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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
COMMISSION FILE NUMBER 1-12551
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MAIL-WELL, INC.
(Exact name of Registrant as specified in its charter.)
COLORADO 84-1250533
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8310 S. VALLEY HIGHWAY, #400 80112
ENGLEWOOD, CO
(Address of principal executive offices) (Zip Code)
303-790-8023
(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, $0.01 par value per share The New York Stock Exchange
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. / /
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes /X/ No / /
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of March 7, 2003 was $62,275,389.
As of March 7, 2003 the Registrant had 48,343,060 shares of Common
Stock, $0.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part III of this form (Items 11 and 12
and part of Item 10) is incorporated by reference from the Registrant's
Proxy Statement to be filed pursuant to Regulation 14A with respect to the
Registrant's Annual Meeting of Stockholders to be held on or about May 1,
2003.
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TABLE OF CONTENTS
PART I
PAGE
----
Item 1. Business.................................................... 1
The Company................................................. 1
Commercial Printing......................................... 1
Envelope.................................................... 1
Printed Office Products..................................... 1
2001 Strategic Plan......................................... 1
The Printing and Envelope Industries........................ 2
Our Products................................................ 2
Our Services................................................ 2
Marketing, Distribution and Customers....................... 3
Printing and Manufacturing.................................. 4
Materials and Supply Arrangements........................... 5
Patents, Trademarks and Brand Names......................... 5
Competition................................................. 5
Employees................................................... 6
Environmental............................................... 6
Item 2. Properties.................................................. 6
Item 3. Legal Proceedings........................................... 6
Item 4. Submission of Matters to a Vote of Security Holders......... 6
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 7
Item 6. Selected Financial Data..................................... 7
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 7
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 27
Item 8. Financial Statements and Supplementary Data................. 28
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................. 68
PART III
Item 10. Directors and Executive Officers of Registrant.............. 69
Item 11. Executive Compensation...................................... 72
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters................ 73
Item 13. Certain Relationships and Related Transactions.............. 73
Item 14. Controls and Procedures..................................... 73
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.................................................. 74
PART I
ITEM 1. BUSINESS
THE COMPANY
We are one of the largest printers in North America competing primarily
in the commercial printing and envelope market segments. We believe we are
the world's largest manufacturer of envelopes, the leading printer of
envelopes in the U.S. and Canada, the premier high impact color printer
in the U.S., a leading general commercial printer in several major U.S.
markets and a leading supplier of printed office products. We operate
86 printing and manufacturing facilities throughout North America. The
combination of our broad network of facilities and our sales force, which
is among the largest in the industry, has enabled us to build our customer
base to over 80,000.
COMMERCIAL PRINTING
Our commercial printing business generated $764.4 million of sales in
2002. We serve two primary commercial printing markets: (i) high impact
color printing, in which we print a wide range of longer run premium
products for national and regional accounts; and (ii) general commercial
printing, in which we print a wide array of products and offer printing
services to local commercial customers. Our commercial printing business
operates 35 plants throughout the U.S. and one in Canada.
ENVELOPE
Our envelope business generated $760.5 million of sales in 2002. We
serve two primary markets: (i) customized envelopes and packaging products,
including Tyvek(R) mailers used by the U.S. Postal Service, sold directly
to end users or to independent distributors who sell to end users; and
(ii) envelopes and other products sold to wholesalers, paper merchants,
printers, brokerage firms, office product establishments and superstores.
We manufacture envelopes in 26 U.S. plants and 13 Canadian plants.
PRINTED OFFICE PRODUCTS
Our printed office products business generated $203.8 million of sales
in 2002. This business, which operates 11 manufacturing facilities
throughout the United States, is a leading supplier of customized and stock
labels, mailers and printed business documents to small and mid-size
businesses generally through independent distributors of office products.
Refer to Note 14 of our consolidated financial statements included
elsewhere in this report for additional information concerning the
operating and geographic segments.
2001 STRATEGIC PLAN
In May 2001, we completed a comprehensive review of our operations and
adopted a new strategy that focused on our two core businesses--commercial
printing and envelope. In support of this strategy, we sold our Curtis 1000
Inc. printed office products subsidiary in February 2002, our prime label
segment in May 2002 and the file folder division of our envelope segment in
August 2002. We also consolidated three of our commercial printing plants
into one facility and closed 10 of our envelope plants and redeployed the
equipment and other assets at other facilities. We also announced our
intention to sell our PrintXcel printed office products group of
subsidiaries, and to sell the digital graphics division of our commercial
printing business. In June 2002 we discontinued our efforts to sell
PrintXcel because we had not received an offer we considered consistent
with its value. This business is now an integral part of our strategy of
expanding our printed products and services to a larger customer base.
Our new strategy also includes the launch of several initiatives to
significantly improve operations and marketing effectiveness. Both the
commercial printing and envelope businesses have programs in place to
institute best practices, standardize costing and pricing systems
and align equipment and services to better serve our customers and
markets.
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THE PRINTING AND ENVELOPE INDUSTRIES
The printing industry is one of the largest and most fragmented
industries in the United States with total estimated 2002 sales of $167
billion among an estimated 45,963 printing businesses, according to the
Printing Industry of America, Inc. The printing industry includes general
commercial printing, financial printing, printing and publishing of books,
labels, newspapers and periodicals, quick printing and production of
business forms and greeting cards. The Company believes the market in which
we primarily compete has a total estimated sales of $55.4 billion among an
estimated 21,249 printing businesses. The envelope industry is not as
highly fragmented as the printing industry. Envelope printing and
manufacturing combined constitutes a $4.8 billion market in North America
according to the Envelope Manufacturers' Association. Products in the
envelope industry include customized envelopes for direct mail,
transactional envelopes, non-custom envelopes for resale, and specialty
envelopes and filing products. The printed office products industry
constitutes a $15 billion market, with the short-run indirect segment of
the market in which we compete estimated at $3.4 billion.
OUR PRODUCTS
Commercial Printing. We serve two primary commercial printing markets:
(i) high impact color printing, in which we print a wide range of premium
products for national and regional accounts; and (ii) general commercial
printing, in which we print a wide array of products and offer printing
services to local commercial customers. Our printing products include
advertising literature, corporate identity materials, annual reports, car
brochures, calendars, greeting cards, brand marketing materials, catalogs,
maps, CD packaging and direct mail.
Envelope. We serve two primary markets: (i) customized envelopes and
packaging products, including Tyvek(R) mailers used by the U.S. Postal
Service, sold directly to end users or to independent distributors who sell
to end users; and (ii) envelopes and other products sold to wholesalers,
paper merchants, printers, brokerage firms, office product establishments
and superstores. In the customized envelope market, we offer printed
customized conventional envelopes for billing and remittance, direct mail
marketers, catalog orders and other end-users, such as banks, brokerage
firms and credit card companies. In the wholesale envelope market, we
manufacture and print a broad line of custom envelopes that are featured in
national catalogs for the office products market or offered through office
products retailers, including contract stationers.
Printed Office Products. We print a diverse line of custom products
for small and medium-sized businesses including both traditional and
specialty forms for use with desktop PCs and laser printers and pressure
sensitive labels. Our printed office products include business documents,
specialty documents produced through VersaSeal(R), Hi-reply(TM) and
Pro-card(TM) brands and short-run secondary labels which are made of paper
or film affixed with pressure sensitive adhesive and are used for mailing,
messaging, bar coding and other applications. These products are generally
sold through independent value-added resellers of office products.
OUR SERVICES
We offer our customers a wide variety of related services to enhance
the value of our printed products, such as:
Delivery Systems. We offer a flexible "just-in-time" delivery program.
This program allows customers to receive their products just prior to when
they are needed.
Digital Archiving. We allow customers to store digitally rendered
artwork on our file servers. The artwork can then be accessed and retrieved
either at the plant during the prepress stage or from a remote site via
high speed transmission during the design stage.
Direct-to-Plate Technology. We offer digital direct-to-plate
technology, which eliminates the production of film and several manual
functions in the platemaking process. This technology offers a complete
digital workflow, providing a better printed product and faster turnaround
without additional cost.
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E-commerce. We have the capability to offer our customers a full range
of e-commerce services to order printing or other products through their
web page.
Electronic Prepress. We offer a fully automated electronic process
that allows the customer to submit its artwork and other data in digital
format, either on a diskette, high speed transmission line or in hard copy
that can be computer-scanned. We can then manipulate the image, prepare
color separations and edit the design on a computer to create the file from
which the printing plate is made. Electronic prepress greatly reduces the
time and the number of people involved in the production of plates.
Fulfillment. We offer complete fulfillment centers with online order
assembly and barcoding strategically located throughout the United States.
Inventory Management Systems. We offer this service primarily to large
national organizations with centralized purchasing and supply departments
that service multiple locations. We facilitate order processing by giving
customers information on usage by item and/or available supply in our
warehouses and provide for summary billing.
Mail-Well 1-2-1. We offer on-demand digital printing services using
variable imaging and other features to produce personalized marketing
material, direct mail and other forms of targeted customer communications.
Prepress. The traditional design phase typically requires us to
incorporate customer-submitted graphics, photograph the artwork, develop
the file and prepare a plate from which to print.
Printmailwell.com. We offer a full range of robust Internet-based
print procurement and print management solutions via our Printmailwell.com
e-commerce platform, powered by PrintCafe.
Warehousing Services. A customer will often place an order for
significantly more product than it may need at the time. When this occurs,
we offer to store the finished product and drop-ship them on an "as-needed"
basis.
Our goal is to offer the highest standards in meeting our customers'
needs with our primary focus on responding quickly and competitively to
customer demands and requirements. Many of our production facilities are
open 24 hours a day, seven days a week, to allow for timely production of
materials. At certain facilities we also offer a number of unique services
to our customers such as complimentary transportation between the airport
and our offices, in-plant overnight accommodations, on-site meeting rooms
and lounge, travel and hotel arrangements and computers for use by the
customers when on-site.
