equipment and resources at the remaining 39 plants we operate
in the United States and Canada. In 2001, we accrued the separation and
related employee costs covering the 920 employees expected to be terminated
over the course of this project. As of June 30, 2002, 666 employees had been
separated. Employee training expenses include the costs to train the new
employees that have been hired at the plants that are absorbing the
production of the plants being closed. The training programs for these
employees are between three and nine months in duration. Other exit costs
include the expenses incurred to move and reinstall equipment, and the cost
incurred to restore buildings to the condition required by lease agreements
or to prepare them for sale. Project management expenses are primarily
consulting fees and related expenses incurred to assist management in
managing the consolidation project. Consultants were used to assist in such
tasks as capacity planning, workflow planning, production scheduling and
change management. The write-downs recorded for property and equipment taken
out of service or sold as a result of the plant consolidations are reported
net of $6.2 million of proceeds received from the sales of those assets.
Our commercial printing business completed the consolidation of its
operations in the Philadelphia, Pennsylvania area in 2001. In addition, in
response to changes in market conditions, commercial printing has made
significant changes to its cost structure by reducing its fixed costs. The
severance costs incurred as a result of eliminating 136 overhead positions
totaled $819,000.
Our Printed Office Products business closed a manufacturing facility in 2002
to eliminate excess internal capacity and reduce costs. Severance incurred
as a result of this plant closure were $134,000 covering 19 employees.
Expenses were also incurred to prepare the building for sale and to write
assets down to fair market value. In addition, Printed Office Products has
reduced headcount at certain of its other facilities in response to market
conditions. Severance costs incurred in connection with these reductions,
covering 128 employees, totaled $249,000.
In 2001, we initiated several programs to significantly improve operations
and marketing effectiveness. These programs include the implementation of
best practices, the standardization of costing and pricing systems in the
envelope and commercial printing businesses and the alignment of equipment
and services to better serve our customers and markets. We incurred $2.4
million in expenses for outside assistance in order to expedite the
implementation of these programs. In addition, the Company incurred
consulting fees of $587,000 related to tax matters that arose as a result of
the divestitures. These expenses have been reported as other charges.
We expect to complete our strategic initiatives by the end of 2002 and
anticipate further charges of approximately $10 million. Our current
estimate of the total cost of our restructuring program is $76 million, of
which
26
approximately $20 million will be non-cash charges and $56 million will be
cash charges. This is well below our original estimate of $98 million.
OPERATING INCOME (LOSS)
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
(dollars in thousands) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------
Reported
Operating income (loss) $(19,275) $(1,825) $(14,466) $24,129
Operating margin (5%) 0% (2%) 3%
- --------------------------------------------------------------------------------------------------
New Mail-Well
Operating income* $ 11,557 $22,947 $ 28,555 $46,971
Operating margin 3% 5% 3% 5%
- --------------------------------------------------------------------------------------------------
* Excludes operating income of certain operations of our envelope and
commercial printing businesses held for sale and impairment, restructuring
and other charges.
New Mail-Well's operating income declined $11.4 million, or 50%, in the
second quarter of 2002 compared to the same quarter of 2001. The reduction
in operating income was due to the following:
o Gross profit in the second quarter of 2002 was $76.6 million compared
to $92.5 million in the second quarter of 2001. As a percentage of
sales, gross profit declined 1.1%. The reduction in gross profit due to
lower sales was approximately $20 million. Lower prices for our
products due to increased competition impacted gross profit by
approximately $2.2 million. Our consolidation program and other cost
reduction programs have resulted in reductions in fixed manufacturing
costs of $6.1 million in the second quarter of 2002 compared to the
second quarter of 2001.
o Selling expenses were approximately $1.0 million lower in the second
quarter of 2002 than in the prior year due to lower sales commissions.
o Amortization expense was $3.6 million lower in the second quarter of
2002 due to the adoption of Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets, on January 1, 2002,
which eliminated the amortization of goodwill.
The reported loss of $13.2 million in the second quarter includes three
impairment charges. We recorded an additional impairment charge on PrintXcel
of $10.4 million. This charge was primarily the reversal of a tax benefit
recorded when PrintXcel's assets were written down to net realizable value.
We also recorded an impairment of $6.1 million on our filing products
business, which was sold in August 2002, and an impairment of $2.8 million
on our other assets held for sale based on a letter of intent received from
the prospective buyer. In addition, the reported loss includes restructuring
and other charges of $9.3 million.
New Mail-Well's operating income for the six-months ended June 30, 2002
declined $18.4 million, or 39%, from the comparable six-month period of
2001. This decline was due to the following:
o Gross profit was $158.1 million compared to $188.3 million during the
six-months ended June 30, 2001. The reduction in gross profit due to
lower sales was approximately $37 million. Lower pricing due to
increased competition also reduced gross profit by approximately $9
million. Gross profit as a percent of sales declined 1% despite
reductions in fixed costs of approximately $15.7 million.
o Selling and administrative expenses have been reduced approximately $5
million as a result of lower commissions and cost reduction programs in
our administrative functions.
o Amortization expense was down $6.9 million due to the implementation of
Statement 142.
The reported operating loss of $8.4 million for the six-months ended June
30, 2002 reflects the impairment charges discussed above and restructuring
and other charges of $23.8 million.
27
INTEREST EXPENSE
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
(dollars in thousands) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------
Total interest expense $20,966 $20,134 $39,448 $41,667
Less: Allocation to discontinued operations (1,993) (3,671) (5,570) (7,896)
- --------------------------------------------------------------------------------------------------------
Reported interest expense $18,973 $16,463 $33,878 $33,771
- --------------------------------------------------------------------------------------------------------
New Mail-Well $19,310 $16,842 $35,491 $34,637
During the quarter ended June 30, 2002, interest before allocations to
discontinued operations increased 4% due to higher average interest rates
despite lower outstanding debt. Our weighted average outstanding debt during
the second quarter of 2002 was $943.2 million compared to $992.2 million in
the second quarter of 2001. Our weighted average interest rate was 8.08% in
the second quarter of 2002 compared to 7.49% in 2001. The increase in the
weighted average interest rate was due primarily to the issuance of $350
million of 9 5/8% senior notes on March 13, 2002. Since a significant
portion of the proceeds of the senior notes was used to repay bank debt,
which accrued interest at a lower variable rate, our weighted average
interest rate will continue to be higher than the prior year.
For the six months ended June 30, 2002, interest expense before allocations
to discontinued operations was lower than the comparable period in 2001.
Interest in 2002 reflects our weighted average outstanding debt of $945.0
million in 2002 compared to $999.6 million in 2001 and our weighted average
interest rate of 7.84% in 2002 compared to 7.73% in 2001.
Reported interest excludes an allocation of interest expense to discontinued
operations based on the net assets of those operations relative to the net
asset of the Company.
Interest expense for New Mail-Well was calculated on a pro-forma basis as if
the actual net proceeds from the sales of our Label operating segment and
Curtis 1000, Inc. were received on January 1, 2001. Interest expense
determined on this basis is greater than reported interest expense.
INCOME TAXES
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
(dollars in thousands) 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------
Reported
Provision (benefit) for income taxes $(5,586) $(3,461) $(7,128) $(1,126)
Effective tax rate 15% 18% 15% 11%
- ------------------------------------------------------------------------------------------------------
New Mail-Well
Provision (benefit) for income taxes $(3,280) $ 2,005 $28,556 $46,840
Effective tax rate 42% 46%