We believe that the consolidation of the printing industry is being
driven in part by the rapid pace of technological change. Recent advances
in computer-based prepress equipment, such as electronic prepress, allow
for faster and more precise manipulation of images and text prior to
printing. Similarly, recent advances in photo imaging technology have
greatly increased the quality of the final image produced in the printing
process. These advances have increased the capital requirements for
maintaining technologically advanced equipment. We believe that many
smaller local and regional commercial printers will find it increasingly
difficult to obtain adequate financial resources to remain competitive in
the segments of the commercial printing market in which we operate.
MARKETING, DISTRIBUTION AND CUSTOMERS
As a result of the wide array of applications, customer preferences and
order sizes, our marketing efforts vary significantly among markets and by
region. Although our marketing efforts traditionally have been local or
regional, we continue to emphasize a more focused national accounts program
to attract customers whose needs are national or cover multiple regions. We
have national marketing directors in each of our segments working together
to target large national customers.
We maintain one of the largest sales staffs in the industry, with
approximately 450 sales representatives and 20,000 resellers as of December
31, 2002. The vast majority of our commercial printing and envelope
products are sold through sales representatives, the exception being
occasional "house" or company accounts. Our sales representatives work
closely with customers from the initial
3
concept through prepress, proofing and finally the press run. Because
our sales representatives are our primary contacts with our customers,
our goal is to attract, train and retain an experienced, qualified
sales force in each of our businesses. Sales representatives typically
are compensated by commission. Commissions generally depend on such
factors as order size and type, prepress work, reruns or rework and
overall profitability of the job. Printed office products are sold
primarily through catalogs, telemarketing and the Internet to value-
added resellers who distribute our products to end-users. We also
coordinate sales efforts among regions within our operating businesses,
and among the operating businesses themselves, in order to compete for
national account business, enhance the internal dissemination of
successful new product ideas, efficiently allocate our production
equipment, share technical expertise and increase company-wide selling
of specialty products manufactured at selected facilities.
Because of the highly fragmented nature of the general commercial
printing and envelope businesses, and the wide array of customer needs and
preferences, we market most of our general commercial printing and
envelopes locally. Due to the project-oriented nature of these market
segments, sales to particular customers may vary significantly from year to
year depending upon the number and size of their projects. Our customer
supply agreements are typically on an order by order basis or for a
specified period of time. The sales force is supported by a technical
service team that provides customers with highly customized printing
solutions. Most of our printing facilities have customer service
representatives that work with the sales team and the customers to manage
orders efficiently and effectively. In some cases, the customer service
representatives have direct responsibility for accounts.
In commercial printing, our marketing efforts differ between two broad
product areas: high impact color products, such as auto brochures, annual
reports and high-end catalogs, and general commercial work. We market high
impact printing primarily on a regional basis, through sales
representatives working out of sales offices across the United States. In
2001, we implemented our innovative "Go-to" marketing program as part of
our strategic plan. This program utilizes a team approach to customer
service relationships that we believe is unique in the printing industry.
In envelope, we market the majority of our envelopes and packaging
products through sales representatives, who generally work with customers
from the initial product design stage through product delivery to ensure
that finished products meet the customers' applications and marketing
needs. Products not marketed by our own sales representatives are sold
through distributors to better serve selected wholesale markets, geographic
regions without direct sales representation and certain specialty markets.
In printed office products, our products are marketed primarily under
the "PrintXcel" brand through distributors who act as intermediaries
between PrintXcel and the end-users of its products. Printed office
products are sold to five major channels; independent solution providers;
outsource for "direct" solution providers; commercial printers; ad
specialty dealers; and quick printers.
Our customer base totals approximately 80,000. Our customers in the
high impact commercial printing market include Fortune 500 companies,
graphic designers and advertising agencies. Our customers in the general
commercial printing and envelope businesses include national and local
businesses, insurance and finance companies, the U.S. Postal Service and
other government agencies and not-for-profit organizations. None of our
customers accounted for more than 2% of revenue in 2002.
PRINTING AND MANUFACTURING
Our commercial printing business operates 35 printing facilities
throughout the U.S., and one in Canada. These plants combine advanced
prepress technology with high-quality web and sheet-fed color presses and
extensive binding and finishing operations. Many of our commercial printing
facilities operate seven days a week, 24 hours a day to meet customer
printing requirements.
Our envelope business operates 39 printing facilities throughout North
America. Envelopes are produced from either flat sheets or rolls of paper.
The paper is folded into an envelope, which is glued at the seams and on
the flap, and then printed as required. Web machines are typically used for
larger
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runs with multiple colors and numerous features. Die cut machines,
which require a preliminary step to provide die cut envelope blanks from
paper sheets, are used primarily for smaller orders typically including
customized value-added features. The manufacturing process used is
dependent upon the size of a particular order, custom features required,
machine availability and delivery requirements.
In our printed office products segment, we operate 11 facilities in the
United States. In printed office products, we design and print forms and
other customized materials for a wide range of businesses. A majority of
printed office products orders are delivered to us "camera ready," and we
perform prepress and platemaking functions and print on web presses.
MATERIALS AND SUPPLY ARRANGEMENTS
The primary materials used in each of our businesses are paper, ink,
film, offset plates, chemicals and cartons, with paper accounting for the
majority of total material costs. We purchase these materials from a number
of suppliers and have not experienced any significant difficulties in
obtaining the raw materials necessary for our operations. We have
implemented an inventory management system in which a limited number of
paper suppliers supply all of our paper needs. These suppliers are
responsible for delivering paper on a "just-in-time" basis directly to our
facilities. We believe that this system has allowed us to enhance the
flexibility and speed with which we can serve customers, improve pricing on
paper purchases, eliminate a significant amount of paper inventory and
reduce costs by reducing warehousing capacity. We believe that we purchase
our materials and supplies at very competitive prices due to our volume
leverage.
PATENTS, TRADEMARKS AND BRAND NAMES
We market products under a number of trademarks and brand names. We
also hold or have rights to use various patents relating to our envelope
business, which expire at various times through 2012. Our sales do not
materially depend upon any single or group of related patents.
COMPETITION
The commercial printing industry is highly competitive and fragmented.
We compete against a number of large, diversified and financially stronger
printing companies, as well as regional and local commercial printers, many
of which are capable of competing with us in both volume and production
quality. Although we believe customers are price sensitive, we also believe
that customer service and high quality products are important competitive
factors. We believe we provide premium quality and customer service while
maintaining competitive prices through stringent cost control efforts. The
main competitive factors in our markets are customer service, product quality,
reliability, flexibility, technical capabilities and price. We believe we
compete effectively in each of these areas.
In envelope printing, we compete with a few multi-plant and many
single-plant companies that primarily service regional and local markets.
We also face competition from alternative sources of communication and
information transfer such as facsimile machines, electronic mail, the
Internet, interactive video disks, interactive television and electronic
retailing. Although these sources of communication and advertising may
eliminate some domestic envelope sales in the future, we believe that we
will experience continued demand for envelope products due to (i) the
ability of our customers to obtain a relatively low-cost information
delivery vehicle that may be customized with text, color, graphics and
action devices to achieve the desired presentation effect, (ii) the ability
of our direct mail customers to penetrate desired markets as a result of
the widespread delivery of mail to residences and businesses through the
U.S. Postal Service and the Canada Post Corporation and (iii) the ability
of our direct mail customers to include return materials in their
mail-outs. Principal competitive factors in the envelope business are
quality, service and price. Although all three are equally important,
various customers may emphasize one or more over the others. We believe we
compete effectively in each of these areas.
Our closest competitors in the printed office products market are other
document printers with nationwide manufacturing locations and
regional/local printers, which typically sell within a 100 to 300-mile
radius of their plants. To a limited extent we compete with much larger
direct selling forms
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manufacturers. We compete mainly on the breadth of our product offerings
and close customer relationships.
BACKLOG
At December 31, 2002 and 2001, the backlog of customer orders to be
produced or shipped in the next 120 days was approximately $82.6 million
and $84.2 million, respectively.
EMPLOYEES
We employed approximately 10,200 people as of December 31, 2002, and
approximately 2,200 of our employees at the various facilities are
represented by unions affiliated with the AFL-CIO or Affiliated National
Federation of Independent Unions. These employees are governed by
collective bargaining agreements, each of which covers the workers at a
particular facility, expires from time to time and is negotiated
separately. Accordingly, we believe that no single collective bargaining
agreement is material to our operations as a whole.
ENVIRONMENTAL
Our operations are subject to federal, state and local environmental
laws and regulations including those relating to air emissions, waste
generation, handling, management and disposal, and remediation of
contaminated sites. We have implemented environmental programs designed to
ensure that we operate in compliance with the applicable laws and
regulations governing environmental protection. Our policy is that
management at all levels be aware of the environmental impact of operations
and direct such operations in compliance with applicable standards. We
believe that we are in substantial compliance with applicable laws and
regulations relating to environmental protection. We do not anticipate that
material capital expenditures will be required to achieve or maintain
compliance with environmental laws and regulations. However, there can be
no assurance that newly discovered conditions or new or stricter
interpretations of existing laws and regulations will not result in
material expenses.
AVAILABLE INFORMATION
Our Internet address is: www.mailwell.com. We make available free of
charge through our website our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed pursuant to Section 13 (a) or 15 (d) of the Exchange Act as
soon as reasonably practicable after such documents are filed electronically
with the Securities and Exchange Commission. In addition, our earnings
conference calls and presentations to securities analysts are web cast live
via our website.
ITEM 2. PROPERTIES
We occupy 86 printing and manufacturing facilities in the United States
and Canada, of which 36 are owned and 50 are leased. In addition to on-site
storage at these facilities, we store products in 19 warehouses, of which
four are owned, and lease 21 sales offices. We also lease 47,153 square
feet of office space in Englewood, Colorado for our corporate headquarters.
We believe that we have adequate facilities for the conduct of our current
and future operations.
ITEM 3. LEGAL PROCEEDINGS
From time to time we may be involved in claims or lawsuits that arise
in the ordinary course of business. Accruals for claims or lawsuits have
been provided for to the extent that losses are deemed probable and
estimable. Although the ultimate outcome of these claims or lawsuits cannot
be ascertained, on the basis of present information and advice received
from counsel, it is our opinion that the disposition or ultimate
determination of such claims or lawsuits will not have a material adverse
effect on the Company. In the case of administrative proceedings related to
environmental matters involving governmental authorities, management does
not believe that any imposition of monetary damages or fines would be
material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the New York Stock Exchange
("NYSE") under the symbol "MWL." At March 7, 2003, there were
approximately 455 shareholders of record and, as of that date, the Company
estimates that there were more than 11,500 beneficial owners holding stock
in nominee or "street" name. The following table sets forth, for the
periods indicated, the range of the high and low sales prices for the
Company's common stock as reported by the NYSE.
HIGH LOW
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2002
First Quarter........................................... $6.28 $4.42
Second Quarter.......................................... $6.80 $5.02
Third Quarter........................................... $5.14 $0.99
Fourth Quarter.......................................... $2.64 $1.03
HIGH LOW
---- ---
2001
First Quarter........................................... $7.30 $4.50
Second Quarter.......................................... $6.22 $4.25
Third Quarter........................................... $5.30 $3.70
Fourth Quarter.......................................... $4.50 $3.67
The Company has not paid a dividend on common stock since its
incorporation and does not anticipate paying dividends in the foreseeable
future because our senior secured credit facility, senior notes and senior
subordinated notes limit the Company's ability to pay common stock
dividends.
ITEM 6. SELECTED FINANCIAL DATA
The summary of historical financial data presented below is derived
from the historical audited financial statements of the Company. The
financial data presented reflect the restatement of all historical data
for discontinued operations. The results of operations acquired in
acquisitions accounted for under the purchase method have been included in
the historical income statement data of the Company from their respective
acquisition dates. Historical income statement data for 1998 has been
restated as appropriate to reflect mergers accounted for as poolings-of-
interests. The data presented below should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the consolidated financial statements and the related notes
included elsewhere herein.
YEAR ENDED DECEMBER 31
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2002 2001 2000 1999 1998
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales.................... $1,728,705 $1,868,768 $2,044,350 $1,699,222 $1,463,097
Income (loss) from continuing
operations................. (63,363) (45,213) 34,746 61,997 25,546
Income (loss) per diluted
share from continuing
operations................. (1.33) (0.95) 0.70 1.16 0.53
Total assets................. 1,107,367 1,476,867 1,683,592 1,310,260 1,127,955
Total long-term debt,
including current
maturities................. 763,899 855,221 922,351 666,397 587,124
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CORPORATE OVERVIEW
In 2001, we adopted a strategy to focus on our two primary
businesses--envelopes and commercial printing--and announced plans
to divest our prime label and printed office products businesses,
the filing products division of our envelope business and the digital
graphics division of our commercial printing business. In addition to
the planned divestitures, we initiated a restructuring program to
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consolidate manufacturing facilities to improve our competitive position and
implemented other initiatives to significantly improve operations, reduce
costs and increase marketing effectiveness.
In February 2002, we sold Curtis 1000 Inc., the distribution business
included in our printed office products business. In May 2002, we sold our
prime label business. As of June 2002, we had not received an offer for
PrintXcel, also part of our printed office products business, that we
considered consistent with its value. Because PrintXcel generates reliable
cash flow and a satisfactory return on assets we concluded that it was not
in our best interest to sell this business and we discontinued our efforts
to do so. This business is now an integral part of our strategy of
expanding our print products and services to a larger customer base. In
August 2002, we sold the filing products division of our envelope business.
We are continuing our efforts to sell certain digital graphics operations
of our commercial printing business.
We have substantially completed the restructuring of Mail-Well that
began in 2001. Mail-Well is now one company focused on producing products
and services that help our customers deliver their messages more
effectively.
We believe we are the world's largest manufacturer of envelopes. We
produce approximately 38 billion envelopes annually in our 39 envelope
manufacturing facilities located throughout the United States and Canada.
Approximately 84% of these envelopes are customized specifically for our
customers for use in billing and remittance, direct mail advertising and
specialty packaging. The remaining 16% are stock envelopes sold into the
resale market.
We are one of the largest commercial printers in the United States. We
operate 35 printing plants located strategically throughout the United
States and one in Canada. We specialize in high impact printing, in which
we print a wide range of premium printed products for national and regional
customers, including annual reports, car brochures and brand marketing
collateral, and general commercial printing for local and regional
customers.
We are also a leading domestic supplier of customized and stock labels,
mailers and printed business documents to small and mid-size businesses
generally through independent distributors of office products. Our printed
office products business operates 11 manufacturing plants strategically
located throughout the United States. The labels produced and sold by our
printed office products division do not compete with those produced and
sold by the now-divested prime label business due to differences in
customer base, distribution channels and production methods.
Paper is our most significant raw material. We purchase approximately
500,000 tons of paper annually for our businesses. Prices of uncoated
papers, which are the principal grades of paper used to manufacture
envelopes, increased 10% in the fourth quarter of 2002. The costs of
uncoated paper had declined approximately 10% during 2001 after a year of
stable prices in 2000. Prices of coated papers, which are used principally
in commercial printing, increased approximately 3% in 2000, decreased
approximately 8% in 2001 and remained flat in 2002. Historical changes in
paper pricing generally have not affected the operating results of our
commercial printing business because we have been able to pass on paper
price increases to our customers. Paper pricing has, however, impacted the
operating margins of our envelope business. When paper prices are rising,
operating margins on our envelope products tend to be lower because we
generally are not able to increase our prices as quickly as paper prices
increase. Accordingly, since uncoated paper prices increased at the end of
2002, operating margins of our envelope business will be negatively
impacted in 2003 to the extent we are unable to increase the prices of our
envelope products.
Prior to 2001, our growth was primarily due to our acquisition
strategy. We substantially curtailed our acquisitions in 2001 and 2002 in
order to concentrate on implementing our strategic plan. In 2000, we
acquired American Business Products, Inc. and four smaller companies. The
acquisitions have been accounted for as purchase transactions. Recording
acquisitions in this manner impacts comparability of our financial
statements because the results of each of the acquired companies are
included in the consolidated results from the dates acquired. When
appropriate, we have noted the impacts of our acquisitions in the following
discussions of our results.
8
CONSOLIDATED RESULTS OF OPERATIONS
The financial statements for all periods presented have been restated
as required by generally accepted accounting principles to report the
results of our prime label and Curtis 1000 businesses as discontinued
operations. Our PrintXcel business had also been reported as a discontinued
operation prior to June 2002. Since this business is no longer held for
sale, the results of PrintXcel have been reclassified to be included in
continuing operations for all periods presented. The summary financial data
set forth in the tables that follow present reported amounts as well as
comparable financial data for New Mail-Well. The financial data presented
for New Mail-Well exclude the results of the prime label, Curtis 1000 and
filing products businesses sold in 2002 as well as the results of our
digital graphics operations held for sale at December 31, 2002. New
Mail-Well results also exclude restructuring, impairments and other charges
reported in the consolidated statements of operations for the years ended
December 31, 2002, 2001 and 2000.
The economic slowdown that began in 2001 continued to adversely affect
the sales and margins of our businesses in 2002, especially the portion of
our commercial printing business related to print advertising and the
direct mail segment of our envelope business. In addition, the market for
traditional business forms continues to decline due to the increasing use
of laser printing technology by the end-users of these products. We do not
expect significant increases in sales and margins until the markets we
serve, especially advertising and direct mail, recover. In the meantime, we
will continue to control our costs and balance production with the needs of
our customers.
SALES
YEAR ENDED DECEMBER 31 % CHANGE
-------------------------------------------- ---------------
2002 2001 2000 2002 2001
---------- ---------- ---------- ---- ----
(DOLLARS IN THOUSANDS)
Reported......................... $1,728,705 $1,868,768 $2,044,350 (7)% (9)%
New Mail-Well*................... $1,675,713 $1,809,050 $1,975,193 (7)% (8)%
- --------
* Excludes sales of the filing products division of our envelope business
sold during 2002 and sales of certain digital graphics operations of our
commercial printing business held for sale. New Mail-Well's sales
include sales of $3.5 million, $30.2 million and $23.5 million in 2002,
2001 and 2000, respectively, to operations that have been divested which
are expected to continue.
In 2002, sales of New Mail-Well were $133.3 million, or 7%, lower than
in 2001.
* Sales of our envelope business were $61.9 million lower in 2002 than
in 2001 primarily due to lower sales to direct mail customers and
lower selling prices.
* Sales of our commercial printing business were $53.4 million lower in
2002 than in 2001 primarily due to reductions in demand by our
customers for advertising related printed material. Sales of our high
impact printing to our national and regional customers were flat in
2002 while sales of commercial printing to our local customers were
weak.
* Sales of our printed office products were $18.0 million lower in 2002
than in 2001 primarily due to the continuing decline in sales of
traditional business forms.
In 2001, sales of New Mail-Well were $166.1 million, or 8%, lower than
in 2000. Excluding the impact of acquisitions completed during 2000, the
sales decline was $198.5 million, or 10%.
* Sales of our envelope business were $35.6 million lower in 2001 than
in 2000 primarily due to reductions in spending by our customers on
direct mail promotions, lower sales of our high strength specialty
envelopes and lower sales to merchant and office products customers.
* Sales of commercial printing were $147.3 million lower in 2001 than
in 2000 primarily due to reductions in demand for advertising related
printing and lower sales to our technology and telecommunications
customers.
* Sales of our printed office products business were $15.6 million
lower in 2001 than in 2000 as the demand for business forms continued
the decline that began in 2000.
Reported sales in 2002 and 2001 declined from the prior year by similar
percentages and were impacted by the same factors as the sales of New
Mail-Well.
9
RESTRUCTURING, ASSET IMPAIRMENTS AND OTHER CHARGES
We have responded to the impact of the current economic environment on
our businesses by continuing to evaluate our operations for improvement
opportunities. Because of the significant decline in sales experienced over
the last two years, we have taken actions to consolidate facilities,
rationalize and realign capacity and otherwise reduce costs. These actions
have resulted in significant restructuring and other nonrecurring charges.
This process is ongoing, as our industry and markets change, and we will
continue to take the actions necessary to react to these changes.
2002 ACTIVITY
Restructuring and other charges recorded in 2002 were $74.6 million.
The following table and discussion present the details of these charges:
PRINTED
COMMERCIAL OFFICE
ENVELOPE PRINTING PRODUCTS CORPORATE TOTAL
-------- ---------- -------- --------- -------
(IN THOUSANDS)
Employee separation and related
expenses........................ $ 884 $ 3,206 $1,404 $ -- $ 5,494
Employee training expenses........ 7,043 -- -- -- 7,043
Project management expenses....... 9,246 -- -- -- 9,246
Asset impairment charges, net..... 9,644 3,259 925 -- 13,828
Other exit costs.................. 4,219 4,691 658 -- 9,568
Reversal of unused accrual........ (500) -- -- -- (500)
------- ------- ------ ------- -------
Total restructuring costs..... 30,536 11,156 2,987 -- 44,679
Other charges..................... 2,038 4,655 161 23,018 29,872
------- ------- ------ ------- -------
Total restructuring, asset
impairments and other
charges..................... $32,574 $15,811 $3,148 $23,018 $74,551
======= ======= ====== ======= =======
ENVELOPE. The consolidation of ten of our envelope manufacturing
facilities is complete. We began this consolidation in 2001 in order to
reduce excess internal capacity and improve utilization of the equipment
and resources at our other envelope plants in the United States and Canada.
The cost incurred during 2002 related to this consolidation were as
follows:
* Employee training expenses of $7.0 million were incurred to train the
new employees that were hired at the plants that absorbed the
production of the plants that were closed. The training programs for
these employees were between three and nine months in duration.
* We incurred project management expenses of $9.2 million which were
primarily consulting fees and related expenses incurred to assist
management in managing the consolidation project. Consultants were
used to assist in such tasks as capacity planning, workflow planning,
production scheduling and change management.
* Impairment charges of $9.6 million were recorded for property and
equipment taken out of service or sold as a result of the plant
consolidations, net of $5.9 million received from the sales of those
assets.
* Other costs of $4.2 million include the expenses incurred to move and
reinstall equipment, and the cost incurred to restore buildings to
the condition required by lease agreements or to prepare them for
sale.
* In 2001, we accrued separation and related employee costs to cover
the 920 employees we expected would be affected over the course of
this project. As of December 31, 2002, 722 employees had been
separated and we have reduced the accrual by $0.5 million.
As a result of other cost reduction actions, our envelope business
incurred employee separation and related employee expenses of $0.9 million
in connection the elimination of 139 jobs.
COMMERCIAL PRINTING. During 2002, we reduced the size of many of our
commercial printing operations in response to the significant decline in
sales. We incurred $1.9 million in employee separation and related expenses
to cover the elimination of 192 jobs. We also recorded impairment charges
of $1.3 million for equipment taken out of service and other restructuring
costs of $0.7 million
10
for expenses associated with lease commitments and the cost to dismantle,
move and reinstall equipment.
In September 2002, we closed our commercial printing operation in
New York City and began the consolidation of our web printing operation
in Indianapolis, Indiana with our web plants in St. Louis, Missouri and
Baltimore, Maryland. We also moved a web press from our plant in Portland,
Oregon to our plant in St. Louis. We incurred employee separation and
related expenses of $1.3 million to cover the 132 employees affected by
these actions. Impairment charges on equipment taken out of service totaled
$2.0 million. We recorded $4.0 million to cover the expenses associated
with terminating lease commitments and the costs to dismantle, move and
reinstall equipment. We anticipate spending an additional $1.0 million in
2003 to complete the consolidation of our web press operations.
PRINTED OFFICE PRODUCTS. During 2002, we closed two of our traditional
documents plants in response to the decline in the demand for business
forms. The employee separation and related employee expenses covering
64 employees was $0.6 million. As of December 31, 2002, all of these employees
had been separated. Impairment charges related to equipment taken out of
service as a result of these closures totaled $0.6 million. Other
restructuring expenses of $0.7 million were incurred primarily to prepare
the two plant buildings for sale.
As a result of other cost reduction measures, Printed Office Products
has incurred employee separation and related expenses of $0.8 million in
connection with the elimination of 184 jobs and impairments of
$0.3 million.
OTHER CHARGES. Other charges include the following items:
* In 2001, we initiated several programs to significantly improve
operations and marketing effectiveness. These programs included the
implementation of best practices, the standardization of costing and
pricing systems in our envelope and commercial printing businesses
and the alignment of equipment and services to better serve our
customers and markets. We used outside assistance in the
implementation of these programs which cost $4.4 million in 2002.
* In connection with the refinancing of our bank credit facility in
June 2002, we were required to refinance an operating lease stemming
from a sale/leaseback arrangement executed in 1997 and amended in
2000. The value of the equipment subject to the lease was reduced
from $34.9 million to $19.1 million, and we were required to pay the
difference of $15.8 million. In addition, we wrote off deferred
costs of $6.1 million associated with the lease prior to this
refinancing.
* We have recorded an impairment charge of $1.8 million related to the
write-down of idle equipment in our commercial printing business to
net realizable value.
* We have incurred severance payments unrelated to the restructure
plans of $1.1 million.
* We have incurred consulting fees of $0.7 million related to tax
matters that arose as a result of our divestitures.
2001 ACTIVITY
The restructuring and other charges totaled $43.1 million in 2001. The
following table and discussion present the details of these charges:
COMMERCIAL PRINTED OFFICE
ENVELOPE PRINTING PRODUCTS CORPORATE TOTAL
-------- ---------- -------------- --------- -------
(IN THOUSANDS)
Employee separation and
related expenses............ $ 9,042 $ 385 $ 618 $ -- $10,045
Employee training expenses.... 2,628 -- -- -- 2,628
Project management expenses... 5,404 -- -- -- 5,404
Asset impairment charges,
net......................... 8,178 601 (1,300) -- 7,479
Other exit costs.............. 6,510 1,978 691 -- 9,179
Strategic assessment costs.... -- -- -- 2,677 2,677
------- ------ ------- ------ -------
Total restructuring
costs................... 31,762 2,964 9 2,677 37,412
Other charges................. 1,360 1,482 1,231 1,600 5,673
------- ------ ------- ------ -------
Total restructuring, asset
impairments and other
charges................. $33,122 $4,446 $ 1,240 $4,277 $43,085
======= ====== ======= ====== =======
11
ENVELOPE. The separation and related employee costs covered
923 employees that were expected to be affected over the course of the plant
consolidation project described above, of which 359 had been separated as
of December 31, 2001. Other exit costs included lease termination costs of
$1.4 million, equipment moving expenses and building clean-up costs. As of
December 31, 2001, we had completed the closure of three facilities. The
$8.2 million asset impairment charge relates to the write down of equipment
taken out of service as a result of these plant closures.
COMMERCIAL PRINTING. Our commercial printing business closed a plant in
Philadelphia, Pennsylvania and consolidated two other printing operations
in the Philadelphia area. We took these actions to improve our cost
effectiveness and our competitive position in the Philadelphia market. The
costs associated with the consolidation included employee separation and
related expenses covering the elimination of 25 jobs. Other exit costs
included expenses incurred for lease termination costs and costs to move
and reinstall equipment. Equipment taken out of service was written down
$0.6 million to its fair market value.
PRINTED OFFICE PRODUCTS. Our printed office products business
substantially curtailed its operation in Denver, Colorado in 2001. The
employee separation and related expenses of $0.6 million were related to
the elimination of 62 jobs. Other exit costs were the expenses incurred to
dismantle, move and reinstall equipment. Additionally, we reversed an asset
impairment charge of $1.3 million taken in 2000 to write-down a building to
its estimated fair market value. This building was sold for more than its
original carrying value.
CORPORATE. In developing our strategic plan, we engaged outside
advisors to research and evaluate our markets, survey our customers and
assess existing strategies. In addition, we engaged financial advisors
to evaluate options for improving our capital structure. The cost of
these advisors was $2.7 million in 2001.
OTHER CHARGES. Other charges include the following items:
* The outside assistance used in the implementation of initiatives in
our envelope and commercial printing businesses to establish best
practices, standardize our costing and pricing systems, and align
equipment and services to better serve our customers and markets
totaled $2.2 million in 2001.
* We wrote-off $0.7 million of costs incurred by our envelope business
for a human resource information system that was not implemented.
* Printed office products incurred $1.2 million of fees and expenses
associated with the settlement of a lawsuit.
* We wrote-off a $1.6 million investment in a company that was
developing a service, which would enable the management of the
creative process of a printing job online.
2000 ACTIVITY
We began the comprehensive review of our operations at the end of 2000
and identified certain actions that could be taken at that time. The
following table and discussion present the details of restructuring
charges, as well as other charges recorded in 2000:
COMMERCIAL PRINTED OFFICE
ENVELOPE PRINTING PRODUCTS TOTAL
-------- ---------- -------------- -------
(IN THOUSANDS)
Employee separation and related
expenses................................ $ 86 $ 188 $1,261 $ 1,535
Asset impairment charges.................. -- 749 3,299 4,048
Other exit costs.......................... -- 473 1,045 1,518
------ ------ ------ -------
Total restructuring costs............. 86 1,410 5,605 7,101
Other asset impairments................... 1,872 2,036 2,723 6,631
------ ------ ------ -------
Total restructuring, asset impairments
and other charges................... $1,958 $3,446 $8,328 $13,732
====== ====== ====== =======
12
ENVELOPE. Our envelope business closed a resale operation in Vancouver,
Washington. The employee separation and related expenses covered the
elimination of 19 jobs.
COMMERCIAL PRINTING. Our commercial printing business consolidated two
operations in St. Louis into an existing facility and closed its bindery
operation in Mexico. We reduced our total workforce by 165 employees. The
losses recorded as a result of the lease terminations and asset impairments
were primarily related to the closure of the Mexico bindery.
PRINTED OFFICE PRODUCTS. Our printed office products business closed
its business forms plants in Oceanside, California; Sparks, Nevada; and
Houston, Texas. The employee separation and related expenses covering the
elimination of 190 jobs totaled $1.3 million. Other exit costs are
primarily the cost associated with the termination of lease commitments at
these facilities. The loss incurred on the equipment that was sold or
abandoned was $3.3 million.
We incurred asset impairment charges in 2000 totaling $6.6 million that
were unrelated to the restructuring. These assets were taken out of service
and could not be redeployed or sold, and therefore were written off.
We completed a restructuring program initiated in 1998 during 2000.
Charges recorded in 2000 related to that program totaled $0.8 million.
LOSS ON ASSETS HELD FOR SALE
In August 2002, we completed the sale of the filing products division
of our envelope business, which had been held for sale since June 2001. The
loss on assets held for sale recorded in 2002 included a $6.1 million
impairment in connection with this divestiture and $0.3 million related to
the assets of the digital graphics division held for sale at December 31,
2002.
IMPAIRMENT ON OPERATIONS FORMERLY HELD FOR SALE
In 2001, we reduced the carrying amount of the net assets of PrintXcel
by $33.6 million to reflect its expected net realizable value. PrintXcel's
net realizable value was based on estimated sales proceeds, net of expenses
and a tax benefit of $11.5 million that would have resulted from the sale.
This charge has been reported as an impairment on operations formerly held
for sale in the consolidated statement of operations as of December 31,
2001.
Due to our decision in June 2002 not to sell PrintXcel, we reversed the
tax benefit since it would not be realized and $1.1 million of expenses
related to the sale that had been accrued but not incurred. The net amount
of $10.4 million has been reported as an impairment on operations formerly
held for sale in the consolidated statement of operations as of December
31, 2002.
In October 2002, we discontinued our efforts to sell a portion of the
digital graphics division of our commercial printing business. The
impairment on operations formerly held for sale in the consolidated
statements of operations as of December 31, 2002 and 2001 includes
$2.5 million and $2.9 million, respectively, related to the digital graphics
operation no longer held for sale.
OPERATING INCOME (LOSS)
YEAR ENDED DECEMBER 31 % CHANGE
------------------------------------- ------------------
2002 2001 2000 2002 2001
-------- ------- -------- ------ -----
(DOLLARS IN THOUSANDS)
Reported
Operating income (loss)......... $(16,456) $14,824 $130,214 (211)% (89)%
Operating margin................ (1)% 1% 6%
New Mail-Well*
Operating income................ $ 78,280 $83,011 $134,983 (6)% (39)%
Operating margin................ 5% 5% 7%
- --------
* Excludes the operating income of the filing products division of our
envelope business sold during 2002 and the operating income of certain
digital graphics operations of our commercial printing business held for
sale. New Mail-Well's operating income also excludes restructuring,
impairment and other charges discussed above.
13
In 2002, New Mail-Well's operating income declined $4.7 million, or 6%,
compared to 2001. This decline was due primarily to the following:
* Gross profit declined $28.7 million during 2002. The impact of lower
sales and lower margins was partially offset by savings in fixed
manufacturing overhead of $36.5 million realized from our
restructuring and other cost control initiatives.
* Savings realized from reductions in selling and administrative
expenses totaled $5.6 million for the year.
* Amortization expense was $13.8 million lower in 2002 than in 2001 due
to the adoption of Statement of Financial Accounting Standards
("SFAS") No. 142, Goodwill and Other Intangible Assets, on January 1,
2002, which eliminated the amortization of goodwill.
The reported operating loss for 2002 was $16.5 million and reflects
charges not included in the operating income of New Mail-Well. These
charges were as follows:
* Restructuring, asset impairments and other charges of $74.6 million.
* The impairment charge of $10.4 million recorded when PrintXcel was
reinstated as a continuing operation.
* The impairment charge of $6.1 million recorded as a result of the
sale of our filing products business.
* In connection with our decision to discontinue efforts to sell one of
our digital graphics operations, an impairment charge of $2.5 million
was recorded. An impairment charge of $0.3 million was recorded on
the digital graphics operations that remain held for sale.
In 2001, New Mail-Well's operating income declined $52.0 million, or
39%, compared to 2000. Excluding earnings of approximately $3.9 million
contributed by acquisitions completed in 2000, the decline was 41%. The
reduction in operating income was primarily due to approximately $61.0
million of contribution lost on the decline in sales and $5.0 million due
to lower margins. Offsetting these declines were reductions in fixed
manufacturing overhead and administrative expenses, which totaled
approximately $11.0 million during 2001.
Reported operating income in 2001 was $14.8 million and reflects
restructuring, asset impairments and other charges of $43.1 million and an
impairment charge of $36.5 million on operations formerly held for sale.
Reported operating income in 2000 reflects restructuring, asset impairments
and other charges of $14.5 million.
INTEREST EXPENSE
YEAR ENDED DECEMBER 31 % CHANGE
------------------------------------- -----------------
2002 2001 2000 2002 2001
------- -------- -------- ----- -----
(DOLLARS IN THOUSANDS)
Total interest expense............... $76,031 $ 78,891 $ 92,138 (4)% (14)%
Less: Allocated to discontinued
operations......................... (5,570) (15,577) (19,141)
------- -------- --------
Reported interest expense............ $70,461 $ 63,314 $ 72,997 (11)% (13)%
======= ======== ========
New Mail-Well........................ $72,992 $ 69,057 $ 76,610 (6)% (10)%
======= ======== ========
In 2002, interest before allocations to discontinued operations
decreased 4% due to lower average outstanding debt despite a higher
weighted average interest rate. Our average outstanding debt during 2002
was $872.8 million compared to $978.6 million in 2001. Our weighted average
interest rate was 8.59% in 2002 compared to 7.06% in 2001. The increase in
the weighted average interest rate was due primarily to the issuance of
$350 million of 9 5/8% senior notes on March 13, 2002, the proceeds of
which were used to repay bank debt which accrued interest at a lower
variable rate and our 5% convertible notes.
14
In 2001, total interest expense declined 14% due to lower average debt
balances and lower average interest rates. Our average outstanding debt
during 2001 was $978.6 million compared to $1,095.1 million in 2000. Our
weighted average interest rate was 7.06% in 2001 compared to 8.22% in 2000.
Reported interest excludes the allocation of interest expense to
discontinued operations based on the net assets of those operations
relative to the net assets of the Company.
Interest expense for New Mail-Well was calculated on a pro forma basis
as if the actual net proceeds from the sales of our prime label, Curtis
1000 and filing products businesses and the estimated net proceeds of the
digital graphics operations held for sale had been received on January 1,
2000.
INCOME TAXES
YEAR ENDED DECEMBER 31
------------------------------------
2002 2001 2000
-------- ------- -------
(DOLLARS IN THOUSANDS)
Reported
Provision (benefit) for income taxes................ $(25,308) $(5,200) $21,624
Effective tax rate.................................. 28.5% 10.3% 38.4%
New Mail-Well
Provision for income taxes.......................... $ 1,526 $ 6,312 $21,633
Effective tax rate.................................. 42.8% 52.9% 37.7%
New Mail-Well's effective tax rate for 2002 decreased by
10.1 percentage points due to the elimination of the net impact of both
nondeductible goodwill amortization and nontaxable interest income
on the effective rate.
New Mail-Well's effective tax rate for 2001 increased by
15.2 percentage points due to the impact of nondeductible goodwill
amortization on the effective rate.
The reported effective tax rates for 2002 and 2001 reflect the tax
impacts of the permanent differences related to impairment charges.
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE AND INCOME (LOSS)
PER SHARE--DILUTED
YEAR ENDED DECEMBER 31 % CHANGE
------------------------------------- ------------------
2002 2001 2000 2002 2001
-------- -------- ------- ----- ------
(DOLLARS IN THOUSANDS)
Income (loss) from continuing
operations before extraordinary
items and cumulative effect of a
change in accounting principle
Reported........................ $(63,363) $(45,213) $34,746 (40)% (230)%
New Mail-Well*.................. $ 2,045 $ 5,622 $35,748 (64)% (84)%
Income (loss) from continuing
operations per share before
extraordinary items and cumulative
effect of a change in accounting
principle--diluted
Reported........................ $ (1.33) $ (0.95) $ 0.70 (40)% (236)%
New Mail-Well*.................. $ 0.04 $ 0.12 $ 0.72 (67)% (83)%
- --------
* Excludes the income of the filing products division of our envelope
business sold during 2002 and the income of the digital graphics
operations of our commercial printing business held for sale. New
Mail-Well's income also excludes restructuring, impairment and other
charges discussed above.
In 2002 and 2001, New Mail-Well's income from continuing operations
declined 64% and 84%, respectively. In both years the decline was the
result of lower sales and lower margins partially offset by lower fixed
manufacturing overhead and lower selling and administrative expenses.
Interest
15
expense, which was higher in 2002 than in 2001, was lower in 2001
than in 2000. New Mail-Well's income from continuing operations also
benefited from lower amortization expense in 2002.
Reported income (loss) from continuing operations in 2002, 2001 and
2000 reflect restructuring, impairment and other charges of $93.8 million,
$79.6 million and $14.5 million, respectively, discussed above.
LOSS FROM DISCONTINUED OPERATIONS
The loss from discontinued operations for 2002 was $16.9 million, or
$0.35 per share. The loss on discontinued operations reflects the proceeds
received from our divestitures of Curtis 1000 and our prime label business,
net of related selling expenses and tax benefits. Adjustments of this loss
may occur if expenses are different than those estimated or if there are
revisions to the tax impact of the sales.
The loss from discontinued operations for 2001 was $91.0 million, or
$1.91 per share and included the following:
* A write-down of our prime label business and Curtis 1000 to net
realizable value in the amount of $88.0 million, net of a tax benefit
of $35.4 million, based on estimated sales proceeds; and
* The actual and forecasted results of our prime label business and
Curtis 1000 from the date of the announcement through the expected
date of disposal, including an allocation of interest expense and
income taxes.
The loss from discontinued operations of $8.6, or $0.17 per share,
million in 2000 reflects the results of our prime label business and Curtis
1000 after the allocation of interest expense and income taxes.
EXTRAORDINARY LOSS
Results for the year ended December 31, 2002 include an extraordinary
charge of $10.1 million, or $0.21 per share. This represents the write-off
of deferred financing fees related to our bank credit facility that was
refinanced in June 2002.
IMPAIRMENT OF GOODWILL
The Company adopted SFAS No. 142 on January 1, 2002, which required an
impairment test of the goodwill recorded for each of our operating segments
as of that date. Our testing indicated an impairment of the goodwill
recorded by our commercial printing business. This impairment was due to
the significant decline in the performance of our commercial printing
business in 2001 and the impact of that decline on expected future cash
flows. The fair value of our commercial printing business was estimated by
discounting the expected future cash flows and the use of market multiples.
Using the estimated fair value of the business and the application of the
other provisions of SFAS No. 142, we determined that $111.7 million of
commercial printing's goodwill was impaired. This transitional impairment
loss was reported as a cumulative effect of a change in accounting
principle in the consolidated statement of operations as of December 31,
2002.
NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE--DILUTED
YEAR ENDED DECEMBER 31 % CHANGE
--------------------------------------- ------------------
2002 2001 2000 2002 2001
--------- --------- ------- ----- ------
(DOLLARS IN THOUSANDS)
Net income (loss)
Reported...................... $(202,104) $(136,217) $27,618 (48)% (593)%
New Mail-Well*................ $ 2,045 $ 5,622 $35,748 (64)% (84)%
Net income (loss) per
share--diluted
Reported...................... $ (4.24) $ (2.86) $ 0.56 (48)% (611)%
New Mail-Well*................ $ 0.04 $ 0.12 $ 0.72 (67)% (83)%
- --------
* Excludes the net income of the filing products division of our envelope
business sold during 2002 and the net income of the digital graphics
operations of our commercial printing business held for sale. New
Mail-Well's net income also excludes restructuring, impairments and
other charges, the extraordinary items, and the change in accounting
principle discussed above.
16
New Mail-Well's net income and net income per share exclude results
of discontinued operations and assets held for sale, restructuring,
impairments and other charges, extraordinary items, and the charge related
to the goodwill impairment reported as a change in accounting principle.
BUSINESS SEGMENTS
ENVELOPE
The following table presents the reported sales and operating income of
our envelope business, as well as sales and operating income excluding the
results of the filing products division that was sold in August 2002 and
restructuring and other charges ("New Envelope").
YEAR ENDED DECEMBER 31 % CHANGE
-------------------------------------- -----------------
2002 2001 2000 2002 2001
-------- -------- -------- ----- -----
(DOLLARS IN THOUSANDS)
Net sales
Reported....................... $760,487 $835,534 $861,803 (9)% (3)%
New Envelope*.................. $719,214 $781,127 $800,821 (8)% (2)%
Operating income
Reported....................... $ 45,302 $ 54,168 $ 90,202 (16)% (40)%
New Envelope*.................. $ 75,110 $ 79,248 $ 84,980 (5)% (7)%
- --------
* Excludes sales and operating income of the filing products division
that has been sold. New Envelope sales include sales of $1.1 million,
$20.0 million and $15.5 million in 2002, 2001 and 2000, respectively, to
operations that have been divested and are expected to continue.
Sales of New Envelope were $61.9 million, or 8% lower, in 2002 than in
2001. The sales decline was due to the following:
* The average selling price of our envelope products fell 2% in 2002
due to competitive pressures on the prices of many of our products
and lower sales of higher value added products. As a result, revenue
declined approximately $16.7 million.
* Sales of our consumer direct envelopes were down approximately
$25.3 million due primarily to reductions in spending by our customers
on direct mail promotions.
* Sales to the resale segment of the market were down approximately
$9.8 million. Our merchant and office products customers lowered
inventory in the first half of 2002, which impacted our volume. In
addition, we ceased production of certain low margin products, which
we sold into the resale segment of the market during 2001.
* Sales of our high strength specialty envelopes declined $4.7 million
in 2002 due to lower demand for these products.
* In February 2002, we exited the domestic photo envelope market. Sales
of these envelopes were $5.4 million in 2001.
In 2001, sales of New Envelope were $19.7 million, or 2%, lower than in
2000. Excluding the impact of acquisitions completed in 2000, sales were
approximately $35.6 million, or 4.0%, lower than in 2000. The sales decline
was due to the following:
* Sales of our consumer direct envelopes declined approximately
$18.3 million due primarily to reductions by our customers in spending
on direct mail promotions.
* Sales of our high strength specialty envelopes were $12.6 million
lower in 2001 due to reduced demand from the U.S. Postal Service.
* Our merchant and office products customers began to reduce
inventories in 2001 in response to the weak economy, which
contributed to a $4.7 million decline in sales into the resale
segment of the market.
The operating income of New Envelope was $4.1 million, or 5%, lower in
2002 than in 2001. The decline in operating income was primarily due to
lower sales and lower prices in 2002. Contribution lost due to the decline
in sales and lower prices was approximately $21.7 million. The savings
realized
17
from our consolidation program and other cost reduction initiatives
offset $17.6 million of the lost contribution. Reductions in fixed
manufacturing overhead totaled $15.9 million, and reductions in
administrative expenses totaled $1.7 million.
In 2001, operating income of New Envelope was $5.7 million, or 7%,
lower than in 2000. Excluding the earnings of companies acquired in 2000,
the decline was $7.8 million, or 9%. Contribution declined approximately
$16.7 million due to lower sales and inefficient manufacturing performance
at several of the plants involved in the consolidation program. Reductions
in fixed manufacturing overhead and administrative expenses realized from
plant consolidations totaled $8.9 million.
We believe the significant operational restructuring, which began in
2001 and was completed in 2002, will enable our envelope business to
compete effectively under the market conditions expected in 2003. Since
paper prices increased at the end of 2002 and competitive pressures on
pricing are likely to continue, 2003 is expected to be another challenging
year. We anticipate realizing additional benefits from the plant
consolidations that were completed in 2002 as well as other cost
improvement programs initiated during 2002. Our focus in 2003 will be on
improving customer service, product quality and manufacturing efficiencies.
COMMERCIAL PRINTING
The following table presents the reported sales and operating income of
our commercial printing business, as well as sales and operating income
excluding the results of its operations that are held for sale and
restructuring and other charges ("New Commercial Printing").
YEAR ENDED DECEMBER 31 % CHANGE
-------------------------------------- ------------------
2002 2001 2000 2002 2001
-------- -------- -------- ------ -----
(DOLLARS IN THOUSANDS)
Net sales
Reported...................... $764,404 $817,937 $961,780 (7)% (15)%
New Commercial Printing*...... $751,354 $804,719 $944,855 (7)% (15)%
Operating income (loss)
Reported...................... $(16,255) $ 14,763 $ 54,758 (210)% (73)%
New Commercial Printing*...... $ (1,082) $ 18,096 $ 56,541 (106)% (68)%
- --------
* Excludes sales and operating income of the digital graphics division
operations held for sale. New Commercial Printing sales include sales of
$1 million, $3 million and $0.5 million in 2002, 2001 and 2000,
respectively, to operations that have been divested and are expected to
continue.
In 2002, sales of New Commercial Printing declined $53.4 million, or
7%, compared to sales in 2001. Due to strong sales in the fourth quarter of
2002, sales of our high impact printing business for national and regional
customers were comparable to such sales in 2001. Excluding sales of
$11.9 million of a company acquired in 2002, sales of our local commercial
printing business were $65.3 million lower in 2002 than in 2001. The
following factors contributed to the sales decline in our local business in
2002:
* Approximately 50% of our commercial printing sales are related to
advertising. Many of our customers have significantly reduced
promotional spending in response to the economic slowdown and this
has had a significant impact on the sales volume at all of our printing
operations serving local markets.
* Sales in the Philadelphia market were $24.0 million lower in 2002
than in 2001. This decline was due in part to the closure of a plant
in Philadelphia in April 2001. Much of the work produced by this
plant was marginal work which could not be produced profitably at any
of our other facilities in the Mid-Atlantic area. In October 2001,
we consolidated two plants serving this market, and many of our
customers did not move their printing to our new facility.
* Sales at our plant in Indianapolis declined $13.8 million during
2002. In our efforts to improve the profitability of this plant, we
lost some of our low margin business. In addition, demand for
18
long run web business at this plant was weak. We are in the process of
moving the web presses in Indianapolis to our web plants in St. Louis
and Baltimore.
* Sales of our plant in New York City declined $5.6 million, or 32%, in
2002. We ceased production at this plant in September 2002.
In 2001, sales of New Commercial Printing declined $140.1 million, or
15%, compared to sales in 2000. The economic slowdown, which began to
affect the printing industry in the fourth quarter of 2000, had a
significant impact on all of our printing operations during 2001. Overall
demand for commercial printing, especially advertising related printing,
was weak in 2001. In addition, sales to our technology and
telecommunications customers, which were strong in 2000, were down
approximately $30.0 million in 2001. The impact of the sales decline on our
national and local businesses was as follows:
* Sales of our high impact national business were $77.9 million, or
25%, lower in 2001 than in 2000.
* Sales of our local commercial printing business were $62.2 million,
or 10%, lower in 2001 than in 2000.
Operating income of New Commercial Printing declined $19.2 million in
2002 compared to 2001. This significant decline in profitability was due to
lower sales and lower margins. New Commercial Printing lost contribution of
$21.3 million due to the decline in sales. Cost reduction initiatives
reduced fixed manufacturing overhead and administrative expenses by
approximately $14.3 million in 2002. However, competitive pricing pressures
and inefficient manufacturing performance at several plants negated most of
these savings.
In 2001, operating income of New Commercial Printing declined $38.4
million, or 68%, compared to 2000. The decline was primarily related to the
significant sales decline in 2001 and increased competition, which reduced
contribution by more than $40.0 million. Administrative expenses were
reduced $3.3 million.
We do not expect market conditions for commercial printing to improve
significantly in 2003. Sales in the second half of 2002 were improved over
the first half, and we are hopeful that this trend will continue into 2003.
Over the last two years we have initiated programs to improve customer
service, strengthen customer relationships, reduce costs and improve
business processes. We expect to realize the benefits of these initiatives
in 2003.
PRINTED OFFICE PRODUCTS
The following table presents the reported sales and operating income of
our printed office products business, as well as sales and operating income
excluding restructuring and other charges ("New Printed Office Products").
YEAR ENDED DECEMBER 31 % CHANGE
-------------------------------------- ------------------
2002 2001 2000 2002 2001
-------- -------- -------- ---- -------
Net sales
Reported....................... $203,814 $215,297 $220,767 (5)% (3)%
New Printed Office Products*... $205,145 $223,204 $229,517 (8)% (3)%
Operating income
Reported....................... $ 16,838 $ 18,127 $ 16,306 (7)% 11%
New Printed Office Products.... $ 19,987 $ 19,367 $ 24,634 3% (21)%
- --------
* Sales of New Printed Office Products include sales of $1.3 million,
$7.9 million and $8.8 million in 2002, 2001 and 2000, respectively, to
operations that have been sold and are expected to continue.
In 2002, sales of New Printed Office Products declined $18.0 million,
or 8%, compared to sales in 2001. An explanation of the sales decline was
as follows:
* Sales of traditional business forms were $12.2 million lower in 2002
than in 2001. Demand for business forms has been declining for
several years as businesses have acquired laser-printing
19
capabilities. Also, the consolidation of two traditional document
plants in 2002 affected revenues in 2002 since we were not able to
retain all of the sales associated with the plants that were closed.
* Sales of label products were $4.6 million lower in 2002 than 2001 due
primarily to a decline in sales to quick printers and lower sales of
labels with patriotic themes, which were unusually high in the fourth
quarter of 2001.
In 2001, sales of New Printed Office Products declined $6.3 million, or
3%, compared to sales in 2000. Excluding the sales of a company acquired in
early 2000, the decline was $15.6 million. The decline in sales of
traditional business forms was $15.9 million in 2001. Growth in sales of
our specialty mailer products of $5.7 million offset lower sales of label
products.
Operating income of New Printed Office Products increased $0.6 million,
or 3%, in 2002 compared to 2001 despite the decline in sales. The
contribution lost as a result of the sales decline was approximately
$3.4 million, which was more than offset by $4.0 million in reductions
in fixed manufacturing overhead and administrative expenses.
Operating income of New Printed Office Products was $5.3 million lower
in 2001 compared to 2000. The decline was $7.1 million excluding the impact
of the acquisition completed in 2000 and was the result of the contribution
lost on lower sales and lower margins in 2001. Reductions in overhead
expenses in 2001 totaled $1.8 million.
In 2003, we expect continued erosion in demand for traditional business
forms. However, we expect to stabilize sales in 2003, by increasing sales
of our specialty mailer products and several new label product initiatives.
We also expect to fully realize the benefits of the two plant
consolidations, which were completed in 2002.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, our debt had been reduced $91.3 million to
$763.9 million from the balance of $855.2 million at December 31, 2001.
We generated $23.0 million of cash flow from operations compared to
$170.9 million in 2001 and $153.2 million in 2000. The decrease in operating
cash flow was due to the greater loss in 2002 and a smaller cash flow
benefit from the reductions made in working capital in 2002 compared to 2001.
Reductions in working capital, which consist of current assets exclusive of
cash and cash equivalents and net assets of discontinued operations, less
current liabilities, exclusive of the current portion of long-term debt,
increased cash flow from operations by $3.8 million in 2002, $93.1 million
in 2001 and $39.6 million in 2000. A portion of the decrease in working
capital has been the result of the Company's practice of extending payments
to its suppliers, with their agreement, to better balance the days payable
outstanding with the days sales outstanding. The Company's standard
payment terms have been increased to 45 days. The impact of this practice
on the amounts due to our suppliers over the last two quarters of 2002 has
been less than $25.0 million.
Capital expenditures, excluding acquisitions, were $30.9 million in
2002, $32.7 million in 2001 and $67.1 million in 2000. We anticipate
capital expenditures of approximately $40.0 million in 2003.
In 2002 and 2001, acquisition spending was reduced significantly to
$2.6 million and $3.8 million, respectively. In 2002, we purchased the
in-house printing and fulfillment operations of American Express Company.
In 2001, we purchased a small printing and fulfillment operation in
Denver, Colorado. In 2000, we obtained a new senior secured credit
facility to fund the acquisition of American Business Products, Inc. for
$331.0 million in cash plus $7.5 million of assumed debt. We sold the
extrusion coating and laminating operation of American Business Products
in September 2000 for after-tax cash proceeds of approximately $110.6
million. Other acquisitions in 2000 included three commercial printing
companies and an envelope company. The cash paid for these four companies
totaled $53.2 million.
During 2002, we completed a significant restructure of our outstanding
debt. In March 2002, we sold $350 million of 9 5/8% senior notes due 2012.
We used the net proceeds from this offering to repay $197.0 million of our
bank term debt, $134.0 million of our revolving credit facility, and
$9.2 million of
20
other debt. The remaining $2.0 million of net proceeds from the offering
were used for other working capital needs.
Also in March 2002, we applied $20.5 million of net proceeds received
from the sale of Curtis 1000 to the repayment of our bank term debt. In
May 2002, we applied $67.0 million of net proceeds received from the sale of
our prime label business to the repayment of our bank term debt.
In June 2002, we entered into a three-year $300 million senior secured
credit facility with a syndicate of banks. The purpose of this new facility
was to enable the refinancing of our existing bank term debt and secure
financing for ongoing working capital needs and other general corporate
purposes. Loans made under this facility are issued on a revolving basis
and are subject to availability and a borrowing base. Loans bear interest
at a base rate or LIBOR, plus a margin, and are secured by substantially
all of our assets.
In August 2002, we applied the net proceeds of $31.5 million received
from the sale of the filing products division of our envelope business to
the reduction of our revolving loan balance. On November 1, 2002, we
redeemed the $139.1 million of convertible subordinated notes due on that
date.
The following table summarizes our cash payment obligations as of
December 31, 2002 by year:
TOTAL CASH
LONG-TERM DEBT OPERATING LEASES OBLIGATIONS
-------------- ---------------- -----------
2003....................... $ 2,961 $ 33,054 $ 36,015
2004....................... 1,228 27,074 28,302
2005....................... 102,879 23,817 126,696
2006....................... 787 19,245 20,032
2007....................... 842 14,469 15,311
Thereafter................. 655,202 12,608 667,810
-------- -------- --------
Total...................... $763,899 $130,267 $894,166
======== ======== ========
At December 31, 2002, we had outstanding letters of credit of
approximately $24.5 million related to performance and payment guarantees.
In addition, we have issued letters of credit of $2.3 million as credit
enhancements in conjunction with other debt. Based on our experience
with these arrangements, we do not believe that any obligations that
may arise will be significant.
Our credit ratings as of December 31, 2002 were as follows:
SENIOR SENIOR SENIOR
SECURED UNSECURED SUBORDINATED
RATING AGENCY DEBT DEBT DEBT LAST UPDATE
- ------------- ------- --------- ------------ -----------
Standard & Poor's..... BB- BB- B July-02
Moody's............... B1 B1 B3 February-02
The terms of our existing debt do not have any rating triggers, and we
do not believe that our current ratings will impact our ability to raise
additional capital.
We expect to be able to fund our operations, capital expenditures and
debt and other contractual commitments within the next year from internally
generated cash flow and funds available under our senior credit facility.
At December 31, 2002, we had $128.1 million of unused credit available
under this credit facility.
SEASONALITY AND ENVIRONMENT
Our commercial printing business experiences seasonal variations. Our
revenues from annual reports are generally concentrated from February
through April. Revenues associated with holiday catalogs and automobile
brochures tend to be concentrated from July through October, and calendars
from May to September. As a result of these seasonal variations, we are at
or near capacity in some facilities at certain times during these periods.
Several consumer direct market segments served by our envelope business
and certain segments of the direct mail market, experience seasonality,
with a higher percentage of the volume of products sold
21
to these markets occurring during the fourth quarter of the year. This
seasonality is due to the increase in sales to the direct mail market
due to holiday purchases. Seasonality is offset by the diversity of our
other products and markets, which are not materially affected by seasonal
conditions.
Environmental matters have not had a material financial impact on our
historical operations and are not expected to have a material impact in the
future.
CRITICAL ACCOUNTING POLICIES AND JUDGMENTS
In preparing our financial statements, we are required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. We evaluate our estimates and
judgments on an ongoing basis, including those related to bad debts,
inventory valuations, property, plant and equipment, intangible assets,
income taxes, restructuring costs, and contingencies and litigation. We
base our estimates and judgments on historical experience and on various
other factors that we believe to be reasonable under the circumstances.
Actual results may differ from these estimates.
In 2002, upon adoption of SFAS No. 142 we recorded a $111.7 million
impairment of the goodwill recorded by our commercial printing business as
a change in accounting principle. Our estimate of this impairment was based
on discounting the future cash flows of this business and comparisons to
market multiples of other similar companies. In preparing projected future
cash flows, we used our judgment in projecting the profitability of this
business, its growth in future years, the capital spending required, the
working capital requirements and the selection of a discount rate. In our
comparisons to market multiples of other similar companies, we used our
judgment in the selection of the companies used in the analysis.
We will reevaluate the carrying value of our goodwill as of December 1
of each year, or earlier, if there are indications of impairment. Our
evaluation as of December 1, 2002 indicated no additional impairment over
what was recorded upon the adoption of SFAS No. 142 on January 1, 2002.
In 2002, the decision was made to reinstate the PrintXcel business as
an operating asset. Under generally accepted accounting principles, when a
business that was held for sale is reinstated as a continuing operation, it
is to be recorded at the lower of its carrying value or fair market value.
In 2001, we reduced the carrying value of the net assets of this business
to its net realizable value. We based our determination of the net
realizable value of this business on the advice provided to us by our
financial advisors. Our internal valuations of this business support its
current carrying value, which approximates its fair market value.
Assets held for sale have been recorded at net realizable value. The
net realizable value of the assets held for sale is based on a letter of
intent received from a prospective buyer. We do not expect the actual
proceeds to be significantly different from our estimates; however, until
the sale is completed, the possibility exists that the actual proceeds
could be materially different from our estimate.
We exercise judgment in evaluating our long-lived assets for
impairment. We believe our businesses will generate sufficient cash flow to
more than recover the investments we have made in property, plant and
equipment and other intangibles recorded as a result of our acquisitions.
We are self insured for the majority of our workers' compensation costs
and group health insurance costs. We rely on claims experience and the
advice of consulting actuaries and administrators in determining an
adequate liability for self-insurance claims.
The determination of our tax provision is complex due to operations in
tax jurisdictions outside the United States. In addition, realization of
certain deferred tax assets is dependent upon our ability to generate
future taxable income and future capital gains.
NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143
addresses financial accounting and
22
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. Mail-Well
will adopt SFAS No. 143 as of January 1, 2003. The Company does not
expect the impact of the adoption of SFAS No. 143 to have a material
impact on the consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. Among other provisions, SFAS No. 145 rescinds SFAS
No. 4, Reporting Gains and Losses from Extinguishment of Debt. Accordingly,
gains or losses from extinguishment of debt shall not be reported as
extraordinary items unless the extinguishment qualifies as an extraordinary
item under the criteria of Accounting Principles Board ("APB") Opinion
No. 30, Reporting the Results of Operations--Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions. Gains or losses from extinguishment of
debt that do not meet the criteria of APB No. 30 should be reclassified to
income from continuing operations in all prior periods presented. The
Company will adopt the provisions of SFAS No. 145 as of January 1, 2003 and
will reclassify extraordinary items from all prior periods into income from
continuing operations upon adoption.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 provides guidance
related to accounting for costs associated with disposal activities covered
by SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets
or with exit or restructuring activities previously covered by Emerging
Issues Task Force ("EITF") Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). SFAS No. 146
supercedes EITF Issue No. 94-3 in its entirety. SFAS No. 146 requires that
costs related to exiting an activity or to a restructuring not be
recognized until the liability is incurred. SFAS No. 146 will be applied
prospectively to exit or disposal activities that are initiated after
December 31, 2002.
In November 2002, the FASB issued Interpretation 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN 45"). FIN 45 requires a
guarantor to recognize, at the inception of a guarantee, a liability for
the fair value of the obligation undertaken in issuing the guarantee.
FIN 45 also expands the disclosures required to be made by a guarantor
about its obligations under certain guarantees that it has issued. Initial
recognition and measurement provisions of FIN 45 are applicable on a
prospective basis to guarantees issued or modified. The adoption of the
fair value provisions of this interpretation are not expected to have any
impact on the financial statements of the Company. The disclosure requirements
are effective immediately and are provided for in Note 7 to the consolidated
financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation--Transition and Disclosure. SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. SFAS
No. 148 also requires that disclosures of the pro forma effect of using the
fair value method of accounting for stock-based employee compensation be
displayed more prominently and in a tabular format. Additionally, SFAS
No. 148 requires disclosure of the pro forma effect in interim financial
statements. The transition and disclosure requirements of SFAS No. 148 are
effective for 2003. The Company does not currently plan to transition to a
fair value method of accounting for stock-based employee compensation.
AVAILABLE INFORMATION
Our Internet address is: www.mailwell.com. We make available free of
charge through our website our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed pursuant to Section 13(a) or 15(d) of the Exchange Act as
soon as reasonably practicable after such documents are filed
electronically with the Securities Exchange Commission. In addition, our
earnings conference calls and presentations to securities analysts are web
cast live via our website.
23
FORWARD LOOKING INFORMATION
Certain statements in this report, and in particular, statements found
in Management's Discussion and Analysis of Financial Condition and Results
of Operations, constitute forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Generally, the words
"believe," "expect," "intend," "estimate," "anticipate," "project," "will"
and similar expressions identify forward-looking statements, which
generally are not historical in nature. All statements which address
operating performance, events or developments that we expect or anticipate
will occur in the future are forward-looking statements. Such statements
reflect our current views of Mail-Well with respect to future events and
are subject to risks and uncertainties. Actual results may differ
materially from those expressed or implied in these statements. As and when
made, we believe that these forward-looking statements are reasonable.
However, caution should be taken not to place undue reliance on any such
forward-looking statements since such statements speak only as of the date
when made. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
In addition to those described elsewhere in this report the following
are some of the factors that could cause our actual results to differ
materially from the expected results described in or underlying our
forward-looking statements:
* We reported losses for 2002 and 2001 primarily as a result of
expenses related to our restructuring initiatives and the economic
slowdown. The slowdown in the economy has significantly impacted our
sales. Reductions by our customers in spending on printed advertising
material and direct mail promotions impacted sales of commercial
printing and envelopes. In addition, sales of traditional business
forms by our printed office products business have declined. Our
ability to return to profitability depends in part on our customers'
recovery from this slowdown and the realization of the benefits of
our restructuring and other cost reduction initiatives.
* We formed our company through the acquisition of over 50 separate
businesses. Until 2001 our business philosophy was generally to
continue to operate these businesses as separate businesses operating
autonomously in their historic markets. In 2001, we adopted our
existing strategy described in this report which focuses on the
integration of our businesses and operational improvements through
the sale of non-core assets, consolidation of facilities and sharing
of best practices. Part of our strategy for growing market share
includes market focused regionalization within our segments and
training our sales force to offer our full array of products and
services to existing and prospective customers. This strategy is
designed to capitalize upon the depth and breadth of our products
and geographical footprint especially with large regional and
national buyers of printed products. To be successful with this
part of our strategy certain of our customers will need to change the
way they buy printed products as one stop shopping has not been
traditionally available except through resellers. In addition, our
sales people will need to be intensely trained and change the way
they focus on new customer opportunities because in the past they
generally only sold the products offered at the location out of which
they work. We believe that this one stop shopping, total company
strategy will be accepted by customers as a way to streamline the
procurement process and thereby reduce procurement costs. However,
this strategy is generally untested and therefore there is no
assurance that it will be successful.
* In the past, we have grown rapidly through acquisitions. Although we
believe that our experience in making acquisitions is an important
asset, the terms of our senior credit facility limit the acquisitions
that we may currently pursue. To the extent that we pursue
acquisitions, we cannot be certain that we will be able to identify
and acquire other businesses on favorable terms or that, if we are
able to acquire businesses on favorable terms, we will be able to
successfully integrate the acquired businesses into our current
business or profitably manage them.
* The industries in which we compete are generally characterized by
individual orders from customers or short-term contracts. Most of our
customers are not contractually obligated to purchase products or
services from us. Most customer orders are for specific jobs, and
repeat business largely depends on our customers' satisfaction with
the work we do. Although our
24
business does not depend on any one customer or group of customers,
we cannot be sure that any particular customer will continue to do
business with us for any period of time. In addition, the timing
of particular jobs or types of jobs at particular times of year may
cause significant fluctuations in the operating results of our various
printing operations in any given quarter. We depend to some extent on
sales to certain industries such as the advertising and automotive
industries. We estimate that approximately 50% of our commercial
printing sales are related to advertising. To the extent these
industries experience downturns, as is currently the case in
advertising, the results of our operations are adversely affected.
* The printing industry in which we compete, including the printed
office products industry, is extremely fragmented and highly
competitive. In the market, we compete against a number of large,
diversified and financially stronger printing companies, as well as
regional and local commercial printers, many of which are capable of
competing with us on volume, price and production quality. In the
envelope market, we compete primarily with a few multi-plant and many
single-plant companies servicing regional and local markets. There
currently is excess capacity in the markets in which we compete,
which could result in excessive price competition. We are constantly
seeking ways to reduce our costs and become more efficient
competitors. However, we cannot be certain that these efforts will be
successful or that our competitors will not be more successful in
their similar efforts to reduce costs and become more efficient. If
we fail to reduce costs and increase productivity, we may face
decreased profit margins in markets where we encounter price
competition, which in turn could reduce our cash flow and
profitability.
* Most envelopes used in the United States and Canada are sent through
the mail and as a result, postal rates can significantly affect
envelope usage. Historically, increases in postal rates, relative to
changes in the cost of alternative delivery means and/or advertising
media, have resulted in temporary reductions in the growth rate of
mail sent, including direct mail, which is a significant portion of
our envelope volume. We cannot be sure that direct mail marketers
will not reduce their volume as a result of any increases. Because
rate increases in the U.S. and Canada are outside our control, we can
provide no assurance that any increases in U.S. and/or Canadian
postal rates will not have a negative effect on the level of mail
sent, or the volume of envelopes purchased, in either or both
countries. In such event, we would expect to experience a decrease
in cash flow and profitability or financial position. Factors other
than postal rates that detrimentally affect the volume of mail sent
through the U.S. and Canadian postal systems may also negatively
affect our business. If the threats of mass bio-terrorism in the U.S.
mail system persist, or if there is a perception of a lack of safety
in the U.S. or Canadian postal systems, we cannot be sure that direct
mail marketers will not reduce their volume as a result of any such
persisting threats or insecurity, or that s